The thing that people seem to have difficulty with is getting their mind around the different world of free enterprise conditions.
If anyone with capital of about (lets say) $100 000 dollars or more can go into banking tommorrow this is a different situation from what we have today.
We ought to never claim that a country has “free banking” if this condition of open access does not apply. Its a misnomer and a very misleading one.
Under a condition where fractional reserve exists there is always needless monetary oscillation. But if the banks have taken a risk with their clients money and now are struggling to meet their committments, then this creates a monetary squeeze.
The consequences of this monetary squeeze are unemployment and a loss of business investment momentum. The consequences of the rapid expansion of new fractional reserve loans during the recovery is for investment to not be as well-directed as it might be. And this behaviour sets up the economy for the next recession in endless cycle.
In theory if all regulations were dropped you wouldn’t need to ban fractional reserve. Since everyone could issue paper and make bogus promises……. then the paper would be valueless unless banks could prove they were not making loans on fractional reserve.
This is an entirely different scenario from today. Today we have a regulated crony-capitalist system. We might call it a regulated ologopolistic system. Under this system, if we moved to commodity money, the banks would most likely be a bit cautious with their committments.
But under free enterprise there must be one rule for all. All players must have the same basic ground-rules, and not many of them, or else its not free enterprise.
Now we know what these ground-rules ought to be. We know through both monetary theory and history that its simply a matter of:
1. Knowing WHOSE commodity/property the gold/silver/platinum/Rum/Tobbacco/liquified-coal/standardised-enriched-uranium belongs to at any instant in time. If the money is on-call then we ought to say that this money….without ambiguity…. belongs to the depositer.
2. But if the money is on time deposit then that money ought to be totally the banks money until the contract falls due.
If we have this clear distinction then we can have the massive multiple electronic transactions that a modern economy needs without ever having a recession, or having the distortion that fractional reserve brings.
This is not really even a regulation. What we are talking about is akin to natural law. When we buy things at the shop the question of clear ownership is handled so as to minimise the number of seconds where the ownership of the property is ambiguous.
You go to buy your can of coke. You are holding the can of coke. It is not yours. You take it to the counter. You put it on the counter. The girl scans it. The price comes up….. the coke belongs to the business… you reach for your wallet… the money is yours but the coke is not. At that moment that the girl accepts the money from your hand or picks it up from the counter the coke is yours but the money is in limbo. Once the change is given the money is the businesses. The ambiguity lasts for the minimum amount of time.
This procedure for clarifying the ownership of property developed naturally. As did 100% backing in banking. The only difference being that in banking:
1. The temptation to cheat is unbearable to the banks. If not under normal situations then under conditions of rising prices and high nominal interest rates.
2. The consequences of this violation or at least morphing and ambiguity in property-rights do not become apparent for a long time. So the damage done by the stretching of the time where property-rights are ambiguous start piling up.
3. Because of two we get an inbuilt movement to interventionism and crony capitalism. Since real capitalism only functions in the context of clarity-in-property-rights.
For these reasons banking might be the only business where we pre-emptively assume fraud and audit against it happening rather punish it after the fact.
Now you notice that nowhere here am I advocating the banning of banks. So when you see Humphreys lying about this you will know that he’s just a monetary crank and neoclassical know-nothing trying to obstruct the debate like he always does.