Article Image
IPFS News Link • Economics: Austrian

The Faults of Fractional-Reserve Banking


In a November 1, 2010, blog post titled "Could the World Go Back to the Gold Standard?," Martin Wolf, the Financial Times chief economics commentator, comes to the conclusion that "we cannot and will not go back to the gold standard."

Among a number of mainstream-economics arguments leveled against the desirability and feasibility of the gold standard, Mr. Wolf puts forth a line of reasoning that can serve particularly well as a starting point for debating his position. Mr. Wolf writes,

Economists of the Austrian school wish to abolish fractional reserve banking. But we know that this is a natural consequence of market forces. It is wasteful to hold a 100 per cent reserve in a bank, if depositors do not need their money almost all of the time. Banks have a strong incentive to lend some of the money deposited with them, so expanding the aggregate supply of money and credit.

Read Full Story

1 Comments in Response to

Comment by Robert Bilyeu
Entered on:

Good article, unfortunately I personally don't see any way to return to the gold standard without an audit of our gold reserves, which Ron Paul has asked for.  Down through history from the goldsmiths to modern day bankers, when they realized that most depositors seldom used over ten percent of their deposits and they seen no need for that money to set idle, they would move to lend out several times the amount of currency they held.  It is man's nature to make the most amount of money with the least amount of effort.

The Federal Reserve prints money and lends to Governments or to member banks (debt money) with interest attached, which is never created under the auspice of controlling boom and bust cycles by tightening or loosening credit.  The member banks or the government receive this money first hand, so they get the full value at time of issuance.    Unfortunately, by the time it filters down to the people through either government spending or the fractional reserve system, the people are caught in an inflationary trap which they cannot escape from.  Keynes made the statement that not one in a million would ever understand the system.  Under the Coinage Act of 1792, the penalties for debasing the currency were extreme.