Yesterday we were discussing the nature of money. Today I would like to call your attention to a related topic involving the banking system. Most of us engage in the practice of depositing our income, whether it be FRNs (Federal Reserve Notes), paychecks or what have you in bank accounts. We will limit our discussion to so called "demand deposits" as many savings accounts have restrictions on withdrawals but pay virtually no interest. A checking account or "demand" deposit theoretically allows the depositor to withdraw the sum of the account by either writing a check for the entire balance or entering the bank and carrying his cash out. In other words, the depositor retains 100% ownership in the amount existing in his account.. The bank has many such depositors but is required by law to retain no more than 10% of these funds. It generates its profit by lending out depositors funds to borrowers at interest. A borrower can then take the borrowed funds and deposit them into another account and retain 100% ownership in that account. We now have a situation wherein the depositor and borrower have a legal claim to the same "money". A curious situation indeed from a legal viewpoint. Can any of you gentle readers name another instance where two or more parties exercise legal ownership of 100% of the same property?
The practice is known as fractional reserve banking and has existed for several centuries. In the US prior to 1934 the practice occasionally resulted in sometimes ugly events known as "bank runs" wherein depositors lost confidence in the bank's management and came knocking on the bank's doors to reclaim their cash. The administration of FDR created the Federal Deposit Insurance Corporation (FDIC) in that year to assuage the fears of depositors and for all intents and purposes bank runs virtually ended. This was easy for the New Deal administration, as the previous year it had declared the possession of gold by the citizenry to be a crime punishable by a $10,000.00 fine, 10 years imprisonment or both. Strangely enough the government had seized the people's gold and paid 20 paper dollars per oz and soon after declared the gold to be worth $35.00/oz. Governments can do amazing things by having a monopoly of deadly force.
The government requires banks to pay "premiums" to the FDIC but the fund is now functionally bankrupt and could not pay even a small fraction of the amount to cover insolvent banks. Not to worry! The government bails out the insolvent banks (if they are really big) by printing up FRNs and electronic digits out of thin air to later be covered by the citizens in the form of the cruelest tax of all: inflation. The general citizenry appears to be unaware of what is eventually going to transpire as a result of all this or believes the fecal matter will strike the rotating ventilating device on their children's watch.
This old Greek has coined an appropriate description of what he believes to be the future events: "One who insists on burying his head in the sand will eventually submit to the need to bury his own material treasures in order to prevent them from being seized by the government or robbers; but I repeat myself." ΛΕΟΝΙΔΑΣ