I hate to disagree with other libertarians. But there’s a group of them who are getting the banking system really wrong, and their superficially attractive thesis is causing all manner of confusion. These are the Rothbardian campaigners who claim that fractional-reserve banking is theft. They say that this evil and sinister system must be wiped off the planet.
So what exactly do they oppose? At present, when you deposit £1000 into your current account, the bank lends some of that money. The cash is used, for example, to provide a mortgage to a first-time buyer or give finance to a small business wanting to expand. The Rothbardians claim that this is fraudulent. Actually, this is a perfectly reasonable thing for banks to do. It creates economic growth by giving businesses and individuals access to finance. And, frankly, everyone knows that banks lend out deposits: there is no fraud involved at all.
What the Rothbardians want is for a bank to take your money and leave it untouched in a vault. But banks already offer this: they rent safe deposit boxes – not that many people use them, and those who do tend to put jewelry and other valuables in them.
Instead of supporting a free market, the campaigners demand the criminalisation of fractional-reserve banking – they want to strip consumers of a choice over where they deposit their cash. This is a breathtakingly unlibertarian position for a bunch of supposed libertarians.
In fact, fractional-reserve banking is just a result of market forces, going back to the bankers in of Genoa and Venice in the 12th century, who lend out their deposits.
Conversely, according to the Austrian economist Prof George Selgin, every significant bank in history that just sat on deposits “was a government-sponsored enterprise, which depended for its existence on some combination of direct government subsidies, compulsory patronage, or laws suppressing rival (fractional reserve) institutions.”
We already have enough financial socialism. Do we really want to ban a banking custom that consumers, through history, have chosen?