What is Fractional Reserve Lending?

Q: So what is fractional reserve banking, and why does it matter?

fiat currency, gold standard, fractional reserveA: To give some historical context, the dollar was backed by gold until 1971. In the 1960s, France saw the United States spending on the Great Society and the Vietnam War and started getting a little bit leery of the U.S. government spending all this cash. In large part, their actions led to Nixon severing the gold standard.

The Evolution of Money

Gold and silver started off as a commodity money. This means the commodity is actually used as money. In this case, gold and silver coins were used as money and exchanged directly for goods and services.

The next evolution was a receipt system where the commodity was put into a depository or bank and the owner received a receipt. People started trading the receipts, because it was easier than carrying around the metals. The receipts were portable and 100% backed by gold and silver, a real and tangible commodity.

The Scheme

That was the nature of the banking system until the banks started playing games with pure one-to-one backing and, out of pure greed, created fractional reserve lending. The bankers realized people weren’t actually coming back to get the metals, but instead were just trading the certificates or receipts. The bankers realized they could print more certificates, loan them out, charge interest, and make more profits based on something they created out of thin air.

The system of issuing more receipts or currency than the bank has the reserves to cover is called fractional reserve lending, and it’s somehow legal and rampant all over the planet today. The difference today is that the actual gold backing the receipts has been eliminated from the equation! The banks now have deposits of currency that they lend out, but they lend multiples of what they have on deposit. For more on this, read G. Edward Griffin’s book, The Creature from Jekyll Island.