New York City activist

November 1, 2007

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.
  2. For more information, see:

    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.

  3. 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.
  4. 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.

  5. 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:

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.



  1. Diane, I generally agree with everything you say.

    I could see anti-Semitic writers used to discourage people from looking at the banking system, but I could also see what you do — criticism of banking used to promote anti-Semitism. Neither get to the merits of the arguments about what kind of banking system we should have, but are just the propaganda we have to wade through.

    My understanding of the Federal Reserve comes from William Grieder, Secrets of the Temple, which I read years ago. So far in my reading, the only statement Tarpley has made in his 9/11 book about the Federal Reserve is that it takes a lot of power from the president, which if I recall correctly was the major theme of Secrets of the Temple. He also talks about powerful people on Wall Street who have long had power in our government – e.g. Dulles, Clark, Harriman, all WASPS I assume. So I don’t see any basis for Berlet’s criticisms, and even if there is a grounds for concern about anti-Semitism, they certainly don’t warrant dismissing everything Tarpley says.

    Sorry if this relates more to the prior thread. About monetary policy,
    I have found this man’s writings interesting, though I only have a very shallow understanding of monetary policy. He worked for the treasury and doesn’t support a gold standard. I’d be interested to hear what you (and Krugman) think about his proposals.

    Of these articles, this might be the best to begin with:

    An Emergency Program of Monetary Reform for the United States – by Richard C. Cook – 2007-04-26

    Monetary Reform and How a National Monetary System Should Work – by Richard C. Cook – 2007-05-11

    Comment by dwightvw — November 1, 2007 @ 8:36 am | Reply

  2. I haven’t had tome to study this yet, but, at first glance, it looks at least like a saner critique of the banking system than some of the wild claims I’ve heard within the 9/11 Truth movement about the Federal Reserve System.

    Comment by Diane — November 4, 2007 @ 2:06 pm | Reply

  3. I have to admit to not being impressed by Krugman’s take on how “goldbugs” understand the advantages of a gold standard. Two points for now:

    1) The thing about “goldbugs” is that they must also, by necessity, be critical of the way our current version of capitalism encourages unsustainable growth through consumption, and for growth to continue despite widespread malinvestments. To not understand the latter is indeed to make it seem like the former is completely illogical. Put the two together and a more coherent picture is possible.
    2) Gold is indeed just a metal, and if Midas did exist there would indeed be a huge problem with gold as an widely accepted money. Krugman fails to address the issue of scarcity, one of the key reasons for the market throughout history to have chosen gold as money. To the extent that a “goldbug” holds on to the value of a gold standard despite the existence of King Midas, they must be criticised. To the extent that the supply of gold on Earth remains quite stable and remains scarce, they still have a coherent case IMO.

    Thank you for the Gene Callaghan link, it is always good to see different people’s takes on such issues. He indeed helped to point out a flaw in my own thoughts on it, i.e. to remember that money itself is a good, which I appreciate. Everything he says seems very logically consistent except for one thing: in reality, do people indeed understand the nature of fractional reserve banking (or indeed fiat money) and the effects of monetary inflation? Do we really treat money as just another economic good, rather than a special category of dependable value? From my experience as a 1st year economics student, I would argue strongly that we do not. Fractional Reserve Banking may indeed not be inherently fraudulant, but given the context of public understanding of the system there still remains the case that the current system is.

    This road can lead us away from “pure” libertarianism however…

    Comment by bzn10 — November 20, 2007 @ 10:27 pm | Reply

  4. (This comment is an edited pingback.)

    The post linked below contains a brief summary and index to the information I’ve collected so far about the Federal Reserve System and various right wing populist allegations about it.

    – Diane

    Pingback by Please do NOT trust Eustace Mullins as an authority on the Federal Reserve System! « New York City activist — December 24, 2007 @ 9:48 pm | Reply

  5. When interest is charged on money that does not exist or even money that does exist, what happens to the principle money supply? Over time it gets depleted to where it is impossible to remove yourself from debt. All of the principle money ends up in one central location allowing that location to own everything. Ask yourself this. How much principal money is in circulation? And what is our national debt? You will quickly come to realize there is no principal money in circulation. Conspiracy theory? It’s 3rd grade math. Stay in your fantasy…This financial collapse has been predicted for years and you see it happening and still call it a “conspiracy theory?” Have you seen what happened in Argentina?

    Comment by digtheheavy — October 14, 2008 @ 11:47 am | Reply

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