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Fractional Reserve Banking is Bad!

Please up-vote if you do not like Fractional-Reserve Banking and keep bumping the more you dislike it.

I prefer to see a post with this title bumped up rather than one that supports the practice of fractional-reserve banking I saw floating around that has a decent number of up-votes. Having titles that I don't support irks me, no matter how many down-votes it gets. Surprisingly the post that supports fractional-reserve banking has a decent number of up-votes. There are arguments for and against fractional-reserve banking there:

I personally think fractional-reserve banking is a fraud and fits the definition of a Ponzi scheme to a tee and I detest the practice with every bone and fiber in my body. However I don't want to get into a game of semantics.

I also think this topic is not discussed or understood well enough and is just as important to fixing our monetary system as ending the Federal Reserve system. It took me many years to figure out the puzzle of the fractional-reserve and central banking systems.

If Andrew Jackson had a tombstone that read: 'I killed the bank' maybe mine would be: 'Fractional-reserve banking is a Ponzi scheme' Maybe then I'd be able to rest in peace.

The best resource on this topic is:
Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto
Was on Top 10 Recommended list on Mises.org

One of the keys to understanding fractional-reserve banking is the difference between a loan or mutuum contract and an irregular deposit contract.

Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto
1. Introduction pg. 115
2. Why it is Impossible to Equate the Irregular Deposit
with the Loan or Mutuum Contract pg. 119

If you have questions, have arguments in support of it or want me to respond please use this post. I personally will only post on this thread.

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At the risk of encouraging lots of downvotes...

I'd like to add that the entire stock market concept is almost just as bad.

Taken from the customer's point of view, why should the company get "a loan" where the principle is never paid off and the interest payment that can be attained becomes the driving factor in how to operate the business? I've never understood why a company owner (other than a short-termer) would want to give away ownership to a group of strangers who only care about the shortest term bottom line. It always ends up that the product quality gets cut beyond sustainable levels and the workforce gets shafted from technological advancement.

On top of that, "they" have even made it criminal for the lower class to privately invest in private companies that don't sell shares through approved traders. (Section D's $300k requirement, anyone?)

To me, this rounds out the triad of bad monetary policy - private money creation, fractional reserves and stock ownership - to allow the big bank players to eventually rob every drop of profit from every industry, population group and governmental entity.

One way I'd love to see attempted to mitigate all this is to tax income earned on any leveraged amount invested. In other words, Leverage Income Earned tax. This should hit all the big players hard while leaving all the little guys (who play fair with their money) untouched. My calcs show that just 2% tax on LIE would wipe the national debt in 2 years. :)

I agree!

My folks--who started with jack squat--have worked hard to build up what I refer to as "their empire" (LOL!) over the years. To their credit, they have pretty diverse portfolios (real estate being the best, IMHO), BUT most investments are in the market. My Dad is one of those older fellows (now something close to retired) who sits at the TV a few times a day and "watches the market". He talks positively about stocks and inheritance for us and all that, and I am truly grateful for his intentions. However, it seems crazy to me! Most of it will simply evaporate. This we know (or most of us) here on the DP. I mean, money ain't worth poop unless you're spending it (FRNs anyway), and these ledger assets just sit there and dividend re-invest. He is a WSJ junkie, and that's all there is to it. The Fed can do no wrong, boom-busts are just "natural" cycles, and all the rest.

Honestly, if there is anything left for him to pass on, I will just pass to my nieces: they're gonna need it more than I! (Maybe I'll sell up and get them started in metals, etc....) Plus, I'm not comfortable taking stuff for which I did nothing / no work to attain. But it does sadden me, though.

The frickin' "market" is just as manipulated as all the rest. What a scam.

What would the Founders do?

I agree with this post

it also makes the financial system insolvent. There is more digital money than there is hard money...so if everyone withdrew their money the system would collapse. It's a type of leveraging that can create drastic swings in deflation and inflation that wouldn't otherwise occur.

Many people argue about the "busts" while we were under the gold standard. If you look at it, we were really under a fractional reserve system....which can expand and contract the money supply just like the fed does. Any time you have an expansion of the money supply you wind up with bubbles being formed in certain areas....depending on who gets to do the expanding.

There are two ways the money supply can be expanded -

1.) Direct injections by the Fed (fed purchases bonds)
2.) Fractional reserves

Both are insidious and create boom/bust cycles.


How can anyone come to this site and defend FRB?

