It is useless to “ban” fractional reserve banking (especially while simultaneously maintaining a central bank). The solution lies in the legal domain. De Soto analyzed the Spanish civil code and found that only very few changes are needed to bring banks back into the fold of the law. As long as the state exists, this needs to be done. The idea of “separating the investment function and the savings function,” which has been discussed frequently in this context, seems strange, since it is clear that it requires state control and, consequently, is fraught with abuses.
Again, fractional reserve banking causes harm only under a monopoly monetary unit; in a free economy, banks producing their own fiduciary currency can certainly exist. And although, of course, this will look quite strange, it is quite possible that someone will also demand such currency. Importantly, in such an economy, the holders of such currency will bear the losses from fiduciary money, which makes the game fairly honest. In general, when you hear about free banking and that fractional reserve banking can certainly exist under competition, always clarify whether we are talking about a monopoly—that is, a currency common and mandatory for all these banks. If yes, then this system is not fundamentally different from the current one.