Fractional reserve banking

Economics Economics Questions
569

Wed. 10/02/24 18:39 EST
.post #5

Is the problem…

  1. that the government insures deposit accounts;
  2. that deposit accounts are insured; or
  3. that what is “paid” by the FDIC is not gold, not even paper, but merely an electronic credit; or
  4. that FRB (as practiced today) is “bankrupt”?

I question assertion #4.

I deposit $100 in the Rapture Bank. Rapture Bank lends 90 of my dollars to some businessman, yet my account statement still shows a balance of $100. Then I write a check for $100 to someone, and my account statement now shows a balance of $0.00. At this point, the Rapture Bank must somehow replenish the $100 to re-establish the 10% reserve requirement. It can do this by borrowing $100 (from, let’s say, the Fed’s “discount window”). At some point, either after other customers have made sufficient new deposits, or after the original business loan is repayed, the bank’s debt to the Fed is, or at least can be, repayed.

If this simplified scenario is correct, then I don’t see that Fractional Reserve Banking, as practiced today, is “bankrupt.”