Clearing UP Confusion On Fractional Reserve Banking

I am neither for or against fractional reserve banking but I would like to clear up some widespread confusion on this topic. Back on July 1, 2013 the Daily Paul featured a video on “Fractional Reserve Banking Explained”.


The problem with the video about the fed study “Modern Money Mechanics” (MMM) is that it was originally published by the Chicago fed in 1961 and most recently revised in 1992 and printed in a final edition in 1994. The narrative in the video is all about what is commonly called the fed “Money Multiplier Model” which has been taught in standard economics 101 textbooks for decades as gospel but in fact is sorely out of date. Recent up to date research from the fed's own research suggests that this standard money multiplier model is wrong because it has the causality backwards. There is no statistical evidence to show that there is a transmission belt from fed interest rate targeting, to changes in bank reserves, to new loan origination. I refer to “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?” by Seth B. Carpenter and Selva Demiralp 2010.


The standard money multiplier model creates the impression that the fed pushes money out into the commercial banking system which then leverages it up to ten times the original amount based on the 10% reserve ratio requirement.

Common wisdom perceives that fed injection of cash reserves via open market operations always ends up getting re-deposited and thus re-levered over and over again. However, if this is true, how is it that nearly $2 trillion of in excess reserves injected into the commercial banking system as a consequence of fed purchases of Treasury debt and mortgage backed securities from its QUANTITATIVE EASING operations lies idle on account at the fed as overnight excess reserves earning a mere 0.25%?

It is true that banks only have to hold 10% of a loan amount on account with the fed as reserves, but the causality begins with loan origination. After booking a loan, a convention known as “lagged reserve accounting” gives banks about 30 days to deposit the 10% reserve with the fed. In other words, the loan comes first and the 10% reserve requirement with the fed comes subsequently.

This means that the existence of $2 trillion in excess reserves held on account at the fed has absolutely no material impact on the ability or willingness of banks to make loans. Banks can make as many loans as they want to credit worthy borrowers regardless whether there are $2 trillion in excess reserves or $1. This issue was addressed in a the Financial Times / Alphaville article.


In other words, the process is based on loan demand pulling reserves out of the Fed as a consequence of the Fed's interest rate targeting mechanism, which in normal times means adjusting the fed funds rate. If loan demand is strong and a lot of banks are making loans, they will need reserves to deposit with the fed which they can borrow in the fed funds market from other banks that have more reserves on hand than they need.

However, if there is a net reserve deficit in the commercial banking system, competition among banks bidding for reserves can drive up the fed funds above the fed’s target. If so, then the fed will conduct open market operations to buy Treasury securities from primary dealers in exchange for cash reserves until the fed funds rate comes back down to target.

This means that by targeting the fed funds rate, the fed relinquishes control over the money supply. The fed cannot control interest rates and the money supply simultaneously any more than it is possible for someone to hit two birds with one arrow.

Fractional reserve banking is a hot button issue for many and clearly too much leverage is definitely not a good thing, but too little leverage may not be so good either. It may be that leverage is ingrained in in human nature as a function of risk taking. "I'll Have Another", the winner of the 2012 Kentucky Derby was rated at 15 to 1. Long before the creation of the fed, goldsmiths during the Renaissance realized that they could lend out 90% of the gold placed on deposit with them because it would be a rare event that more that 10% of gold depositors would come to claim their gold holdings at any one time. If the commercial banking system reformed itself along the model of full reserve banking, it makes me wonder how would an outright ban on leverage would be enforced?

Ed Rombach

There is also the point

that the a bank shouldn't be allowed to do something an individual or corporation isn't allowed to do. Obviously if I can't lend out a $100 three ways and collect interest on $300 of lending, a bank shouldn't be able to do that either. Even if a free market theoretically keeps fractional reserve banking in check, it's still an unfair privilege, and thus not part of a free market. If there's an argument otherwise, I'd like to hear it.

Bad would be understating it.

National theft is bad, slavery is bad.

But you fail to mention the real bad part. THE money created to cover the inflation caused by the fractional reserve system is counterfeited by a EUROPEAN/IzUnREAL ROTHSCHILD family owned central bank corporation. Its digitized out of thin air. NOT AS MONEY but as a COMPOUNDING (See the reverse miricle of compounding debt.) but as a phony national debt. WHereby the shill installed political puppets go along with it enriching themselves with the FEDERAL RESERVE DEBT NOTES, while promoting ever increasing IRS collections of this phony debt. They dont need money if they have that KEYBOARD at the federal reserve bank. THey foist the false National Debt as a DEBT SLAVE CONTROL MECHANISM. Using the claims of FALSE DEBT, IRS NATIONAL DEBT COLLECTION to justify extortion, theft, prison, torture, and murder.

