The problem is that in a fractional reserve banking system banks are inherently unstable.
Fractional Reserve Banking would end, as would the Fed and the tiers of banks.
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So, we had a problem, bank runs, brought on by the simple nature of fractional reserve banking.
Without fractional reserve banking, without the Fed, and with sound money there would absolutely be no business cycle.
This is simply true of any system of fractional reserve banking and is the cause of bank runs.
In a fractional reserve banking system, banks are permitted under law to create deposit money out of thin air.
The central bank sets short-term interest rates, and fractional reserve banking is allowed.
In 1694 with the creation of the Bank of England, the practice of fractional reserve banking was given legal permission.
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Fractional reserve banking expands the money supply without regard to real wealth, and this is inflation, resulting in price increases.
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Normally, because of fractional reserve banking, this would lead to a further multiple expansion of bank deposits and the money supply.
This induced artificial variability in the real price of gold, especially during the periodic financial panics that attend fractional reserve banking.
As for banking, Napolitano calls for an end to fractional reserve banking, and a return to a 100 percent reserve system.
The Fed sets short-term interest rates, and fractional reserve banking is allowed.
Since December 2008, the U.S. has, in a sense, no longer had fractional reserve banking, because the monetary base has been greater than M1.
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Thus the bank is holding only a fraction of deposits in reserves and is lending out the rest: fractional reserve banking which is what we call the system.
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And the other alternative reading, that they have 32 times as much capital as they do assets makes no sense at all in a system of fractional reserve banking.
Look purely at what fractional reserve banking itself is.
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Also, the central bank and the (fractional reserve) banking system would face a nearly irresistible temptation to use their ability to create money to hold the deflation at bay as long as possible.
The Cyprian banking system, like all banking systems today, is a fractional reserve system.
As for the larger Eurozone banking system, it too is a fractional reserve system.
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