Murray Rothbard on Fractional Reserve Banking

I have written before on the subject of fractional reserve banking.  I believe the federal government and central bank enable fractional reserve banking, at least to a large degree.  While I don't necessarily think it is good practice, I don't necessarily view it as a criminal act, particularly if there is no intentional fraud.  If banking customers are aware that their deposits are being used by the bank (and in return probably getting higher interest rates or lower bank fees), then the banks should not be held criminally liable if depositors cannot be made whole.

The subject of fractional reserve banking has been a hotly debated topic within the Austrian school of economics.  Many of the heavy Austrian hitters think it should be illegal, but I'm not exactly sure what they think the penalties should be.  Would bankers go to jail in their world or be personally liable?  I'm not sure that there is any standard position.

I should note that (and this, I believe is consistent with Mises' position) in a world with free banking and no government backstop, fractional reserve banking would be far more limited.  Threats of bank runs and bankruptcy would tend to keep banks in check.

I found it interesting to read recently, Chapter 8 of The Case Against the Fed, written by Murray Rothbard.  It was published as an article on  I read this book about 10 years ago when I was just getting entrenched into libertarianism.  It was the first full book I read on the Fed.  I did not remember the first paragraph of this chapter.  Rothbard started the chapter as follows:

"The fractional-reserve banker, even if he violates his contract, cannot be treated as an embezzler and a criminal; but the banker must still fact the lesser, but still unwelcome fact of insolvency.  There are two major ways in which he can become insolvent."

The rest of the chapter is mostly irrelevant for the purposes of this discussion.  I wish Rothbard would have expanded on this one short paragraph, whether in this book or anywhere else.  This did not stick out to me when I first read the book.  It stuck out at me immediately when I recently read this.

I had always wondered how Rothbard could hold the position he did in regards to fractional reserve banking.  Rothbard was a hardcore libertarian.  In fact, he was proud of the fact that he was an anarcho-capitalist.  Yet I could never understand how he could hold such a position on fractional reserve banking, at least from a moral aspect.

By the way, it is not inconsistent for an anarcho-capitalist to believe it should be against the law to murder, rape, steal, etc.  It is just a question of whether the law should be upheld by a monopoly state.  But in the case of fractional reserve banking, it is hard to say that it is a violation of the non-aggression principle, particularly if banking customers are aware of what the bank is offering and doing, at least in general terms.

So all along, I thought Rothbard wanted to throw bankers in jail, or at least make them pay restitution from their personal funds.  But this one paragraph contradicts everything that I thought about Rothbard and his views on the subject.  Everything else I have read by Rothbard indicates that he thinks a fractional-reserve banker is a criminal.

For Rothbard just to say that the banker must face the "unwelcome fact of insolvency" is obvious, at least to libertarians.  I don't think many libertarians would disagree with this position.  Of course banks should face insolvency.  Most hardcore libertarians are against the FDIC and the Federal Reserve, regardless of their thoughts on fractional reserves.  Without the FDIC and central bank, then banks would be subject to insolvency like any other business.  I don't know of many libertarians that advocate government bailouts.

There is, of course, a great difference between a banker facing criminal penalties versus facing insolvency for his business.

It makes me curious if Rothbard wrote more on this subject that I am unaware of.  I have been curious about his position on this one subject for a while now because I found it inconsistent and I highly respect his work in general.  If Rothbard were alive today, maybe I would find more agreement with him on this issue than I originally thought.