Yet I stills see these people try to teach me how bad fractional reserve is as if it even matters compared to the way the sovereign national curency is created as compounding debt.

THE REAL NEWS - just about every country has the zionist Rothschild central fasle debt slave crime bank.

Why worry about inflation from fractional resever when the IRS is taking you off to prison for failure to pay national debt collection.


Fractional reserve banking is equivalent to gun control

Depend on who’s holding the weapon whether it’s good or not…… the government or the public. How many of you really know that the second amendment is more about keeping the government from forming and keeping a “standing army” then “your right to bear arms”? That the reason for a “well-regulated militia” was to keep the newly formed government from having a standing army and the citizens responsibility was given to them in the “right”…….the “right to keep and bear arms”…….here is the exact wording…….

A well-regulated Militia, being necessary to the security of a Free State, the right of the people to keep and bear Arms, shall not be infringed.

So the Anti- Federalist that fought for the “Bill of Right” was telling us that in order to keep the control….do not have a standing army (which they saw as a threat to our liberty). The “well-regulated militia” was to keep the threat of a standing army at bay and to protect our “Liberty”, both foreign and domestic.

The same can be said for fractional reserve banking. Only when a cartel is established by the government for the benefit(Financing deficits) of the government is fractional reserve banking a threat to our liberty. By privatizing the profits and socializing the losses the government threatens our liberty under the guise of protecting us from the hassle and inconvenience of being responsible for our own choices about which private bank notes maintain their purchasing power, but under ANY AND ALL government banknotes we are assured of deprecation of purchasing power. (We are the slave to the master we created)If we fought as hard to keep our “right” of our property of maintaining our purchasing power like we do our guns this debate would not be necessary. Fractional reserve banking practiced in the FREE MARKET (without a cartel) by banks that must operate under the laws of ALL OTHER businesses in this country that if they cannot pay their obligations (redeem paper notes on demand for specie) they are insolvent and should go out of business. It is the responsibility of the CITIZENRY to defend the purchasing power of their property just as it is a “right” for every citizen to defend his person and his family.

With a free banking system and a real bill doctrine of the fractional reserve lending we could have a system where we are not being plunder by our government……..this is how the debate should be formed….and stop debating the merits of fractional reserves banking……it makes you all sound smart but solves nothing.

PS if you want the root debate of fractional reserve banking research “The Currency School vs The Banking School” debate in Great Britain. The CS believed that if you required a bank to hold a certain amount as a reserves that would restrict bank note expansion…..The BS believed if you maintained the requirement of species on demand from banknote holders this would restrict banknote issuance. But in the end fractional reserve banking is all about the extension of credit and without a reestablishment of the disintermedation laws and the return of Glass Stiegel…..it’s all hopeless…..the Fed is going to default on the dollar……the USG will pays it bills with worthless paper……and we will become Argentina, and the USG will have some badass weapons that we can’t compete against……so much for the Second Amendment.

Fractional Reserve Banking is Fraudulent - Ron Paul on CNBC

Fractional Reserve Banking is Fraudulent - Ron Paul on CNBC


I should have just bumped this post that We The People posted back in 2010. Amen.

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So you can't debate in the other thread...

And instead make a new one so you can have an echo chamber? LOL








Why don't you debate me in the other thread if your arguments have so much merit?

If your belief in your position is so weak you need to create a thread where you can have an echo chamber then I think you might need to rethink your opinion.

Nope, because FRB is a fraud ....

I answered your questions below and a couple posts down. Have you even read Professor de Soto? I read your first two links to George Selgin, quickly scanned through the pdf, and did not watch that youtube but I explain why Selgin is WRONG on multiple counts. I'm curious what your background is. You seem to so easily dismiss Rothbard, Block, Hoppe, de Soto and top Austrian Economic thinkers so I'm just curious because most people in the liberty movement wouldn't be so easy to dismiss them despite not knowing the intricacies of monetary theory.

