Some economists suggest that because fractional-reserve banking is the rule in Western banking systems today, it has passed the “market test,” whereas the alternative arrangement of 100 percent reserves for money titles has not. In reality, the present-day dominance of fractional-reserve banking is not a matter of having passed the market test but of legal restrictions that have hindered product differentiation in banking.

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Other Independent Review articles by Jorg Guido Hulsmann
Summer 2000 Banks Cannot Create Money