The business of accepting deposits and lending money

A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.

  • Central Banking - The practice of establishing a country's monetary policy through a government-owned or -controlled institution


Anatomy of the Bank Run, by Murray Rothbard, The Free Market, Sep 1985
Explains fractional reserve banking, deposit insurance and monetary inflation
"... the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick ..."
Book Note: Rothbard: Man, Economy, and State: A Treatise on Economic Principles [PDF], by Manny Klausner, New York University Law Review, Jun 1963
Review of Rothbard's economic treatise with emphasis on areas of interest to lawyers
"Is there any way to prevent a depression? Yes, states Rothbard, the answer is simple: '[A]void starting a boom. And to avoid starting a boom all that is necessary is to pursue a truly free-market policy in money, i.e., [rejecting fractional-reserve banking in favor of] a policy of 100% specie reserves for banks and governments.' The practice of fractional-reserve banking is what permits the banks to expand credit. To Rothbard, this basic banking procedure, whereby banks are not required to retain in their vaults the full amount of the liabilities that must be paid to their depositors on demand, is tantamount to fraud."
Cartels: Economists and Central Bankers, by Gary North, 11 Jul 2007
Discusses why economics textbooks never delve into the necessity of central banking
"Those few people who understand the inherent moral fraud in all fractional reserve banking find that they are not understood by their peers. They also find that their arguments are not taken seriously by academic economists. They find it difficult to explain why the entire profession has made a monumental methodological error in not applying the theory of monopoly to central banking."
Related Topic: Murray Rothbard
Competing Money Supplies, by Lawrence H. White, The Concise Encyclopedia of Economics
Discusses the arguments in favorand against free banking, with multiple private banks issuing their own notes, including historical precedents and proposals for the medium for note redemption
"Competition among banks would, history indicates, compel all banks in the system to redeem their deposits and banknotes for a common basic money, such as gold or a standard paper currency issued by the government. ... To attract customers, Citibank would be glad to accept deposits in Chase notes or Chase deposits, which it would then return to Chase for redemption at the clearinghouse. ... The reason is that by agreeing to accept each other's notes and checks at par, both Citibank and Chase would make their own money more useful, and therefore more widely accepted."
Gold Policy in the 1930s, by Richard Timberlake, The Freeman, May 1999
Discusses U.S. government monetary policies during the 1930s, in particular, the Gold Reserve Act (1934) which allowed FDR to devalue the dollar, the Banking Act (1935) which reformed the FRS and the misguided policies of Treasury Secretary Morgenthau
"Prior to the Banking Act, [member bank] reserve requirements were statutory at 7, 10, and 13 percent ... based ... on the size of the city in which the bank was located. The larger the city, the higher the legal reserve requirement. The Banking Act of 1935 used the existing set of reserve requirements as the lower end of a new range of requirements: 7–14, 10–20, and 13–26 percent. Board of Governors' decisions in Washington were to specify the precise set of requirements in force at any time. Thus Fed policy could be restrictive by mandating an increase in requirements."
Inflation Deflation Red-flation Blue-flation, by Matthew Beller, Mises Daily, 24 Jul 2008
Explains what is inflation, what is money, contrasts "bad" vs. "not-bad" inflation and analyses the Federal Reserve's recent and potential actions
"When a depositor places a sum of money in a checking account at a fractional-reserve bank, the bank may loan out 90% of his deposit to another person with the assumption that the depositor will not withdraw all of his funds. When the bank extends such a loan, the depositor has effectively loaned his money to the borrower, but without his knowledge. In fact, both the depositor and the lender will have legal title to the same sum of money at the same time."
Related Topic: Inflation
Interview with Adam Smith [via Edwin West], by E. G. West, The Region, Jun 1994
Professor Edwin G. West stands in for Adam Smith and answers questions from the Federal Reserve Bank of Minneapolis banking and policy issues magazine
"I never believed that banking was a strong exception to my free market ideas. I always insisted that the state should assume no supervision over entry into the banking business. It should, in fact, encourage the erection of as many banking enterprises as possible, and it should give monopolies to none."
Interview with Gary Becker, by Gary Becker, The Region, Jun 2002
Topics include the economics of crime, economics and law, banking discrimination, economic education, social security, behavioral economics, sociology, career choices and moral hazards
"... you have to ask if the bank gets an application from, say, blacks and whites, is it giving up profits in order to avoid lending to blacks? A profit test would be the crucial test. ... Presumably, black-owned banks do not discriminate against blacks, or not as much as white-owned banks. Are they lending to blacks in greater propensities and making a higher return on their investments? Or what are the policies and profits of female-owned banks? I do not know the answer to those questions, but my belief is that the Boston Fed study greatly overstated the degree of discrimination by banks. That does not mean there's none."
Jean-Baptiste Say: Neglected Champion of Laissez-Faire, by Larry J. Sechrest
Biographical and bibliographical essay, discussing Say's life, methodology and his writings on money, banking, the law of markets, entrepreneurship, capital, interest, value, utility, taxes and the state