You cannot loan a 'deposit' and still call it a 'deposit' unless you are defrauding someone. Professor De Soto talks about the legal definition of a deposit throughout history and under various judicial systems. If you don't call it a 'deposit' and you think the 'depositor' is aware that the bank is lending it, it should be called a 'loan' so the person lending (not depositing) the money can be aware of the risk. Furthermore, you can loan your specie money without a bank directly to a borrower or any other financial institution for interest or dividends. The banks use the pretense that money is held in safety as a 'deposit' yet they loan it out. Again that is fraudulent. Deposits by definition should be 100% warehoused.

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"Fractional Reserve is Bad... mmm'kay."

So your argument is that because I don't think every single thing every economist who calls himself an Austrian is 100% correct I'm not a true liberty minded person?

All the while you try label something which anyone who knows anything about banking would understand as the standard in pretty much every system that has existed in hundreds of years, "fraud", just because you don't like it?

As for de Soto's legal argument, it doesn't make sense at all.

Quoted from here: http://www.freebanking.org/2012/07/12/reply-to-salerno/#comm...

Banknotes effectively are property titles, but they aren't title to deposited money. They are title to any bank capital, particularly the collateral securing a bank's loans, like titles to mortgaged real estate. I understand the distinction between equity and debt, but if a bank's creditors may claim the bank's equity before the bank's "equity holders", the distinction makes little difference. If I deposit a hundred dollar bill in a bank, and if the banker then uses my hundred dollar bill to light his fat cigar, the bank still owes me a hundred dollars. As long as he has any equity to burn, the banker burns his own hundred dollars, not mine.

Anyway, I refuse to bump this thread further just to satisfy your own ego. If we're going to debate I'll debate you in the other thread where the rest of my arguments are. I'm not going to waste my time and resources just to make you feel better.

I'll be here:


Your thread is effectively nothing more than a dupe of the above linked one.

That's fine with me...

I'm not here to debate. I'm here to educate. I respond specifically to each argument and state exactly why Selgin is WRONG in the post comment below:

All you say is Professor de Soto's argument 'doesn't make any sense at all' with no explanation at all or with no explanation for most of my points I've made so I'm not going to spend any more time. It seems you don't even attempt to read anything other than Selgin's posts or comments thereof.

BTW you make a lot of faulty assumptions. I didn't say you were not liberty-minded, but I'm wondering how someone can so flippantly dismiss the TOP AUSTRIAN ECONOMISTS without much consideration. 'Oh geez..you know that Professor de Soto guy just doesn't make any sense..' Are you related to Selgin? Were you his understudy at the B-school in Georgia? Just curious. You know Selgin supported Bernanke's QE to combat 'bad deflation' you know? Oh wells. Good luck with your learning if that is truely what you're after.

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If you don't wish to debate then you can't really educate...

As you're only letting people see one side of the story.

Let's see... and then you make a bunch of accusations which you can't back up, ad hominem.

All you say is Professor de Soto's argument 'doesn't make any sense at all' with no explanation at all or with no explanation.

I did explain, that the banker is still responsible for the deposits even if he loans them out. So the de Soto stuff is misleading. That was the purpose of the blockquote I made, was explaining why de Soto's argument doesn't make sense.

Then you go on about me daring to not believe 100% of what you consider "TOP AUSTRIAN ECONOMISTS" to be. You sound like those in the global warming cult. "YOU'RE GOING AGAINST TOP CLIMATOLOGISTS!" You speak as though I've dared to question your religion.

You know Selgin supported Bernanke's QE to combat 'bad deflation' you know? Oh wells. Good luck with your learning if that is truely what you're after.

This is misleading. You sound just like one of those Rand bashers who can't understand one has limited time to get his point across. See Selgin's response regarding this here:


You're mischaracterizing Selgin's opnion on this. He doesn't believe centrak banks should be meddling in this sort of thing, but he's speaking of monetary aggregates. He believes a free banking system creates the necessary effect without government intervention. As he explains here:


That is, in fact, precisely what I argue in Less Than Zero, where I try to show that the combination of a fixed or frozen base and a free banking system tends to result in the automatic stabilization of NGDP (or some related measure of total spending), and will thereby also approximate a productivity-norm.

And I've never met Selgin or been to his university. It's funny that I get accused of this by so many rabid Rothbardians though.


Good luck with your learning if that is truely what you're after.

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You're a few years too late

They changed the reserve requirement in 2007 to 0. A bank can loan as much as it has been authorized to push the button for.

Well according to Wiki there still are reserve requirements..


