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Fractional reserve banking explained

Fractional reserve banking is one probably the least understood aspect of money; further misunderstood is how fractional reserve banking—when it is used to expand the money supply—impacts our economy and causes the business cycle, which, if it runs to extremes, results  in recession at best, depression at worst.

People who want to protect savings and make smart investments need to gain at least a basic understanding of the relationship of fractional reserve banking and the Fed to the business cycle.

The best known expose of the Fed and fractional reserve banking is The Creature from Jekyll Island, G. Edward Griffin’s 600-page tome.  Less well known and less daunting but just as informative is Murray Rothbard’s Origins of the Federal Reserve.  Mises.org makes Origins available in book form for $12 and as a free pdf download.  But, the best way to get started learning about these issues is to watch online Money, Banking and the Federal Reserve, a 41-minute video produced by Mises.org.

The first ten minutes of Money, Banking and the Federal Reserve explains how fractional reserve banking came to be.   The rest of the video explains how fractional reserve banking and the Fed feed the business cycle.  The video uses America’s Great Depression as an example of how fractional reserve banking and the Fed intervention in the financial markets lead to the business cycle.  The video is also an excellent historical look at money in America and the Great Depression.

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