End Fractional-Reserve Banking: Part I

Posted: September 8, 2011 in Politics
Tags: , , , , ,

(Note from author: I have recently been convinced that fractional-reserve banking, though it’s a bad idea, should not be outlawed.  The government should not outlaw bad ideas unless fraud or another for a violating rights is involved.)

 

The Basics:

Law of Identity: A is A

Law of Excluded Middle: Anything is either A or non-A

Law of Contradiction: Nothing can be both A and non-A at the same time in the same respect

Law of Causality: The relationship between cause and effect

The Problem:

Fractional-reserve banking is a fraudulent process because it violates the law of contradiction. Because it is a fraud it is incompatible with the free-market; therefore, free-market laws should prohibit such frauds and protect individuals from it. Our whole financial system, however, is designed around concealing that fact and it’s designed around sustaining its operation besides. The motive for maintaining this particular contradiction (as far as I can tell) is that there is a ton of money to be earned and because it’s lasted this long thus far (i.e., status quo). It will soon be coming to an end, as most contradictions eventually do, one way or another; either by choice or by the implacability of reality rearing its head — I sincerely hope for the former.

Why fractional-reserve banking is a fraud:

What is fractional-reserve banking? Fractional-reserve banking is what allows banks to lend part of its deposits (AKA assets) while maintaining a small fraction (in this example 10%) in reserve; thus, the term “fractional-reserve banking”. That doesn’t sound so bad, that is until one carries it out to its logical conclusion.

Let’s say for the sake of argument that only $1000 exists in circulation, only one bank exists, and there is only one depositor (so far) at this bank, who deposited the existing $1000. The bank can now lend $900 while maintaining $100 in reserve. That $900 gets spent and then deposited back into the bank. Because banks do not care about the source of their deposits, that $900 is counted as an asset. The bank can now lend 90% of $900 while maintaining 10% in reserve. That lent money gets spend, it’s deposited back into the bank, and it’s counted as an asset which the bank can now lend 90% of again. This cycle can continue until the very last penny. The result being that $1000 is in the reserve (the original $1000), $9000 is on the books as lent out, and $10,000 is on the books for deposits. That should raise a few eyebrows, but it gets worse.

Here in lies the contradiction; that $1000 is claimed to be owned by several people. People will spend their deposit as though they own it. People will assume that their money exists in full. Keep in mind that nothing can be A and non-A at the same time in the same respect – that would be a contradiction. In this case, that $1000 belongs to the first depositor and not to the first depositor at the same time in the same respect — that is a contradiction. Any one or all of its many owners may go the bank to claim “their” money — you better be the first one in line though because only $1000 exists.

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