[ad_1]
Fractional- Reserve Banking: the complete guide
The concept of money has really come a long way. At the beginning we had the barter system in which goods were exchanged. Then came the coins that were then minted and served as a means of buying supplies that were necessary. The establishment of banknotes took the idea of coins and gave them a fixed value. Gold and silver were the standards on which the banknotes were against to prove they were valuable. But in today's world, the "Gold Standard" no longer exists.
The money that is produced today is based on an imperfect system that has been repeatedly shown to be unstable. The system we have now is known as the Banking Fractional-Reserve or FRB system. The FRB is a shaky structure that is crashing. He may not go down tomorrow, or in five years, but he will. That's why we need a more reliable form of currency that allows trade to continue on a more stable platform.
Bitcoin represents the platform the world needs to maintain a currency that has no restrictions. With Bitcoin or cryptocurrency, there are no intermediaries that can hinder instability. But could you ask yourself what's wrong with the FRB system? After all, did it work well enough without major problems? Why change it?
To answer these questions, you need to step back and look at the origins of the FRB system.
A short story
In 1609, the Bank of Amsterdam was founded and revered as a forerunner of the modern central banks we have today. The bank of Amsterdam is important because it accepts banknotes and bank receipts. The bank receipt or banknote could then be exchanged for gold, silver or other valuables deposited at the bank.
The banknotes were considered the standard means of exchange between the common people and the goldsmith or bank in which they were depositing their funds. It did not take long before the goldsmith and the banks realized that they could issue more notes than they had in their reserves. The goldsmith and bankers also discovered that people did not redeem their notes all at once, but rather at different times. So it was the creation of banks and what soon became the system of Fractional Reserve Banking (FRB).
In 1668, after the creation of the paper money and the success of the Bank of Amsterdam, the Swedish Riksbank was established. The Swedish Riksbank has been accredited as the world's first central bank. It did not take long for other countries to follow the example and set up central banks within their respective borders.
They are the central banks that control and store the reserves collected by private banks. Central banks set reserve requirements and distribute money to smaller branches. The whole purpose of a central bank is to act as lender of last resort to smaller departments and financial institutions in the event of a bank's execution.
What are bank travels?
A simple bank run is when all those who have deposited money in an account withdraw it all at once. One of the most significant bank runs took place in the 30s and the history labeled it as "Great Depression".
Although, despite what history has taught us, the realization is that bank travel is an inherited component of the FRB system. A great example and still present is the fact that the US Federal Reserve is considered the central banking system for the United States. It is well known that the power and authority of the American Federal Reserve have been significantly extended by the Great Depression and the global financial crisis that occurred due to the housing bubble that shocked the world in 2008.
The United States Federal Reserve
Founded December 23, 1913, the Federal Reserve had three primary objectives. The reserve was to stabilize prices, maximize employment and see long-term interest rates. The Federal Reserve serves both private and public institutions. The sole purpose of the Federal Reserve is to monitor private commercial banks and regulate financial institutions. However, it does not print the currency, this task is delegated by the US Treasury Department.
Fractional Reserve Banking: how it works
As already mentioned, the financial system in which we use today is the Fractional-Reserve banking system. This is a system in which only a small part of the deposits is covered by money and available for collection. The purpose of FRB is to free capital that can then be lent to other people as a way to grow the economy. It seems simple enough, but there are flaws in this system.
Because of the laws in force, banks are required to have a predefined amount of cash available for collection to the public. Most banks hold about 10% of every deposit made. A quick example would be if you deposit $ 100 in your bank, that the financial institution is required by law to hold $ 10 of your deposit and put it in reserve.
The sad truth is that when you deposit money into your bank account, those funds are no longer your property. The money that you bring into that institution becomes the property of the bank. However, the bank will issue the depositor an asset that we know as a deposit account.
The deposit account is a liability on the balance sheet of the financial institution. This account shows the bank that they are legally responsible for paying it on request. In the fine print, however, all banks have a clause stating that it is possible to withdraw funds as long as they have the funds required to cover it. In short, you as a depositor can collect the funds in your account up to the last cent as long as the bank has the funds to cover your request.
