To trust banks is irrational unless we expect monetisation of debt

The problem of Fractional-Reserve Banking is possible (only) when money* is used.

When money is not used, as in the situation when all that exist are property (land) and tools, Fractional-Reserve Banking does not arise. This is because a loan does not deprive the other (the lender) of the item's use. I am deprived of a tool when it is loaned to others, as is the case with land. Money, being a symbol of wealth only, has the property that many people can be considered (by themselves at least) the owner and this does not cause a conflict.

We find out that there is a conflict if more than one person assumes themselves to be the owner of land, or a tool. In the case of bank deposits, if more than one person is assumed to be the owner, by them, if not the bank, then there is no immediate conflict.

We do not, generally, discount the possibility that others might make a claim on the money we consider to be ours. Everyone thinks they are rich (have lots of money) but due to the inherent nature of the commodity used as money, it is possible to be unaware of the potential conflict. If only one person is able to own an asset (and would be immediately aware of a claim from a third party) then Fractional-Reserve Banking would not be possible. An example of such an asset might be jewellery worn on the person, not left in a bank.

Banking arises from the need for security which is provided by the bank. If we are able to provide our own security, banking inflation would not be possible. Permission would be sought from the depositor, before the money is loaned, since the customer will be deprived of the money for the duration of the loan.


When we make a deposit, in the present system, this is slightly deceptive to the new customer because they are given the impression of their money being safely held in the bank. In reality, the bank is only providing a promise to the customer to provide equivalent currency on demand.

It is not generally a problem for the true owner of the money, if another considers themselves to the owner. It can then be thought of as a shared tool which is typically returned to the bank. But we are not really as rich as many of us imagine ourselves to be, at least not those tardy in a bank run.

For what reason would a person want to borrow money which has no function? If I pay to borrow land I do not have the land as an asset. If something different may be returned (let's say we "borrow" a barrel of oil, which must be repaid, but not necessarily the same oil, or similarly grain...) then it is not strictly a loan. It is not a loan if we are capable to repay it with another item. If something is loaned, ownership of the object does not pass from the lender to the borrower; it is temporarily rescinded.

The true comparison is between a normal loan and being able to pay someone with bank liabilities, increasing the claims on the deposited money, which is not (strictly) consented to by the original customer.


Ownership of land means the exclusive ability to eject all others from the premises. A person with a bank deposit does not own the money in the same way. They are able to exclude the others, only if they get there first. No one would (pay, get into debt to) borrow something if they are unable to use it. In the case of Fractional-Reserve Banking the "use" derived from the loan is the purchasing power transferred from the remainder of the population.

Fractional-Reserve Banking would not be possible in a free market (with good information) because there would be a bank run. We assume fiat currency would be impossible also. There isn't a bank run because the money is possible to print.

The banks are wealthy because no one bothers to withdraw their money (fearing a bank run) because the money can be printed and subsequently the banks make huge interest revenue whilst not being able to meet their liabilities without Government support. Lenders pay (get into debt) to be able to make a purchase that is funded by a reduction in purchasing power for the other users of the banking system. Temporarily, wealth is taken from the rest. The banks have the ability to reduce purchasing power for their other customers, selling inflation, diluting deposits.

The counterfeiter is rich even if (s)he must sell the new notes for the debt of borrowers. They sell (new) bank deposits in exchange for the future repayments of the borrower; selling money.


Banks reduce purchasing power for everyone else holding the currency. Only actual printing would reduce the purchasing power? Banks are rich because they can sell demand deposits at parity with cash. Banks dilute the price of cash since deposits are generally accepted (in the market, currently) to be equivalent in value. Because, if it is rational, we expect the money to be replaced with fresh cash in the event of a crash; monetised. The rational explanation (for the inflation) is that the market expects monetisation, otherwise it is not rational, there is no rational explanation.

That banks cause inflation is irrational unless we expect the monetisation of bank liabilities by the Government.

*Money being distinct from other objects due to it being valuable for its own sake only; multiple claims on it each have value. It can be inflated.