Fractional Reserve Banking

Home Forums Discuss Austrian Economics, Step by Step Fractional Reserve Banking

Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
  • #18825

    I am into my second reading of THE ETHICS OF MONEY PRODUCTION by Hulsman and I am trying to wrap my head around fractional reserve banking. I feel like I am missing something obvious.
    If a bank has $1,000 in deposits and there is a 10% reserve requirement then it can issue credit for $10,000.
    If someone takes that $10,000 and puts it in a bank and leaves it there for some reason can that bank issue credit of $100,000? Could that happen ad infinitum? It makes no sense, what am I missing?


    The reserve held by a bank is either cash or a deposit at the Federal Reserve. Suppose, then, that a bank has $1,000 in cash. It can extend a loan to a customer for $10,000 and credit the customer’s checking account for $10,000. The bank would be meeting a 10% reserve requirement. The customer’s checking account balance cannot serve as a reserve for another bank. Another bank would have to obtain either cash or a credit by the Federal Reserve to the bank’s account at the Fed. A bank normally does this by selling securities to the Fed.

    Take a look at Murray Rothbard’s book, Mystery of Banking.


    Thank you

Viewing 3 posts - 1 through 3 (of 3 total)
  • You must be logged in to reply to this topic.