Callahan has written two posts on fractional reserve banking, which are well worth reading:
“The ‘Immorality’ of Fractional Reserve Banking Revisited,” May 23, 2009Callahan is a pro-fractional reserve banking (FRB) libertarian, and the Austrian school is in fact divided between pro- and anti-FRB wings (for the pro-FRB position, see Selgin and White 1996).
“That Old-fashioned, A Priori History,” December 23, 2010
The pro-FRB Austrians are in fact the only ones who really do have a logically consistent argument for free markets, economic freedom, and free contract.
The anti-FRB Austrians such as Murray Rothbard hold a position that is incoherent and would require restriction of free contract and private enterprise – so in fact such Austrians, by their own demand for pure laissez faire – demand an “evil”, collectivist, anti-freedom ideology requiring limits on private liberty.
The only logically-consistent Austrians are the pro-FRB and free banking ones. But such libertarians must face the fact that there is overwhelming empirical evidence from the 19th century that their free banking system had a business cycle and asset bubbles.
When FRB systems collapsed – as, for example, the case of Australia in the 1890s when it had no central bank and was on the gold standard (Hickson and Turner 2002) – the result was catastrophe, a debt deflationary depression as bad as the Great Depression of the 1930s.
Hickson, C. R. and J. D. Turner, 2002, “Free Banking Gone Awry: The Australian Banking Crisis of 1893,” Financial History Review 9: 147–167.
Selgin, G. A., and White L. H. 1996. “In Defense of Fiduciary Media – or, We are Not Devo(lutionists), We are Misesians!,” Review of Austrian Economics 9.2: 83–107.