Is Your Checking Account a Deposit Contract?

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.


  1. I think his point is not that fraud wouldn’t happen (it would) nor that it would be tolerated. Rather that market forces like bank runs and reputation would force most banks to behave above board or not have customers. In the days of the wild west, this happened quite often… fraudulent banks were crushed by banks runs and more conservative banks did better. Even if they engaged in FRB practices, the degree to which this risk could be handled in the absence of FDIC or a central bank usually minimized the wanton abuse of FRB.

  2. The idea that a free market will sort through the issue of the fraud involved in FRB without any necessity to make FRB illegal is foolish. Historically even under free banking and laws that considered the practices of FRB to be illegal, unscrupulous individuals still engaged in this crime. Why do so many libertarians insist that in a free market nobody would be so unscrupulous? The potential profits in FRB are enormous, as long as the perpetrator gets out in time. Too many libertarians credit a free market with magical powers to change human nature. The truth is that the free market will not change human nature, it just makes the most of what human nature is. The free market requires as a prerequisite a legal system that upholds property rights, there is no free market without property rights. To claim that fraud can be tolerated in a free market as a matter of law is to deny free markets entirely.

  3. We might say that the main problem is not FRB per se, but FRB at such low interest rates. In a free market, the risks inherent in FRB would drive depositors to demand much higher rates of interest in exchange for loans (i.e., deposits) that may disappear or become inaccessible due to FRB. But, as you note, the moral hazards of “lenders of last resort” and the FDIC distort this with disastrous results.

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