Carl’s intent was to investigate whether or not fractional reserve banking would play a part in a free banking system. If fractional reserve banking is fraudulent, the practice would be excluded in a free market.
One point White and Watner discuss is the idea of freely contracting on the matter. Some consumers may want to negotiate 100% reserves and others would go ahead and accept fractional reserve banking, perhaps as a way of avoiding fees for every service. Watner agrees that explicit contracts, even for fractional banking, would be legitimate but he also discusses what might happen in regards to property ownership if there is no explicit agreement between the parties.
So…much of the discussion centers on who actually owns the funds that are deposited in a bank. Is there such a thing as conditional ownership on funds deposited or held by a bank? Should a bank be able to hold less than 100% in that case? Or does that mean they are taking and using property that is not theirs?
Carl is very concerned that even explicit contracts agreeing to fractional reserves are a problem. Why? Because of the effect on third parties. He quotes Rothbard to explain:
“Commercial banks - that is, fractional reserve banks - create money out of thin air. Essentially they do it in the same ways as counterfeiters. Counterfeiters, too, create money out of thin air by printing something masquerading as money or as a warehouse receipt for money. In this way, they fraudulently extract resources from the public, from the people who have genuinely earned their money. In the same way, fractional reserve banks counterfeit warehouse receipts for money, when they circulate as equivalent to money among the public.”
Therefore, if fractional reserve banking is the same as counterfeiting, then even people who do not consent are affected by inflationary practices of fractional reserve banking.
I am confused in one regard here because it seems to me that in a free banking system, people who did not want to participate in fractional reserve banking could just refuse to use that bank or to trade with others who use that bank. So wouldn’t the problem take care of itself? Or am I missing something here?
Perhaps it's still a problem because banks and people will potentially get so intertwined with each other that it would be impossible to remain uninvolved in fractional banking practices.
I would be very interested in any comments from those of you more knowledgeable than I am on this topic.