Under FRB, aggregate debt (principle + interest owed) invariably becomes greater than the amount of currency in existence. The only way these debts can all be satisfied without any artificial increase in the money supply is if the principle only is paid. Which is never the case. That interest MUST eventually come from somewhere else outside the vacuum. And since the interest can't be mined, grown or sewn, someone's going to have to create it -- or else default on the borrower's parts are an absolutely inevitability. Even with matched maturities, removing the RIGHT NOW claims from demand deposits, without perpetual expansion the entire system is still physically, logically impossible to reconcile, and defaults are a mathematical certainty - even if hard specie was the only currency in existence.
You are mistaken, interest come out of the principle meaning, there's less and less of it available for loans.
Firstly, interest always originates as the principle of some other loan. Secondly, the interest paid to banks is also available for loans in one form or another. Banks pay out money for salaries, dividends and bills like any other business - which money is then deposited into and circulates within the banking system. Furthermore, banks loan out their own remaining assets; in fact, no bank can even come into existence without its own assets to place into a reserve account to begin with.
So if the FRB loans $900 from that original $1,000, the borrower buys bullion from the bullion seller, bullion seller pays salary to borrower $10 (remember FRB wouldn't just make any loans, he'd loan to someone who has the means to repay), now instead of $900 going back into the reserves only $890 goes back and so the principle of the next loan gets smaller..
$890 ($900 - $10 paid in salary) might be the case if the person earning the salary is actually cashing his check at the bank and not depositing it anywhere, and assuming further that this cash simply continues to circulate outside the banking system in cash-only transactions. Otherwise, the moment it goes back into the system as a deposit anywhere, it is again counted as reserves.
But you bring up an interesting question: What if that $10 didn't get ever deposited anywhere? And what if others followed suit, as would be the case where "maturity matching" is required for deposits:
Think about what would happen if the majority of transactions were cash only, and banks were used by people solely as vehicles for obtaining loans and making cash only payments on loans (which cash-only payments banks like BofA HIGHLY resist as a matter of policy). This is what proves in my mind that the entire system is nothing more than the fraudulent illusion based on credit dependency (as a requirement) paradigm, one that is incompatible with privately accumulated capital as competition:
In the absence of a central bank, if nobody wrote checks or used the banking system at all as a vehicle for payment of debts, but cashed out and paid all debts in cash only,
bank reserves would dry up completely, and all banks would immediately face a massive liquidity crisis in a catastrophic domino effect. If everyone was forced to wait for their money each time a deposit was made, fewer people would make deposits.
Even if nobody saved (no money in coffee cans or hidden in safes and mattresses) and all of the money busily and openly circulated throughout society, in the eyes of banks it would appear to be "hoarding" (open hoarding by everyone, no less - more like a game of keepaway). That's because credit is only abundant when the actual reserves, which are rare, are in the possession of the banking system. That is even to the point where banks consider all of those instruments conveniences of the banking system (which they will smugly state are conveniences to "customers of the banking system"). The system itself absolutely requires a "mostly cashless" society to even function, given the banking system's absolute dependency on the reserves required to maintain the illusion of solvency.
If everyone used cash only (NOT checks or other bank instruments) for most transactions, a conundrum exists ONLY for banks and for those using credit (which is NOT EVERYONE). The damage inflicted would extend to everyone - including parties who have ZERO credit, and are not parties of interest to any of these credit transactions, but that is incidental, since the claim is that the risks of FRB are confined only to those who knowingly participate.
The velocity of money would slow to a stop, credit would be increasingly difficult to obtain, and prices would fall (ALL VERY GOOD FOR THE ECONOMY IN MY MIND). That includes the prices of all assets -
except for the bank loans, which do not adjust to deflation. Those loans are designed to be repaid with currency that is expected to lose, not gain, value relative to all other goods and services, based on an ever-expanding supply. Now you're sitting there with $1,000 in total currency, most of which is circulating openly but not in the banks possession, and therefore not counted as reserves. However, $9,000 in loans + interest (read=OVERVALUED ASSETS) must somehow be repaid -- using the $1,000 in existence.
