Wednesday, March 2, 2016

Rothbard on how Fractional Reserve Banking would be illegal in Anarcho-Capitalism

In the passage below:
“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 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).
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.

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;

(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.
But, curiously, in Rothbard’s system there is no criminal law – only private civil law.

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.


  1. It was this part of the Rothbardian school of ideas that I struggled to understand.

    How would these people expect complete freedom and then try to make illegal all those practices and ideas they did not like?

    It was even harder to understand when some of them try to forbid open borders in line with their total freedom ideas.

    1. "How would these people expect complete freedom and then try to make illegal all those practices and ideas they did not like?"

      Because they are retards who never understood the real world and complexities in it.

  2. "But, curiously, in Rothbard’s system there is no criminal law – only private civil law."

    As Prateek suggests, this is where it gets into unicorns. Does a government exist with the sole purpose and power of jailing fractional reserve bankers?

    And what IS money to these people. I choose to pay the gardener in bit-coin, and he pays the grocer. That seems it should be allowed in any society that calls itself libertarian, but what is it but creating new non-gold backed money? I am sure they have some hand waving excuse for actually allowing this -- calling it barter perhaps -- but the special magical status of gold and greenabcks remains an oddity.

  3. I think I had some sympathy for the whole libertarian school of thought when I was a teenager (big surprise!), but when it led me to Rothbard's book on fractional reserve banking, I was quickly left stunned.

    The moment he began discussing fractional reserve banking, he wrote, "There is a ford for this. Fraud." Come again? One of the most common practices in the world is fraud? Large businesses and organizations are happy to allow themselves be defrauded?

    The result of reading this book was being launched out of orbit from libertarian ideas very strongly, more strongly than I should have been. I think the whole Auburn, Alabama branch of libertarianism has done a lot more harm than good to libertarian thinking.

    1. Indeed. Libertarian really ought to encompass a lot they hate, and they have smutzed up the word. I had a debate with them where they thought an accused should be able to be tried over and over and over. Unreal. Libertarian my ass.

  4. I have never understood why they think its 'fraud'. When you open an account with any bank, in the paper work you sign, it is acknowledged the fractional banking. If somebody discloses to you on the front end of a transaction, fractional banking how can they be accused of fraud?

    It would only be fraud if a bank doesn't discloses this and gives you the new depositor, the impression that your money is not loaned out and the full amount is available for withdraw at a moment's notice.

    1. Of course.
      I invite you to wander over to Murphy's and explain this, and see what reaction you get.

      I was taught this in school. Everyone learns about the depression, bank runs, the FDIC. There's FDIC stickers in every bank. Lots of us saw Mary Poppins. But to Austrians it's a plot only they understand, the evil fount of the warfare-welfare state.

  5. The whole ancap concept of 'private law' is completely incoherent.

    Rothbard himself acknowedged that so-called 'private courts' and enforcement agencies would have to abide by an over-arching system of law in order to be in accordance with his principles. But then who creates and enforces this overarching law? Whoever that group is, is the government, or the state. And in ancapistan that government/state is not democratically elected or controlled. It is simply an organization which forcibly imposes its laws on the population, without their consent or agreement or even participation in the law-making process.

    So in other words, 'anarcho-capitalism' is a complete misnomer. Ancaps are not anarchists. What they actually advocate is a form of capitalist or plutocratic dictatorship.

    1. Every dollar has equal rights with every other dollar.