“Indeed, a ‘free market’ necessarily implies total respect for and protection of private property. But this means that rights of private property must always be preserved. This implies not only a cracking down on assault and murder, but also on all forms of theft and fraud, including counterfeiting. Counterfeiting must be prosecuted fully by the law and, more than that, must be scorned and condemned by public opinion. As an advocate of 100 percent reserve banking, of full gold backing for all bank notes and deposits, I recognize that it would be difficult for government to police the banks, banks being notably ingenious in discovering market ways of getting around government regulations. One hundred percent banking must be enforced, not by administrative regulations, but by the legal system. While investigative snoops can hunt down counterfeit warehouse-receipts, it would be far simpler and more effective to crack down immediately and totally on any failure of a bank to pay in full on demand. First, as the Jacksonians wanted, but were never able to get through the Whig-dominated Congress in the late 1830s, at the first sign of such non-payment, the bank must be declared insolvent and its assets liquidated. But, second, these fractional-reserve bankers must be treated not as mere entrepreneurs who made unfortunate business decisions but as counterfeiters and embezzlers who should be cracked down on by the full majesty of the law. Forced repayment to all the victims plus substantial jail terms should serve as a deterrent as well as to mete out punishment for this criminal activity.I suspect that Rothbardians these days have sensed that they have lost the argument on fractional reserve banking, and that Rothbard’s idea that fractional reserve banking is inherently fraudulent and immoral has been refuted time and again.
I envision the free-market world of the future, then, as one of purely metallic worldwide money. Increases of bank money will not be tolerated and will be treated as the counterfeiting and the invasion of property rights that they really are. The money supply, then, will grow only slowly, concomitant with the slow growth in the stock of the world’s gold.” (Rothbard 1992: 39–40).
Consequently, modern Rothbardians would like to sweep the passage above (and ones like it by Rothbard) under the rug and pretend he never said it. Well, he did.
Rothbard’s views are clear:
(1) bankers have a propensity to engage in fractional reserve practices;But, curiously, in Rothbard’s system there is no criminal law – only private civil law.
(2) in an anarcho-capitalist world, the private law code would make fractional reserve banking illegal, and
(3) fractional reserve bankers would be punished with the full force of the law, including forced repayment and substantial jail terms.
That is to say, all crimes are offences only punishable under a system of private law, and the victim can obtain redress or justice only if they privately bring a law suit or legal action against the perpetrator of the crime.
This means the only way to punish fractional reserve banking is by private suits. But of course if you have lost all your savings in a bank run, you do not have that option, not without a loan, or a lawyer willing to work for free, or a “no win, no fee” lawyer.
In any case, Rothbard’s opinion is stated explicitly: fractional reserve banking needs to be banned and illegal in anarcho-capitalist utopia.
Rothbard, Murray N. 1992. “The Present State of Austrian Economics,” Working Paper from the Ludwig von Mises Institute, November 1992.