Fractional Reserve Banking / by kevin murray

Fractional reserve banking is a fraud upon the American people and other countries in which their central or controlling banks practice the same thing.  The very definition of fractional reserve banking should send shivers up and down one's spine.  Basically, a deposit is made at a bank, and by law the banks need only hold a portion or a fraction of the demand deposits place into the bank and can thereby loan out the remainder of the money to the public at large.  To translate it another way, you make a deposit into your bank in good faith in which you can demand your money back at any time for any reason from the bank.  Instead of safekeeping your money and possibly even charging you a fee for doing so, the bank instead, loans your money out and hopes that you won't come a knocking on the door and demand your money back.  It's quite clearly a formula for disaster and is deliberately duplicitous in its nature.  The apparent purpose of fractional reserve banking is to keep the money flowing and in circulation to the public at large, noble goals for what they are worth, but fractional reserve banking is not the ideal way to do this.


In actuality, fractional reserve banking benefits the banks most of all through the power of leverage.  They banks are protected by law and afforded the opportunity to lend out monies that they no longer have on demand and thereby make profits from doing so.   This is a beautiful system for the banks as long as the public doesn't make a rush to retrieve their monies all at once. If, however, there is a run on a particular bank or banks, and people who made these deposits in good faith, demand their deposits back now, the whole house of cards is in a position of imminent collapse.  This is the fundamental problem and error of allowing fractional reserve banking for demand deposits. 


Far better it would be to have our banking system return to full reserve banking.  Within full reserve banking, a depositor would be given the opportunity to either make his deposit, a demand deposit, and thereby the bank acts in a fiduciary capacity to protect his deposit and in all likelihood would charge a fee for doing so, or the depositor could take all or portion of the monies deposited and be issued a certificate of deposit, or a time deposit,  in which a particular term length amount and interest fee would be assigned to the depositor for the term completion of said loan.  All of this would be on the up and up, in which no money is being created out of thin air, no leverage is being utilized by the bank, and money itself maintains its utility and its usefulness.  This would bring back sound money to our country and would substantially stabilize its value.  In fact, with full reserve banking, our government could still issue fiat money and not have to revert back to the gold or silver standard, so that there would be no return to the brow of labor being crucified on a cross of gold.