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Fractional Reserve
Banking
"Fractional reserve banking" is
a breach of checks and balances whereby banks lend out
way more than they have in reserves. Here is a good
explanation;
"The way “fractional
reserve banking” ( scroll
down to "Gold Dinar vs US Dollar")
works in a fiat
currency system is this: when banks “loan” you money, they don’t really
give up anything of value. When you borrow your neighbor’s lawnmower,
he foregoes the use of his lawnmower until you return it. When your
grandpa borrowed gold from a bank, the bank coughed up the gold, and he
had to return it, usually with interest (or the bank parted with cold,
hard paper notes that represented an equal claim to gold).
In our
modern system, your local bank parts with precisely nothing when it loans you money. It creates a
bookkeeping entry in your account that says “credit” while at the same
time recording that you owe it that same amount of money in its
receivables column. You can now use that money to write checks, etc.,
but you in contrast to the bank, you have to WORK
for that money to pay it back to the bank. You give up something of
value, and the bank doesn’t, but now you owe the bank interest on top
of that. Thus, whenever the bank makes a loan, the domectic money
supply is increased in the same amount - out of nothing. Fair deal?"
Fractional reserve
banking works even better in the presence of a central bank. Thus
were the Morgan interests in establishing the Federal Reserve in 1913.
"A central banking
system vastly increases the ability of bankers to lend more money than
they possess in reserves. Absent central control, monetary expansion in
a fractional reserve system faces limits. If a bank, desiring to
increase its profits, expands too much, rival banks will call in its
notes. If it cannot meet its obligations, it will collapse. A central
banking system removes
this obstacle." (10th paragraph)
* This video from the
Ludwig von Mises Institute includes
a thorough explanation of fractional reserve banking