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Fractional Reserve Banking | Bank REO Real Estate
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UK MP Carswell introduces bill to stop fractional reserve banking

September 23, 2010 by · Leave a Comment
Filed under: Policy News 

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This has been a taboo subject since the Great Depression in the 1930’s almost everywhere.   Keynesians seems to have won out and making sure the growth of credit was not hampered and the prevention of deflation was the number one priority.  The problem is the in a debt-based monetary system where ” P< P+I”, this creates the environment that you have to have growth and inflation or face dire consequences.

Fractional reserve banking is the method that is universally used to let banks generate credit and this is a major reason why we see constant inflation over time without pause.  MP Carswell has made a well thought out argument against this form of banking and has introduced a bill to change the system in a way where banks can only do fractional reserve banking is with investment savings accounts and not on demand deposit (checking accounts).

The point where I agree the most is the fact that when the economy heats up, banks use the demand deposits to create more credit and this will be more than normal because demand is greater and with factional reserve banking, it amplifies the effects of this demand.  Carswell said that instead of the current system, banks should instead increase the interest rate they pay for investment deposits and that would in effect draw savings into the fold and that would create a natural brake and would create credit proportional the the savings available in the economy.  This would limit the major portion of projects that normally get financed that have no chance of being paid back.

Once the boom is over, we bailout and create money to cover losses so the system doesn’t crash and creates more inflation that devalues our money.  That system is not fair to everyone and is especially harsh on savers that did not get into the bubbled frenzy.  We will need to watch how this plays out in the United Kingdom and we could learn a thing or two and try and reform our credit / debt generation system in the United States.   Please comment if you have an opinion.

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