Does this journalist make sense on the Fractional Reserve Banking system?
He’s got some details wrong; I don’t agree with his policy conclusions; and his comment on Bernanke is inappropriate, but overall, he does make sense. (1) Over-simplified, a bank’s income comes from the interest on the loans it makes. The more money it can loan out, the more money it can take in. So, how much can it loan out? A. The old system was that it could only loan out its own money. If the bank had $1,000,000, it could only loan out $1,000,000. If its lending rate was 10%, then its income would be $100,000. And all the bank expenses would have to come out of that income. Clearly, if there are fixed costs and only a limited amount to lend, the interest rate on those loans has to be pretty high to cover all the costs. B. With fractional reserve banking, banks can also lend out some of the money they get from depositors. On the one hand, since they are paying interest to the depositors, their costs go up. But since they can now lend a lot more money, they can lend at a lower intere
