In my writings I've long opposed calls for banning fractional reserve banking, and I oppose this one for the same reasons.

Every last one of these proposals starts from the premise that fractional reserve banking systems are inherently unstable. Yet that premise is demonstrably false. We know of many episodes of fractional reserve banking systems that thrived for long periods, without suffering any crises, and often without even witnessing any important bank runs. The experiences of Scotland, from 1772 (after the Ayr crisis--concerning which everyone ought to read Tyler Goodspead's excellent book) until the 1850s, and Canada from 1871 to 1914 (or 1935, if you prefer) are only the most well-known ones.

These particular episodes, and the historical record more broadly, also reveal that banking systems that were least hampered by regulation tended to be most stable. I survey evidence in my 1989 essay on "Legal Restrictions" etc., reprinted in in Money: Free and Unfree; those seeking more evidence should read Calomiris and Haber's Fragile by Design. Moreover, it is not difficult to show precisely how government interference rendered banking systems unnecessarily crisis prone, once one delves into the details of the interventions involved. (In U.S. history prior to the 1990s, for example, restrictions on branch banking alone were a major cause of instability.)

I have had numerous opportunities to speak to opponents of fractional reserve banking about this alternative view, and in every case, I'm sorry to have to say, what came across to me most clearly was the appallingly limited knowledge of banking history these critics possessed. Indeed, it is not much of a stretch to say that they had hardly any real history at all. Instead, most had substituted in its place a familiarity with (1) the Diamond-Dybig model--though not with any of that model's very significant shortcomings, both analytical and empirical--and (2) "It's a Wonderful Life"! No, I am not kidding! (Why they don't more frequently refer as well to Mary Poppins, so as to better bolster their case, is something of a mystery.)

Nor am I impressed with arguments, such as one hears from John Cochrane and Morgan Ricks, to the effect that fans of free markets should welcome their calls for 100% reserve banking or something like it, because what they are proposing is really a sort of "deregulation," in that it would make most existing kinds of bank regulation unnecessary. No doubt it would, but only in the same sense that, say, making automobiles illegal would make most traffic laws and parking regulations unnecessary.

And here is another place were the 100-percent types go badly awry. Because just as cars are useful, despite the accidents and other problems that their use causes, so, too, are fractional reserves banks. It is further evidence of poor scholarship of that these critics of the most fundamental of bank undertakings--the making of loans financed by demandable debt--appear not to appreciate either the significant social benefits of that activity, or the lack of any close substitutes for it, as eloquently explained in numerous writings by outstanding economists and economic historians from Adam Smith to Rondo Cameron to Anil Kashyap.

Finally, the "Austrain" theory according to which fractional reserves and "fiduciary media" inevitably give rise to excessive credit creation, below "natural" interest rates, and business cycles, adds another layer of bad economics to the mix, for whether a fractional reserve system does these things depends entirely on what sort of system one is talking about. It is easy to show analytically, moreover, that keeping rates at their natural levels is not a matter of ruling out the creation of bank IOUs unbacked by reserves. Instead, it is a matter of seeing to it that IOU creation corresponds to concurrent attempts by the public to accumulate real money balances. Seen from this perspective, it should be perfectly obvious that keeping banks on fixed (let alone 100 percent) reserve ratios and having them perform as "pure intermediaries" are entirely different things.

I'm sorry for the longish rant. But really the 100-percent reserve position needs to be called out for what it is: an extremely naive product of superficial understanding of both banking history and monetary theory.