Financial systems, especially
those with fractional reserve banking, are ingenious in coming up with new ways to leverage new business opportunities.
The deposit multiplier is part of the money supply expansion activity by a bank made possible
with fractional reserve banking.
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.
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.
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:
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.
With or without a central
bank,
fractional reserve banking will tend to bring about a boom / bust cycle and thus reduce the long - term rate of economic progress.
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.
Fractional reserve banking is doomed to a boom bust cycle, unbroken since politicians colluded
with central bankers to degrade money by printing and borrowing.
You can borrow against the equity in your life insurance policy without any of the hassles associated
with getting a loan through a
fractional reserve bank.
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.
With a gold standard and without
fractional reserve or central
banking, bubbles are small and localized.
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).