"... 'banks of circulation' ... hold fractional reserves, issue banknotes, and generate an interest income by discounting promissory notes and bills of exchange. ... Say even argues that these fractional-reserve-holding banks ... bestow a benefit upon society because they provide 'the advantage of economizing capital, by reducing the amount of the sum kept in reserve.' And if it happens that such fractional-reserve banknotes also supplant part of the specie that had been in circulation, then 'the functions of the specie, that has been withdrawn, are just as well performed by the paper substituted in its stead.'"
Les Economistes Libertaires, by Carl Watner, Reason, Jan 1977
Discusses the French economists of the 19th century and in particular Gustave de Molinari and his thoughts on the provision of security and defense services by private agencies
"Although Molinari made these compromises with the State, he was not so ready to concede any government involvement in monetary matters. As Vera Smith noted, the subject of centralized, 'state controlled banking vs. free banking was one of the most keenly debated of its time in France ...' Molinari thought the money industry should be open to free competition. It was his view, says Gaetan Pirou, that 'banks should be free to offer metal coins or paper money and the public [should be free] to choose whichever served their best interest.'"
Lysander Spooner, Part 1, by Wendy McElroy, Future of Freedom, Oct 2005
Lengthy biographical and bibliographical essay; from Spooner's birth to 1850-1860, examining his writings on economics, money, banking, mail delivery and slavery
"Why was the right to issue private currency of primary importance to Spooner? Part of the reason was ... he believed private currency and unregulated banking were necessary conditions for working people to emerge from poverty. ... Through the National Banking Act of 1863, Congress guaranteed the notes of authorized bankers and legally protected them from liability for debt. A national tax of 10% for all money not authorized by Congress was also established. Through such measures, Spooner believed that Congress held a de facto and unlawful monopoly over the most important industry to the American economy — banking."
Martin Van Buren: The Greatest American President [PDF], by Jeffrey Rogers Hummel, The Independent Review, 1999
Discusses the Van Buren presidency and why he should be considered "the greatest president in American history"
"Although traditional historians have subjected this era of relatively unregulated banking to trumped-up charges of financial instability, many economists are coming to agree that it was probably the best monetary system the United States has ever had. The alleged excesses of the fraudulent, insolvent, or highly speculative 'wildcat' banks were highly exaggerated. Total losses suffered by banknote holders from 1836 to 1861 in all the states that enacted free-banking laws would not equal the losses for one year from an inflation of 2 percent, if superimposed onto the economy of 1860."
Milton Friedman, 1912-2006, by Hans Sennholz, 7 Dec 2006
Memorial essay, but critical of professor Friedman's advocacy of monetary policies which would leave money issuance in hands of the government
"The increasing importance of government obligations as bank assets gives great confidence to monetarists; however, it creates anxiety because government obligations merely are receipts for money spent and savings consumed. ... The growing importance of government obligations in bank portfolios actually signals government consumption of economic substance and wealth. To commercial banks, it means the loss of real property securing the loans, and the addition of yet more government promises to tax, print and pay. A banking system built primarily on government IOUs is in a precarious condition."
Monetary Central Planning and the State, Part 31: Ludwig von Mises on the Case for Gold and a Free Banking System, by Richard Ebeling, Future of Freedom, Jul 1999
Examines Mises' thinking on why the gold standard is needed, why it is necessary for it not be subject to political manipulation, why free banking is needed and the ideological environment required for its success
"The only monetary and banking system that would have the potential capability of minimizing, if not preventing, monetary abuses on the part of governments would be a free banking system. ... Would the establishment of a truly free banking system make a country's monetary system impervious to state control, manipulation, and destruction? Mises admitted that it might not, because ultimately a sound monetary and banking system could be maintained only against the background of an ideology consistent with the classical-liberal ideals of individual freedom, a free-market economy, and free trade."
Monetary Central Planning and the State, Part 32: Friedrich A. Hayek and the Case for the Denationalization of Money, by Richard Ebeling, Future of Freedom, Aug 1999
Shows the progression of Hayek's thinking on money from 1945 when he was agreeable to central monetary control to 1976 when he advocated a system of private competing currencies
"Hayek outlined a system of free, competitive private banking, outside the control of government, that would supply the money ... By "private competitive currencies," however, Hayek did not mean a system of private and independent banks accepting deposits in, say, gold or silver, and issuing coins or paper notes representing fixed quantities of gold and silver, redeemable on demand. Instead, he suggested a system of alternative currencies in which each issuing bank would promise and attempt to keep the value of its private money constant through an expansion or contraction of its currency in circulation."
Monetary Central Planning and the State, Part 33: Murray N. Rothbard and the Case for a 100 Percent Gold Dollar, by Richard Ebeling, Future of Freedom, Sep 1999
Examines the arguments made by Rothbard in his 1962 essay "The Case for a 100 Percent Gold Dollar"
