Why will common good banks use the fractional-reserve system?
Many people who have become disillusioned with our current economic system mistakenly believe that the fractional-reserve system is the problem. In the fractional-reserve system, banks are allowed to lend out a certain large fraction of the amount that has been deposited. In the United States, this fraction is 9/10. Each loan creates new money, which can then be deposited in the same bank or in a different bank. Most of that money (the same fraction) can then be lent out again, creating more money, and so forth. Overall, the result of this practice is a several-fold increase in the country’s money supply (for example, by a factor of ten in the United States). But each bank is limited to lending 9/10 of what it has received as deposits, so it is not always obvious from the banker’s point of view that any money is being created. The name “fractional-reserve” is meant to suggest that something is being held “in reserve”. However, since almost all money is just database entries, nothing re
