Is fractional reserve banking sustainable

Why is Fractional Reserve Banking not a Ponzi scheme? [closed]

It is possible to repay debts (including interest) without spending new debt money. I think that is at the heart of your question.

Let me present a sophisticated example in which society has four people and one bank.

Here is a bank with $ 100 in initial deposits. The total amount of money in this society is $ 100. (We assume there is no currency in circulation as you are interested in debt money.)

This bank lends Bob USD 90 for a one year term and 10% annual interest. Bob spends that $ 90 with Charlie to buy raw materials. Charlie pays $ 90 in the bank.

The money supply just went from $ 100 to $ 190.

Bob does something with the raw materials and adds value by eventually selling the finished goods for $ 110. In our stupid little economy, the only people who have money are Adam and Charlie, so we have to assume they're buying $ 110 worth of goods from Bob between the two. Let's say Adam buys $ 60 and Charlie buys $ 50 - the actual amounts don't matter. Bob deposits this money in the bank.

Still $ 190 in money.

At the end of the year, Bob instructs the bank to transfer the payment from his deposit account to his loan account. The bank wipes off his debt and the money in Bob's account represents his return.

Who is this David? He is the owner of the bank. He earns $ 9 in interest on the loan to Bob and pays Adam $ 5 in interest on Adam's deposit. The remaining $ 4 is the profit for the owner of the bank.

The money supply went from $ 190 to $ 100 after Bob paid off his loan.

After writing this, I realized that I was just leaving out, "Where does Adam get $ 100 in the beginning?"Presumably Adam starts with a currency, either fiat money or commodity money.(IOW, debt money cannot be created out of nothing, it must be expanded in addition to a currency.)

Daniel

Good example, although it works with 100% reserves. As you go higher with the loan amounts, you will find that for Bob to sell his product, someone else will have to take out a loan to pay for the product, which in turn must result in even higher returns that someone will have to pay with the borrowing money ...

not_a_comcast_employee

@ Daniel With 100% reserves, Bob was not allowed to get his loan.

Daniel

@not_a_comcast_employee: Read again. The deposit is $ 100. With a reserve requirement of 100%, the bank can lend $ 100. With a reserve requirement of 10% as is currently the case in the US, the bank could borrow $ 1000!

not_a_comcast_employee

@Daniel If the bank borrows $ 100, they'll have $ 0 in reserve if Bob withdraws the money, or $ 100 in reserve for $ 200 in deposits if Bob has the money in the bank. Both are less than 100%.

Daniel

@not_a_comcast_employee: Exactly, the bank would have 0 reserves left after borrowing $ 100. When Andrew withdraws his money, nothing really happens except that the bank breaches its reserve requirements. You would have to quickly raise reserve capital to be operational again. If both Andrew and Bob wanted to physically withdraw their money, we would have a bank run and the system would break (in this limited example). One of the inherent problems with a reserve banking system.