Has Fractional-Reserve Banking Really Passed the Market Test?
By Jorg Guido Hulsmann
This article appeared in the Winter 2003 issue of The Independent Review
Some economists suggest that because fractional-reserve banking is the rule in Western banking systems today, it has passed the market test, whereas the alternative arrangement of 100 percent reserves for money titles has not. In reality, the present-day dominance of fractional-reserve banking is not a matter of having passed the market test but of legal restrictions that have hindered product differentiation in banking.