Banks, said Murray Rothbard, are always inherently bankrupt. Because "they issue far more warehouse receipts to cash (nowadays in the form of 'deposits' redeemable in cash on demand) than they have cash available. Hence, they are always vulnerable to bank runs. These runs are not like any other business failures, because they simply consist of depositors claiming their own rightful property, which the banks do not have. 'Inherent bankruptcy', then, is an essential feature of any fractional reserve banking system."

If that isn't plain enough, try Frank D. Graham in 'Partial Reserve Money and the 100% Proposal' (American Economic Review, September 1936):

"The attempt of the banks to realize the inconsistent aims of lending cash, or merely multiplied claims to cash, and still to represent that cash is available on demand is even more preposterous than.. eating one's cake and counting on it for future consumption.. The alleged convertibility is a delusion dependent upon the rights not being unduly exercised."

The way Rothbard saw it, the business cycle is straightforward. Bank credit expansion causes an inflationary boom, which is marked by an expansion in the money supply and by what he and other Austrian economists call malinvestment, both by bankers and entrepreneurs. The crisis comes about when credit expansion halts abruptly and the malinvestments are thrust forward into plain sight. What he then calls the "depression recovery" starts the necessary adjustment process "by which the economy returns to the most efficient ways of satisfying consumer desires."

David Fuller's view There are more interesting points from the perspective of 'Austrian school' economics in this issue.

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