What was Ayn Rand’s position on Fractional Reserve Banking

Ayn Rand was among the best thinkers of the 20th century. She was a philosopher and not an economist. To my knowledge she never discussed Fractional Reserve Banking explicitly.

Francisco’s beautiful and powerful money speech in Atlas Shrugged is however a clear statement against FRB. One of the main points in his speech is that money has no value unless there is something to buy and unless someone has produced:

When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others.

I find the same idea expressed in ““Hunger and Freedom,” in the Ayn Rand letter.

Money cannot function as money, i.e., as a medium of exchange, unless it is backed by actual, unconsumed goods.

To explain FRB we must start with normal banking which has two institutions the deposit and the loan. We jump into the case where you have money in your hands. This means that you have produced something and put it on the market.

  • When you deposit money you want them readily available for withdrawals and payments. The money is yours and you can spend them whenever you want. When you spend your money you withdraw goods to the same worth that you have just produced.
  • When you lend the money the money is no longer yours for a defined period of time. You  own the money no more. The guy who lend the money can however withdraw goods to the same worth that you have just produced. He also promise before the loan expires to put goods back in the market to the original worth + interest.
  • Now I’ll explain FRB (which is one of three things that makes me feeling sick. The others are blood and horror movies). When you FRB money  the bank keeps your money in your bank account. They are still yours.But simultaneously they lend out most of the money to some other guy. What they actually do is to open another bank account. And since bank accounts are money just as good as notes and coins the bank is creating money. But no goods are produced in the process.

The deposited money is backed by actual unconsumed goods whereas the new money is backed by “promise to produce goods”. This is clearly in contradiction with Ayn Rand’s statement of money. And in fact I find her insightful on the issue of money: The main point of money is not that it is ‘backed’ by gold but rather that it is backed by unconsumed goods.

The result of the widespread FRB practice is that the money supply is a mix of sound ‘first produce then consume’ money and upside down modern philosophy ‘first consume then produce money’. But as Ayn Rand made clear: Money cannot function as money, i.e., as a medium of exchange, unless it is backed by actual, unconsumed goods.

Ayn Rand undoubtly opposed FRB

Update: Stuart Hayashi made a reply on my note:

http://www.facebook.com/notes/stuart-hayashi/under-laissez-faire-can-full-reserve-and-fractional-reserve-banking-coexist-yes-/10150202188691600?ref=nf

Another thread on the topic started here http://www.facebook.com/ghorvay

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Filed under: on June 25, 2011 at 6:35 pm Comments (2)

2 Comments

  1. On June 27, 2011 at 12:11 pm Mira Sier:

    Our monetary system is based on credit or debt, and without constantly continuing issuance of debt, the whole thing falls apart. Our system of ‘fractional reserve banking’ gives commercial banks a licence to literally create money out of thin air – and then charge interest on the money they created. Fractional reserve banking is the cause of spiralling debt.

    A public campaign has started to end fractional reserve banking, and I recommend readers to look at the http://www.PositiveMoney.org.uk website which explains further and support the campaign.

    THX making me aware of this!

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  2. On July 2, 2011 at 8:28 am Stuart K. Hayashi Sier:

    Thank you very much for linking to my reply! ^_^

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