I go over the difference between fractional reserve banking and 100 percent banking. Catch behind-the-scenes posts and help choose my next video topic at:

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Transcript:

Fractional Reserve Banking versus 100 Percent Banking.

Every day, people use bank accounts to store and transmit currency, from writing checks, to using debit cards.

But what many do not know is that banks, as we know them, do not keep on reserve all the deposits given to them.

Banks lend out more cash than what they have on deposit under a policy called “fractional reserve banking.”

Fractional reserve banking means that banks lend out deposits up to a certain percentage of the total deposit.

For example, if someone named John were to deposit $1,000 into a bank, and the bank had a 10 percent reserve requirement, the bank could loan out $900, or 90 percent of the $1,000 deposit, while keeping only 100 dollars, 10 percent of the $1,000 deposit, on hand.

However, this fractional reserve lending doesn’t stop there.

Imagine if the $900 loaned out is then placed back into the bank by the loan recipient. Now, the bank has $900 on deposit from that new customer, and can then loan out $810 of that $900, which is 90 percent of the $900, keeping only 10 percent, or $90, of that loan’s cash on hand.

As you can see, within just two loans out from two deposits, the bank now has $190 on hand, but the balance owed for the deposit and the loan amount totals one thousand, eight hundred, and ten dollars.

This means that the currency supply just went from $1000, to $1810.

This is rather problematic if John wishes to take out his $1,000 from the bank, but the bank does not have the cash liquid.

This is why bank runs, when many people all at once go demand their account deposits, can lead to bank insolvency, where the bank does not have the resources to pay out all demands.

What’s even more dangerous is when the reserve requirement, as mandated by the Federal Reserve Bank, is removed entirely, as happened on March 26th, 2020, making it so that banks could lend nearly without limit as they did not have to keep a certain percentage of cash on-hand for each deposit.

This is why banks seem to be able to buy up so much even when everyone else is so broke.

Unlike you and me, these bankers can keep operations going with IOUs.

We would be arrested if we tried to do this for fraudulently creating currency out of thin air.

So, the question then is, what’s the solution to this system that favors banks in a legalized protection racket?

The answer to this is full-reserve banking.

Full-reserve banking is when banks must keep 100 percent of deposits on hand for customers, meaning they cannot create more currency virtually through IOUs.

Instead of banks making their money from creating currency through lending, banks would make revenue by charging service and use fees, and other means of financial investment tools that require capital commitment over a period.

The fractional reserve system, in this light, could not even be called “banking,” as it’s just a risky investment practice where people hope to not be screwed if the bank does not have their money when they need it most.

One hundred percent banking is the ethical future we should strive for, and if people wish to do business with an institution using fractional reserves, that cannot be called “banking.”

Rather, it should be considered an investment vehicle with great risk, like people investing in a new startup or people investing in a company that has considerable hurdles for success.

Anyone calling themselves a “bank” who engages in fractional reserve practices would be guilty of criminal fraud, making it so that only those who consciously contract for the risky purposes of unbacked lending investments can ethically participate.

To achieve this end, banks currently existing that go insolvent can only continue to operate in bankruptcy by moving to a 100 percent reserve model.

The transition toward this end may mean backing, through physical currency, the accounts held at the bank in coordination with the U.S. treasury, with the aim of moving toward a free market in banking and money.

No matter what, there will be a painful transition period as we must reckon with all the reckless IOUs and crony banking practices that must all come to an end, along with the Federal Reserve Bank.

But we can get there when we agree that 100 percent banking is the only ethical label of “banking” and fractional reserves is not banking, but a risky roll of the dice.

Sources:

The Money Masters (1996)

The Faults of Fractional-Reserve Banking
https://mises.org/library/faults-fractional-reserve-banking

Mises on 100-Percent Reserve Banking
https://mises.org/wire/mises-100-percent-reserve-banking

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#banking #infinitebanking #infinitebankingconcept #taxationistheft #libertarian