This archived content originally appeared at, the predecessor site to, and does not carry the sponsorship of the Cato Institute.

More Dumb Anti-Fractional Reserve Stuff

Over at the ultra-Rothbardian EconomicPolicyJournal one finds the following among other comments (some favorable to yours truly):

So, Selgin calls fractional reserving deposits 'Monetary Freedom'. This is a very interesting position.

So, I have $50,000 in a savings account. The bank can lend $45,000 out of my money and still maintain a 10% reserve.

It could also arguably loan out $450K while holding the entirety of my $50K as the 10% reserve. It would simply expand the balance sheet for $450K in liabilities for the loan, $50K liability to me and $450K receivable as an asset from the loan plus the $50K cash asset from me. The result is a 10% cash reserve either way…

…Selgin says this is Monetary Freedom?

Actually I say it is wretched economics, involving the elementary error (one that would earn any student in my undergrad Monetary Economics class an F) of confusing what individual, competitive bankers can get away with with what ordinary central bankers get away with on a routine basis. An individual bank can't get away with lending more than its excess reserves; in the example, if our ultra-Rothbardian makes a fresh deposit of $50,000, and his bank seeks to maintain a 10% reserve, it can in fact only lend $45,000. That is, it is limited to lending rather less than the savings brought to it, which means there's no "thin air" lending. As for lending $450K, the possibility is "arguable" only in the sense that anyone who doesn't argue with it doesn't know how banks work. For their sake: when banks make loans, the borrowers tend to spend the proceeds. In a competitive banking system that means writing checks that are likely to end up with other banks, which then return them to the lending bank for settlement in reserve money. All this tends to happen within days. So our banker in this case would soon be confronted with a $450K clearing debit, which he'd have to cover somehow. He can't cover it with a mere $50K of new deposits. So unless he was sitting on another $400K of excess reserves beforehand (which possibility of course begs the question, why hadn't the greedy shyster lent those already?), his bank will go bye-bye, or at least would do so in a free banking system in which there was no alternative of a central bank rescue.

Though Rothbard himself never dove to quite the depths of silliness involved in this example, the example is nonetheless representative of poor grasp of basic theory typical among those of Rothbard's devoted followers who swallow his facile equating of fractional reserve banking with fraud.