The Great Central Banking Deception(glparchives.com)
glparchives.com
The Great Central Banking Deception
http://www.glparchives.com/economics/great-central-bank-deception/
2 comments
Yes. It's called fractional reserve banking. It isn't a secret conspiracy, nor a deception http://en.wikipedia.org/wiki/Fractional_reserve_banking The alternative is full reserve banking. To the best of my knowledge, there are no full reserve banks.
>>It is now up to you to demand your deposit back and to challenge the validity of your “signature” on any alleged bank “loan” agreement or check.
Great. Have fun stashing your cash under your mattress. Or maybe you'd rather just have gold bars, but I hear those aren't as valuable as they used to be these days[0].
This is nonsense. Fractional reserve banking[1] has existed for literally centuries. Based on the concept that "not all depositors need their money at the same time" and "most creditors pay back their loans," a bank can give out loans in excess of the cash they have on hand.
Naturally, this isn't full-proof. Banks can make too many loans, and too many of those loans go bad, and not actually have any money when depositors want their money back. This possibility used to end up being self-fulfilling -- if you thought your bank was at risk of not having enough money to repay your deposits, then you'd immediately withdraw your money, and if everyone did this, then they really would likely not have enough money to pay back your deposits.
You'd have fractional reserve banking even if the currency was anchored to some sort of asset like gold. I'd urge anyone to try and imagine a world where banks were required to have 100% of what they loaned out backed in full by deposits. Credit would be extremely tight. Almost any successful business -- internet startup or otherwise -- starts with some credit, and you'd basically be throwing a huge roadblock into any brilliant but capital-intensive idea. Did you invent an amazing prototype and now want to get a loan so you can build a factory and crank out and sell your new invention? Well, guess you have to wait until a bank has enough in deposits to loan out, of which they'll probably charge you usurious interest rates, since they can't tolerate any risk of eventual default because that could bring their below 100% of deposits.
In lieu of requiring banks to cover 100% of loans with deposits, in the the US we have things like FDIC insurance, and we had laws like Glass-Steagall, to minimize the chance of bank runs and bank defaults happening, and to mitigate the impact when it does. I'm sure all the resident HN Paulbots are already furiously pounding away at their keyboards ready to blast my naivete about fiat currency, government manipulation, inflation, Ben Bernanke being the spawn of Satan, Too Big to Fail, etc. To me, those are separate from the OP's point, which attacks fractional reserve banking as some sort of Great Lie that needs to be expunged.
[0] http://krugman.blogs.nytimes.com/2013/05/20/dead-ingot-bounc...
[1] http://en.wikipedia.org/wiki/Fractional_reserve_banking
Great. Have fun stashing your cash under your mattress. Or maybe you'd rather just have gold bars, but I hear those aren't as valuable as they used to be these days[0].
This is nonsense. Fractional reserve banking[1] has existed for literally centuries. Based on the concept that "not all depositors need their money at the same time" and "most creditors pay back their loans," a bank can give out loans in excess of the cash they have on hand.
Naturally, this isn't full-proof. Banks can make too many loans, and too many of those loans go bad, and not actually have any money when depositors want their money back. This possibility used to end up being self-fulfilling -- if you thought your bank was at risk of not having enough money to repay your deposits, then you'd immediately withdraw your money, and if everyone did this, then they really would likely not have enough money to pay back your deposits.
You'd have fractional reserve banking even if the currency was anchored to some sort of asset like gold. I'd urge anyone to try and imagine a world where banks were required to have 100% of what they loaned out backed in full by deposits. Credit would be extremely tight. Almost any successful business -- internet startup or otherwise -- starts with some credit, and you'd basically be throwing a huge roadblock into any brilliant but capital-intensive idea. Did you invent an amazing prototype and now want to get a loan so you can build a factory and crank out and sell your new invention? Well, guess you have to wait until a bank has enough in deposits to loan out, of which they'll probably charge you usurious interest rates, since they can't tolerate any risk of eventual default because that could bring their below 100% of deposits.
In lieu of requiring banks to cover 100% of loans with deposits, in the the US we have things like FDIC insurance, and we had laws like Glass-Steagall, to minimize the chance of bank runs and bank defaults happening, and to mitigate the impact when it does. I'm sure all the resident HN Paulbots are already furiously pounding away at their keyboards ready to blast my naivete about fiat currency, government manipulation, inflation, Ben Bernanke being the spawn of Satan, Too Big to Fail, etc. To me, those are separate from the OP's point, which attacks fractional reserve banking as some sort of Great Lie that needs to be expunged.
[0] http://krugman.blogs.nytimes.com/2013/05/20/dead-ingot-bounc...
[1] http://en.wikipedia.org/wiki/Fractional_reserve_banking