Fractional Reserve Banking

Fractional Reserve Banking is a process that creates new money and enables the expansion of an economy. This process allows banks to lend out money that does not exist as new loans while only holding a percentage of the deposits, often 10 percent, on reserve. A central bank is required to issue the new money for the borrower on behalf of the lending bank. The borrower can use the new money to build a house, set up a factory, or engage in productive activities that add to the assets in the economy. When the loan is repaid to the bank, the central bank can erase the debt on its books, and the economy has expanded. To avoid bank failures that harm depositors, bank insurance that guarantees a minimum amount of depositor savings is required.

Fractional reserve banking is valuable for economic development and a primary process of capitalism. When money is based on a gold standard, petroleum, or other physical bases, the economy can only expand at the rate that resource is mined. Fractional reserve banking allows, through the creation of fiat money, everyone to pursue their own economic development as they choose. However, the honest and just control of this system has never been implemented.

First, fractional reserve banking is widely abused and corrupted by "banksters" (banking gangsters). Instead of loan payments going to the depositors who worked and saved their money, banks take the payments for themselves. This act of theft gives the banksters all of the newly created money. This is economic feudalism, with only a few banking lords acquiring the new wealth rather than it being widely distributed among the depositors whose labor created the reserves.

Government/bank cabals have corrupted the process further. In such a cabal, a government borrows money from a central bank it controls. The central bank creates new money for the loan guaranteed by citizen taxes rather than reserves. These loans are usually not used for productive purposes that expand the economy but for wars, welfare payments, or expanded bureaucracy. This causes inflation rather than stable economic development. Excessive abuse of such cabals leads to economic collapse. Most modern central banks, and the governments that control them, are guilty of this practice.

In an honest banking and adequately regulated banking system, the new money should be distributed among depositors. This can give everyone who works hard and saves an opportunity to share in the creation and ownership of capital through fractional reserve banking. This would be a form of economic democracy. In an adequately regulated system, central banks would serve as clearing houses that issue money and not lend money themselves. Governments would be required to balance budgets based on tax revenues or the sale of bonds to individual citizens. New money could only be used for productive purposes that banks would issue against assets and borrower credibility, minimizing inflation and underpinning the fiat money with the value of the economy's assets.