The Essential Rothbard - Ludwig von Mises Institute

38 The Essential Rothbard
response involves another fundamental insight of Austrian economics.
Inflation does not affect everyone equally: quite the contrary,
those who first obtain new money gain a great advantage,
since they can purchase goods and services before most people
become aware that the purchasing power of money has fallen.
Politicians use inflation to benefit themselves and their supporters.
Another dubious monetary practice arose out of deposit banking.
Because of the inconvenience of carrying gold and silver, people
often deposited their money in banks, obtaining in return a
receipt. These receipts, since they are promises to pay gold and silver,
soon began to circulate as money substitutes. But a temptation
presented itself to the bankers. The receipts normally did not specify
particular gold or silver coins to be returned to the depositor;
they were rather entitlements to specified amounts of the money
commodity. 82 Since they are required only to return the amount of
money specified in the receipt, bankers might give out more
receipts than they had gold and silver on hand, trusting that not all
depositors would demand redemption at the same time. For those
willing to assume this risk, the prospect of vast profits called
appealingly.
But is not this practice a blatant instance of fraud? So it would
appear, and so Rothbard firmly avers that it is. Unfortunately, several
British legal decisions held otherwise, and the American
courts adopted these verdicts as well.
Our banker-counterfeiter, one might assume, can now proceed
happily on his way to illicit fortune. But an obstacle confronts him:
if he issues more receipts than he can redeem, the clients of other
banks might ruin him through demands for payment that he cannot
make good. Hence the bankers worked to establish a central banking
system. Under a centralized system, the danger of bank runs
would diminish. If Rothbard is correct, the entire basis of modern
deposit banking, the fractional reserve system, is a type of counterfeiting
that must be abolished. Under present arrangements, “the
82 Rothbard noted that the great nineteenth-century economist
William Stanley Jevons warned against these “general deposit warrants.”