The Theory of the “Tragedy of the Commons” Should Be Applied to Fractional-Reserve Banking Since the Expansive Process Derives from a Privilege Against Property Rights

We first had the opportunity to defend the thesis that the theory of the “tragedy of the commons” should be applied to fractional-reserve banking at the Regional Meeting of the Mont-Pèlerin Society which took place in Rio de Janeiro, September 5–8, 1993. There we pointed out that the typical “tragedy of the commons” clearly applies to banking, given that the entire expansive process derives from a privilege against property rights, since each bank entirely internalizes the benefits of expanding its credit while letting the other banks and the whole economic system share the corresponding costs. Moreover, an interbank clearing mechanism within a free banking system may thwart individual, isolated attempts at expansion, but it is useless if all banks, moved by the desire for profit in a typical “tragedy of the commons” process, are more or less carried away by “optimism” in the granting of loans.

—Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, trans. Melinda A. Stroup (Auburn, AL: Ludwig von Mises Institute, 2006), 394n.