A key question in the debate over fractional reserve banking is the extent to which people know that banks lend their deposits out to others. People must accept that if they all went to get back their deposits, the banks would not be able to pull in all the money they have lent on, and the system would collapse. The fact is that not all people want their money back at the same time, so the scheme works and allows interest to be paid. I have always held that people would be horrified if they knew what was actually done with their money. In the absence of any empirical data, the Cobden Centre commissioned a group of students at ESCP Europe working under our Founding Fellow, Dr Anthony Evans, with the market research company ICM, to survey the views of 2000 people. Anthony has written an informative and useful summary. The report considers the key questions of solvency and liquidity, and concludes that “by reasonable auditing standards, high street banks are insolvent”.

My take is that people are confused. 74% think they own their money, when of course they do not, the bank does. 15% want safe keeping and 67% want easy access. Easy access implies safe keeping to me as there is no access if you have a bank run. I do feel that clarity, more so than ever, is required to start the clearing up of this mismatch of understanding between what a bank actually does and what people think it does. This can only be resolved by a change in law as mentioned in this article. At the same time, our fractional reserve free banking colleagues may take comfort from our finding that 61% of those surveyed do not mind having their money lent out so long as the lending isn’t reckless. This strengthens the position of allowing FRFB between consenting adults. The debate will roll on. We hope this will add an empirical edge that will sharpen the focus of some of the best thinking Austrian economists.

I am minded to return at a later date and commission a further survey that helps spell out to the public the actual bank credit creation multiplier as this is not brought out by our questions, and see what the empirical data throws back at us. I suspect that hairs will stand up on the back of necks, with a general sense of horror, but these are my prejudged views and I would be interested to see the evidence.

In the meantime, I recommend this video of Anthony’s presentation of our findings to the Liberty 2009 Conference: