4 ms·

Everything you say is true, but the catch is that they can loan out the money while still saying it is in an account readily available to the depositor. So, th

Everything you say is true, but the catch is that they can loan out the money while still saying it is in an account readily available to the depositor. So, they could say get a deposit for $10, loan out $7, and still be telling the depositor the whole time he can come get his $10 back at any time. As so often happens, wikipedia can explain it far better than I can put into words on the spot: http://en.wikipedia.org/wiki/Fractional_reserve_banking http://en.wikipedia.org/wiki/Fractional_reserve_banking

dedward 16y ago
Wikipedia article says it all for sure - wasn't sure if I'd get bashed for linking it or not. I know I'm going off-topic - but it's a sensitive point with me, because most people who rail out against fractional reserve banking don't actually understand it. (That said, I'm not arguing for or against it, just for understanding before arguging at all). People call it a "catch" or a "scam" - but I"d counter that just because the banking system isn't a big vault full of peoples money like they thought it was doesn't make it a scam - how banking works hasn't been a secret, and nobody lied about it - it's just an assumption people make, and are often shocked when they learn how fractional-reserve banking really works. The general populace's ignorance of how money works doesn't make fractional reserve banking a scam. The law generally says the bank has to pay you. A run on the bank due to panic WILL bankrupt the bank - nobody pretends otherwise... the fact of the matter is most people won't do that, and won't take their money out of the bank, and the system as designed allows the banks to take on some risk in order to make the money flow and keep things moving. And there are banks out there in the world that have huge reserve requirements (50% +), and even some that don't lend out your money, and don't pay interest - they also charge you a reasonably hefty fee for keeping your money safe. Imagine the fallout if banks suddenly had 100% reserve requirements. No more loans, for business or otherwise. Everyone would be charged hefty fees to keep their money in the bank, and no interest at all on their deposits (not that there's much to speak of nowadays anyway). Nobody would go for that.
- lionhearted 16y ago
  > Imagine the fallout if banks suddenly had 100% reserve requirements. No more loans, for business or otherwise. Everyone would be charged hefty fees to keep their money in the bank, and no interest at all on their deposits (not that there's much to speak of nowadays anyway). Nobody would go for that. Good comment and I'm upvoting you, but you're actually describing classical banking. Under classical banking, there's two different kinds of banks - "deposit banks" that you pay fees to hold your money for you which you can get whenever, and "loan banks" where you can only collect your money at certain times that pay interest (it works similarly to a bond). We're in a system that's mixed - a "savings and loan banking" system. The problem is that your money is both loaned out, and you can collect it at any time. When too many people do this, it's a bank run, and the bank goes bankrupt leading to lots of problems and turmoil. To make this system work, you need a central reserve bank and fiat currency that can be printed. Unfortunately, this inevitably gets abused by some unfrugal government sooner or later, leading to the country's financial system going through hell and back. Historically, every fiat currency has eventually gone down to zero value. I think classical banking could work in the modern era - separating out into savings banks and loan banks. Interest rates would go up, and there'd be less speculative buying. It'd smooth the boom/bust cycle, at the expense of some growth during booms. I think it could work, but yeah, it'd be very different than things are now.

dedward 16y ago

Wikipedia article says it all for sure - wasn't sure if I'd get bashed for linking it or not. I know I'm going off-topic - but it's a sensitive point with me, because most people who rail out against fractional reserve banking don't actually understand it. (That said, I'm not arguing for or against it, just for understanding before arguging at all). People call it a "catch" or a "scam" - but I"d counter that just because the banking system isn't a big vault full of peoples money like they thought it was doesn't make it a scam - how banking works hasn't been a secret, and nobody lied about it - it's just an assumption people make, and are often shocked when they learn how fractional-reserve banking really works. The general populace's ignorance of how money works doesn't make fractional reserve banking a scam. The law generally says the bank has to pay you. A run on the bank due to panic WILL bankrupt the bank - nobody pretends otherwise... the fact of the matter is most people won't do that, and won't take their money out of the bank, and the system as designed allows the banks to take on some risk in order to make the money flow and keep things moving. And there are banks out there in the world that have huge reserve requirements (50% +), and even some that don't lend out your money, and don't pay interest - they also charge you a reasonably hefty fee for keeping your money safe. Imagine the fallout if banks suddenly had 100% reserve requirements. No more loans, for business or otherwise. Everyone would be charged hefty fees to keep their money in the bank, and no interest at all on their deposits (not that there's much to speak of nowadays anyway). Nobody would go for that.

lionhearted 16y ago
> Imagine the fallout if banks suddenly had 100% reserve requirements. No more loans, for business or otherwise. Everyone would be charged hefty fees to keep their money in the bank, and no interest at all on their deposits (not that there's much to speak of nowadays anyway). Nobody would go for that. Good comment and I'm upvoting you, but you're actually describing classical banking. Under classical banking, there's two different kinds of banks - "deposit banks" that you pay fees to hold your money for you which you can get whenever, and "loan banks" where you can only collect your money at certain times that pay interest (it works similarly to a bond). We're in a system that's mixed - a "savings and loan banking" system. The problem is that your money is both loaned out, and you can collect it at any time. When too many people do this, it's a bank run, and the bank goes bankrupt leading to lots of problems and turmoil. To make this system work, you need a central reserve bank and fiat currency that can be printed. Unfortunately, this inevitably gets abused by some unfrugal government sooner or later, leading to the country's financial system going through hell and back. Historically, every fiat currency has eventually gone down to zero value. I think classical banking could work in the modern era - separating out into savings banks and loan banks. Interest rates would go up, and there'd be less speculative buying. It'd smooth the boom/bust cycle, at the expense of some growth during booms. I think it could work, but yeah, it'd be very different than things are now.