2. It is certainly not fraud when you make it clear to your customers that there is some possibility you will be unable to fulfill it--as the Scottish banks (to take the obvious example--some of them had option clausies) did.
The notes are not receipts, they are promises to pay on demand. Under most circumstances the bank can fulfill those promises because although its reserves (i.e. the part of its assets held as gold, if that is the monetary metal) are less than the total of its notes outstanding, its assets are more.
Suppose the bank holds reserves of 20%. Customers bring in notes totalling 10% for redemption. The bank redeems them. It then sells some other assets and buys more gold. Repeat. The process continues until all notes have been redeemed.
There are two situations where this breaks down:
1. The bank is mismanaged, ends up with assets less than its liabilities, and goes bankrupt. That can happen to non-bank firms too. As I said, making a contract when you know there is some possibility you will be unable to fulfill it is not in itself fraudulent.
2. Customers bring notes in so fast that the bank doesn't have time to liquidate other assets and buy gold. The Scottish banks dealt with that (under a silver system) by an option clause--a term in the contract (I think actually printed on the banknote) specifying that the bank had the option of postponing payment (I think for a year, although I'm not sure), but then paying face value plus an interest penalty.
I think a system of private fractional reserve banking, preferably based on a market basket of commodities rather than a single metal, is a sensible way to produce money. A system of private fractional reserve banking based
on a monetary metal is an inferior, but also pretty good, way of doing it. A 100% reserve system is a relatively costly way of producing money, and as a result is unlikely to survive in a competitive market.
Rothbard wanted to reach a conclusion--that fractional reserve banking, private or public, ought to be prohibited. The reason he wanted to reach that conclusion, in my judgement, was that he thought fractional reserve banking had bad consequences--led to macro instability. But he was also committed to two other beliefs--that a free market worked very well without government intervention and that one could only legitimately ban activities if they involved force and fraud.
The only way he could make those beliefs consistent was to argue that fractional reserve banking involved either force or fraud, hence could be legitimately banned--whether by a government or in an anarchist society. But fractional reserve banking does not, in general, involve either force or fraud. Hence the need to fudge up a moral argument--to pretend that fractional reserve banking was inherently fraudulent.
I don't think government banking deceives the depositors as such--they believe, correctly, that they will almost always be able to go to the bank where they have deposits and get pieces of green paper in exchange. The whole system "deceives" the public as a whole, in the sense of being based on what I think are false claims--but then, most of the people making those claims believe them, which makes it error, not fraud.
2. For a bank to hedge against changes in the value of the monetary commodity, due to bank runs or anything else. It can hedge on the futures market, or it can hedge by holding assets whose price correlates with the price of the monetary commodity, such as stock in gold mines.
3. To use a monetary commodity whose monetary demand is very small compared to the non-monetary demand, so that the change in monetary demand due to a run on the bank, as Reisman describes it, has a negligable effect on its price. That was part of the point I was making in an early post, about why a market basket of major commodities was a better monetary standard than gold.
1. [Rothbard's arguments] don't apply to the current banking system, because deposits are redeemable in pieces of green paper, and the banks have a friend with a printing press.
2. Think about the logic of fractional reserve banking. A bank starts with a thousand ounces of gold and prints up five thousand "one ounce" bank notes--promises to pay one ounce of gold on demand. It then uses those ounces to buy things--claims to future payment if it makes loans, or alternatively land, stocks, bonds, whatever. So its assets, assuming it isn't stupid about what it buys, start out at six thousand ounces--one thousand ounces in gold, five thousand ounces worth of whatever it bought with its notes. Its liabilities start out at five thousand ounces--claims against it by the holders of its note. Net assets are 1000 ounces after it issues its notes, just as they were before (neglecting the cost of printing up the notes etc.).
So for a bank to have assets to cover its liabilities is the normal situation. It is only when something goes wrong--the treasurer absconds, or the bank makes bad investments, or the like--that a fractional reserve bank becomes insolvent. And other firms can become insolvent under just the same circumstances.
Incidentally, the idea of private fractional reserve banking is not an obscure possibility, at least not for an economist with any interest in the history of his field. Adam Smith in the wealth of nations discusses banking at some length--and the system he was discussing was a system of private fractional reserve banks. So when Rothbard says that "FRB, therefore, are inherently inflationary institutions" and "If fraud is to be proscribed in a free society, then fractional reserve banking would have to meet the same fate" he isn't just talking about government banks.
price level rises. It doesn't have to fall very far, however, before the increase in quantity demanded as a result of the fall in price brings quantity demanded up to quantity supplied (which, of course, may decline a little as the price of gold, the amount of other things you can get in exchange for an ounce of gold, falls).
precisely a million banknotes. But practically none of the world's steel, oil, etc. is actually being held by banks as reserves, so monetary demand for the reserve commodity has a negligable effect on total demand for it, so changes in the monetary system have very little effect on prices.
which the market price of the reserve commodity equals its monetary price--an ounce of gold sells for a "one ounce banknote" if gold is the reserve commodity.