photo credit: Daníel Starrason

The turbulent events of recent weeks have demonstrated, in small measure, the instability of our global banking system. While minor differences do indeed exist between commercial banking institutions throughout the world, nearly every single one shares a common foundation: its fractional-reserve system.

Lest I bore those who consider this unimportant, let me begin by asserting (for the benefit of those who otherwise might not care) that the banks we patronize are counterfeiters, using our money in an immoral fashion to “cook the books”, as it were, and make money at our expense.

You see, the very essence of fractional-reserve banking implies that a financial institution will carry less reserves in its possession than is necessary to fulfill its obligations to its customers. This is made possible by the fact that few individuals withdraw their money (or in our case, Federal Reserve Notes) at any given time, and thus the banks are tempted to use our money while it sits in their vault. Thus, our money is loaned out to others, for which a profit is made by the bank.

Banks founded on this principle of counterfeiting are constantly on guard to prevent their biggest threat: a bank run. This event is triggered when a large number of customers lose confidence in their bank, and demand their rightful deposits be returned to them. Of such a threat, Murray Rothbard wrote:

The first and most devastating route, because it could happen at any time, is if the bank’s customers, those who hold the warehouse receipts or receive it in payment, lose confidence in the chances of the bank’s repayment of the receipts and decide, en masse, to cash them in. This loss of confidence, if it spreads from a few to a large number of bank depositors, is devastating because it is always fatal. It is fatal because, by the very nature of fractional-reserve banking, the bank cannot honor all of its contracts. Hence the overwhelming nature of the dread process known as the “bank run,” a process by which a large number of bank customers get the wind up, sniff trouble, and demand their money. The “bank run,” which shivers the timbers of every banker, is essentially a “populist” uprising by which the duped public, the depositors, demand the right to their own money. This process can and will break any bank subject to its power. Thus, suppose that an effective and convincing orator should go on television tomorrow, and urge the American public: “People of America, the banking system of this country is insolvent. ‘Your money’ is not in the bank vaults. They have less than 10 percent of your money on hand. People of America, get your money out of the banks now before it is too late!” If the people should now heed this advice en masse, the American banking system would be destroyed tomorrow. (Murray Rothbard, The Case Against the Fed, page 46)

Supporting his statement that fractional-reserve banks cannot honor all of their contracts, Rothbard earlier notes:

In other words, honoring the contracts, and maintaining the entire system of fractional-reserve banking, requires a structure of smoke-and-mirrors, of duping the depositors into thinking that “their” money is safe, and would be honored should they wish to redeem their claims. The entire system of fractional-reserve banking, therefore, is built on deceit, a deceit connived at by the legal system. (Ibid, page 43)

Fractional-reserve banking gets it name because literally, it is a system wherein only a “fraction” of the reserves are available at any given time. This is comparable to a company selling 200 motorcycles but only having 20 in their warehouse. It is blatantly unethical to promise things you do not have, yet this is what we allow our banks to do.

Our global banking system is highly connected, and it is therefore quite likely that a bank failure in one region will affect its operations or sister companies in another region. But regardless of the actual relationship between banks in the global economy, a cascade of bank runs would sweep over the world like an unleashed contagion of epic proportions. Once a point is reached where depositors lose confidence in banking in general (and not just their specific bank), a worldwide run on fractional-reserve banking would take place. In such a scenario, having access to your money would depend on how much of an early bird you are; first come, first served (until the bank becomes insolvent and closes its doors, that is).

Rightly, then, did Henry Ford once say that “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” A loss of confidence in and permissiveness of the immorality and deceit of our banking system would bring it to its knees within hours.

Inasmuch as the government props up the immoral banking system (as is the case in America and a majority of other countries around the world), “liquidity” is provided through the printing press, where the central bank (an agent of the government) simply prints more money and loans it to the bank to help it meet its demands and keep up the ruse. Thus, in a scenario where massive bank runs took place, either the entire system would collapse, or the central bank would kick its printing press into overdrive to meet all the demands (as is happening right now in Greece) and thus trigger hyperinflation, which would pound the monetary unit (in our case, the dollar) into oblivion.

Either way, it’s not a pretty picture. When the foundation of the world’s (massive and numerous) banking institutions is a rotten, hollow frame ready to collapse, it quickens the rate at which the patrons catch wind of the heist and take swift action.

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