# What does anyone have against fractional-reserve banking? **URL:** \ **Category:** Great Debates\ **Created:** [February 4, 2014, 8:54pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516 "2014-02-04T20:54:32Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [February 4, 2014, 8:54pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/1 "2014-02-04T20:54:32Z")
I have heard some people rail against [fractional-reserve banking](http://en.wikipedia.org/wiki/Fractional_reserve) (or, simply, “banking,” I know of no other kind) on occasion, but don’t understand their objections. They seem to think it’s some kind of evil conspiracy, or a way for bankers to coin money out of nothing, or something. But how could industrial capitalism be possible without it? ---
**Author:** ![Human\_Action](https://avatars.discourse-cdn.com/v4/letter/h/ac91a4/32.png) [@Human\_Action](https://boards.straightdope.com/u/Human_Action)\ **Post date:** [February 4, 2014, 9:47pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/2 "2014-02-04T21:47:44Z")
It’s just folk economics, having money listed in a customer’s account when it’s actually been loaned out to someone else just _feels_ shady and weird to people who don’t know any better, so they conclude it must actually be a shady conspiracy that’s ripping them off. Just a slightly updated variation on the old world’s contempt for charging interest on loans. Any economic activity that’s not physically tangible runs into these objections. ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [February 4, 2014, 10:27pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/3 "2014-02-04T22:27:32Z")
> [@BrainGlutton](#): > > or, simply, “banking,” I know of no other kind It’s called “full-reserve banking”. Its kind of a thing (your link mentions a few examples), but pretty uncommon. Basically they take depositor money and charge fees instead of loaning out cash to make a profit. A few economist have tried to work out ways to make it work large scale, but they all either end up hypothetically abolishing fractional-reserve banks and then positing another institution which ends up being the same thing with another name, or end up assuming obviously silly things (like that someone that wants to buy a house can just make friends with a rich person and borrow the money from them.) So I’d say you’re right. Large-scale capitalism doesn’t work unless there’s some sort of middle-man system that owes money to one group of people which it loans out to a second group of people. ---
**Author:** ![BrightNShiny](https://avatars.discourse-cdn.com/v4/letter/b/7bcc69/32.png) [@BrightNShiny](https://boards.straightdope.com/u/BrightNShiny)\ **Post date:** [February 4, 2014, 10:30pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/4 "2014-02-04T22:30:12Z")
> [@BrainGlutton](#): > > But how could industrial capitalism be possible without it? I don’t have a problem with fractional reserve banking, but you could theoretically run an industrial capitalist economy without it. There are lenders out there who aren’t affiliated with savings institutions (payday lenders, etc.), and there are a number of ways to raise capital without borrowing from a lender (selling shares, etc.). ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [February 4, 2014, 10:36pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/5 "2014-02-04T22:36:24Z")
> [@BrightNShiny](#): > > I don’t have a problem with fractional reserve banking, but you could theoretically run an industrial capitalist economy without it. There are lenders out there who aren’t affiliated with savings institutions (payday lenders, etc.), and there are a number of ways to raise capital without borrowing from a lender (selling shares, etc.). Sure, but I don’t think that would work very well on a large scale; you need investment banking for big biz. ---
**Author:** ![BrightNShiny](https://avatars.discourse-cdn.com/v4/letter/b/7bcc69/32.png) [@BrightNShiny](https://boards.straightdope.com/u/BrightNShiny)\ **Post date:** [February 4, 2014, 10:47pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/6 "2014-02-04T22:47:25Z")
> [@BrainGlutton](#): > > Sure, but I don’t think that would work very well on a large scale; you need investment banking for big biz. Well, until the repeal of Glass-Steagall, investment banks weren’t either fractional or full-reserve banks, since they generally didn’t take deposits. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [February 4, 2014, 10:49pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/7 "2014-02-04T22:49:07Z")
> [@BrightNShiny](#): > > Well, until the repeal of Glass-Steagall, investment banks weren’t either fractional or full-reserve banks, since they generally didn’t take deposits. Where did they get their money? ---
