Quote:
Originally Posted by mcsluggo
I wasn't quoting Rothbard, I was quoting Alex. Fractional reserves are what enable a bank to lend out money.
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If you have time deposits then you don't have to have any reserves.
"Before we discuss fractional reserve banking, it is important to understand the essence of savings and lending. The first myth to dispel is that money is wealth. Money is not wealth; real wealth is tangible physical goods. Your house, your furniture, your car, your golf clubs -- those are real wealth. Money, as the medium of exchange, is a claim on real wealth. Therefore, the act of saving is the expression of an individual’s preference to relinquish his claim on wealth today for a future date. It is very important to understand this. Money is a convenience that arose to facilitate trade. Before money, every trade was an exchange of real wealth (barter). With the introduction of money, every trade is still an exchange of real wealth, just temporally disconnected because the receiver of the money doesn’t complete his side of the trade (receive his goods) until he spends the money he received in exchange for his goods.
This is true of lending as well. Jones borrows $1000 today to purchase goods and services. Tomorrow he repays $1000, but is actually repaying what the money can purchase. He borrows real wealth, and returns real wealth. Therefore, lending entails a transfer of real wealth from lender to borrower. The existence of money tends to obfuscate this insight, but does not change it.
Bank lending
Recall that gold warehouses are storage facilities. An individual depositing money at a warehouse does not relinquish his or her ownership of it, and more importantly, does not relinquish his or her claim on real wealth. The money is still theirs to spend, it is just being safeguarded. This arrangement is a checking account. Alternately, the depositor may instruct the warehouse to lend out their money through a savings account. Here, a depositor relinquishes his or her ownership of the money to the lending institution and thus the would-be borrower. Restated, the depositor relinquishes his or her claim on real wealth in favor of the borrower. In this manner, real wealth is saved, and lent out. The transaction is still a trade of real wealth where money is merely the intermediary.
Savings and lending are voluntary acts on the part of the lender and borrower to trade real wealth now and in the future. Fractional reserve banking undermines this process"