Follow the money
Now with FRB, things get complicated when you look at what is known as the multiplier effect. For example:
Janet goes to a commercial bank to deposit her $ 1 billion lottery winnings on her bank account. The bank takes its deposit and is required to set aside 10% of its deposit, which is by chance $ 100 million. That hundred dollars is now put aside to be used as money available to Janet, and available for withdrawals via cashiers or ATMs. Janet's bank now has $ 900 million that can be dispersed in loans to other people.
Next, we have Jeff. Jeff goes to the same bank as Janet and needs a loan of $ 900 million. The bank gives Jeff the $ 900 million. Because each bank is obliged to issue credits up to 9-10 times larger than its reserves, it now has less than the amount that the bank is legally obliged to pay in exchange for demand deposits. This means that the money that Jeff received is actually another $ 900 million in addition to the first $ 1 billion dollars deposited by Janet.
Now that Jeff has his $ 900 million, he goes to another financial institution and deposits it on his account. This now makes the total sum from $ 1 billion to $ 1.9 billion Janet. For each transaction the process is repeated and is known as a multiplier effect.
Of course, the FRB system is much more complicated than the example above, but this is the juice of that. However, when analyzing this example, a question appears: how have $ 900 million been created?
In a word, debt. Since the financial worlds today exist primarily through digital media, Janet has not actually delivered $ 1 billion in cash to the bank. Instead, information is stored on a centralized digital ledger.
The bank that issued a credit of Jeff $ 900 million was digitally executed. And since the original bank responsible for $ 1 billion of Janet, the second bank where Jeff has deposited his $ 900 million is now also responsible for that money. So you see that money was created from nothing. Because of the way this system works it is the cause of inflation, interest rates and currency devaluations.
In short, the multiplier effect is the process of issuing and depositing credits that are repeated over and over again by a single deposit. Using the example above and the $ 1 billion deposit of Janet, the possible impact of FRB on the money supply is obtained by multiplying 10 by the deposit. Janet and her $ 1 billion deposit have the potential to create $ 10 billion of new USD in the financial system.
Inflation events, debt and black swan
FRB usually works smoothly because depositors rarely require their accounts to be withdrawn at any given time. When there are not so many people requesting their funds all at once, then the possibilities for bank runs are scarce. However, there is still the possibility that they will happen when financial institutions are not stable and people panic.
Many points of view show that bank runs are inevitable obstacles to maintaining a secure and stable financial system. But these opinions are wrong because they do not take into account the social and political consequences of these events.
It is important to state that US debt has steadily increased over the years. The money supply and debt are both correlated in their upward trend. The reasoning behind this increase is due to the "new" money created by the FRB system.
Now, due to the FRB process, the consequences are inflation, along with dollar devaluations. It is not the increase in services and goods, but it is the debt that is decreasing the value of the dollar. As long as more money is pushed into the economy that comes from nowhere, the dollar will continue to decline.
As of now, the United States has a debt of over $ 22 trillion. The cause of such a high deficit is due to the financing of companies, the advancement of the US economy, the generation of innovation and excessive spending by the government. But, with all these projects in the works, it also caused defaulting loans, wealth inequalities and the growing misunderstanding of money and value.
Conclusion
Thomas Jefferson once said that if people ever allowed private banks to control the issue of their currency, banks would deprive the population before inflation, then deflation. He went on to say that the power of such circumstances should be in the hands of people, not financial institutions.
This is where we are today, right now. Financial institutions around the world hold too much power over the currency. There have been reports of governments closing banks to steal people's money to support the country. There were problems in which the banks had to be saved because of the outstanding loans. Then you see the problems that arise when you think about the possibility of carrying out bank transfers. Countries could fall within hours if their citizens demand to withdraw their funds from their institutions.
Digital currencies like Bitcoin offer a better solution that goes hand in hand with Thomas Jefferson. Because Bitcoin is not linked to centralized financial institutions, there is no worry about inflation. It is from electricity and hard work known as the extraction process that feeds cryptocurrencies like Bitcoin. It is not created from scratch as the FRB is now structured. This is why cryptocurrencies should be the new form of currency.
[ad_2]Source link
