Banking QuestionSubmitted by elkingrey on Fri, 11/02/2007 - 02:20
Okay, I'm having a slight freak out here. I'm re-evaluating my position on the gold standard. Hopefully somebody can help me clarify.
Let's say we were to snap our fingers, and we were all living on the gold standard, or silver, whatever. There is NO central bank. What would prevent a liquidity crunch in the banks? Let me give you an example. Say fractional-reserve banking exists. [I say fractional-reserve banking exists because how else would there be enough capital to make loans? And why shouldn't fractional reserve banking exist?] Okay, so fractional reserve banking exists. What happens if there is a bank run, or for whatever reason a bank over extends itself and has loaned more than it can afford to pay back to its depositors. Then what happens? Does the bank go insolvent? Is it forced to call in all of its loans? That seems highly disruptive. What happens now is that if there is a liquidity crunch, the fed can bail it out. Yes, it is a bummer to have to have inflation, but what is worse? A few percent inflation every year as a tax? Or bank runs, and general instability? Help me out here. No, I'm not a troll.