Over at Cafe Hayek, some comments made concerning my last Free Banking post suggest that Murray Rothbard, though opposed in principle to fractional-reserve banking, did not wish to see it prohibited. That’s not really correct. As I pointed out there:

“Actually in arguing that FR banking was fraudulent, Rothbard could hardly escape implying that the polizei, or some anarcholibertarian equivalent, ought to shut it down. And he certainly did argue for setting up “anti-bank vigilante squads” charged with organizing runs and otherwise making life impossible or at least miserable for such bankers. I always wondered about this: if Rothbard believed people were being systematically duped, then wouldn’t just informing them suffice to make them run on their banks–why speak of “squads”? And then wouldn’t it make still more sense to organize, not “anti-vigilante” squads, but rather 100-percent banks that could thrive on the money withdrawn from the FR banks whose fraud was being revealed? Finally, if that would be a good idea, why hadn’t any of those excellent entrepreneurs Rothbard and other Austrians are always telling us about ever figured it out? (Please don’t answer by appealing to deposit insurance: before 1967, only one country had it; and before 1934 none did. That leaves plenty of time in which the entrepreneurs might have made hay.)”

Larry White and I had already pointed out this tension between the “fractional-reserve-banking-as-persistent-fraud” argument and the Austrian theory of entrepreneurship, which treats the latter as serving to systematically spot and exploit profit opportunities, in our 1996 Review of Austrian Economics article, “In Defense of Fiduciary Media.”