Tuesday, March 19, 2013
A lesson from Cyrus on the danger of fractional reserve banking
This Spiegel Online International article contains a hidden lesson in the danger and fallacy of fractional reserve banking, which is completely dependent upon the willingness of the people NOT to demand their money all at the same time. Murray N. Rothbard explained this fraudulent system in The Mystery of Banking. You can download the relatively small book for free from this website. Pay special attention to the chapters on separating deposit banking from loan banking. Deposit banking (demand deposits or current accounts) must be back 100% by reserves. Loan accounts are the only interest-bearing accounts, because the depositor LOANS his money to the banker to re-loan to his customers at interest. There can be no deposit guarantee other than the banker's capital account and his reputation. Know this--there is no such thing as deposit insurance. What everyone calls insurance is merely the government's promise to print as much money as needed to bail out the banker when he cannot meet his contractual obligations to repay his depositors. Such deposit insurance creates moral hazard, whereby bankers take increased risk knowing that their losses will be partially born by others. This is why J. P. Morgan's early 20th century attempt to create a private insurance fund failed. All he created was moral hazard that encouraged members of his consortium to take increased risk. As a result, Morgan and others lobbied mightily for the federal government to create a central bank that would bail them out of their periodic liquidity crises.
The Great Cypriot Banking Heist is making all this very clear to those who take the time to understand the REAL business of banking.