the most truly inconvenient truth is that the world's economic system, which is based
on fractional reserve banking (which essentially allows for printing money whenever a government chooses to do so, independent of any real productive value underlying the printed currency), which then requires constant growth to pay the interest on ever increasingly debt on the new «money» that is then used to create loans or government financing of whatever.
As we pointed out in a previous essay
on fractional reserves banking, a deposit contract is essentially different from a loan contract.
Not exact matches
Concurrent with this orgy of public debt, the State encourages massive expansion of private credit via
fractional lending, low
bank reserves, and other forms of leverage, in a vain attempt to stimulate demand in an economy burdened with overcapacity, declining employment, marginal return
on capital and saturated markets.
One of his views that always stuck with me
on that subject, at least as a starting point for thinking about it, was that it was somewhat nonsensical to talk about what «equilibrium exchange rates» should be in a world of fiat currencies and
fractional reserve banking.
(As an aside, equilibrium means «no tendency to change,» fiat means deriving its value from law rather than some underlying commodity backing, and
fractional reserve means that
banks hold only a fraction of deposits
on reserve, loaning the rest out.).
Here is a post from Libertarian News that begins, «I recently got into an argument over
on the Reddit Bitcoin boards where I held the position that
fractional reserve banking with Bitcoins was not possible,» which sounds fun; he recants that view but does make what I think is a very valid point:
So there's a conflict between the «owed or obligated» language in the press release, which would prohibit basically any bitcoin leverage, and the «custody or control of Virtual Currency
on behalf of another Person,» which would allow leverage — but still not
fractional -
reserve deposit
banking, etc..
With
banks holding
fractional reserves of Federal Reserve dollars (notes and deposit claims
on the books of the Fed, whose sum is called «the monetary base»), when the Fed increases the quantity of Federal Reserve dollars by $ 1 billion, the
banking system ordinarily creates a multiple amount of deposit dollars.
But an expert in that market, Jeffrey Christian of the CPM Group, acknowledged at the March 25 hearing of the U.S. Commodity Futures Trading Commission, as he had acknowledged in an explanatory report published in 2000, that the London bullion market is actually a
fractional -
reserve gold
banking system built
on the presumption that most gold buyers will never take delivery of their metal but rather leave it
on deposit with the LBMA members from whom they bought it.
I mean given that the
fractional reserve banking system is so over-levered, globally, but just thinking about the U.S. for a minute if everybody put 5 % -10 % of their money in Bitcoin or some other cryptocurrencies, the whole
banking system implodes
on itself.
(Note now that we are not talking about a free
banking system — I want to make a point about
fractional reserve systems in general and show how the problem is that the system isn't free, not that it's based
on fractional reserves.)
Once a
bank has built up a reputation of solidity, it will be fairly easy for it to just keep a
fractional reserve at hand — this is to say, instead of actually warehousing the entire amount
on deposit, it will only keep a certain percentage at hand that it estimates will suffice to satisfy withdrawal demands in the «normal course of business».
As I have described above, it can be loaned into existence by
banks operating
on the
fractional reserve system.
For those unfamiliar with
fractional reserve banking it just means that the
bank isn't required to keep 100 % of the amount
on deposit in the
bank at all times.
If I deposited 100 newly minted coins into a
bank and that
bank proceeded to loan out 80 of my coins where 80 are deposited into another
bank who then proceeds to loan out 60 of the coins, and so
on... the production of coins only changed by the initial 100 that I minted - not by the
fractional reserve multiple.
In the
fractional reserve system, a
bank can have loans of $ 100 for every $ 50 they have
on deposit.
Let's start with a quick definition of
banking before moving
on, because it is essential to the discussion of any specific type of
banking, such as
fractional reserve banking.
There is no limit as to how much Credit the
banking system can create through
fractional reserve banking — other than the ability of the borrowers to pay interest
on the money they have been lent.
Yes, transparency is a problem, but that would ALWAYS be true under our current
fractional reserve banking system — it's inherently a Ponzi scheme that functions
on public gullibility and government edict —
banks get to violate private property rights.
Critics will say that the nation had recurring booms and busts while
on the classical gold standard, but they may be confusing the chaos of
fractional reserve banking (being able to pyramid loans
on top of deposits with fiduciary media) with the classical gold standard (the citizenry is able to convert currency into a fixed amount of gold).
Just like you said for Ponzi schemes «the only source of the so - called interest
on the money was the contributions of future investors», for
fractional -
reserve banking the source of interest is the future profit made by lending the investor's money - to the investors themselves!
Fractional reserve banking is the practice of keeping only a fraction of a
bank's demand deposits
on reserve, while lending out the rest.
Unlike
banks, Poloniex does not operate
on fractional reserves.
As the exchange does not operate
on fractional reserves like
banks, you can always sell or withdraw all of your funds without quantity issues.