Thursday, July 5, 2012

Fractional Reserves, Legal Tender, and Central Banking

This discussion is prompted by Larry White’s testimony on the history and practice of fractional reserve banking before Rep. Ron Paul’s subcommittee on monetary policy in late June. White’s testimony is a concise yet thorough discussion of why fractional reserve banking came to be and why it is not at the root of monetary problems. As he points out, “[A] fractional-reserve banking system is not unstable when the banking system is free of hobbling legal restrictions and free of privileges.” U.S. history illustrates this point.

Fractional reserve is not a problem as long as it isn't being subsidized by government insurance and bailouts.