It's 0% for small institutions and 10% for larger ones. There have been no reserve requirements for money in savings and CD's since 1990.

I do agree though that all they have to do is press a button to create checkbook money out of thin air.

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Response to someone on the other thread:

From timmay00:
I'm familiar with de Soto and he's wrong about this. Actually read the links I've supplied.

Links from timmay00:

Link #1:

1)George Selgin is WRONG and this is an important point.
With a $50k deposit, an individual bank could easily loan out $450k. How else could you have the situation where before the 2008 crisis banks roughly had $800 billion in total reserves and roughly $8 trillion in M2 and $14 trillion in M3 money supply? There was more that 10 -17 times more debt-money created than reserves! In the above scenario that assumes debt money as 9x the deposit. The Fed didn't create most of the money out of thin air. All the commercial banks created money out of thin air and inflated the money supply to $14 trillion (M3)!

2)Selgin states you need to have $450k in excess reserves to be able to lend out that amount. WRONG again. Excess reserves are what you need when you are going beyond the 10-17x leverage on reserves. It's easy to get reserves thru inter-bank lending at the Fed Funds rate(at 0-.25%). Hence most of those FRB (fractional-reserve banking) 101 tutorials showing the multiplier effect is different from what really happens. Creating debt-money is as simple as pushing a few keystrokes on a computer and 'Voila!' (The only limit to debt-money creation is the limit to how many unqualified people, corporations, & governments banks can get to take loans before the ponzi scheme fails. We are seeing the end of this debt-bubble collapse now)
Furthermore, many types of accounts require very little reserves. Institutions with net transactions below $12 million have 0% reserve requirements. Those with $79 million net transactions have a 10% requirement. Savings and CD's have 0% reserve requirement. Ever wondered why your bank insists on setting up a savings account and setting automatic transfers from your checking? That's right they have 0% reserve requirements on savings. ZERO.

3)No I'm not going to call Selgin 'dumb' as he does to anti-FRB folk, nor will I give professor Selgin an F in econ as he suggests for anti-FRB folk, nor am I going to call him silly as he does Murray Rothbard. I'm going to just let my responses do the talking.

Link #2
Banknotes Are Not, and Have Never Pretended to Be, Warehouse Receipts

1) Selgin is WRONG. Rothbard is RIGHT Selgin uses a syllogistic error. Just because Selgin shows different examples of warehouse receipts and bank notes is irrelevant. The goldsmiths at the bullion banks were some of the first to issue more certificates than the gold they had. Banks have continued that by having the pretense of warehousing specie and commodity money as 'deposits', while actually creating almost limitless banknotes out of thin air through the fractional-reserve system and by debt-creation.

2) The fundamental point is that 0% of your specie money that is on deposit should be loaned. If you want to lend your specie money via a separate loan or mutuum contract then you are putting your specie money at risk with expectation of interest, dividends etc and that is fine. There is no reason this irregular deposit should be COMBINED as a mutuum loan contract as all fractional reserve banks have done.

Link #3:
I don't disagree with Selgin on Central Bank flaws, but he doesn't understand the booms,busts and instability of fractional reserve banks throughout the hundreds of years before the Fed. There would virtually be no bank runs with 100% banking.

Link #4:

1. Sure Selgin did a presentation in Georgia at some Ron Paul event, but he is NOT an Austrian economist. He's a monetarist at best. Selgin even came out in favor of Bernanke's QE1 and states there is something such as 'bad deflation'. Ouch.

Here is the link:

And Austrian Economist Salerno's response:

Final thoughts:
Fractional-reserve banking is fraud and I hope people would actually read Professor Jesus Huerta de Soto's seminal work before stating otherwise:
Money, Bank Credit, and Economic Cycles

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It's not just *bad*...

... It's the WORST!

(Funny how all legalized fraud schemes become institutionalized--and with full support of the law. LOL! They're not just merely tolerated; they're embraced.)

: (


What would the Founders do?

Thanks for the bump!

I agree it's the WORST!

I want to change my title now from bad to worst..oh wells.

Yeah. What do you think is the best resource to explain fractional reserve banking to the average person? I thought Foster Gamble of Thrive did a great job with this:

Note: Most people describe the multiplier process as in the above video, but in reality banks don't have to wait for that process to play out. For example if the bank reserve requirement is 10%, when a person deposits $50,000 a bank can instantaneously loan out $500,000 created out of thin air from their computers to another person.

What do you think of that Thrive video?

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