Fractional reserve banking: A response to some of the hullabaloo

The banking system is certainly not above criticism. However, as I pointed out in a comment after my post on Chip Berlet and “conspiracism”, there are at least three reasons to be wary of some of the allegations about the Federal Reserve System that have been circulated widely in the 9/11 Truth movement:

1. Many of the more inflammatory allegations originated in anti-Jewish propaganda. Although the people who repeat these allegations are not necessarily Jew-haters themselves, and although the anti-Jewish origin of a claim does not, in itself, prove the claim to be false, it is a good reason to be suspicious. At the very least, it’s a good reason to double-check the accuracy of the claim rather than repeat it uncritically. An example is the claim that the Federal Reserve System makes huge profits that go into the pockets of the owners of member banks, a claim I questioned in my post about Some of the rhetoric against the Federal Reserve System. I subsequently learned that one of the main sources for the more extreme claims about the Federal Reserve System is Eustace Mullins, a notorious Jew-hater.

For more information, see:


• The Myth of Jewish Control of the Federal Reserve System on the Anti-Defamation League site
• Wikipedia article on Eustace Mullins
• collection of Usenet posts about Mullins on the Nizkor site
• Errata for Waking up from our Nightmare by Don Paul and Jim Hoffman

The Wikipedia article quotes a 1993 interview in which “Mr. Mullins seemed to disclaim his past antisemitism.” However, subsequent Jew-hating writings of his can be found on the net, such as “The Four Horsemen of the Apocalypse.” As for Hoffman’s speculation that Mullins’s Jew-hating was “a booby-trap planted to discredit other exposures of the FED,” I think it far more likely that Mullins’s book on the Federal Reserve was an attempt to bring scholarly respectability to a disguised form of anti-Jew bigotry. Hence, in my opinion, Mullins should not be regarded as an authority on the Federal Reserve System. Any and all claims of his should be double-checked thoroughly, from primary sources, before endorsing them.

2. I personally think that the antiwar movement and the 9/11 Truth movement should be more concerned about the military-industrial complex than about the banking system. Although bankers do profit from war too, they profit only indirectly, via the military-industrial complex, primarily. Banks do not depend on war, or the threat of war, in the way that the military-industrial complex does. Banks are quite capable of making huge profits in peacetime too. Of course, a lot of the same people who own the major banks also own weapons manufacturing corporations, oil companies, etc. But I see no particular reason to single out these people’s role as bankers over other roles of theirs more directly relevant to war and profits from war.

Hence a disproportionate focus on the role of banks, on the part of an antiwar or 9/11 Truth activist, suggests at least some sort of political agenda beyond just investigating 9/11 and opposing war or imperialism. That agenda need not be anti-Jewish; it might just be a libertarian free-market agenda, for example. But, whatever the underlying agenda might be, it’s not something that all 9/11 Truth activists should necessarily be expected to support.

3. From a leftist perspective, the source of many of the world’s ills is the concentration of wealth in the hands of a relatively few people. The banking system is only one aspect of this, and is not the crux of the problem. Hence leftists, in particular, should think twice about jumping on the “Abolish the Federal Reserve!” bandwagon.

I’ll now comment on some of the rhetoric I’ve seen not just against the Federal Reserve System but also against fractional reserve banking in general.

In reply to my post on Some of the rhetoric against the Federal Reserve System, infohoe recommended the article Fractional Reserve Banking by the late Murray N. Rothbard. I’ll now comment briefly on that article.

Rothbard was an economist and a staunch advocate of free market ideology. He is credited with having been “the founder of modern libertarianism.”

His article on “Fractional Reserve Banking” starts off with a brief mention of his advocacy of a gold standard. Many economists do not agree with Rothbard that returning to a gold standard would be a good idea. For some reasons why, see the November 1996 essay The Gold Bug Variations by MIT economics professor Paul Krugman (who has also written a bunch of other essays on what he, or the person who put together the “unofficial Paul Krugman website,” calls Crank economics).

Rothbard does not give a very clear explanation of what fractional reserve banking is or how it works. So, I would recommend reading the following pages (or, better yet, an Economics 101 textbook if you happen to have one handy) as a clarification to Rothbard’s less precise and more propagandistic explanations:

• Wikipedia article on Fractional Reserve Banking
• Money: What it is, how it works
• Reserve Requirements on the website of the Federal Reserve Bank of New York

Not even all free-market libertarians would agree with Rothbard’s opposition to fractional reserve banking. Nearly all free-market purists do indeed reject the idea of a government-authorized central bank such as the Federal Reserve System. However, there are many libertarians who do not share Rothbard’s opinion that fractional reserve banking itself is inherently fraudulent. See, for example, The Libertarian Case Against Fractional-Reserve Banking by Gene Callahan

A leftist critique of the banking system would be utterly different and would not focus either on fractional reserve banking or on the existence of a central bank as the evil that should be eliminated.

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