Fractional reserve banking acceptable or not in laissez-faire system?

This is one of my comments I wrote under an article at "Laissez-faire blog" of Ayn Rand Institute

I've read your article, and it addresses only the issue of FR banks "disguising" their banknotes as fully-backed claims to gold - which would never occur in a laissez-faire capitalism with no government intervention into monetary matters. Clearly, such disguising is fraud and courts would stand ready to punish such banks on the basis of protection from fraud.
That's why in a truly capitalist system FR banks could only issue banknotes or checks with explicit information about the fractional nature of their reserves, and that's why each person willing to accept these fiduciary media would be aware of the risks involved, and possible costs from either inflation (banknotes losing purchasing power), redemption delay or outright bankrupcy in the worst case scenario (market signals would not be hampered though, so each banknote would be discounted depending on the situation). Thus, noone is forced by legal tender laws to accept fiduciary media in a laissez-faire system. Those who choose to hold gold or other specie used as money, are not affected by the loss of purchasing power, because inflation of one FR bank's notes only affects this bank's notes' purchasing power. The temporary rise in demand due to credit expansion is immediately curbed whenever a FR note is redeemed for specie, or a loan created out of FR deposit is paid off, therefore in the long run there is a monetary equilibrium.
Again to conclude - in the absence of central bank, legal tender laws and government intervention into monetary matters, that is, in the environment of full laissez-faire including money production, there is no infringement of rights in fractional-reserve banking, given that FR banks are outright honest about their practice and courts uphold the law protecting from fraud as explained in the first paragraph.

Now, I am acquainted with such literature as professor Jesus Huerta de Soto's "Money, Bank Credit and Economic Cycles" and Jorg Guido Hulsmann's "The Ethics of Money Production", and I consider myself a supporter of 100% reserve banking - as a bank client! I probably would not deal with FR banks whatsoever if I had a choice in a laissez-faire system - bearing the cost of such a behaviour. But clearly there is no argument from a rights' perspective against FRB, given all the institutional framework of a truly capitalist society, with a functional court system and no legal privileges for FRB. I cannot make myself more clear with that.

We can condemn FRB as an unnecessary, overly dangerous business practice - just as we condemn for instance extreme sports, drug use, "insider trading" etc., but these are perfectly voluntary activities in a free society, involving only willing parties and having no effect (from a rights' perspective!) on uninvolved people. Saying that an expansion in credit by a FR bank harms third parties is, as I explained earlier, mistaken. It is not even close to, for example, a case where one buys a piece of property and one day, because of fully legitimate actions of his neighbours, the price of his property falls by a significant amount - I rarely find a free-marketer who would object to such an outcome and call for state intervention or sueing of neighbours when no rights were infringed and only market forces were at work. In a free banking world, people's savings are safe from inflation when they keep them in gold or in 100%-reserve deposits, because only FR notes are affected. And nobody is forced to use FR notes. People weigh costs and benefits from using that or that kind of banking, saving and investment opportunities, using their own reason, preferences and acting on their behalf. That's the main point.

I hope this finally resolves this interesting issue once and for all.

About fractional reserve free banking once more

Fractional reserve free banking is inherently unstable, and Scottish episode of free banking was very far from stable. It was rife with booms and busts and suspension of payments to depositors, although the role of Bank of England in fueling the Scottish banks' credit expansion was to an extent significant.
As David Howden, a renowned Austrian monetary economist, explained in yesterday's talk at the Austrian Scholars Conference (the video will be available shortly on YouTube via "misesmedia" channel), fractional reserve free banking continually mismatches savings with investments, because the banks engaged in fractional reserve treat cash balances as savings, while the depositors don't. That is - when a depositor senses a bad investment climate and instead of channeling his funds into savings account, decides to keep them as additional cash balance on his deposit account, the bank treats it as savings anyway and loans it to business. Market interest rate therefore are low, even though depositor's time-preference is high - he senses uncertainty and prefers to have a higher on demand cash. Fractional reserve banking deprives him of that, fueling an investment boom which is inherently unstable, because the depositor will use his cash balance for his own spending in undiscernable future (either for consumption or investment), when he feels certainty again in the market, thus forcing the bank to curtail its outstanding loans and eventually bankrupting several investors who borrowed the depositor's cash balance as if it were his genuine savings. The bank may even have to suspend payments, if depositors who had increased their cash balances were in high number. So, a typical boom & bust cycle.
Fractional reserve banks engage in such practices at all times, because of prisoner's dilemma - if a bank would like to remain prudent and don't expand credit with ingenuine 'savings' (deposits), he suffers a competetive disadvantage from other banks, who liberally expand credit and fuel investment boom, raking in huge profits. When bust hits, some banks go bankrupt, some survive - retaining some profits, and still being better off than before boom. Therefore, every bank in fractional reserve regime will expand on fiduciary credit, because it's in its self-interest much more than not.
This observation, made by professor Jesus Huerta de Soto in his magnum opus "Money, Bank Credit and Economic Cycles", is staggering. Federal Reserve did not appear out of thin air, but it was decades-long cycle of fractional reserve free banking getting more and more centralized, until the need for the lender of last resort was finalized to make the cartel complete.
And I haven't even mentioned the obvious transgression of property rights of depositors, which takes place in fractional reserve banking, unless the depositor is informed in plain English in his contract, that he does not in fact deposit his money, but loans it to bank and receives not money certificates, but mere lottery tickets for possible redemption - and not on demand, but when bank decides so.
And we could go on and on.

From the perspective of property rights, fractional reserve banking with a central bank is inherently immoral. Without a central bank - it remains immoral as long as a legal tender law is in effect, as it renders all banknotes issued in excess of bank reserves as duplicate titles to pieces of property (money proper). With no legal tender laws, and each bank issuing his own bank tickets - property rights are not violated only in as long as the contract signed with the customer clearly states that it is not a deposit service, but a loan, and money is not 100% redeemable on demand.