Bankers helped shaped banking laws and our monetary system. We have lived with the current financial
system for so long we hardly question it. When trouble comes we blame a particular banker or come up with new regulations, and move on.
But we never seem to take a closer look at the fragile nature of the fractional banking system itself: it is highly leveraged.
If we all withdrew our bank deposits this Monday, the ensuing bank panic can cause an economic meltdown. Can it really be that fragile?
Since banks never have enough cash to honor all withdrawals at once, they will have to call in loans early and cause businesses to fail.
In the early years of bank runs, it never occurred to bankers to solve the problem by keeping more of depositors money in hand. The FDIC was created not because it keeps enough cash to honor simultaneous withdrawals. It’s to discourage depositors from withdrawing at once to allow the bankers to continue their business practice: collecting interest from money that was created by banking law. If a bank takes a dollar in deposit then loans out eight, the bank is essentially collecting interest on the phantom eight dollars. That is fractional reserve banking. Except those pesky withdrawals remains a threat even with the creation of the central bank.
