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Stray Thoughts
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A
Den of Thieves:
Fractional Reserve Banking Sam Aurelius Milam III This is the first article in a series of articles that I hope to present during the next few months. The articles will be based on my essay They Can Fool Too Many Of The People Too Much Of The Time. Due to the limited amount of space in this newsletter, I'll eliminate from the articles a lot of material that's included in the essay. However, copies of the essay are available upon request. The subject of the articles will be fractional reserve banking. If that seems like a dull subject, then think again. You might as well claim that hungry crocodiles, cornered rats, or mad dogs are dull subjects. Fractional reserve banking is every bit as dangerous as they are. That ought to lend the subject some interest.1 However, before I can present my thoughts on fractional reserve banking, there are a few preliminary ideas that must be addressed. That will be the purpose of this article. An understanding of money is the first prerequisite to an understanding of fractional reserve banking. Such an understanding of money must begin with a knowledge of the rules of money. That is, to work well as money, a thing must be durable, portable, divisible without loss, available in limited quantity, generally accepted as money, and it must have intrinsic value as money.2 Nothing in use today satisfies those rules very well. Much of what passes for money today doesn't satisfy the rules at all and, therefore, isn't money. Throughout these articles, I'll try to avoid using the word money. Instead, I'll use the word dollars. Even that isn't quite right because a dollar is a unit of measure of money. A transaction might involve a certain number of dollars of money just like it might involve a certain number of gallons of ice cream. If the ice cream melted on the way home and I say that I brought home some gallons, that's pretty much like talking about dollars in today's economy. There isn't much money. It's mostly empty dollars. In my analysis of fractional reserve banking, I'll treat the banking system as if it were a single bank. That model simplifies the analysis, which is already complicated enough without worrying about which bank is which. One bank is a reasonable model for understanding fractional reserve banking and illustrates the mechanics of the process very nicely. When I refer to "the bank" in the articles, then I'll be referring to the model bank. When I refer to a bank as a part of the banking system that exists in the real world, and if I think that my meaning might not be clear, then I'll refer to it as a "real bank." There are only two relevant locations for dollars in this analysis: in the bank or not in the bank. I'll therefore consider all of the rest of the economy to behave as a unit with regard to its interaction with the bank. In terms of the consequences of fractional reserve banking, it doesn't matter what the dollars do while they're out of the bank, or where they go. What matters is the consequences of their leaving the bank and entering the bank. The consequences of fractional reserve banking are dictated entirely by the mechanics of the dollars entering the bank and leaving the bank. When someone makes a deposit into a real bank, then the real bank must be prepared to return the same amount of the same thing that was deposited. If the deposit is in cash, then the real bank must be prepared to return the same amount of cash. The real banks assume that people won't all want their cash at the same time and keep only a fraction of the cash that was actually deposited. That cash is called the fractional reserve, which is a subtle deception. It should more properly be called the cash reserve. When someone deposits cash into a real bank, a record of the deposit is made. The real bank then uses most of the deposited cash for some purpose of its own and keeps on hand only the cash reserve. The record of deposit isn't changed when the dollars are used for something else. That is, the real bank has a few dollars on hand (the cash reserve) but a record indicating that it has many more dollars on deposit. The cash on hand is real, tangible cash. In these
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articles, I'll call those cash dollars.
The dollars on deposit are mostly not really there. I'll call those
deposit dollars. They're only the record of the cash dollars that
were deposited and then mostly used for something else.
When someone deposits a check into a real bank, cash doesn't cross the counter. Cash doesn't enter the vault. The checks are all processed through a clearing house, a correspondent bank (real bank), or a Federal Reserve Bank (real bank again), and net settlement is made not by transferring cash but by changes in deposit balances. That means that when a deposit is made by check, it's impossible for a real bank to keep a cash reserve because the real bank doesn't receive cash as a result of the deposit. The same thing is true of electronic transfers of funds. A real bank doesn't receive any cash as a result of an electronic transfer of funds. The very concept of a cash reserve requires that deposits must be made in cash, of which a fraction can be kept on reserve. Neither checks nor electronic transfers deposit cash. That's why it's deceptive to refer to the cash reserve as a fractional reserve. The real bank may measure a fraction of anything, but it can keep a cash reserve only if it receives a cash deposit. A real bank takes the dollars deposited and loans them and you can be sure that the dollars people borrow will eventually be redeposited into another real bank. That's guaranteed by the fear of losing cash. If the dollars are to be redeposited as cash, then they must be borrowed as cash.3 Remember, if a deposit is made by check or by electronic transfer, then cash doesn't go into the real bank. For cycles of fractional reserve deposits and loans to occur, dollars loaned as well as those deposited must be in cash. You can already see that the real banking system is only approximately a fractional reserve banking system. Few transactions are made with cash. The cash on reserve in the real banks must be a fraction of something, but I seriously doubt if it's the required fraction based on all deposits.
Dirty Trickster Reminisces Fiction by Sam Aurelius Milam III I've mostly wrote about my complicated stuff but some of my pranks are purty simple. Once while I was workin' as a janitor at a court house, I snuck a whole bunch of Plaster of Paris into the place and, after folks was gone home, I dumped some in all tha toilet bowls. The stuff was white, just like the toilets. It wasn't real obvious until somebody tried to flush the thing. I also put sand in tha sink drains. They had a Hell of a mess. Once when I worked at a kennels, there was some big wig that was gonna fly into town at the airport. I slipped a whole bunch of laxative into the food for them drug dogs an' bomb dogs just a few hours before time fer 'em to start sniffin' things. There was plenty to sniff at the airport that day. Back when you could still rent movies on tapes, I used to put a little piece of Scotch tape over the hole in the edge and erase all them FBI warnings before I returned the tapes. Sometimes I like to go around town lookin' fer cop cars with no cop in 'em, probley inside eatin' donuts an' coffee. Then I let the air out of a tire and super-glue the valve cap to the valve stem. It's all somethin' to do while I think up my next big one. Then it'll be time to yell, yaahooo! The Dirty Trickster riiiids again! Old Timers' Lore
A White Man's Notes
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