More Than Quibbles: Problems with the Theory and History of Fractional Reserve Free Banking

Abstract

The extensive debate over fractional reserve free banking (FRFB) has spanned decades and includes volleys from many contributors. Consequently, relative newcomers to the controversy often wish to extend the conversation on several fronts. In this spirit, Bagus and Howden (2010) is a 27-page paper detailing numerous objections to FRFB, which they modestly entitled, “Fractional Reserve Free Banking: Some Quibbles.” The present paper continues in this tradition, elaborating on some of the key critiques of FRFB raised by others earlier in the debate. In particular, I critically explore two key claims of the FRFB camp: that holders of banknotes implicitly lend funds to the issuing bank, and that the historical periods of relatively free banking illustrate the stability of the system.