Unlike Most Economists, Murray Rothbard Views Bank Runs Favorably because Bank Failures Are a Healthy Weapon by which the Market Keeps Bank Credit Inflation in Check

The bank run plays a special role according to Rothbard. Unlike the overwhelming majority of economists, he views bank runs favorably. They function as a constraint on inflationary monetary expansion under free banking. They also "instruct the public in the essential fraudulence of fractional reserve banking." Rothbard seems literally to believe that if one observes a period during which there occur very few bank failures, then this is sure to be a time of inflationary monetary expansion. A case in point is that of Scottish free banking (1765-1845). In discussing Lawrence White's work on Scotland, Rothbard contends that a low rate of bank failure "might indeed mean that the banks are doing better, but at the expense of society and the economy faring worse. Bank failures are a healthy weapon by which the market keeps bank credit inflation in check . . . a lower rate of bank failure can scarcely be accepted as any sort of evidence for the superiority of a banking system."

--Larry J. Sechrest, introduction to Free Banking: Theory, History, and a Laissez-Faire Model (Auburn, AL: Ludwig von Mises Institute, 2008), 145-146

The Eight Standard Criticisms Raised in Opposition to Private Money and Laissez-Faire Banking

The body of conventional literature on monetary matters has, for many years, included several propositions that explicitly challenge the viability and/or desirability of free banking. Chapters 2, 3, and 4 presented a detailed theoretical case for free banking on the grounds that it would maintain nominal national income, reflect consumer preferences in the time and money markets, keep the market rate of interest equal to the natural rate, achieve continuous monetary equilibrium, and avoid business cycles. Despite those arguments, in order to complete the discussion, one must address the standard criticisms. That is, one must examine the key points in the case against free banking. The issues so often raised in opposition to private money and laissez-faire banking include the following claims: (1) that money is a "public good" and thus cannot be profitably produced in a free market; (2) that there exist significant "external effects" such that private money balances would be suboptimal; (3) that money production is a natural monopoly, that is, that marginal and average costs decline over the relevant range of output; (4) that competition in money will lead to massive inflation; (5) that free banking is inefficient in that it represents a waste of resources; (6) that privately produced moneys suffer from serious counterfeiting problems; (7) that central banking arose in response to true consumer needs, that is, that it is central banking rather than free banking that represents the natural evolution of money markets; and (8) that a lender of last resort (a central bank) is necessary in order to prevent or mitigate financial crises.

--Larry J. Sechrest, Free Banking: Theory, History, and a Laissez-Faire Model (Auburn, AL: Ludwig von Mises Institute, 2008), 157.