Fractional Reserve Lending

[Aractus]

There is 1.9 trillion dollars in the Australian economy, in total. Most people would think that means that the RBA has printed/minted $1.9 trillion in notes & coins. That's not so. The amount of actual currency that exists is only $311 billion (sources here and here). The current national government debt is $405 billion as of the start of this year. To put that into a perspective people can understand: if the government held all of the currency that exists in this country, they still could not pay back the debt!

This is because of a practise that enriches the rich called fractional reserve lending. Due to this practise, most of Australia's money exists purely as bank deposits artificially created by banks, this is allowed because banks only need to hold a small amount of currency money in reserve. There is 6x as much "bank created" money in Australia than there is real currency. Now you might say that "bank created money isn't really money", the reason why it IS money is because it's backed and guaranteed by the government just like currency is. If it wasn't then you could make the argument that it's "investment money" or something.

So why does it enrich the wealthy? It should be obvious. Based on our 6:1 ratio - mind you, out of the $311 billion, ~$65 billion is in circulation. So that that tells you about 80% of currency is held by banks, meaning we have ~$246 billion in currency held by banks. So the ratio of money created by banks to currency (money created by the Royal Australian Mint) is actually ~7.7:1. Right, so who created the other $1.59 trillion and got to issue it and spend it themselves? That's right - the banks did. Imagine if the government were the ones to issue all that money, that would mean the government would have no debt and hold $1.1 trillion in reserve that they could spend any time they want.

So we have this stupid system that enriches banks unfairly, and puts everyone else into debt to the banks - even governments. This is the same system that caused the global financial crisis. Yes, the GFC was caused by banks shorting on high-risk mortgages, but the trigger mechanism doesn't matter: when people default on their loans the banks accumulate their property &/or assets.

& if anyone wants to explain to me why this system is better than 100% reserve banking then have it.

[Joods]

Congrats! You've just become aware of something I knew about years ago.... as the same thing applies to the Unites States Federal Reserve.

[Thumpalumpacus]

Fiat currency, no?

[Aractus]

Congrats! You've just become aware of something I knew about years ago.... as the same thing applies to the Unites States Federal Reserve.

I've not "just" become aware of it, and yes I could have easily phrased it in the US context or the UK context - or any other.

[vorlon13]

Cecil Adams has a column about how the US does it.

I might be able to find a link. As I recall, he wasn't concerned about it, don't recall the thinking behind it though.

[Ben Davis]

As I understand, Fractional Reserve practices exist in order to avoid the need for physical collateral to underwrite currency (e.g. as opposed to the Gold Standard). The reason for this is capitalist profiteering: the more money available, the more money that can be made and capitalism requires profits to always increase. The need for collateral was a bottleneck and Fractional Reserve removed that blockage.

[The Grand Nudger]

You set up frb and full reserve as opponents OP...so why not let depositors decide who they'd rather trust their assets with?  Let the gov set thresholds, ban egregious practices, sure...but also refuse to allow them to underwrite the risks and failures that any bank using either system might take (it's central banking as-practiced..and not either system in and of themselves that create the issues you seem to be concerned with).  I think you'd find that successful frb banks outperformed their full reserve counterparts by orders of magnitude...this is, ofc, why we went with the system to begin with.  Those who were risk adverse would use full reserve banks, while those who wanted to assume a little risk in order to avail themselves of longer lines of credit would use frb banks. Others would avail themselves of both.

[brewer]

Sounds like you need to set up a bank.

[The Grand Nudger]

You know..on that note..it's amusing to note..that there's no law that says a bank -has- to use the frb provisions offered.  They could, if they wanted to, go full reserve.  Though I don't know why anyone would.  I guess they'd have to split the baby between paying employees and shareholders and granting loans.  Not sure that would go over well with any involved party.  Higher fees, shorter lines of credit, reduced profits, reduced pay.  

They'd need a hell of alot of luck to make it work against frb even if frb -wasn't- backed by a central bank, and luck isn't the kind of thing you want to hear when you're talking about the place you store your cash, amiright, lol?

[Napoléon]