A Primer On Fractional Reserve Banking

I stole this from Hans’s Facebook post. First published in the British humour magazine “Punch” on April 3, 1957:

Q: What are banks for?

A: To make money.

Q: For the customers?

A: For the banks.

Q: Why doesn’t bank advertising mention this?

A: It would not be in good taste. But it is mentioned by implication in references to
reserves of $249,000,000,000 or thereabouts. That is the money they have made.

Q: Out of the customers?

A: I suppose so.

Q: They also mention Assets of $500,000,000,000 or thereabouts. Have they made that
too?

A: Not exactly. That is the money they use to make money.

Q: I see. And they keep it in a safe somewhere?

A: Not at all. They lend it to customers.

Q: Then they haven’t got it?

A: No.

Q: Then how is it Assets?

A: They maintain that it would be if they got it back.

Q: But they must have some money in a safe somewhere?

A: Yes, usually $500,000,000,000 or thereabouts. This is called Liabilities.

Q: But if they’ve got it, how can they be liable for it?

A: Because it isn’t theirs.

Q: Then why do they have it?

A: It has been lent to them by customers.

Q: You mean customers lend banks money?

A: In effect. They put money into their accounts, so it is really lent to the banks.

Q: And what do the banks do with it?

A: Lend it to other customers.

Q: But you said that money they lent to other people was Assets?

A: Yes.

Q: Then Assets and Liabilities must be the same thing?

A: You can’t really say that.

Q: But you’ve just said it! If I put $100 into my account the bank is liable to have to pay it
back, so it’s Liabilities. But they go and lend it to someone else, and he is liable to have to
pay it back, so it’s Assets. It’s the same $100 isn’t it?

A: Yes, but….

Q: Then it cancels out. It means, doesn’t it, that banks haven’t really any money at all?

A: Theoretically……

Q: Never mind theoretically! And if they haven’t any money, where do they get their
Reserves of $249,000,000,000 or thereabouts??

A: I told you. That is the money they have made.

Q: How?

A: Well, when they lend your $100 to someone they charge him interest.

Q: How much?

A: It depends on the Bank Rate. Say five and a-half percent. That’s their profit.

Q: Why isn’t it my profit? Isn’t it my money?

A: It’s the theory of banking practice that………

Q: When I lend them my $100 why don’t I charge them interest?

A: You do.

Q: You don’t say. How much?

A: It depends on the Bank Rate. Say a half percent.

Q: Grasping of me, rather?

A: But that’s only if you’re not going to draw the money out again.

Q: But of course I’m going to draw the money out again! If I hadn’t wanted to draw it out
again I could have buried it in the garden!

A: They wouldn’t like you to draw it out again.

Q: Why not? If I keep it there you say it’s a Liability. Wouldn’t they be glad if I reduced
their Liabilities by removing it?

A: No. Because if you remove it they can’t lend it to anyone else.

Q: But if I wanted to remove it they’d have to let me?

A: Certainly.

Q: But suppose they’ve already lent it to another customer?

A: Then they’ll let you have some other customers money.

Q: But suppose he wants his too….and they’ve already let me have it?

A: You’re being purposely obtuse.

Q: I think I’m being acute. What if everyone wanted their money all at once?

A: It’s the theory of banking practice that they never would.

Q: So what banks bank on, is not having to meet their commitments?

A: I wouldn’t say that.

Q: Naturally. Well, if there’s nothing else you think you can tell me….?

A: Quite so. Now you can go off and open a banking account!

Q: Just one last question.

A: Of course.

Q: Wouldn’t I do better to go off and open up a bank

Faulty logic

A good argument can always be destroyed with nonsense.

If you are familiar with the ways the Republican Party has operated under Karl Rove then you’ll have an idea. It maintained that all ideas are created equal and none were worse than others. It allowed them for example to put intelligent design against evolution as a just as perfectly good idea. The US media, which is vulnerable from any accusations of being “biased”, allowed the Republicans plenty of airtime and column inches to pitch all sorts of lunatic ideas, as if they were facts.

It succeeded in energizing the “base”, meaning religious right wingers, but has distanced older and more educated Republicans from the party. People who have read a few books  in their lives are less likely to buy into faulty logic (emphasis on less likely).

In Iceland faulty logic is having a field day. My favorite three:

1) Would you rather have the other guys running the country? Now that would be a disaster.
Used by staunch supporters of the Independent Party and Samfylkingin.

Meaning that if the current government resigned we would automatically hand the power to the Left/Greens, Progressive Party and the Liberal Party, all of whom are in disarray. This logic is faulty because it assumes that things would be so much worse if others were in charge. But things are extremely bad. They happened on the current government’s watch. Just because someone else “could” do worse doesn’t mean they would. It would actually be very hard to make a bigger mess.

It also implies a threat and invokes fear. If you vote us out you will suffer more.

Logic would say that the economic disaster happened on this government’s watch and that there are many shady things coming to light. Therefore it is even more dangerous for the country that the same people who were in places of power and influence are the ones that are supposed to clean up the mess. When disaster strikes an entire country, affecting the livelyhood of everyone then politicians should have to renew their mandate. And just because things are the way they are, as in how we govern our country, does not mean it cannot be changed if need be.

2) Iceland will lose its independence and control of its fishing grounds  if we join the EU.
Used by politicians and fisheries.

This implies that we are an independent country that is in full control of its biggest natural resource, the fishing grounds. If we joined the EU our self-governance would cease to exist, our control of the natural resource would diminish and our culture would suffer.

Culture and nationality is shaped by many things. Languague, weather, music etc. Culture and nationality can also become shackles that hold people down. People who are independent are in control of their destiny. People who must pay billions to foreign nations for generations because of shady actions of select group of businessmen and politicians are not in control of their destiny. This group of people has shackled a nation. Iceland is not independent until its citizen’s livelyhood is not compromised because of massive debts abroad.

This same group of people has also stolen the fishing grounds a long time ago. The fishing quota system has enabled the same select band of people to leverage the fishing grounds to the hilt, move ships and production away from the country and hire low paid foreign labor. The fish in the sea has been mortgaged massively and does not belong to the nation of Iceland anymore.

This group is obviously trying to keep hold of its powers and the valuables they have received from the nation. They are so afraid that they are not even prepared to enter talks with the EU to see what could come out of them.

Logic would tell anyone to keep their options open and see what benefits they could reap. But they would rather not.

3) The Euro is not the answer. The dollar, Swiss frank and Norwegian krona are.
Used by same as above.

This is diversion tactic. When all roads lead to Rome, the ones that don’t want to go to Rome point towards Milano, Napoli, Genoa…or Oslo for that matter.  They are trying to stall.

It is amazing how some people can criticize the Euro on the grounds that we would lose our fiscal independence to some entity abroad can then turn around in the next sentence and want the Norwegian krona. The NKR is a small international currency and what about putting all your eggs in one basket? Would Norway care that much more about us than the European community?

The world needs fewer currencies. Why should we not get become a part of one of the bigger currencies in the world, one which our trade is more connected to than any other, but instead become part of others that are just options because they are there.

Unfortunately the media in Iceland is in worse pinch than in the US. It doesn’t investigate or offer different opinions from experts. Politicians can usually get away with delivering soundbytes that are unopposed by newscasters or experts. Minister of Justice, Bjorn Bjarnason for example has delivered all the soundbytes above recently and never to a newscaster that he does not approve of.

So faulty logic prevails.