Fractional Reserve Banking

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What do you think of fractional reserve banking? If you don't know what it is, it's pretty much the notion that banks aren't required to hold all of your deposits. The Federal Reserve sets "reserve requirements" for banks. Right now it's at about 10%, which means banks take 90% of all money you deposit and gamble it out on loans.

Personally I think it should be abolished in its entirety, because it aids in creating an extremely unstable financial system.


Edit: Sorry, forgot to finish a sentence up there after I started writing the poll.

Last edited by Cyanide on 16 Apr 2009, 1:01 pm, edited 1 time in total.

Interesting note about Fractional Reserve Banking, in 12th century England,FRB was punishable by death.

The problem with abolishing FRB are twofold:

1) The world economy is almost entirely based on people buying things. They can only do this if the money exists. In order to keep from having massive inflation, credit is needed. FRB provides credit.

2) There is not enough money to satisfy the innate need for a capitalist economy to keep growing. Therefore, credit is needed.

As you can see, these issues boil down to a debt based economy that needs debt to function. It has been repeatedly pointed out by many that the US Dollar is not equity, it is debt. On that basis, it is a necessity that the masses be kept in eternal debt, and that the elites be in eternal debt to each other. This creates a system that relies on codependent eternal servitude to exist. FRB is not a cause but a symptom.

A civilization based on debt that cannot be paid off is inherently unstable, and eventually collapses. Rome is a good example-rather than reform the system, they kept piling the debt on until hyperinflation rendered the monetary system worthless, and Roman soldiers deserted in such numbers that the empire could no longer defend itself against the Germans. Our civilization is apparently doing the same thing. In the end, if Obama's debt spree is allowed to stand, hyperinflation will destroy the dollar and collapse the government, and America will pull down the rest of the world with it. The system of eternal debt needs to be reformed, not just the FRB system.

When someone puts money in a bank, of course the bank should be able to loan most of it out. If they merely kept it in a vault, it would not be put to work, would not grow, and would not meet the needs of society.

If you don't like the idea of fractional reserve, buy gold. It sits in a vault doing nothing, and chances are quite high that people will consider it money in 10, 50 or a 100 years from now. It can be stolen, but won't rust.

wow i didnt know banks used most of your money if you put it in there thinking it was safe. i dont have a bank account so im not shocked by that at all so i dont really have an opinion because i dont have a bank account. one thing i hate is if i have a check, wich i usually get once a month and try to cash it at a bank where's i dont have an account they charge me freaking $5 to cash and some banks wont even csh them because i dont bank with them. i mean wtf? so i just take it on down to wal-mart to get it cashed, there not snobby

Well, it is safe in the sense that it is guaranteed by the US Government up to a certain amount ($100,000 per account, or something like that)

And that is how the bank can make loans for cars and houses. If the bank reviews the loan applications and makes good decisions, they get the money back plus the interest fees, which they share with the people that deposit the money. If everyone wanted to withdraw all their money at the same time (a panic or run on the bank) it would be a problem, but the system is set up to handle that if isolated individual banks fail.

One of the problems with the deregulation of banks is that instead of making a critical decision on each loan and living with the consequences, many banks (especially the big ones) decided they would approve almost every loan (even if it was obvious that the person could not pay it back). They wanted to collect the fees for originating the loan, and then they bundled those loans into packages, which they sold to other people as 'collateralized debt obligations.' When it became apparent that this new type of investment had problems, investors freaked out - no one could sell them, because no one would buy them (didn't know how much they were really worth).

well summed up.

Within the paradigm of a fiat, credit-driven monetary system, FRB is a necessary evil. Of course, we shouldn't have a fiat, credit-driven monetary system, because it means our money is essentially worthless.

Money is supposed to have value, and the only way you ensure that is by backing it with hard assets.

and to the floor with credit default swaps *spits*

FRB allows economies to grow at an incredible rate... which is not sustainable and therefore subject to crashes with catastrophic consequences for all who do not forsee (and potentially take advantage of said crashes).


its a tool for the banking cartels to rule the world.

Fractional reserve banking is a great system- basically, the bank acts as an intermediary between the saver (investor) and borrower, enabling all of society's existing resources to be put to use rather than merely idling in a vault. Fluidity helps growth. Otherwise, we would have massive amounts of wealth sitting idle in bank vaults, doing nothing useful.

There is little fundamental difference between fiat currency and, for instance, a gold standard. Why do "hard assets" such as gold have any value? That we attach value to them is completely arbitrary. The main difference is that a gold standard is much less reliable on short time scales (which is what really matters) and during the days of gold-based currency we had massive price fluctuations, deflationary spirals, and frequent economic depressions. Properly managed fiat currency is much more stable. Now, whether our fiat currency is properly managed is another debate, but we have yet to see anything like hyperinflation so we don't seem to be doing too badly.

And 12th century England pretty much sucked. And there was essentially no economic growth that century. 1200 and 1300 in England looked fairly similar. From 1900 to 2000, using fractional reserve banking, observe the extent to which economic conditions have improved.

No, money is a symbol of value. A piece of paper, a string of shells, a gold coin, or a pretty feather has little to no value per se. Money is a social system, as I can exchange my symbol for all kinds of different things that I deem valuable, provided the other person also believes that the feather or gold or greenback is a symbol of wealth. The government does not have to have gold or 'hard assets' in a vault - as long as the amount of money is proportional to the wealth flowing in a country, things work out.

I would rather see currencies backed by resources than gold - coins and notes that represented a pound of chicken, a gallon of gasoline, or a cord of firewood. Such currencies would not be as flexible as a fiat currency, but they could be useful.

Perhaps people will look back on 21st century USA and say the same thing. A system constrained by the availability of necessary resources and that relies on economic growth to survive seems doomed to failure at some point.

That's why they call economics the dismal science - it deals with allocating resources that are finite or scarce. And seriously, in the last 50 years, the USA had ample energy, food, shelter, other basics, along with improving technology.

Yes, conditions will continue to improve. That is the wonder of development and growth that a market economy allows.

Um... is there any conceivable system that is *not* constrained by the availability of necessary resources? I mean, to avoid that you would basically need a system with no connection to reality.