The Rothbard Deposit Bank Practices Honest, Noninflationary 100 Percent Reserve Banking

Let us assume we now have a Rothbard Deposit Bank. It opens for business and receives a deposit of $50,000 of gold from Jones, for which Jones receives a warehouse receipt which he may redeem on demand at any time. The balance sheet of the Rothbard Deposit Bank is now as shown in Figure 7.1.

Fifty thousand dollars’ worth of gold has simply been deposited in a bank, after which the warehouse receipts circulate from hand to hand or from bank to bank as a surrogate for the gold in question. No fraud has been committed and no inflationary impetus has occurred, because the Rothbard Bank is still backing all of its warehouse receipts by gold or cash in its vaults.

The amount of cash kept in the bank’s vaults ready for instant redemption is called its reserves. Hence, this form of honest, noninflationary deposit banking is called “100 percent reserve banking,” because the bank keeps all of its receipts backed fully by gold or cash.

--Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 94-95.