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Narrator: I do want to clarify that the whole point
that I'm showing these weaknesses in Fractional
Reserve lending isn't to argue that it
necessarily has to go away or that it is
somehow unviable.
It's clearly viable, it's the system that most
market economies, actually all that I know of,
use today.
The reason why I am doing it is to show that
it's not the only type of system that we really
should scrutinize any systems that we have in place
to realize that they aren't a law of physics,
that we have to have Fractional Reserve lending.
That in order to have this system function
there has to be engineering in place
and there still are some drawbacks,
the un-stability in order to combat that
you need to have central bank insurance
and you also have to have the central bank
as a lender of last resort of reserves.
The bad incentives ... and these are
well documented, these aren't just coming from me.
Bad incentives, if you were looking to invest
in any other type of investment company,
someone who is taking your money
and investing it on your behalf,
they would typically be talking about how
good they are at investing money.
Most, when you're looking at Commerical banks
that's not what they're talking about
because they know that that's not what consumers
care about because of the insurance there.
They will talk about things like how easy it is
to access your money with their ATM's
and their online banking,
how low their fees are.
They won't even bring up the idea that
hey, we're lending your money and we're lending it
in really, really, responsible ways.
It is also well documented by having a
Fractional Reserve lending system,
it is putting a significant amount of the money
creation system, essentially the checkable deposits,
it's putting it in the hands of private banks
as opposed to the central banking authority.
With that out of the way you're probably saying
are there any other alternatives.
I'm not advocating one or the other,
but I'm just showing you that this is not
necessarily the only way that we would have
to set up our banking system.
In fact, the original way is the alternative.
The original way would be Full Reserve banking.
(writing) full, full reserve, reserve banking.
It is exactly what it sounds like,
which is that a bank would have to ...
if someone puts reserve or cash dollar
or federal reserve notes in their demand
deposit account then the bank would just have to
keep it there.
If I have a bank, right over here,
(drawing) If I have a bank
and if I were to put $3.
(drawing) $3, 3 federal reserve notes here
3 federal reserve notes here.
If I were to say that this is in my ...
I want to have this on demand.
I want to be able to go to the bank at any
moment in time and be able to take these things out
then the bank would have to keep all
of these reserves there.
You might say, well then how will lending happen
and all the rest?
In order for lending to happen the bank would
have to say hey, look, you're not going to need
them to have all of this on demand,
why don't you keep some fraction of this on demand,
maybe it's this dollar bill right over here
and the rest of these, we, the bank,
will literally borrow that from you.
This isn't an actual foreign concept.
When you go buy a certificate of deposit
at a bank, when you put your money in a CD
at the bank that's essentially what the bank is doing.
They are borrowing that money from you,
they're making it explicit.
They're not saying that that money will be
on demand.
They're saying this is a timed deposit
that this money, you are giving it to us now
and then you can get it back in 6 months,
or a year, or 2 years or whatever.
Usually the longer the duration,
the longer you keep your money ... you lock your
money in with them the higher the interest
they would pay.
They'll say, look, this is on demand
(writing) This is on demand, that's in a
demand deposit.
Then this right over here, you will loan it to us,
this is a time deposit.
(writing) This is a time deposit.
Then the bank could loan this money out.
It could loan these reserves out.
This loan process would not increase
the money supply, so that money could be loaned
out maybe to someone else and maybe that gets
deposited in another bank and maybe in a demand
deposit, it gets deposited right over here
in a demand deposit.
You might say, well isn't this just like
Fractional Reserve lending?
Now you have $5 in the system.
The difference is, is that no one can now use
this perceived money right over here as money.
You wouldn't be able to write checks
against this money right over here.
You could write it against this over here
and that's okay.
You could write a $1 check and it's backed
by this $1 of reserves so you're not
creating any new money.
The only reserves here that really can
act as money or be used to back checks
are now the original $3.
(writing) The original $3 here.
The value of this type of a system,
and there are drawbacks to it,
the main drawback is, that the bank is not
going to be able to make any money on its
demand deposits so it will probably have to
charge higher fees to customers to
keep their money.
They'll say, hey I'm safeguarding your money,
I'm putting it in a vault for you,
I'm making it accessible to you through checks,
through ATM's so I'm going to charge you
more money for me to essentially
safeguard your money.
Right now what banks are doing
and Fractional Reserves system is like,
hey, we'll do all of these services for you
for a lot less, sometimes even free if you
keep a large enough deposit with them.
We're going to hold your money for you,
we're going to keep it accessible on ATM,
we're going to give you a bank ATM card
and all of these things.
The reason why the bank is able to do that
is because they're essentially doing ...
they're lending out a significant fraction of
your money and getting interest on it
and that's how they're making money.
Here it just becomes much more explicit.
The bank is saying, look, on this right over here
we are doing a service for you, we are holding
your money, we are keeping it on demand
from wherever you want to access it
and over here you are doing a service for us,
you are lending us your money
and then we are going to lend it out probably
for higher interest so that way we can make
money off of it.
Obviously if we were to convert to some type
of a system like this, there wouldn't be as
much money being created or actually no money
would be created by this lending process.
So, the central bank or whoever the monetary
authority is in the country would have to
essentially print more money to have the money
available to essentially be the grease
in the economy.
Just to make it clear that this isn't a fringe
idea, that this is essentially what banking was
until the mid 14th Century.
It was the Venetian bankers who first brought up
the idea of Fractional Reserve lending
and there were some very mainstream banks
that did full reserve lending into the 1800s.
As The Great Depression got longer and longer,
in 1939 some very serious economists proposed
a reversion back to Full Reserve banking.
They even articulated exactly how it would do
and how it would not introduce too many
interruptions to the economy.
Although, anything like this would be dangerous
because you introducing a whole new way of doing
things and you don't know exactly what
the repercussions will be on the economy.
If you want to read their proposal
it's actually quite fascinating.
In just reading their proposal you'll get
more depth on how the monetary system works.
It's written by mainstream economists.
Do a Google search for
A Program for Monetary Reform.
(writing) ... for Monetary, monetary Reform.
It was written in 1939, so you can also do
a Google for that.
On Wikipedia there is actually the full text
of A Program for Monetary Reform.
When it was published it was supported
actually by a majority by mainstream economists
to go to a Full Reserve banking system.