"The problem, Rothbard explained ... is that the owners of the warehousing facilities often also operated as lenders of their own funds to potential borrowers in the market. That is, they began to function as bankers also. But these emerging bankers soon came to realize that they could extend additional loans to borrowers in the form of "notes" that looked exactly like the warehouse receipts issued to their gold and silver depositors. And that the look-alike notes were accepted in trade on the market ... This, Rothbard argued, was the beginning of "fractional-reserve banking.""
Money and Banking, by Lawrence H. White, The Encyclopedia of Libertarianism, 15 Aug 2008
Discusses some of the issues regarding money, whether state- or privately issued, and banking, including central banks, such as the Federal Reserve, fractional reserve banking and free (fully unregulated) banking
"Perhaps because early banks often operated under exclusive state charters, some classical liberal thinkers ... condemned bank-issued money that rested on fractional reserves as per se illegitimate. They called for a return to 'hard money,' a system that relied only on coins made of precious metals or on certificates fully backed by precious metals. Others ... called for free banking, or the complete separation of banking and the state. In their view, governments should neither shelter banks from market competition nor restrict the sorts of contractual arrangements, including fractional reserves that banks may make with their customers."
Money and Gold in the 1920s and 1930s: An Austrian View, by Joseph Salerno, The Freeman, Oct 1999
Criticizes Richard Timberlake's Freeman articles on U.S. monetary policy during 1920-39, contrasting the British Banking School vs. Currency School definitions of inflation
"In practice depositors could withdraw their savings deposits from commercial banks on demand, because the law that permitted the banks to insist on a waiting period was rarely if ever invoked. Similarly, while savings and loan associations were contractually obligated to 'repurchase' their 'shares' at par on request of the shareholder, they could legally delay such repurchase for shorter or longer periods depending on their individual bylaws. Nonetheless such delays rarely occurred and 'for many years savings and loan associations have made the proud boast "every withdrawal paid upon demand" or some similar statement.'"
Money in the 1920s and 1930s, by Richard Timberlake, The Freeman, Apr 1999
Attempts to set the record straight on the economic and monetary events of the 1920s and early 1930s, arguing against both the Austrian view (as expressed by Murray Rothbard) and those who put the blame on stock market speculation
"Four definable institutions created the money in use during the 1920s: the gold standard, the U.S. Treasury, the Federal Reserve System of 12 regional banks and the Federal Reserve Board in Washington, and the commercial banking system of 20,000-odd banks. ... Only the gold standard and the Fed, with a notable assist from the Treasury, were important ... The commercial banks could only take what came their way from the central bank and the gold standard. They, too, created money. But their money-creating activities were all unintentional and strictly a byproduct of their lending operations."
New Declaration of Independence, by Vince Miller, Jarret Wollstein, Jan 2000
Prefaced by quoting the second paragraph of the original Declaration, lists the outrages of the "modern American State" (in a manner similar to the original), ending with a list of demands including Citizen Grand Juries, Citizen Veto and Power of Recall
"They have destroyed our financial security. They have debauched the currency, substituting worthless paper for gold and silver. They have clandestinely seized our banking system – inflating currency and credit and looting the real wealth of the people. ... To restore the freedom, peace and prosperity of the people, we therefore demand: ... That the Federal Reserve, FDIC, FSLIC and currency laws be abolished, and that banking and insurance systems be left to the private sector in order to restore security to our banking system."
Non-Marxist Theories of Imperialism, by Alan Fairgate, Reason, Feb 1976
Examines writings of critics of imperialism that are not based on Marxist analysis
"Hobson's focus on the crucial role of overseas investment outlets naturally brought him to emphasize the strategic position of international bankers ('the central ganglion of international capitalism') in formulating imperialist policies ... Like Hobson, Moon attributed particular importance to the role of bankers: 'The most influential of all business groups, the bankers, may be said not only to have a direct interest in imperialism, through colonial investments, but to represent indirectly all the above-mentioned interests, for banks have financial fingers in every industrial pie' ..."
The Anatomy of Antitrust: An Interview With Dominick T. Armentano, by Dominick T. Armentano, Austrian Economics Newsletter, 1998
Discusses aspects of the United States v. Microsoft Corp case and related issues, such as product tying, exclusivity agreements, theories of compettion, price fixing, Robert Bork's views, government monopolies and Armentano's antitrust book
"Banks are heavily regulated in some ways and privileged in others. I would like to see those interventions repealed. But this is a different problem from that of antitrust. In banking, entry is not completely free. There are minimum capital requirements. But these are modest restrictions. So the analysis I would use on bank mergers would be the same as for any industry. Mergers take place because there are efficiency gains to be realized, and these mergers ultimately benefit consumers."
The Housing-Financial Meltdown Revisited, by Sheldon Richman, 11 Oct 2013
Examines the history behind the 1933 Glass-Steagall act, its repeal in 1999, and the causes behind the 2008 financial meltdown