**Author:** ![BrightNShiny](https://avatars.discourse-cdn.com/v4/letter/b/7bcc69/32.png) [@BrightNShiny](https://boards.straightdope.com/u/BrightNShiny)\ **Post date:** [February 4, 2014, 10:50pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/8 "2014-02-04T22:50:16Z")
> [@Simplicio](#): > > A few economist have tried to work out ways to make it work large scale, but they all either end up hypothetically abolishing fractional-reserve banks and then positing another institution which ends up being the same thing with another name, or end up assuming obviously silly things (like that someone that wants to buy a house can just make friends with a rich person and borrow the money from them.). Do you have any cites? I’d be curious to read the papers. For housing, a full-reserve system could just have the government intervene in the lending market (the way we currently do in the US), but then I supposed that doesn’t count as capitalism. Or, you could have a system where the vast majority of people are renters, rather than owners. None of these are systems I’d favor, but it seems like they should be functional at some scale. ---
**Author:** ![BrightNShiny](https://avatars.discourse-cdn.com/v4/letter/b/7bcc69/32.png) [@BrightNShiny](https://boards.straightdope.com/u/BrightNShiny)\ **Post date:** [February 4, 2014, 10:51pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/9 "2014-02-04T22:51:35Z")
> [@BrainGlutton](#): > > Where did they get their money? Fees and trading stocks/derivatives/etc. ---
**Author:** ![iamthewalrus\_3](https://avatars.discourse-cdn.com/v4/letter/i/258eb7/32.png) [@iamthewalrus\_3](https://boards.straightdope.com/u/iamthewalrus_3)\ **Post date:** [February 4, 2014, 11:04pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/10 "2014-02-04T23:04:24Z")
The problem with fractional reserve banking is what happens in the inevitable run/crash, and the attendant incentive problems that creates. The overall effect is that you get greater financial efficiency at the cost of stability, and this tends to privatize gains and socialize losses. With full reserve banking, there’s no such thing as a run on a bank. If everyone shows up to take their money out, everyone gets their money. Fundamentally, fractional reserve banking makes its money by paying less for short-term deposits than it earns for long-term loans. Which is great as long as the supply of the former meets the demand of the latter. When it doesn’t, you get a run on the banks. These days, runs are generally prevented by government insurance, which means that in good times, bankers make a bunch of money, and in bad times, the government takes a loss. Privatizing gains and socializing losses. Once you establish the idea that the government will step in to protect banks from runs, you get moral hazard in banks (and in bank employees) who are encouraged to take larger risks. If they win, they get the money, and if they lose, the government takes the fall. See the recent global financial upset for an example. Now, you can make a good argument that the added efficiency in the financial sector makes up for that, that we are all made better off by a system where credit is available, and the fact that the administrators of that credit make out like bandits is a small price to pay on a societal level. But it’s not a given. ---
**Author:** ![BrightNShiny](https://avatars.discourse-cdn.com/v4/letter/b/7bcc69/32.png) [@BrightNShiny](https://boards.straightdope.com/u/BrightNShiny)\ **Post date:** [February 4, 2014, 11:55pm UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/11 "2014-02-04T23:55:24Z")
You can head off some of these problems by limiting the risk Federally-insured banks engage in, and by making them pay adequate insurance premiums. You can’t eliminate Federal losses over the long run entirely, since there’s always the risk of some catastrophic shock which takes down the entire banking system. But we managed pretty well from the period between the end of WWII and the late sixties/early seventies. ---
**Author:** ![BrightNShiny](https://avatars.discourse-cdn.com/v4/letter/b/7bcc69/32.png) [@BrightNShiny](https://boards.straightdope.com/u/BrightNShiny)\ **Post date:** [February 5, 2014, 12:50am UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/12 "2014-02-05T00:50:58Z")
I’ve been thinking about this a bit more, and (in my experience) there’s a large overlap between people who object to fractional banking and people who object to the concept of fiat currency. So, for those people, the objection could be that fractional banking looks a lot like printing fiat currency. And in one sense, fractional banking is printing fiat currency (although I think that’s a simplistic way of looking at it). So, that could be the source of the objection. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [February 5, 2014, 1:06am UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/13 "2014-02-05T01:06:35Z")
