Deposit insurance was a mistake

Fractional-reserve banking is worse than counterfeiting because not only are extra bank deposits created in the process (when loans which have been spent are returned into the bank) but we also get the debt and the interest as well.

Counterfeiting is damaging because the purchasing power of the rest of the currency is diminished, through no fault of the owner. Fractional-reserve banking has exactly this effect when new deposits are made.

To create the deposits the bank must also arrange for someone to pay back the money with interest. This places a burden upon the borrower which otherwise would not be there if the money was instead printed directly.

In effect, the counterfeiters are punished with the interest payments and that if the money is not returned to the bank it must go bust. But why allow a crime (if it is a crime) provided certain burdens are overcome, to disincentivise it? They will do it anyway, it is free money after all, so why make the extra hassle of interest and repayments, why not issue a printing press to the whole population? Because they wouldn't (have) allow(ed) it if they had been aware of the implications of the deposit guarantee and re-deposited loans. They would not have transferred the power to issue currency to the banks.


If they had understood the implications, the authorities would not have agreed to guarantee the deposit liabilities of the banks. It was a mistake on their part.