The blogger Bionic Mosquito has a post relating to today’s Mises Daily article on fractional reserve. Mosquito makes that point that modern deposit contracts are not bailments, with the depositor retaining ownership. Instead, the individual depositor in effect enters into a short term credit agreement with the bank.
Of course most depositors certainly do view their bank accounts as a form of bailment. Hence they say “I’m going to the bank to get my money.” There is still a widespread view of banks as safe holders of money deposits. The average Joe doesn’t deposit his paycheck and think, “OK, I just entered into a short term credit arrangement. I can call the loan at any time though.”
Hans-Hermann Hoppe makes this point in Chapter 6 of The Economics and Ethics of Private Property:
First off, as a matter of historical fact fractional reserve banks never informed their depositors that some or all of their deposits would actually be loaned out and hence could not possibly be ready for redemption at any time. (Even if the bank were to pay interest on deposit accounts, and hence it should have been clear that the bank must loan out deposits, this does not imply that any of the depositors actually understand this fact. Indeed, it is safe to say that few if any do, even among those who are not economic illiterates.) Nor did fractional reserve banks inform their borrowers that some or all of the credit granted to them had been created out of thin air and was subject to being recalled at any time.
Regardless of one’s view of fractional reserve, Hoppe’s observation is correct: banks don’t exactly advertise this fundamental aspect of how they do business.
The real problem is not fraud or fractional reserve banking per se. Eliminate cartelized money (the Fed) and the false security blanket (FDIC) and the market would sort through issues surrounding deposit banks and lending banks.