The American Empire in a Changing World


Thursday, November 15, 2012

''The Ills of Fractional Reserve Banking''

From Daily Reckoning Australia

''The first issue is fractional reserve banking (FRB). If you put your gold coins into storage at the bank, the bank can't just go and lend out those gold coins to someone else with interest, hoping you won't come and claim them before the borrower returns them. If the bank did do that, it would be fraud.

But in a fractional reserve lending system the bank does just that with your deposited money. It lends out what you've handed over for safekeeping, and only holds onto a small part in reserves. It is illegal to engage in fractional reserve lending if you don't have a banking license, and even then, you can only do it with bank deposits.

This is an absurd exception from the law given to bankers. And it's the source of their remarkable profits, because they lend out money that was never theirs in the first place. The depositor deposits the money. It's not lent or given away to the bank.

Because of FRB, bank runs can happen. People want their deposits, but the bank has lent them out to borrowers. Bank runs cause a type of financial crisis, which have been a big part of the economic instability we've faced ever since banks have existed. That's more than a few thousand years, in one form or another.''

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