Fractional Reserve Banking is a Fraud Ponzi Scheme

Executive Summary

Fractional reserve banking is a banking system where commercial banks are required to maintain only a fraction of deposits as cash reserves for withdrawal while also having the ability to create money through lending. This has been a topic of heated debate in economics. Both camps have presented arguments that have not conclusively disproved the opposing viewpoint, resulting in a decades-long stalemate on this complex and contentious subject.

Fractional reserve banking is fraudulent and ruinous, asserting that it is fraudulent when banks use funds from non-interest-bearing accounts to issue loans or make investments, as this practice constitutes an infringement of property ownership rights.

It is further fraudulent when commercial banks create money by lending it into existence. Additionally, fractional reserve banking is ruinous because it leads to crises and other detrimental consequences.

The Issue

Fractional reserve lending represents a fundamental fraud in the financial system, akin to deceitful practices like those illustrated by a dry cleaner or hotel valet who misuses entrusted property. When individuals deposit their assets—such as gold or money—into a financial institution, they expect these assets to be safeguarded and accessible. However, fractional reserve banking permits banks to lend out more money than they actually hold in reserves, effectively creating money out of thin air.

In historical terms, if you deposited a hundred ounces of gold with a goldsmith, you received claims (or tickets) against a portion of that gold. Over time, these claims began circulating as if they were gold itself. The goldsmith, realizing that few depositors would claim their gold, started issuing more claims than actual gold available—engaging in a fraudulent practice. This situation, mirrored by modern banks, involves creating money without corresponding real assets, thereby diluting the value of the currency and stealing purchasing power from others.

The problem intensifies with central bank interventions. When central banks reduce reserve requirements or provide emergency loans, they enable banks to commit further fraud without consequences. Deposit insurance and lender-of-last-resort functions mitigate immediate failures but ultimately transfer the risk and costs of fraudulent practices to taxpayers and depositors.

The inherent fraud in fractional reserve banking is not diminished by the awareness or contractual agreements between banks and depositors. Like a Ponzi scheme, it relies on continually attracting new depositors to pay the old ones, perpetuating a cycle of deception. While traditional economic theories argue that fractional reserve banking drives economic growth and stability, its practice has historically led to financial crises, highlighting its unsustainable nature.

Eliminating fractional reserve banking would dismantle this fraudulent system and potentially prevent the severe economic fluctuations observed over the past two centuries. A shift away from fractional reserve lending and central banking could restore integrity to the financial system and promote genuine free-market capitalism.

Therefore, it is imperative to initiate a serious discussion on abolishing fractional reserve banking. The current system, characterized by its inherent fraud and theft, requires re-evaluation and reform to ensure a more transparent and equitable financial future.

Resources:

Fractional Reserve Banking Is Fraudulent and Ruinous