Would you support abolition of Fractional Reserve Banking?

In my opinion, fractional reserve lending is not the problem. No laws containing usury limits are.
http://www.alastairmcintosh.com/articles/1998_usury.htm

Fractional Reserve Banking is fraud and I support anti-fraud laws.

The real questions is would allowing fractional reserve banking interfere with the liberty of others that support the non fractional reserve practice, as well as supporters fiat over a commodity backed currency. I think the practice of fractional reserve does interfere with the liberty of honest money. Here are some thoughts that come to mind, but please understand that I am not an expert, but these are my opinions based on research to date:

It is not necessary to rely on fractions of reserves for savings or fractions of capital to have access to credit.

Sound money in saving and loans makes sense. In addition to sound non-fractional banking, I support hard money backed by real assets. Typical debit and check transactions could be processes similar to today, or electronically but there would actually be something in the bank. Gold and/or Silver would back dollars and like today processing fees are split by both consumers and merchants. In my opinion electronic debit would be more popular than small credit based transactions, as credit would be more likely used in investments and large transactions requiring capital.

Commodity based credit is not an issue because there is collateral to liquidate. Investment loans or credit is not an issue with sound money practice, as people tend to take risk with their savings to create more capital. The market controls interest rates based on risk. People and investment companies have the fear of failure to balance the greed.

There are many aspects to banking and investing, but the first point is fractional reserve is fraud. Another point is the importance of a commodity back currency for stability in regards to purchasing power. The money supply can increase as real capital grows but either more gold or silver have to be stored in the bank vault and/or the value of the commodity would rise. Like Ron Paul mentioned in End The Fed, "You cannot simply stimulate the economy by dropping gold from helicopters".

Laws against fraud would prevent fractional banking. The very concept of fractional reserve is based on fraud. The real question is does the practice of fractional reserve interfere with another’s liberty, and it seems to me that it does.

I do think competitive currency is a good thing and that it is a good angle to compete with the FED, but ultimately it is time to audit and end the federal reserve system and transition to a realistic monetary system for American people and the globe. Gold has been an international currency for thousands of years. It is more likely the system will collapse and the fork in the road from there is another interesting situation.

The scope I am trying to focus on is that fractional reserve banking equals fraud. Moneychangers long ago realized that they always had more gold deposits than they had customers exchanging receipts for the gold. It became a regular practice for early bankers to write more gold receipts than they had gold, or commit fraud.

The practice leads to the fractional reserve banking of today. I also wonder how many crooks are realizing the same thing the old moneychangers did and are selling more gold receipts than they have gold on hand.

In my opinion fractional banking is NOT a liberty because you do not have the liberty to commit fraud. I have entertained the idea that some folks could run ponzi scheme banks and people have the freedom of choice, bur it seems to me it would be no different than illegal ponzi schemes today. I like to remind myself that what I consider fraud may not be considered fraud by others. Fractional banking is like selling something you do not have and there is no liberty in that. It is fraud.

I would not participate in fractional reserve, but would fractional reserve interfere with non fractional sound money? If another person or intuition practices something that does not directly impact me then my liberty is not at issue. I suspect having fractional reserve schemes in the mix would interfere with my liberty via systemic risk, and trying to compete with poney money, and I do not care to care to undergo the consequences of allowing the two to compete. I want sound non fractional money supply with a hard asset backing it.

As a hard money advocate I simply disapprove of the whole fractional reserve practice, but I do not want to interfere with ones liberty either. If these people collectively agree to the practice in fractional reserve banking then it would happen on a black market benefiting the people who get the money first. It would also be a crime, just like it is today to run black market money based pyramid scheems. I am not taking about the legal multi-level marketing pyramids that sell a service or commodity to get around the laws against ponzi schemes, although I choose not to participate in multi-level marketing pyramids either.

I oppose fiat, be it fractional or not. All money needs to be backed by a hard asset like gold. I see no reason it would impose on others liberty to make it law that no bank can practice fractional reserve and all money is backed by a commodity. For example you could have a bimetallic commodity backing the currency like the constitution requires and use both gold and silver. With industrial uses for both gold and silver, but to my knowledge more industrial use in silver it gets tricky to determine the exchange rate of dollars for gold and silver but ultimately the people in the free market decide.

