There are ethical, legal and pragmatic economic arguments against the practice of fractional reserve banking. Some economists and ethicists have concluded that the practice is fraudulent and therefore immoral, in that a bank promises to redeem deposits on demand when it is aware that, through this practice, it will never have sufficient funds to satisfy all depositors. Some critics consider this fundamentally unethical, akin to counterfeiting and/or embezzlement. The simple reality is that no bank engaged in fractional reserve banking can pay its debts as and when they fall due, because a significant proportion of current liabilities (cash deposits) have been lent out and are no longer possessed by the bank. Many analysts (including Murray Rothbard) have concluded that all banks engaged in the practice are inherently insolvent. A bank run is not an "extraordinary", "unusual", or "unexpected" event in finance, but a predictable event that merely reveals the reality of banking - that fractional reserve banking is inherently unstable and that such banks are inherently insolvent. Murray Rothbard and others have concluded that fractional reserve banking is nothing but a monetary Ponzi-scheme, relying on new borrowers (or entrants to the scheme) to remain viable. Reformist economists such as Murray Rothbard support a "full reserve" banking system and criticize fractional reserve banking as inherently fraudulent. Murray Rothbard held this view very strongly throughout his life.
it is not possible to retain the "sound money policy" advocated by Austrian economists without government interfering in the market and criminalising fractional reserve banking or mandating the cash to reserves ratio to be adhered to by banks.
Originally posted by crankySamurai
Alright these are two separate issues. First the to the idea that the money supply must grow with the economy or else there will not be enough. This is talked about by Woods directly in the above video. I'll explain it for you since it seems you did not make it through the video... Money is simply a unite of measure or in essence a division. Like an yard or inch. The total amount is not all that important. Gold and silver weren't chosen because there was just the right amount to match the current economy... The amount is for the most part irrelevant (with the exemption of extremes). As the economy grows and produces more wealth, the money you hold will increase in value, if the supply remains constant. People wont run out of money to trade, they will just trade smaller quantities or divisions of it.
This as nothing to do with the rise of fractional reserve banking. It was not created to fill a gap left as the result of the money supply not being able to meet the demands in a growing economy. This is just not true.
Government would not have to criminalize anything but fraud. Meaning it would only have to enforce that which is not permitted in a free market environment.
Originally posted by crankySamurai
Deflation hurts those investors who did not anticipate it true.
This does not have to do with fractional reserve banking.
Banking is a service and yes it would be essentially money warehousing.
If you deposit your money in a bank, the contract that you sign is that you are able to withdraw your money at any time, meaning that the bank must at all times have enough money to account for all deposits. If the bank is not able to fulfill the contract, present the deposited money at the time requested, then it is committing fraud.
In fractional banking this is the case. No fractional bank has the ability to fulfill all the contracts made with their clients.
If the client is willing to take a risk with his or her money there are other types of contracts that can be made and that is perfectly fine, but if a person is storing money for savings this has to be just what is done, otherwise there is a violation of contract, fraud.