Friday, December 2, 2011

Gold and Fractional Reserve Banking

Bankers, and the ruling elite, love fractional reserve banking. With fractional reserve banking, bankers lend multiples of the dollars held in savings.

In the case of gold, bankers would lend out multiple bank notes for the gold they have in reserve. This works great in boom times. It makes them even boomier.

When the market spooks and people run in to redeem their gold certificates, they discover that the bank doesn't have sufficient reserves to cover the notes and chaos ensues.

Banks that use precious metals to back a fractional reserve currency almost always fail.

Our progressives friends love to point to the failure of gold banks using fractional reserve currency and claim it as proof that precious metals cannot work as a currency.

Goldbugs should point to this failure as indication that fractional reserve banking fails.

Central banks printing a fiat currency provide some relief for banks using fractional reserve lending. When a run on a bank occurs, the central bank can simply print up a pile of notes. This externalizes the failure of fractional reserve banking on society at large.

The fact that our unstable system of fractional reserve lending works better with fiat currency than with gold does not mean fiat currency is intrinsically better than hard currency.

The fact that fiat currency allows banks to temporarily mask a corrupt money supply has proven a major defect in that it turns depressions into recessions or into periods of hyper inflation.

Advocates of precious metal currencies need to argue against fractional reserve lending.

For that matter, the reason I am interested in reviving precious metals as a currency is that I realized that fractional reserve lending magnifies business cycles and leads to economic harm to the people at large.

I am not attracted to the glitter of gold. I am attracted to gold to the extent that it is a more honest currency that fiat money.

Fractional reserve banking multiplies the debt of the people and has proven itself, time and time again, to be toxic to a society. Re-establishing gold and silver as currencies directly challenges the financial structures built around fractional reserve lending.

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