The problem is that in a fractional reserve banking system banks are inherently unstable.
The Cyprian banking system, like all banking systems today, is a fractional reserve system.
As for the larger Eurozone banking system, it too is a fractional reserve system.
It's a fractional reserve system with no reserve requirements and no central bank control.
Fractional Reserve Banking would end, as would the Fed and the tiers of banks.
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So, we had a problem, bank runs, brought on by the simple nature of fractional reserve banking.
Once banks start lending again and expanding base money through the fractional reserve system, M2 could increase exponentially.
Without fractional reserve banking, without the Fed, and with sound money there would absolutely be no business cycle.
This is simply true of any system of fractional reserve banking and is the cause of bank runs.
In a fractional reserve banking system, banks are permitted under law to create deposit money out of thin air.
The central bank sets short-term interest rates, and fractional reserve banking is allowed.
In 1694 with the creation of the Bank of England, the practice of fractional reserve banking was given legal permission.
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Fractional reserve banking expands the money supply without regard to real wealth, and this is inflation, resulting in price increases.
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Normally, because of fractional reserve banking, this would lead to a further multiple expansion of bank deposits and the money supply.
This induced artificial variability in the real price of gold, especially during the periodic financial panics that attend fractional reserve banking.
As for banking, Napolitano calls for an end to fractional reserve banking, and a return to a 100 percent reserve system.
The Fed sets short-term interest rates, and fractional reserve banking is allowed.
Banks, simply because of fractional reserve lending, are vulnerable to bank runs.
Since December 2008, the U.S. has, in a sense, no longer had fractional reserve banking, because the monetary base has been greater than M1.
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They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base.
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Thus the bank is holding only a fraction of deposits in reserves and is lending out the rest: fractional reserve banking which is what we call the system.
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And the other alternative reading, that they have 32 times as much capital as they do assets makes no sense at all in a system of fractional reserve banking.
More complicated are drifts in the fractional reserve level and trends in international outflow requests, which put sustained pressure on the window and cannot be tackled at the source.
Government cannot specifically control the money supply at its source in a fractional reserve system, but only react to conditions caused by the decisions of individual banks to supply or not.
Look purely at what fractional reserve banking itself is.
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Also, the central bank and the (fractional reserve) banking system would face a nearly irresistible temptation to use their ability to create money to hold the deflation at bay as long as possible.
The first fractional reserve lenders (typically the goldsmiths of bygone days) were those who issued receipts for storage of gold on behalf of others in the community, and who made a side business of lending.
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Many of us learned in economics 101 that banks create money by depositing the proceeds of a loan in the borrower's checking account, but the total money created is controlled by central banks through the minimal reserves that banks must maintain with them, the fractional reserve system.
Since all forms of fractional-reserve lending are dependent on the perpetual creation of more and more credit that the system eventually can no longer sustain, it eventually collapses under its own weight.
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