Mediations on the Sound Money Debate: How Banking Can Be Free, Fractional and Solvent
Posted: 19 May 2010 Last revised: 7 Jun 2013
Date Written: September 25, 2010
This paper attempts to shift the debate between fractional and 100% reserve free banking from issues of fraud to issues of solvency. By drawing attention to the reflux mechanism of “adverse clearings,” “withdrawal notices” and “option clauses” it is argued that fractional reserve “instant access” funds are not necessarily fraudulent. However additional institutional devices such as auditing requirements, margins, and limited liability protection are required to ensure banks operate within the general business law. Since the traditional distinction between deposits and loans is mostly etymological and thus irrelevant, a “sound money” system can be free, fractional, and solvent.
Keywords: Fraud, Solvency, 100% Reserve Banking, Fractional Reserve Banking, Business Cycles
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