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The problem with fractional reserve banking is that a bank can lend out any of the money it's keeping on deposit for its customers. In any other business, this
by dpatru 16y ago
The problem with fractional reserve banking is that a bank can lend out any of the money it's keeping on deposit for its customers. In any other business, this would be wrong. Imagine a storage operator renting out its customers' stored belongings. Or an airport that rents out cars left in long-term parking. The reason this works for banks is because the government forces people to use fiat money, money that is without intrinsic value. By dealing in fiat money, the banking system can easily produce any deposit money that is demanded. The cost for this is devaluing of the money.
- cperciva 16y agoThe problem with fractional reserve banking is that a bank can lend out any of the money it's keeping on deposit for its customers. Nobody is forcing you to allow your money to be loaned out to other customers. Rent a safe deposit box and put your money into that. You won't earn any interest, of course; but that's inevitable, since the bank has no means to pay interest on money it can't utilize. Or an airport that rents out cars left in long-term parking. Imagine an airport which paid you to park there rather than vice versa.