> [@BrightNShiny](#): > > I’ve been thinking about this a bit more, and (in my experience) there’s a large overlap between people who object to fractional banking and people who object to the concept of fiat currency. So, for those people, the objection could be that fractional banking looks a lot like printing fiat currency. And in one sense, fractional banking is printing fiat currency (although I think that’s a simplistic way of looking at it). So, that could be the source of the objection. But why do they object to the concept of fiat currency? Fear of inflation, or does it go deeper? ---
**Author:** ![BrightNShiny](https://avatars.discourse-cdn.com/v4/letter/b/7bcc69/32.png) [@BrightNShiny](https://boards.straightdope.com/u/BrightNShiny)\ **Post date:** [February 5, 2014, 1:15am UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/14 "2014-02-05T01:15:39Z")
> [@BrainGlutton](#): > > But why do they object to the concept of fiat currency? Fear of inflation, or does it go deeper? You got me. Basically, their economic arguments tend to ignore the past 70 years or so of economic knowledge we’ve gained, and from what I can tell, there’s a philosophical objection to the notion that money is basically a concept rather than a physical object. Which, I guess puts us back **Human Action** ’s analysis in post #2. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [February 5, 2014, 2:26am UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/15 "2014-02-05T02:26:55Z")
> [@BrightNShiny](#): > > You got me. Basically, their economic arguments tend to ignore the past 70 years or so of economic knowledge we’ve gained, and from what I can tell, there’s a philosophical objection to the notion that money is basically a concept rather than a physical object. Which, I guess puts us back **Human Action** ’s analysis in post #2. Or it could be a form of [moralism](http://rationalwiki.org/wiki/Gold_standard_(economics)). > [@](#): > > **Desire to return to a gold standard** > > Some people (such as perennial Presidential contender Ron Paul and adherents to the Austrian school[10]) continue to preach in good faith that without a gold standard, money is “objectively worthless”; these people are sometimes known as “gold bugs”.[11] Survivalists and conspiracy theorists often like the gold standard, as well as other precious metals like silver and platinum, because it holds out the promise of a stable currency in a governmental vacuum. The idea has also regained currency (no pun intended) recently with the ascent of the Tea Party.[12] > > The general appeal of the gold standard to these groups is to wrest control of the money supply from the government. (Or the Jewish bankers, or the New World Order, or whoever your favored bogeyman is.) As Herbert Hoover said, “We have gold because we cannot trust governments.”[6] Price stability is another advantage to the gold standard. Fiat currencies live with the ever-present threat that the government might print massive amounts of money, leading to hyperinflation, but such an act would be impossible with gold since the supply of gold is intrinsically limited. With fiat currency you trade the possibility of hyperinflation for an inevitable hyper-deflationary spiral when the amount of gold ore that can be found runs out with the population continuing to increase. > > \ > > **The rhetoric and moralism of gold** > > The issue of the gold standard, like all monetary issues, has as much to do with morality and philosophy as it does economics. As above, libertarian proponents of the gold standard often frame the issue in terms of government “corrupting” our money.[37] During the 19th century (and still today), a rhetoric of a superior morality surrounded gold. Gold was thought to be a sign of thriftiness and integrity. It was even sometimes referred to as “God’s money.” There was also a racial tinge to the rhetoric surrounding gold: In some segregated industries, white workers were paid from the “gold roll” while black workers were paid from the “silver roll.”[38] Karl Marx noted this rhetoric as an example of his concept of “commodity fetishism,” writing that both gold and paper money become “the direct incarnation of all human labor.”[39] (Indeed, Marx might have said that capitalism merely replaced gold fetishism with paper fetishism if he had lived to see the 20th century.) Barry Eichengreen and Peter Temin argue that this "gold _mentalite"_ was a factor that worsened the Great Depression due to policy-makers clinging to the gold standard despite its failure.