"This is hardly to suggest that all was well with banking before Dodd-Frank. Not by a long shot. The industry was a corporatist monstrosity, a cartelized affair that included government deposit insurance, which protects banks from conscientious depositors who would otherwise scrutinize their lending practices. But the 1999 repeal of one section of Glass-Steagall was not among the problems."
The Many Monopolies, by Charles W. Johnson, 24 Aug 2011
Describes four ways in which markets are distorted by government interventions, explains Tucker's "Four Monopolies", examines five present-day monopolies and discusses Tucker's libertarian views
"Tucker saw that monetary control not only secured monopoly profits for insulated banks, but also concentrated economic ownership throughout the economy, favoring the large, established businesses that large, established banks preferred to deal with. Tucker identified the Money Monopoly as an economic force in 1888—before the Fed and fiat currency, the FDIC, Fannie, Freddie, the IMF, or trillion-dollar bailouts to banks 'too big to fail.'"
The Nightmare of the New Deal, Part 2, by George Leef, Future of Freedom, Jan 2008
Review of The Forgotten Man (2007) by Amity Shlaes; discusses the Schechter Supreme Court case which caused the National Recovery Administration (NRA) to be declared unconstitutional, the 1940 election and offers some concluding remarks
"Second, I wish that Shlaes had spent a little more time on the causes of the 1929 crash and especially the banking panic in 1930. She leads the reader to understand that the failure of the Bank of the United States had a cataclysmic effect on the banking system but doesn't clearly explain precisely how the bank collapsed and why it had such widespread repercussions. Some discussion of fractional-reserve banking and America's banking laws that prevented interstate branch banking would have clarified a point that's a crucial part of the case that government intervention was the real culprit."
The Organization of Debt into Currency: On the Monetary Thought of Charles Holt Carroll, by Robert Blumen, Mises Daily, 27 Apr 2006
Review of the fractional reserve banking and monetary arguments made by Charles Holt Carroll, a 19th century Massachusetts merchant, in a collection of 36 essays re-published in 1964 in Organization of Debt into Currency and Other Papers
"Fractional reserve banking is a term describing the capital structure of a bank that has loaned funds that were placed there on deposit. This is problematic because deposit and loan transactions are fundamentally different. A deposit is a contract for the storage of currency in the bank to be held in safekeeping and returned immediately on demand. The deposited funds must be available at all times should the depositor wish. In contrast, a loan is a transfer of ownership and availability for a definite term."
Related Topics: Gold Standard, Inflation, Money, Prices
The Prophet of the Great Depression, by Frank Shostak, 4 Oct 2006
"We can thus see here that as long as banks facilitate commodity credit, they should be seen as agents of wealth generation. In contrast, whenever banks embark on the lending of circulation credit they in fact become agents of real wealth destruction. As opposed to commodity credit, circulation credit is not supported by any real saving. This type of credit is just an empty claim created by banks."
The Reserve Requirement Debacle of 1935-1938, by Richard Timberlake, The Freeman, Jun 1999
Delves in greater detail into the reserve requirement policy of the Federal Reserve during 1935-38, discussed in the previous article "Gold Policy in the 1930s"
"Before governments imposed legal reserve requirements, bankers maintained their own reserve accounts. The typical banker considered a variety of circumstances to determine the fraction of reserves he should keep against the bank's demand obligations: the volatility of his lending business, his bank's geographical location—rural or urban and its proximity to financial centers, the season of the year, and the general state of business. ... Whatever his reserve position, the banker had his reserves on hand and knew he could use them to the fullest if any panic or emergency threatened."
The Roots of the Great Depression, by Richard Timberlake, Navigator, Jan 2001
Topics discussed include Federal Reserve policy during 1920-1939, the British attempt to return the pound to its World War I value and U.S. interventions during the Hoover and Roosevelt administrations
"Ordinarily, a central bank, or other monetary 'authority,' sets reserve requirements at conventional levels, that is, where the commercial banks would set them anyway. The imposition of reserve requirements preceded the Federal Reserve Act by 50 years. (... in the National Banking Act, 1863-65.) ... What these policymakers did not consider was the fact that the commercial banking system was shell-shocked to the point of paralysis. When bankers first experienced the crises of the early 30s, 'their' Fed Banks had not supported them by supplementing their reserves by appropriate policies. So, thousands of them failed."
Will 2016 Be a Good Year for the Corporate State?, by Sheldon Richman, 13 Dec 2013
Considers the prospective 2016 U.S. presidential contenders, Hillary Clinton and Chris Christie, and how they line up with the aims of the corporate state, and further comments about South Africa under Mandela
"Clinton recently spoke to a gathering in New York organized by Goldman Sachs, the giant, influential (and bailed-out) investment bank, a gathering that Politico says was attended by 'a few hundred major investors.' .... She got one thing right: The politicians and big bankers 'all got into this mess together.' The financial and housing collapse of 2008 was the fruit of that malign partnership of big government and big business. ... But the big banks are doing fine now, thank you, and there's no reason to think that too-big-to-fail is over. It's regular people who are still hurting. So the bankers liked what they heard."


