Economic necessity produced fractional reserve banking. It became obvious that it was a source of great wealth both for individuals and society as a whole. Removing and storing gold decreases the money supply so drastically that economic growth becomes dependent upon random events.
When and where banking was introduced it created economic and financial powerhouses. To claim otherwise is just a misreading of history.
Removing this ability is impossible today because it would create and sustain a world wide depression that no democratic society could survive.
The key is maintaining confidence in the money and tie the growth rate of the money supply to reasonable targets.
No. It has never been a source of wealth. It has been the source of inflation and subsequent deflation and thus business cycles, and in the case of central banking, perpetual and rampant inflation.
***Removing and storing gold decreases the money supply so drastically that economic growth becomes dependent upon random events.***
Wrong. When gold gets stored, a receipt, or bank note, is printed as proof that it lies in the bank. Then the gold is taken out of circulation because it is not being used and the paper ticket is circulated in its place to be redeemed by whoever holds the note should that be their choice. If for instance there is 100 ounces of gold in circulation and 50 ounces gets put in a bank, bank notes equivalent to 50 ounces of gold will be printed. The total money supply then is 50 ounces of gold and bank notes backed by 50 ounces not currently in circulation. The total money supply is then still the same. When the paper is exchanged for gold in the bank, then the paper is destroyed and the gold goes back into circulation.
Fractional reserve banking came about when bankers realized people didn’t collect their gold in large amounts or even all at once. So they began to print bank notes for gold that didn’t exist, loaning them out, and making profit off interest. It was always a risk because if news got out the bank was unsound, a run would occur and the bank would be rightfully put out of business. Then government stepped in of course.
***When and where banking was introduced it created economic and financial powerhouses.***
Of course. The ability to channel saved funds to entrepreneurs and make profit means most probably that the you will come across a lot of money. And when most people realize they don’t NEED all their money at the current moment and that they can make a profit by allowing banks to loan their money, they will likely deposit this money in the banking system. Fractional Reserve Banking increases the “prestige” of a bank only in appearance. In actuality it’s a recipe for bankruptcy and is nothing less than fraud.
***Removing this ability is impossible today because it would create and sustain a world wide depression that no democratic society could survive.***
No it wouldn’t. It would indeed create a severe recession because then banks could no longer inflate and they would be forced to call in all their outstanding loans (deflation), but this is exactly what happens in any other depression. We survived the 30’s and then the government kept getting in the way of recovery.
***The key is maintaining confidence in the money and tie the growth rate of the money supply to reasonable targets.***
You can’t maintain confidence in a system of ever increasing prices. The free market determines confidence, not some politician trying to delude the people into believing paper money is inherently valuable.
The idea that you can tie the growth rate of the money supply to something “reasonable” is laughable. Firstly who sets this growth rate? Most probably a highly centralized organization cut off from the reality of the everyday economy. And if the government continues to use it’s manipulated CPI and GDP numbers, the target money supply growth will never be accurate. Secondly, why should the money supply grow at all? An increase in the money supply confers no social value and only serves to help those that get the new money first and hurt those who get it last. Thirdly, what is a “reasonable target”? Something that always increases prices? That leads me to believe that in the long run prices will to infinity, but like good old Keynes said, in the long term, we’re all dead. Too bad WE are Keynes’ long term.
The free market will and did determine what the growth of the money supply will be and if ever that money becomes too common or too scarce (or a better money is found), then people will shift to a different commodity.