Banking and its effects on the money supply and asset bubbles: Part 2
Fractional reserve banking in a nutshell. What is it and how does it work?
Dear Reader,
In my bank I described in Part 1, it is unlikely that we will have too many problems. The main issue will be if one of our debtors defaults and I, as the bank, have to use my money to top up your deposit. The implications of a default here are relatively small and unlikely as I focus my lending on assets that will raise the income of my debtors. Farmers who want tractors, factory managers who want new machinery, etc. This is a nice business. I am storing other people’s money and using it to make loans.
But, how can I leverage this further?
I think about this for a while and eventually realise that the people who are selling the assets (tractors, machinery, etc.) to the people I have lent the money to, need to ALSO store their money somewhere. I go to them and convince them to store their money in my bank. I can then use this money to make additional loans. I loan out some more coins and again convince the seller of the asset to my debtor to store their coins in my bank.
T…