Attempts to Legally Justify Fractional-Reserve Banking

In this lesson, we will look at doctrinal attempts to justify the bank-deposit contract as it is carried out today—that is, with a fractional-reserve ratio. We must understand that a practice as widespread as we have seen this to be throughout the world, especially following the Peel Act, a practice which consists of bankers’ appropriating the most significant part of demand deposits to use them in their personal business deals, specifically loans, a practice so widespread, which arises from a privilege governments grant to these economic agents (bankers) but to no other economic agent (whether a natural person or a legal entity) … Such a practice could not be maintained indefinitely without finding some way of defending it, some way of trying to legitimize such behavior, even if only on the surface. Furthermore, the banking world is full of vested interests. Banks are very powerful, and it should not surprise us that bankers have devoted substantial resources and have used their considerable influence to try to give a suitable legal veneer to the type of activity they engage in. So, in this lesson, we will study the two major attempts which, from the standpoint of legal doctrine, have been made to justify the behavior of bankers regarding the use of a fractional reserve with monetary bank deposits.