Posted by: cjenscook | 04/18/2009

Why have Fractional Reserve Banking?

Web of Debt Discussion – Ripple users | Google Groups

It appears that it is compound interest on debt, and not the fractional reserve banking system that is at fault. However, some questions remain: Why have fractional reserve banking? What does fractional reserve banking achieve that full reserve banking can not?

Fractional reserve banking achieves the purpose of creating  the new dynamic credit which is necessary for goods and services to circulate, and to replace the credit continually draining out of the system as it essentially comes to rest and becomes what may be thought of as static credit immobilised within the protocols of financial capital – equity and secured debt – which constitute conflicting legal claims over productive assets.

If all we had were 100% reserve banking then there would be only circulation of existing money, and development could be funded only out of this existing stock.  Economies would rapidly come to rest as liquidity drained out of the system as credit became immobilised.

In a sense that is what is happening as I write, because there is now – as the Mother of All Bubbles collapses – massively negative net credit creation. Defaults are destroying cosmic amounts of existing static credit, and new credit (quantitative easing of the rich) is being poured into the Black Hole. Our financial system is completely and permanently f…d within the current paradigm.

While there is IMHO no way of putting Humpty Dumpty together again, fortunately, there’s no need, because there is no reason why credit creation should not be re-architected rapidly and virally into a new Peer to Peer credit architecture.

In this model credit is created P2P between sellers and buyers within a networked  framework of trust (ie Master Partnership agreements I call  “Guarantee Societies”) .  Banks are disintermediated, and become service providers managing the bilateral creation of credit, through setting “guarantee limits”; managing the accounting system; handling defaults;  managing risk etc pursuant to policies set out in the master partnership agreement.

Such a P2P credit system is how the dynamic credit necessary for the circulation of goods and services etc could be created. Once productive assets such as houses, power stations or the software I am using, have been created, they have a value in use. This value in use may be monetised through what I call “unitisation” – ie the issue of Units redeemable in use value.

eg  About Kilowattcards

The generally acceptable currencies of the future I see as being based upon the commons of land, energy and knowledge, and the use of taxes or levies made by society generally for the exclusive use by individuals of these Commons. Moreover, it is not necessary for an intermediary State to levy these taxes – indeed there is no way that the State ever would make the changes necessary to implement such taxes, thereby abolishing itself. However, we may do so simply by consensually adopting the networked partnership protocols and software that people like us are already building.



  1. I appreciate that this is an old post, however could you please further explain to me how peer-to-peer lending facilitates dynamic credit?

    Surely if person A lends directly to person B, then only existing money would circulate. That would surely result in (the equivalent of) 100% fractional reserve banking. Can any economy be sustained in a scenario where all money is lent P2P?

  2. You make the same point I do, which is that Peer to Peer lending is of existing credit created by the banking system.

    Peer to Peer credit is something else entirely and involves the creation of NEW credit.

    It’s what has happened for thousands of years when people accept each other’s credit. So if I want something from you, but haven’t got (or don’t want to spend) the cash now you may give me ‘time to pay’ or credit. In that case we then have a bilateral Peer to Peer credit obligation between us until this obligation is settled in one way or another.

  3. The Socialist Anti-Semitic Myth of the Creation of Money out of Thin Air

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