How the Banks Lend Up to Ten Times What They Hold in Reserve
There are a number of issues that can be brought up about the current banking system in the United States. One thing that needs to be considered is the idea of fractional reserve banking. This theory is that it is possible for the lender to lend out ten dollars on every dollar that they hold in reserve. There are a number of different areas in modern banking that occur and affect all individuals involved and this is one of them.
The idea behind this type of banking is that there can be an increase in the money supply that is available to the people who are working with the bank. The problem starts when there is little money being paid back by borrowers and when banks are unable to work through their processes to loan and collect money in order to earn income in the form of interest. The process also requires that banks be able to meet demands for withdraws by being able to produce the right amount of money in cash on hand. If the banks are unable to do this then there are a specific number of issues that have been concerned with these things. This is because many people who use a bank to hold money or deposits seek the ability to withdraw from these deposits at any time. People want to be able to use their money and do not want banks to hold their money and withhold it from them.
Overall this basis of fractional reserve banking can create an unstable situation as there are problems with the bank not following through with being able to provide money to all of the consumers who are using the bank. If the bank is lending ten dollars for every dollar that they have then if all of the consumers potentially decided that they wanted their money that was in accounts held at the bank the bank would theoretically be unable to produce this money upon demand and there would be problems with the individuals who were unable to get their money and had to do without until the bank had more money sent in from those who were borrowing money. Overall this means that the system of banking principal that is used makes the consumers’ money unavailable to them and something that they might not be able to understand or utilize. Basically the bank would not be able to give all consumers the money that they had deposited or given to the bank in the first place.
This systematic crisis is referred to as a bank run. These commercial banks are then regulated by government ran system banks that are able to loan commercial banks money if one of these problems was to occur. This insurance of the commercial banks makes it possible for consumers to feel as though they can trust their bank and be able to invest their money in this way. Overall these areas are something that can be considered an important process in understanding how you have little control over your own money.