The FDIC creates another moral hazard with banks today, because bankers are not as concerned with a run on the bank. The money will be available to depositors, however the paper will be worth less because the money supply had to increase to cover the fraction. If everyone shows up at once, or even with large independent withdrawals, one may have to wait for their money as the bank may not have all the FRNs on hand, but the bank will get the depositor some fresh FRNs right off the press.

In conclusion, fractional reserve banking is NOT a liberty because it is fraud. The second point is that money is one half of every transaction, so in order for it to be sound it needs to have real value or be backed by a commodity.

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BTW, I watched a documentary on stupidity a while back. It is available free on Google video, but the excerpt in the link below was very entertaining. Check it out:

"Ignorance is bliss" - Trevor Strong

YES! I absolutely would support such a law.

It's important to remember...

There are 2 types of deposits...

1. Demand Deposits (checking and savings accounts where your money is available on demand).

2. Time Deposits (CDs or other accounts where your money can not be accessed for a mutually agreed amount of time).

ONLY TIME DEPOSITS SHOULD BE ALLOWED TO BE LOANED OUT BY THE BANKS. THAT WOULD SOLVE ALL BANKING LIQUIDITY ISSUES AS THE BANKS WOULD ACTUALLY HAVE DEPOSITOR'S MONEY AVAILABLE.

Fractional reserve banking ended with the end of gold and silver money anyway. Banks ended then too. Currency-generation and collection centers opened in their place. It's 90% blips on a computer these days; how can you not have enough of those to cover more of those?

Getting rid of the fractional reserve system gets rid of credit. First, the dollar would drop to nothing, resulting in a decentralized exchange system from which natural resources would dictate the value of currency. The incentive to live beyond ones means becomes grounded and local banks would restore financial transactions. The technology sector would drop, the government would drastically shrink leaving local markets to facilitate capital flows. Eventually technology would revolve and grow at a proper rate consistent with our knowledge of bioregionalism.

First thing to do would be to abolish the FED
Second thing to start a Permaculture oriented Republic

Hayek is to Mises as Holmgren is to Mollison

Fractional reserve lending has always been a myth - I think it like many other money myths was meant to confuse and obfuscate reality.

Here is my first article of evidence:

Money Multiplier Chart Federal Reserve

If you view the current money multiplier chart shown above, you will be surprised to see that the actual money multiplier has fallen below 1 indicating that there are more than 100% reserves on hand - there is no fractional lending taking place.

But wait, it gets even more crazy. There has never been fractional lending because in actuality, 100% of the money lent by banks is created rather than partially recycled with reserves.

There are two ratios that determine if and how much a bank may create as loans or for their own account. It is up to regulators to ensure that banks maintain the required minimum ratios.

1. Capital Ratio - is the ratio of a bank’s capital (equity) to a risk-weighted sum of the bank's assets. I think the weightings are 0 for reserves, 0 for government securities, 0.2 for loans to banks, and 1.0 for ordinary loans. The BIS (Bank of International Settlements) has established a minimum capital ratio of 8% but I am not sure if it is currently used by the Fed.

2. Leverage Ratio - is the ratio of a bank's equity to the unweighted sum of its total assets. I think the required minimum is 3 - 10%, depending on the size of the bank. The reserve ratio is the ratio of a bank's reserves (deposits at the Fed plus vault cash) to its demand deposits, i.e. checking deposits.

(A) = Assets, (C) = Capital, (L) = Liabilities, (R) = Reserve ratio

When a bank issues a loan, it's assets (A) and liabilities (L) increase equally. It's reserve ratio (R) decreases (R/L) but the capital remains the same (C = A - L) which causes a reduction in the capital ratio (C/A). Banks with an adequate capital ratio may lend without enough reserves. If a bank has a profitable lending opportunity, it will issue the loan and then borrow reserves later if needed.

And here is another obscure truth, banks may create money for their own accounts for investment purposes. According to Ellen Brown, "thirty percent of the new money created by banks, with accounting entries, is invested for their accounts" (Federal Reserve Statistical Release - H.8).

The problem is not that banks may create money in some theoretical fractional multiplier, the problem is that the banks may create all the money they want for free. And we back up every dollar that they profitably create.

Larry