Fractional Reserve Fraud
Check out this great video on the nature of money and of fractional reserve banking.
The bottom line, really, is that fractional reserve banking is fraud. It is no different than if I paid a storage company to store my physical goods, only to find out, when I came to get them back, that the company had been lending them out to other people to use, and may not even have them!
That is how fractional reserve banking works. You give the bank your money, they give it to other people, keeping only a fraction of their deposits at any given time. Most of the time, when you come to take money out of your account, they will have enough on hand to give to you. But in certain circumstances, such as a bank run, you might just be out of luck. Sorry, we gave your money away, and now we can't get it back!
Understandably, people are outraged when this occurs, and they should be. Fractional Reserve Banking is fraud. Its one among many reasons we need free banking.
Whenever an economy develops, it bases its original trade off of barter. For example, I have two fish, you have two bushels of wheat. We each want what the other has, and so we can trade.
However, there are major flaws in this system. The most prominent among them is that if I want wheat, and have fish, I actually have to find someone who has wheat, and also wants fish. Unsurprisingly, this becomes difficult.
So, in a barter economy, what occurs is that some commodity, which it is believed that nearly everybody desires, arises as the standard of trade. In frontier era America, beaver pelts were used as a standard of trade. For all intents and purposes, beaver pelts were currency.
However, for most of western history, gold and silver have been the standards of trade. In a free banking system, one would pay a fee to banks to hold gold and silver (or any other standard of trade) and in return would receive bank notes in the amount of the deposit. Undoubtedly, some banks would still use fractional reserve banking, but entering into contracts with their depositors that allowed them to do so. But they would do so via consent, instead of government-protected fraud. And they would likely have to give their depositors a negotiated kickback.
Such a system would battle inflation by subjecting currency to competition, and would be good for consumers, because it would allow them to freely negotiate interest rates for their deposits, or to simply opt out of fractional reserve, in the knowledge that they would always be able to access their deposits, and never would have to fear bank runs.
This system is better, I believe, both economically and morally.
The bottom line, really, is that fractional reserve banking is fraud. It is no different than if I paid a storage company to store my physical goods, only to find out, when I came to get them back, that the company had been lending them out to other people to use, and may not even have them!
That is how fractional reserve banking works. You give the bank your money, they give it to other people, keeping only a fraction of their deposits at any given time. Most of the time, when you come to take money out of your account, they will have enough on hand to give to you. But in certain circumstances, such as a bank run, you might just be out of luck. Sorry, we gave your money away, and now we can't get it back!
Understandably, people are outraged when this occurs, and they should be. Fractional Reserve Banking is fraud. Its one among many reasons we need free banking.
Whenever an economy develops, it bases its original trade off of barter. For example, I have two fish, you have two bushels of wheat. We each want what the other has, and so we can trade.
However, there are major flaws in this system. The most prominent among them is that if I want wheat, and have fish, I actually have to find someone who has wheat, and also wants fish. Unsurprisingly, this becomes difficult.
So, in a barter economy, what occurs is that some commodity, which it is believed that nearly everybody desires, arises as the standard of trade. In frontier era America, beaver pelts were used as a standard of trade. For all intents and purposes, beaver pelts were currency.
However, for most of western history, gold and silver have been the standards of trade. In a free banking system, one would pay a fee to banks to hold gold and silver (or any other standard of trade) and in return would receive bank notes in the amount of the deposit. Undoubtedly, some banks would still use fractional reserve banking, but entering into contracts with their depositors that allowed them to do so. But they would do so via consent, instead of government-protected fraud. And they would likely have to give their depositors a negotiated kickback.
Such a system would battle inflation by subjecting currency to competition, and would be good for consumers, because it would allow them to freely negotiate interest rates for their deposits, or to simply opt out of fractional reserve, in the knowledge that they would always be able to access their deposits, and never would have to fear bank runs.
This system is better, I believe, both economically and morally.
posted by Ben-T | 6:30 PM
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