Fractional Reserve Banking requires a Business Cycle

[PositiveMoneyUK]

A biggest public campaign has started to abolish fractional reserve system. Visit POSITIVE MONEY website and support the campaign.

[casimirpyahoocom]

Its a lifestyle decision most people don't realize has been made for them. Fractional reserve is like the drug user who craves the extreme highs and lows while an honest system is like the even keeled sober person. Neither is right or wrong except that there isn't really informed consent for most people who don't realize they are living the druggy lifestyle with their money.

[affiliate30]

This economists want to use critical thinking to explain some stupidity that doesn't need critical thinking explanation. You lend more money than you have to make more money than you lend, you have to print money or trick investors into thinking they are getting paid, while what you have going is nothing more than a pyramid scheme. That's because money is good and bad for the economy at the same time, money is linked to products and services by force to speed things up, and create power

[bodhisattva99]

who owns all the BAD DEBT??? that gets flushed out of the system???

[VoteLib3rty]

The cost of the loan is socialized with fractional reserve banking. It wouldn't be quite as evil a system if the excessive profits derived from the counterfeiting effect were heavily taxed and refunded to all note holders or each note were a share receiving dividend.

[SexyMelon]

A somewhat simpler explanation...

Say, bank has 100$. By law, it can loan out 90$ out of those 100$, where the remainder - 10$ - is kept as a reserve.

Sounds fair, right? But, the caller is correct in asserting that it ultimately increases how much a bank can loan out, but omits one important detail in the process...

[SexyMelon]

...Namely, that the bank does not part with the original 90$ dollars it loaned out. The loan money is literally created on the spot.

Now, when you do loan the money, the first thing you do is usually deposit it in that bank you just borrowed it from... So now the bank has 90$ more. And these 90$ can also be used for further loans, keeping a fraction of the sum in reserve, and giving out - or rather creating - the rest.

This expands bank's reserves and overall money supply.

[SexyMelon]

So, assuming the 1:10 reserve ratio, over some time, assuming people continue to create loans, the bank will end up collecting interest on ~1,000$ rather than the 100$ it actually has in it's vaults... Not to mention... It also gets to collect the loans themselves. Yes, all 1,000$ (or however much was produced in the process).

In case this sounds like counterfeiting, or fraud, or what have you, there's a very good reason for that...

That's because it is. What the hell, people?

[bad4ever2001]

@SexyMelon Is this the case where there is no physical money in its vault only electronic money that is fractionally reserved or loaned? The danger from bank runs is that people will ask for the money in cash which is not readily available. Hence the limitation as to how much one can withdraw within a certain time period. Am I correct with this statement?

[SexyMelon]

@bad4ever2001 Bank credit. This may be transformed into common paper money because paper money is constantly being printed, but most of the money today is, indeed, just bank credit: electronical, or existing as written loan or obligation.

The issue you're describing is called a "bank run", and it is indeed one thing that can bring such a system down. It's usually solved by having a large central bank give out paper money to smaller banks to cover-up the lack of physical money/gold.

[SexyMelon]

@bad4ever2001 (Haha, apparently I can't read, sorry for describing what a bank run is...)

And yes, to put it more concisely, correct.

I'd say don't trust me because I'm no economist, but it's not like modern economics isn't just applied demagoguery without any scientific backbone.

[dellwon]

Fractional Reserve Banking is WORST than the Federal Reserve

[bluetablepainting]

The initial explanation here isn't quite right. The bank gets $100 in deposits, puts $100 on reserve and then can loan out $1000. If it put $10 "on reserve" then loaned out $90, the reserve rate would be 1:1 ie they would have $100 in loans backed by $100 in the vault (so to speak). A bank has to have on reserve a certain percentage of the total loans it has out (usually 10%, the 10:1 ratio).

[sustaincain]

No, I think that's just a shorthand way of describing the effect. The lending bank's 10x comes from the effect of depositing loans from bank to bank to bank. 'Course if you own two or more lending banks... But only the central banks in each country create 'fiat money' of themselves. Some of the central banks masquerade as being publically owned or controlled, but it all goes back to the global money dynasties.

[brmbolec2]

I didn't get this, why does fractional reserve create wrong investments?

[myheadhurtsnow]

Inflation forces anyone who wants to save to invest, because if they don't, they lose all their wealth. Also, if you have an endless supply of money with which to invest, why not gamble?

[joshuajl69]

it doenst, it creates a large amount of debt which becomes unsustainable for the economy to be able to pay back

[sustaincain]

It bloats the supply of currency so the economy overheats. Then the banksters who created the currency out of thin air get your house or factory or labour for the next however many years, unless you lean to defend yourself, as few do. Fractional Reserve Banking and privately controlled and owned central banks creating Fiat Money inevitably leads to boom and bust.

[zefvor]

Economy based on ever expanding levels of debt is not sustainable. We need to completely rewrite rules of the system

[LibertaerUeberAlles]

Well, it was tried once before and the result was that an entire country got leveled.

WINSTON CHURCHILL

"Germany's unforgivable crime before the second world war," Churchill said," was her attempt to extricate her economic power from the world's trading system and to create her own exchange mechanism which would deny world finance its opportunity to profit." (Churchill to Lord Robert Boothby, quoted in the Foreword, 2nd Ed. Sydney Rogerson, 'Propaganda in the Next War' 2001, orig. 1938.)

[sustaincain]

Thanks for the interesting quote LibertaerUeberAlles.

There was also the Liberty Dollar, I think the Fed raided them. But other semi-distributed systems are springing up and I'm not sure they can trash them all, at least not the ones that have high residual value ie precious substance backing. The world is waiting for the Napster generation of currency supply.

[LibertaerUeberAlles]

You probably know about the bill in Congress, H.R. 4248. It would fully legalize competing currencies as per the Constitution. It would also remove all taxation on sale of such currencies.

[Lingerfoot]

@zefvor - How is our economy based on ever expanding levels of debt and why is it not sustainable? I still don't understand what you mean by that statement. Peace.

[nazirdjon]

@zefvor that's Islamic bank. no usury, and fairness in business transactions. /wiki/Islamic_banking