[40] > > Opponents of the gold standard and proponents of paper or fiat currency similarly used rhetoric with moralistic and religious overtones. As William Jennings Bryan said in his speech to the Democratic National Convention in 1896: “Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”[41] John Maynard Keynes wrote in his book Monetary Reform: “In truth, the gold standard is already a barbarous relic.”[42] The Greenback Party (active from 1875-1884), a third party that advocated the replacement of the gold standard with the paper “greenback” currency used to finance the American Civil War, often had themes of salvation running through their propaganda.[43][44] When the St. Gaudens design for the $20 gold double eagle coin started being minted in 1907, president Theodore Roosevelt insisted that it not carry the motto In God We Trust, because he felt it was irreverent to put God on our money. (Congress overturned this within the year.) ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [February 5, 2014, 2:28am UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/16 "2014-02-05T02:28:22Z")
BTW, if a U.S. dime were made of gold, it would be worth $91.41. A gold dollar coin would be something you’d have to handle with tweezers. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [February 5, 2014, 2:47am UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/17 "2014-02-05T02:47:29Z")
If a U.S. dime were made of silver, OTOH, it would be worth $1.42. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [February 5, 2014, 2:48am UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/18 "2014-02-05T02:48:57Z")
I’m assuming pure metals, of course; a dime would be worth somewhat less if alloyed with base metal, as it would need to be. ---
**Author:** ![drewtwo99](https://avatars.discourse-cdn.com/v4/letter/d/d07c76/32.png) [@drewtwo99](https://boards.straightdope.com/u/drewtwo99)\ **Post date:** [February 5, 2014, 4:28am UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/19 "2014-02-05T04:28:01Z")
The idea behind gold-backed currency isn’t that the coins or paper money themselves are intrinsically made of a high value metal or product, but that the government requires a bank to give you a certain amount of gold whenever requested in whatever denomination when you want it. It’s silly because, in open capitalism, we can all buy gold anytime we want with our fiat currency, even though the government isn’t mandating it and it’s not your local bank doing it. And it works just fine. There’s nothing wrong with fiat. ---
**Author:** ![Mosier](https://avatars.discourse-cdn.com/v4/letter/m/7ea924/32.png) [@Mosier](https://boards.straightdope.com/u/Mosier)\ **Post date:** [February 5, 2014, 4:36am UTC](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516/20 "2014-02-05T04:36:23Z")
> [@iamthewalrus\_3](#): > > The problem with fractional reserve banking is what happens in the inevitable run/crash, and the attendant incentive problems that creates. The overall effect is that you get greater financial efficiency at the cost of stability, and this tends to privatize gains and socialize losses. > > With full reserve banking, there’s no such thing as a run on a bank. If everyone shows up to take their money out, everyone gets their money. > > Fundamentally, fractional reserve banking makes its money by paying less for short-term deposits than it earns for long-term loans. Which is great as long as the supply of the former meets the demand of the latter. When it doesn’t, you get a run on the banks. These days, runs are generally prevented by government insurance, which means that in good times, bankers make a bunch of money, and in bad times, the government takes a loss. Privatizing gains and socializing losses. > > Once you establish the idea that the government will step in to protect banks from runs, you get moral hazard in banks (and in bank employees) who are encouraged to take larger risks. If they win, they get the money, and if they lose, the government takes the fall. See the recent global financial upset for an example. > > Now, you can make a good argument that the added efficiency in the financial sector makes up for that, that we are all made better off by a system where credit is available, and the fact that the administrators of that credit make out like bandits is a small price to pay on a societal level. But it’s not a given. This is the most interesting reply so far, IMO. I’d like to see someone address it. [Next page](https://boards.straightdope.com/t/what-does-anyone-have-against-fractional-reserve-banking/680516.md?page=2)