Let’s Abolish the Minimum Reserve Requirement

I, along with anyone who adheres to the Austrian School of Economics, would like to completely abolish every regulation in our currently unfree “free market.” Not surprisingly, this includes abolishing the Federal Reserve which would ultimately give rise to commodity money (or “hard money”). This is because sans a government decree, no sane person would accept pieces of green paper backed by nothing as “money.” They would expect it to be exchangeable for a tangible good, whatever it may be. Throughout most of history, money has been backed by either silver or gold for reasons too numerous to write. Money has also been as unconventional as bottles of water and tobacco.  

Since commodity money is backed by a physical good, it cannot be created out of thin air. This is unlike fiat money which is backed by nothing, enforced through government decree, and can be created out of thin air.

As a result, a minimum reserve requirement in a free society (one with commodity money) is redundant. Banks would more or less serve as a warehouse for people’s money. Unhealthy or reckless banks that could not produce its deposits for its consumers would likely go out of business because of increased consumer vigilance. Therefore, it would be both irresponsible and unprofitable, in the long run, to not hold all deposits.

Under our current faux-capitalist-fractional-reserve-banking system, however, a minimum reserve requirement, particularly a high one, is crucial. Scarily enough, the Federal Reserve wants to abolish the minimum reserve requirement without radically altering the system. Says the footnote,

Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

The problems with this proposal are twofold: 1) inflation would necessarily rise, but how much is unkown; and 2) coupled with the FDIC, moral hazard will be more hazardous than ever.

Fractional reserve banking, as taught by the Austrian school, is inherently inflationary. The Federal Reserve manipulates it when they need to inflate or deflate the money supply. Here is a brief explanation on its inflationary nature: by law, banks are only required to be able issue a certain percentage of their deposits (the minimum reserve requirement). All of the other money not being used to fufill this requirement can be lent out, spent, or invested.  Despite the banks having ‘used up’ all but its minimum reserve requirement money, the books still say that they have 100% of deposits.

For example, Bank A has $1,000 deposited into it with a minimum reserve requirement of 10%. Bank A only has to keep $100 in the vault. The remaining $900 can be lent out, invested, or spent as desired. Now, let’s say Bank A lends its remaining $900 to Bank B who then keeps its minimum requirement of $90. Bank B is now free to do with the remaining $810 as it pleases. The inflationary power can be displayed mathematically. The amount deposited divided by the minimum reserve requirement yields the ‘new’ sum of money. So, using our example, we learn that $1,000/0.10=$10,000. Therefore, by abolishing the minimum reserve requirement, inflation can go on completely unchecked. Just as it would create an “ERROR” on your calculator, it would cause a much larger “ERROR” in the economy.

Moral hazard is, “The risk that the presence of a contract will affect on the behavior of one or more parties. The classic example is in the insurance industry, where coverage against a loss might increase the risk-taking behavior of the insured.” The Federal Deposit Insurance Corporation, or FDIC, brought to the American public by the wonderful New Deal insures “deposit accounts.” Surprisingly enough, the FDIC cannot even insure the legally mandated 1.15% of its liabilites, and the fund is ‘in the red.’ The basic flaw of the FDIC is that it is inherently morally hazardous. By buying into the fradulent scheme, banks are guaranteed a bailout by the government.

Because of this nonsensical promise, banks really have no incentive to be prudent in their decisions. Why should they? The government will simply intervene. By eliminating the minimum reserve requirement, banks get the best of both worlds while the public gets the worst of both worlds. Banks can gamble and carry out the most outrageous practices with their seemingly endless flow of money because of the lack of minimum reserve requirement All of the winnings are theirs. However, if the fat cat banker scheme blows up in their face, they suffer no consequences. The loss is shifted to the taxpayer. It is the ultimate ‘heads I win, tails you lose’ scenario.

Ultimately, a minimum reserve requirement in a free, capitalist society, is pointless and redundant. However, in the fascist, corporatist state, it is crucial. What is even more crucial is Ending the Fed. So, get to it!

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