The Banking System is Built on Deception

[Brian4Liberty]

The Banking System is Built on Deception
By Connor O'Keeffe - 03/14/2023

There's nothing like a bank failure to get people thinking about the banking system. And though it appears the Fed has bought the nation's banks some time, the pair of bank runs on Friday and Sunday again exposed the fragility of the nation's banks.

But fragility isn't the only problem. As Rothbard hammered home decades ago, our banking system relies on a deceptive scheme, authorized and supported by the government, called fractional reserve banking.

To quickly review how fractional reserve banking works, say you deposit some of your dollars into your bank account. If the bank's reserve ratio is 5%, it then loans 95% of those dollars to other people who spend them on goods and services. The sellers of those goods and services then deposit the dollars in their own bank accounts.

Again, 95% of the dollars get loaned out and deposited in yet more bank accounts. However, all of these dollars still appear in every one of these accounts. Eventually, we'll arrive at a situation where most of the dollars you see in your bank account also show up in the accounts of many other people, appearing to them as their own dollars.

This gives the illusion that there is more money in the economy. But all that's really happened is that the bank has created new claims on the same amount of dollars. Specifically, a property claim on money stored has been transformed into a sort of callable loan that simultaneously appears available to a number of other bank customers.

Advocates of free banking argue that, on the free market, some bank customers would choose to invest in these types of collectivized callable loans. I agree. But these would certainly trade at a discount compared to cash because of the underlying risk of default.

But in today's banking system, these collectivized callable loans trade at par with cash. That indicates that enough bank customers are ignorant about the nature of their bank accounts. And banks benefit tremendously from this ignorance. They get to loan money into existence without account holders behaving any differently.

The banking deception relies mainly on concealment with a touch of duplicity. Watch banking commercials or read webpages about opening a checking account. You'll find common selling points like ease of access, security, connection to the digital financial system, a large ATM network, and the ability to send money to friends and family. All of these are also features of 100% reserve warehouse-style banking. The fractional reserve process is largely concealed from the customer, while the language used can mislead about the nature of bank accounts.
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More: https://mises.org/power-market/banking-system-built-deception

 

[oyarde]

For an individual ( not business ) it is fairly simple . You really do not need to participate much. Weve been in a third world inflationary economy for what will soon be the start of the third yr. Keeping large sums of cash is nothing but losing. Losing large. If you already have everything you need and will use that is what gold and land are for.

 

[Brian4Liberty]

https://twitter.com/profstonge/status/1638158079609954304

 

[Krugminator2]

"Economist Milton Friedman at one time advocated a 100% reserve requirement for checking accounts,[SUP][8][/SUP] and economist Laurence Kotlikoff has also called for an end to fractional-reserve banking.[SUP][9][/SUP] Austrian School economist Murray Rothbard has written that reserves of less than 100% constitute fraud on the part of banks and should be illegal, and that full-reserve banking would eliminate the risk of bank runs.[SUP][10][/SUP][SUP][11][/SUP] Jesús Huerta de Soto, another economist of the Austrian school, has also strongly argued in favor of full-reserve banking and the outlawing of fractional reserve banking.[SUP][12] "

https://en.wikipedia.org/wiki/Full-reserve_banking



[/SUP]

 

[Madison320]

"Economist Milton Friedman at one time advocated a 100% reserve requirement for checking accounts,[SUP][8][/SUP] and economist Laurence Kotlikoff has also called for an end to fractional-reserve banking.[SUP][9][/SUP] Austrian School economist Murray Rothbard has written that reserves of less than 100% constitute fraud on the part of banks and should be illegal, and that full-reserve banking would eliminate the risk of bank runs.[SUP][10][/SUP][SUP][11][/SUP] Jesús Huerta de Soto, another economist of the Austrian school, has also strongly argued in favor of full-reserve banking and the outlawing of fractional reserve banking.[SUP][12] "

https://en.wikipedia.org/wiki/Full-reserve_banking



[/SUP]

I've never read Rothbard but I thought he was an anarchist. If that's true how can he been in favor of banning fractional reserve banking? Who's gonna ban it?

I don't understand why many libertarians are in favor of banning fractional reserve banking. As long as the banks don't lie about what they're doing shouldn't it be up to the customer? It seems like a flagrant violation of the initiation of force principle to ban fractional reserve banking.

I don't think it was a free market banking system that screwed up the banks. It was when we switched from a free market banking system to a centrally planned banking system.