That is, the robbery inherent in fractional reserve banking, whereby banks lend out your money while promising to give it all back by the asking. One of the most radical edges of Austrian-libertarian economic thinking, Murray Rothbard's insistance that fractional reserve banking is inherently fraudulent and criminal, gets a sympathetic airing in the Wall Street Journal in the context of an actual proposal before Britain's Parliament to abolish the practice.
Here's the piece, alas subscriber only to read in full, but I excerpt the relevent bits, as written by British Conservative MP Steve Baker:
If you borrow a friend's painting and promise that you will give it back on demand, and you then lend that same painting to somebody else, you have committed a fraud. The same rules do not apply, however, to bankers….
Today, banks enjoy the legal privilege of fractional reserve banking, meaning they may lend out what they already owe depositors. By lending and investing on-demand deposits, banks create money by extending credit. When the bank's investments turn sour—and investments often turn sour at some point—the bank cannot pay back the deposits and goes bust…..
This skewed relationship between bank deposits and normal contract and property rights, combined with state interventions like the central planning of interest rates and various guarantees, is what causes boom and bust. Today I will be supporting my colleague Douglas Carswell, member of Parliament for Clacton, as he introduces a bill to phase out fractional reserve banking. Our friends in the U.S. and Europe are watching closely, for the same crony capitalism afflicts the world….
Our Regulation of Deposits and Lending bill would allow you, Britons, to choose how your money is used. You would have the choice either to deposit your money for safe-keeping, or to save it for a term to be invested further by the bank. If safe-keeping is your choice, you can have your money back on demand. Your property rights would be intact—you would remain the owner of your deposit. You would probably not earn interest; in fact you may have to pay for the privilege of direct access through branches and cash machines. If, however, you want a yield, you may choose to deposit your money for a term instead. The bank can then invest it further, potentially earning you an income.
Credit would continue to exist, backed by real savings. The saver would be fully aware of the benefits and risks when choosing between depositing money and saving it for a term…..
The enemies of freedom portray the financial crisis as a failure of capitalism. In reality markets do not grant legal privileges such as fractional reserve banking—politicians do. The legal privilege of fractional reserve banking destroys the sound capitalist mechanisms of property and contract law. Today we hope to end it.
I expect to see the British government abolish the current fractional reserve banking system about as much as I expect Rothbard to arise from the grave to encourage them to do so. Still, an interesting development.