or so argues Steve Horwitz at the Free Banking blog. Some economists, especially Austrian economists, see fractional reserve banking as one of the great evils of the world. Murray Rothbard being an obvious example. But not all economists, even Austrian economists, see it that way. Horwitz looks at arguments against fractional reserve banking and finds them wanting.
He opens by noting,
In some free-market circles fractional reserve banking (FRB) is blamed for everything from business cycles to bad breath. Defenders are seen as apologists for inflation and fraud. Thankfully these views remain a minority because they are gravely mistaken. As I, and other Austrian monetary theorists, such as George Selgin and Larry White, have argued, there’s nothing wrong with FRB that getting rid of a central bank can’t cure. Fractional reserve banking works just fine in a free market.And here, in a few words, is the point. The problem isn't with FRB as such, it is more to do with having a central bank. Get rid of the central bank and move to free banking and FRB would work just fine.
The whole Horwitz piece is worth reading.