If a bank lends out more notes than gold, hasn’t it sealed its fate of bankruptcy at that moment?
The minute you have more claims on gold than gold available doesn’t that mean that inevitably, sooner or later, the bank will go bust?
Some writers say banks ‘run the risk’ of going bust but i thought going bust is inevitable if you loan out more money that you have.
If there is ‘only a risk’ how can a bank escape the risk and get away with it FRB?
You see, to me it looks as though the only way a bank can get away with it is if the person borrowing the unbacked money returns it to the bank before it is deposited at another bank, but that is an unrealistic situation, isn’t it?
Either the bank will fail to redeem some notes - i.e. bankruptcy - although it may be a temporary suspension of ‘conversion’ - a temporary bankruptcy of sorts…
It is critically dependent on the depositors not all withdrawing their money at the same time. The more reserves a bank keeps, the less likely it is that they might go bankrupt (as they have more money actually backing the notes at a given time). Consequently, one can gather that full-reserve banking would prevent going bankrupt from withdrawals.
I’m highly critical of fractional-reserve banking (as are most others here), but to say that it “must inevitably destroy itself” is hyperbole. It really depends on a variety of factors, including both the likelihood of a bank run occurring and the ability of bankers to foresee or fail to foresee one. Not only that, but when fractional-reserve banking is a state-sponsored endeavor (like it is today), such banks are pretty well insulated from the inherent faults in the model.