Ludwig von Mises: Scholar, Creator, Hero, by Murray Rothbard, 1988
Partial contents: The Young Scholar - The Theory of Money and Credit - The Reception of Mises and of Money and Credit - Mises in the 1920s: Economic Adviser to the Government - Mises in the 1920s: Scholar and Creator
"Mises distinguished two separate kinds of functions undertaken by banks: channeling savings into productive credit ('commodity credit'), and acting as a money-warehouse in holding cash for safekeeping. Both are legitimate and non-inflationary functions; the trouble comes when the money-warehouses issue and lend out phony warehouse receipts (notes or demand deposits) to cash that does not exist in the bank's vaults ('fiduciary credit')."
  • ISBN 9999827659: Paperback, Ludwig von Mises Institute, First edition, 1988
The Mystery of Banking [PDF], by Murray Rothbard, 1983
Electronic text available at the Ludwig von Mises Institute


GMU's Lawrence H. White on Free Banking and the Gold Standard (11/18/10), by Lawrence H. White, 18 Nov 2010
Central Banking vs. Free Banking and the Gold Standard, presentation by Lawrence H. White, Professor of Economics, George Mason University, at the Cato Institute's 28th Annual Monetary Conference
Related Topics: Central Banking, Gold Standard

How To Be a Crook, by Larken Rose, 7 Apr 2012
A progression of seven methods to rob from your fellow human beings
Related Topic: Federal Reserve System

Money, Banking and the Federal Reserve, by Mises Institute, Ron Paul, Lew Rockwell, Murray Rothbard, Joseph Salerno, 1996
Explains the origins of money and banking, how and why the Federal Reserve was created and the effects it has had on society. Dedicated to Murray Rothbard.
Related Topics: Federal Reserve System, Money

The Secret of Oz, by Bill Still (writer, director), 1 Oct 2009
Uses The Wonderful Wizard of Oz to examine the history of banking from ancient times to the 2008 financial crisis


The Banks Are Broke, by Joseph Salerno, The Lew Rockwell Show, 22 Jul 2008
Lew asks Salerno why the entire banking industry is threatened if a big bank is allowed to go bankrupt

The introductory paragraph uses material from the Wikipedia article "Bank" as of 23 Oct 2018, which is released under the Creative Commons Attribution-Share-Alike License 3.0.