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Current time:0:00Total duration:7:32

Video transcript

I do want to clarify that the whole point that I'm showing these weaknesses and fractional reserve lending isn't to argue that it necessarily has to go away or that it is somehow an unviable it's clearly viable it's the system that most market economy is actually all that I know of used today but the reason why I'm doing is to show that it's not the only type of system and that we really should scrutinize any systems that we have in place to realize that they aren't they aren't a law of physics that we have to have fractional reserve lending that in order to have this system function there has to be kind of engineering in place and there still are some drawbacks the unstability in order to combat that you need to have central bank insurance and you also have to have the central bank as a lender of last resort of reserves the bad incentives and these are well documented these aren't just coming for me bad incentives when you look at a some if you if you are looking to invest in any other type of investment company someone who's taking your money and investing it on your behalf they would typically be talking about how good they are at investing money but most when you look at commercial banks that's not what they're talking about because they know that that's not what consumers care about because of the insurance there they will talk about things like how easy it is to access your money with their ATMs and their online banking and how low their fees are they won't even bring up the idea that hey we're lending your money and we're lending it in really really responsible ways and it is also well documented by having a fractional reserve lending system it is putting a significant amount of the money creation system essentially the checkable deposits it's putting it in the hands of private banks as opposed to the central banking authority now with that out of the way you're probably saying well are there any other alternatives and I'm not advocating one or the other but I'm just showing you that this is not necessarily the only way that we would have to set up our banking system in fact the original way is the alternative the original way would be full reserve banking full full reserve reserve banking and it is exactly what it sounds like which is that a bank would have to if someone puts reserves or cash dollar or Federal Reserve notes in their demand deposit account then the bank would just have to keep it there so if I have a right over here if I have a bank and if I were to put $3 $3 3 Federal Reserve notes here 3 Federal Reserve notes here and if I were to say that this is in my I want to have this on demand I want to be able to go to the bank at any moment in time and be able to take these things out then the bank would have to keep all of these reserves there and you might say well well then how old lending happen and all the rest in order for lending to happen the bank would have to say hey look you don't you you're not going to need to have all of this on demand why don't you keep some fraction of this on demand maybe it's this dollar bill right over here and the rest of these we the bank will literally borrow that from you and this this isn't an actual foreign concept when you go buy a certificate of deposit at a bank when you put your money in a CD at a bank that's essentially what the bank is doing they are borrowing that money from you they're making it explicit they're not saying that that money will be on demand they're saying this is a time deposit that this money you are giving it to us now and then you can get it back in six months or a year or two years or whatever and usually the longer the duration the longer you keep your money you lock your money in with them the higher the interest they would pay so they'll say look this is on demand this is on demand that's in a demand deposit and then this right over here you will loan it to us this is a time deposit this is a time deposit and then the bank could loan this money out it could loan these reserves out but this this loan process would not increase the money supply so that money could be loaned out maybe to someone else and maybe that gets deposited another bank maybe in a demand deposit so it gets let's say it gets deposited right over here in a demand deposit you might say well isn't this just like fractional reserve lending now you have five dollars in a system the difference is is that no one can now use this perceived this perceived money right over here as money you wouldn't be able to write checks against this money right over here you could write it against this over here and that's okay you could write a 1 dollar check and it's backed by this 1 dollar of reserves so you're not creating any new money the only the only reserves here that I really can either act as money or be used to back checks are now the original three dollars the original three dollars here and the value of this type of a system and there are drawbacks to it the main drawback is that the bank is not going to be able to make any money on its demand deposits and so it will probably have to charge higher fees to customers to keep their money they'll say hey I'm safeguarding your money I'm putting it in a vault for you I'm making it accessible to you through checks through ATMs so I'm going to charge you more money for you to keep for me to essentially safeguard your money right now what banks are doing in fractional reserve system is like hey we'll do all of these services for you for a lot less sometimes even free if you keep large enough deposits with them we're gonna hold your money for you you were gonna keep it accessible on ATMs we're gonna give you a bank ATM card and all of these things and the reason why the bank is able to do that is because they are essentially doing they are lending out a significant fraction of your money and getting interest on it and that's how they're making money here it just becomes much more explicit the bank is saying look on this right over here we are you doing a service for you we are holding your money we are keeping it on demand from wherever you want to access it and over here you're doing a service for us you are lending us your money and then we are going to lend it out probably for higher interest and so that way we can make money off of it and obviously if we were to convert to some type of a system like this there wouldn't just there wouldn't be as much money being created or actually no money would be created by this lending process and so the central bank or whoever the Monetary Authority is in the country would have to essentially print more money to have the money available to essentially be the Greece in the economy and just to make it clear that this isn't a fringe idea that this is essentially what banking was until the mid 14th century and it was the Venetian bankers who first brought up the idea of fractional reserve lending and there were some very mainstream banks that did full reserve lending into the 1800s and in the kind of as the Great Depression got longer and longer in 1939 some very serious economists proposed a reversion back to full reserve banking and they even articulated exactly how it would do and how and how it would not enter DUS introduced too many too many interruptions to the economy although anything like this would be dangerous because you are introducing a whole new way of doing things and you don't know exactly what the repercussions would be in the economy if you want to read their proposal it's actually quite fascinating and just reading their proposal you'll get more depth on how the monetary system works it's written by mainstream economists look up do a google search for a program a program for monetary reform for monetary monetary reform and it was written in 1939 so you can also go to google for that and on Wikipedia there's actually the full text of a program for monetary reform and what it was when it was published it was supported actually by a majority of mainstream economists to go to a full reserve banking system