14 Jun 2010

I Join the Fractional Reserve Banking Wars

Financial Economics, Shameless Self-Promotion 1 Comment

In today’s article at Mises.org I walk through a simple example to show exactly how bankers benefit from fractional reserve banking. Whether you love or hate FRB, I think you should check out the article because I take the analysis one step deeper than I’ve seen it anywhere else.

Specifically, I show exactly how the bankers gain shareholder equity from earning interest on “money created out of thin air,” and I also show why the standard textbooks assume each bank in the process only makes loans equal to the excess reserves generated in that round. For example, in a standard econ textbook, if someone deposits $1,000 in a bank, then bank then loans out $900. But as I show in this article, the bank has the legal ability (vis-a-vis reserve requirements) to actually loan out $9,000; it is simple prudence that limits it to issuing $900 in new credit/money.

One Response to “I Join the Fractional Reserve Banking Wars”

  1. KP says:

    So you’ve joined the “its just plane weird” army? What a war it is.