[pp.int.general] [Pp-leaders.discussion] EU: ESM-treaty

[Yves Quemener]

On 11/07/2011 06:59 AM, Alexander Bock wrote:
> Umm, I'm sorry but fractional reserve banking doesn't quite work like
> that. If the reserve requirement were 10%, a bank that receives a
> deposit of €1000 could lend out €900. 

>From what I understand, the idea is that 10% (your mileage may vary) of
the banks' "money" must be backed up with something tangible (which in
itself is a weird notion : the idea that ownership is a tangible
property). Therefore, a bank that provides 1000€ in an account must have
at least 100€ of tangible valuables (gold or real estate for instance).
Therefore, if a bank receives for 1000€ of gold, it can effectively
raise the total amount in its accounts by 10,000€.

In that respect, there is no real difference for a bank between
receiving euros or lending euros on an account. I don't know what
happens when 1000€ are transferred from bank A to bank B. I guess that
bank B now has to buy 100€ of tangible goods, possibly from bank A which
has now less obligations to keep. So what happens is that if bank B uses
the totality of the 1000€ to buy tangible goods, it can effectively lend
10,000€ minus the 1000€ it still has to guarantee, so 9,000€. And
indeed, banks borrowing from other banks in a circular way could
indefinitely buy tangible goods. I guess that there are regulations to
prevent that but given how badly designed the whole system now appears,
I wouldn't be surprised to discover that even that is not true.