Fractional reserve banking is another aspect of the banking business seldom discussed. Banks only have to keep 10% of deposits on hand. That is, if all depositors wish to withdraw their money from the bank at the same time there would only be enough for each of them to withdraw 10% of their money. The system gambles on a stable environment where each of us acts independently and randomly.
In these days of (I hate to use this overused term but oh well) identity politics where individuals have become mere pieces of demographic classifications, a bank run seems a little more possible. The fact that we are individuals is what makes us strong as a society. Each of us making decisions as part of a chaotic crowd softens blows like a diversified savings portfolio prevents losing it all.
Fractional reserve banking makes the economy more volatile. In the same way that the Fed creates money out of thin air, the fact that banks can pretend there is more money out there keeps interest rates low. Lower rates stimulate borrowing where it might not have occurred and investing in riskier ventures; like when home sales are strong because of low rates.
Of course if the bank is serving its purpose, to keep your savings safe while providing capital for projects that need cash, all those savings won’t be at the bank all the time. The money won’t be available at the spur of the moment for everyone. So it is really important that no panics occur. What is the best way to prevent such a thing?
I remember one of the primary reasons we were happy to quit farming: marketing. If it weren’t for government reports on crop yields or supply, prices would gently fluctuate as world news and local conditions impacted prices. Spring brought uncertainty. Fall brought supply bottlenecks. Hot, dry summers came gradually, influencing prices as storm clouds delivered or not.
On the other hand, government reports were hotly anticipated. Analysts were interviewed on the radio about next week’s report. Then when the report came out prices would soar or drop in limit moves, making or breaking a summer’s work in minutes. That would be described as a panic.
Stability in markets comes from freedom. It comes from millions of individuals doing what they think is best for themselves. Volatility comes from government, whether it is commodity markets or any other good or service we use. To have changes come from any central authority bypasses the will of the diverse millions.
The value of the dollar and the stability of that value has been destroyed by the rampant growth in the money supply. That supply of money was used to fuel the huge spending bills used to ameliorate the COVID crisis, the inflation crisis (even though inflation is the direct result of that action itself), the climate crisis, and the war in Ukraine.
While Russia, China, India, Brazil, and many other nations, making up the majority of world trade, are moving away from the unstable and untrustworthy dollar as the international currency of choice, we are being distracted by Trump’s payment to a porn star. Wow. We should look at the ramifications of this more closely.