Why have Fractional Reserve Banking?
What does fractional reserve banking achieve that full reserve banking can not? Fractional reserve banking achieves the purpose of creating the new dynamic credit which is necessary for goods and services to circulate, and to replace the credit continually draining out of the system as it essentially comes to rest and becomes what may be thought of as static credit immobilised within the protocols of financial capital – equity and secured debt – which constitute conflicting legal claims over productive assets. If all we had were 100% reserve banking then there would be only circulation of existing money, and development could be funded only out of this existing stock. Economies would rapidly come to rest as liquidity drained out of the system as credit became immobilised. In a sense that is what is happening as I write, because there is now – as the Mother of All Bubbles collapses – massively negative net credit creation. Defaults are destroying cosmic amounts of existing static credit
