Are Fractional Reserve Bank Deposits Money?

by Robert Blumen

The issue of fractional versus 100 percent bank reserves has been much debated. One of major disputes is whether fractional reserve banking (FRB) is inherently fraudulent, or whether the mix of cash and other assets to be held against liabilities is a business decision, to be made by banks and customers? This article will show that attempts to construct a nonfraudulent FRB result in assets that are not money.

Deposit Banks, Credit Banks, and Fractional Reserves

The article starts from a world in which gold is the monetary commodity. One hundred percent reserve deposit banks accept gold in exchange for a bank deposit or banknotes. Credit banks are distinct from deposit banks. They are financial intermediaries that accept funds (not deposits) as loans, and then seek profits by lending the money out at a higher rate.

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