Business Administration Faculty Publications

The Morality of Fractional Reserve Banking

Document Type

Article

Publication Date

2020

Journal Title

Journal of Markets & Morality

ISSN

1944-7841

Volume

23

Issue

1

First Page

27

Last Page

44

Abstract

Scholars who consider the morality of fractional reserve banking are often critical not only because of its inflationary impact but also the impossibility of meeting all legal requirements: When deposits are loaned out, they cannot at the same time be redeemed on demand. Given the promise to return demand deposits and the impossibility to do so for all, some Christians have condemned fractional reserve banking as inherently fraudulent. This article will review fractional reserve banking and other institutional arrangements that lead to bank runs and inflation (legal tender laws, central banking, et al.) to determine if fractional reserve banking by itself is necessarily immoral. It will survey existing scholarly thought and ask the question: “Are there any circumstances where fractional reserve banking could be morally justified?” We conclude that fractional reserve banking is not necessarily immoral, when not combined with central banking and legal tender laws.

Keywords

Fractional reserve banking, morality, inflation, central banking, legal tender laws

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