Understanding the reasons of the present financial problems lies In understanding the substance of fractional reserve banking. The substance of fractional banking is in lending more money than the bankers have. Banking of partial reserves is an alternative form which links deposit banking and credit banking. Fractional banking is causing many unfavorable economic impacts in the worldwide system, specifically an inflation. (JEL: E31, E52, G21)
Key words: fractional banking, banking of partial reserves, Ponzi Scheme, Multiplication Effect
The beginnings of fractional banking must be sought in the activities of English goldsmiths of the 16 and 17 centuries because the first bankers were the goldsmiths. When gold started to be taken as a valuable exchange instrument by people, some safe spots needed to be built to store the gold. Therefore the goldsmiths were constructing buildings with safes for their gold. Other wealthy people also needed some safe places for their gold; for this reason a goldsmith gave them the possibility to store their gold in his safe. He issued a certificate confirming the acceptance of the gold; its holder could withdraw his gold from the safe any time he wanted to. In the course of time as this business was spreading, a higher and higher number of people were coming to store their gold and the certificates started to be accepted in the market as if they were the very gold.
Banking of partial reserves is an alternative form which links deposit banking and credit banking .
The goldsmiths in their endeavour to increase their profits started to issue more certificates than they could cover by gold. They issued the certificates being covered by the gold of other owners. It was important for all certificates (paper money) covered by gold not to be presented for repayment at the same time, i.e. that not all people wanted their gold at the same time.
The value of certificates issued by a goldsmith was represented by the gold covering them. But as soon as he issued another debenture which was not covered by anything but the hope that there will be sufficient quantity of gold in stock AT the specific moment, he got in the irrational situation which is the basis of the present day banking. An official recognition of this practice created so called fractional reserve banking, which is the heart of modern monetary system .
The term fractional banking is taken over from the English one :Fractional ReserveBanking, which, when translated, means banking with partial reserves. The substance of fractional banking is lending more money than the bankers have.
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The present times, full of technological inventions would not be complete without the invention of the possibility of an endless growth of economy by means of unlimited generating of uncovered money. Generating money from nothing has become our financial system because we live and realize our business transactions in it. The essence of the present system is the central bank which has been charged with the power to supervise the quality of the currency and to run the flow of money in the country. In reality the power to supervise has been changed to the power to generate money. And this is the weak point of the system because this system generates money from nothing (so called fiat money), to say it expressly, it only prints the banknotes which are further distributes accross the whole economy. In spite of the reason for the existence of the central bank (the stability of currency) the result of working of any central bank in the world is the inflation which is in contradiction with the declared aim, moreover, this permanent inflation is considered to be kept within the reasonable limits, and this fact is due to the successful activity of the central bank.
The probability of continuation of the present inflation system without its being changed is relatively great, which is also proved by the endeavours of governments to pump further uncovered money into the system even in the period of the crisis.
An important role in this system is played by commercial banks, which through their credit expansion generate money by so called multiplicated effect from the accepted deposits, which in great part are used to grant a loan to a further person or company, i.e. another link in the chain. On such a market the central bank acts only as a regulator and creditor of last resort and it manages the whole system by giving regulations, e.g. stating the amount of obligatory reserves of commercial banks, by operations on the free market (purchase or sales of bonds and other securities thus influencing the amoun of money in the system) or by changing the interest rate at which it lends money to commercial banks (so called discount rate).
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Aby zrozumiec przyczyny obecnych problemow finansowych konieczne jest zaznajomienie sie z istota frakcyjnej rezerwy bankowej. Podstawa czastkowych kredytow bankowych jest pozyczanie wiekszej ilosci pieniedzy niz maja bankierzy. Bankowosc rezerw czastkowych jest alternatywna forma, ktora laczy bankowe depozyty i kredyty bankowe. Bankowosc frakcyjna (czastkowa) jest przyczyna wielu niekorzystnych skutkow ekonomicznych w systemie swiatowym, a w szczegolnosci inflacji.