What is the primary source of confusion about fractional reserve is muddled in the fungibility of money with property ownership.

  • If you deposit a work of art for safekeeping (paying a fee of course) in a secure warehouse, and you come back in 1 years time to retrieve it, you would, quite rightly cry “Foul!” if the owners of the warehouse either (a) tried to give you a different piece of art or (b) were not able to produce the chair as agreed. The courts would agree with you.
  • If you were a farmer, and deposited 100 bushels of wheat at an agreed upon quality at the grainery in return for receipts equal to 100 bushels of wheat with said specified quality. If you (a) saved those receipts to cash in wintertime or (b) traded those receipts in whatever denomination to others for the acquisition of others goods, you would, quite rightly, cry “Foul!” if you attempt to redeem those receipts if (a) the grainery did not return the wheat at all or (b) attempted to redeem your receipts in wheat of inferior quality. Again, the courts would agree with you. It was termed “abailment”.

In the above cases, if the warehouse/grainery or any other entity entrusted to safeguard your property either redeemed your receipts or defaulted/repudiated on returning property to you or any other Customers, you would cry “Thief!” and the courts would agree with you.

When it comes to money, property ownership concepts are muddled, possibly (I might come to that later as to why) because of the fungibility (interchangeability) of it.

Since money is a universal intermediary of exchange, if you deposit $100 (your property) at a bank, you do so with the expectation that you can retrieve your $100 within the duration you and the bank agree on, either (a) at any time (demand deposit) or (b) at a specified time interval i.e. in 1 years time (term deposit). Term deposits typically have higher interest charges on them than demand deposits as a mechanism to reward the depositor for allowing the bank to use their money (property) for the duration of the term. Theoretically, the money in a demand deposit should be payable to the borrower at any time (although if you look at your agreement with the bank, it reserves the right to take up to N days to redeem your money).

This is where it gets interesting.

If the bank cannot return its money to you when you want it as a result of them making bad loans or hyper extending itself somehow, and breached the terms of its contract with you (i.e. after N+1 days it still cannot redeem your money, you cry “Thief!” as your property has been stolen. With fiat money, a central bank, and the government (i.e. the taxpayers) instituting the FDIC to bail out the bank, this is not likely to happen as fiat money can always be printed and loaned to the banks to return your money. This in of itself creates a MASSIVE moral hazard where banks are encouraged to approach the maximum loan creation to the federally mandated fractional reserve ratios.

As the banks benefit from fractional reserve banking, your money (property) is affected in a different way. When times are good and loan demand is high, all this new loan money is added to the economy causing inflation. Inflation does not hit all sectors equally, at the same time, and at the same rate. It takes a while for it to ripple out into the economy. This causes the money you had on deposit at the bank to lose its purchasing power, unless your interest rate on your account equals the rate of inflation. My demand deposit pays out 0.25% per year. Inflation is running at, according to official statistics (YMMV) between 2-3% depending on your personal basket of goods. The purchasing power of my dollar is falling when I leave it in the bank. Where is it going?

It goes to the central bank/banking cartel who print the new money into circulation, diluting the old money already in circulation. In otherwords, although I get my $100 back sometime later, the purchasing power, the very property of my money I value it for, has been taken from me. As you know, this is something not 1 in 100,000 people understand. They are satisfied as they think they have their property returned to them in the same condition they entrusted it with – the bank. It clearly is not. Oh, you may argue it is a very small amount if I deposit it on day 1 and take it out on day 14, but add that up for every deposit in every bank….

Another way to think of fractional reserve banking and whether or not it is fraud is to use this analogy:

Let’s suppose I worked for you and I knew that you kept a petty cash drawer with $1000.00 in it. Furthermore, I knew that you only inventoried that drawer once a month and did not use the cash.

I took it.

I blew it on the racetrack, and won $5000.00. Woo hoo! On the last day of the month, I sneak back into your office and replace the $1000.00. The next day, you check it as usual, see it is fully accounted for, and are none the wiser.

I do it again.

This time I lose $5000.00. Uh oh. I panic. I can’t pay you back. I don’t have anyone I can borrow it from like a central bank, another bank who will lend to me, and I can’t force my relatives to give it to me (the FDIC). You catch me and are FURIOUS. You fire me and report me to the police.

My question to you is this, “At what point in time did the theft take place. The moment I took the money (property) or the moment I was caught?”  If you say the former, you recognize fractional reserve banking as fraud.  If you say the latter, I sure as hell don’t want to associate with you.