Is fractional reserve fraudulent?

There has been an ongoing debate about whether or not fractional reserve banking, the current standard of banking, is fraudulent. We believe it is, but only because of other restrictions and regulations on the banking system. In a relatively free market of banking, fractional reserve banking would not necessarily be fraudulent as long as borrowers and depositors were aware of the fractional reserve percentage set by the bank.

The primary reason that fractional reserve banking is fraudulent is the requirement to be “insured” by the FDIC on accounts up to US$100,000. This passes off the risk of the deposit onto taxpayers, which has a significant cost if a bank becomes insolvent (meaning it can not redeem deposits in cash). In a free market, depositors would have the option of taking insurance to protect their deposits, and be relatively free as to which insurer they choose, if any at all. By allowing a choice, competitive pressures should keep the depositor safe, or allow them to take as much risk as they like with their deposit.

The secondary reason that fractional reserve banking is fraudulent is that most fractional reserve banks are backed by the power of the Federal Reserve. In a situation where a fractional reserve bank becomes insolvent (as it happening with banks who invested in the housing market bubble), the Federal Reserve can loan the bank money to cover withdrawals. The Federal Reserve does this by creating new funds (liquidity/credit) for the bank to use. It is the new creation of money (monetary inflation) that causes prices to rise in a market with supply and demand stability. Market bubbles are created, putting pressure on consumers, sellers and market reliant on the bubbled market. In the long run, savers and the poor and middle classes are harmed by monetary inflation, which is an effect of fractional reserve banking. Full reserve banks would not need to receive new inflated money because their deposits, and loans, would be backed 100% by money in their vaults.

The third reason that fractional reserve banking is fraudulent is the lack of choice to use a full reserve bank. As of right now, there are no dollar-denominated banks that have a 100% reserve. To do so would be uncompetitive because of the profits that can be made, fraudulently, by fractional reserve banks. It is my honest opinion that a full reserve bank COULD compete merely on the moral issue and concerns. Christians, Muslims and Jews should be informed of the moral need to use a full reserve bank.

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