I appreciate clarity and brevity, and Gordon excels at both in presenting the fundamentals of Rothbard’s position. The Fed exists to protect fractional-reserve banks from the retributions of the market and to serve as a source of non-legislated tax revenue for its sponsor.

Why Banks?

Perhaps you can clear up a question for me.

Banks seem to profit from a fractional-reserve policy because of the loans they can make to others due to their stockpiles of depositor’s wealth. And clearly, businesses legitimately need capital loans in order to invest in future development. But doesn’t this make the entire system, even under free-markets, an act of nonconsensual speculation on the part of the depositors who must trust the bankers to invest their money wisely in operations that may or may not prove to be profitable? How does this differ from investing your money into a mutual fund? It occurs to me that the mutual fund would be the more prudent investment because a) you know what you are investing in, and b) the rate of return is higher.

If banks are allowed to fail as a free market would demand, then who would invest in banks? What would be the incentive? I can see people paying a fee to keep their deposits in a secure institution that protects their money and gives them the ability to draw from it electronically or via check, but by granting the banks the right to make loans, a free checking account turns out to be anything but free.

Am I missing something?

Sweet Liberty has a point: Fractional reserve banking is like an investment in a mutual fund.

I tend to think of it as working a bit like insurance with interest payments. If an insurance company doesn’t predict claims accurately, then it too can become insolvent.

A fractional reserve bank often pays interest, when in truth, a bank should be charging for its warehouse services. The depositors are making an investment, albeit at low return, but nevertheless they are at least getting the warehousing for free. The true cost is the risk that all depositors come at once. No different than if all insured come at once for their promised claims.

Is this fraud? If everybody knows the risks and the mechanism of fractional reserve banking, then this cannot be fraud.

The real problem is not fraud, rather, it is the force used to make everyone except the banks currency at face value (legal tender laws). This permits the risk to be shared by all who fall under these laws rather than only those that voluntarily placed their funds in a risky warehouse for safekeeping.

@Patrick:

The 12 Federal Reserve Banks (FRBs) are “privately owned” indeed, but this ownership is all but a legal fiction. FRB stock can’t be traded or otherwise transferred; member banks do not control their FRBs; neither can they alter the FRB’s charter or the dividend, both of which are fixed by law. The FRBs’ earnings are not turned over to the stockholders, but to the US Treasury. That is not private ownership by any reasonable standard.

The Federal Reserve System Board of Governors is an independent US Government Agency, like the CIA, the FCC or NASA.

Michael R Stoddard,

Rothbard was an anarchist who supported private money, so there’s no need to be so self-righteous about how terribly insulted you are by the gold standard. Ending a book about the problems of central banking with a recommendation of anarchism would raise more questions than it would answer. A gold standard is a more realistic political prospect.