Fractional Reserve Banking
There are three key parts of the modern banking system. 1. Fiat currency and legaltender laws. 2. Fractional reserve. 3. A central bank to centrally coordinateeverything.Fractional Reserve is a system where banks accept demand deposits and loan outthe depositors’ money, and keep only a fraction of the deposits as a reserve forwithdrawals.Banks tell depositors their money is available to be withdrawn at any time, when infact the money has been loaned to other people. The banks can not meet their obligations. It is a very clever form of a ponzi scheme. This is unique to banks – grain silos and other warehouses don’t do issue counterfeitwarehouse receipts backed by other people’s deposits. If they did it would beconsidered fraud by the courts – however Banks are exception to the legal principle. The reason why counterfeiting is illegal is because it is fraud. People counterfeitbecause it benefits them.As believers in liberty we are against force and fraud.
Fractional reserve has a long history going back to the beginnings of banking.Courts treated all banks as fractional reserve banks – banks had no contractualobligation to be 100% reserve. Depositors were at the mercy of the bankers.hIn the past circulation of paper money backed by fractional reserves of gold led totemporary increases in the money supply which created business cycles. Therewould be more paper money in circulation than actual gold, which distorted prices.Bankers wanted hard money backed by gold. They understood that continualincreases in the money supply would wipe them out. (By contrast manufacturersand farmers with debts wanted more money in circulation so they could repay loanswith less valuable money.) On the other hand they would make more money byloaning out via a fractional reserve system. The long term successful establishmentbankers would keep things in balance, but would face periodic crises from thebusiness cycles that threatened to wipe them out. The net gainers of the process are the banks and the people they loan to. The losersare everyone.Bankers setting up central banks understood that fractional reserve systems areunstable and require a central bank to keep the establishment bankers afloat.