Due to the bank failure at IndyMac, FDIC officials are saying that depositors will suffer up to $500 million in loses. The FDIC only insures up to $100,000, and for those who kept more than this amount in the bank, they are out of luck.
While government and bankers strongly defend fractional reserve banking, Austrian economists loathe this institution. Not only is this system of banking unstable - every bank is technically insolvent after its first loan - but it constitutes legalized fraud, leads to massive inflation, and is therefore, immoral. It should also be pointed out that fractional reserve banking, as it exists today, would not survive without government intervention.
Instead of addressing the morality of fractional reserve banking in my own words, I yield to Murray Rothbard in his work, What has government done to our money? This highly influential essay can be download for free, complementary of the Mises Institute:
"The great difference, however, between the "fractional reserve" bank and all other business is this: other businessmen use their own or borrowed capital in ventures, and if they borrow credit, they promise to pay at a future date, taking care to have enough money at hand on that date to meet their obligation [...] But the bank isn't borrowing from its depositors; it doesn't pledge to pay back gold at a certain date in the future. Instead, it pledges to pay the receipt in gold at any time, on demand.
[...]
The bank creates new money out of thin air, and does not, like everyone else, have to acquire money by producing and selling its services. In short, the bank is already and at all times bankrupt; but its bankruptcy is only revealed when customers get suspicious and precipitate "bank runs." No other business experiences a phenomenon like a "run." No other business can be plunged into bankruptcy overnight simply because its customers decide to repossess their own property. No other business creates fictitious new money, which will evaporate when truly gauged.
[...]
Here we conclude that, morally, such banking would have no more right to exist in a truly free market than any other form of implicit theft."
0 comments:
Post a Comment