We're good here. No problems yet.
That guy on the next block now has $100 (in five $20 bills) that he can use to buy a stereo, but maybe you still want to buy a stereo too. You can go to the bank and borrow $100 if you want. You can use your account as collateral.
This is where I have a problem. You deposited the only $100 in town in your account. The bank loaned it to the other guy for whatever reason. The bank no longer has the only $100 in it's vault. How can they loan me $100 that they do not have? That is fractional reserves. The banks is now earning interest on $200 when they only had "title" to $100. That is what I consider immoral.
Lets assume for a minute that physical gold was the only permissible currency. You deposit 100 gold coins. The bank then loans 100 gold coins to the stereo buyer. The bank's vault is now empty. It has no more gold to lend. It can only earn interest on the coins lent.
Under fractional reserve rules, bankers profits are expanded greatly by allowing them to earn interest on money that it doe not have title to. Money that didn't even exist until they made the loan.
Excellent post-- thanks for pointing out the overlap with money creation and fractional reserves that's been muddying things up. We'll stay together by (hypothetically) saying we're under the gold standard and reserve requirements are 100%. Then we can agree that money supply is independent of the amount of gold.
I see our key point is the role of collateral, and how it can do what reserves do. I suggested that it's OK if the First National Bank of Gold loans $100 to the guy down the street because he lives in a solid gold eight story 4,000sf.house with a gold mine in the basement -- the terms of the loan require bank to hold complete title to the place until the loan is paid in full (this is what is meant by "equity up the yingyang"). The bank figures that they don't have any place to store the guy's house --and why not take the guy's deed; after all, they're just giving the clown a bank draft in return anyway. Next, I said that the bank could also loan me my $100 using my account as collateral. You said "The banks is now earning interest on $200 when they only had "title" to $100. That is what I consider immoral." So it's moral for the bank to accept my five $20 gold pieces as 100% reserves, but it's not moral to accept the deed to a multi-billion dollar solid gold house that the banker can watch from his office window because that's somehow fractional.
Perhaps a 'live and let live' view of the rest of us could be in order-- I'm hoping you could possibly see your way to maybe retracting your condemnation of my hapless banker to the eternal flames. Also, maybe we can even go back to post 200 that started this whole thing with the chaos/order comparison that showed how a Fed adjusted money supply gave us a better chance of knowing what the hell is going on from day to day. I honestly see the switch from chaos to order that occurred simultaneously with dropping the gold standard as not having been caused by all the bankers suddenly getting religion.