the multiplied adverse effect of savings removed from the economy. I.e., if $100 in profits is saved in a mason jar buried in the back yard and removed from the economy, the economy might be slowed by the multiplied loss of $300 to $700 in economic activity. But if that same $100 were deposited in a bank and used to justify loaning another $900 into the local economy, the multiplied loss of $300 to $700 (due to the saving deposit) might be offset by the $900 in credit loaned into the community. Thus, fractional reserve banking might compensate for the adverse multiplied effect on the local economy caused by savings. If that possibility seems unlikely, note that the fractional reserve banking rate (about nine imaginary dollars loaned out for every dollar deposited) is roughly equivalent to economists estimated magnitude (3X to 7X) of the multiplier effect . Curious coincidence, no?
Consumer confidence
The possibility that fractional reserve banking may be a device to offset an adverse multiplied effect of savings also makes some sense on a psychological level. The modern, consumer-based economy is absolutely dependant on the consumer s confidence . When we feel confident about our current financial condition and future prospects, we spend and borrow freely. That keeps the economy s wheels turning. But if the level of consumer confidence falls for any reason, spending and borrowing slows and the economy can grind to a halt. Historically, consumer confidence was directly proportional to savings. For example, when I have enough money in the bank to guarantee my financial survival for some time into the future, I m willing to spend a little of my money on impulse items and even unnecessary or foolish purchases. However, when I m nearly broke, I become tight as a drum and won t spend one dime that s not absolutely necessary. I suspect most people think and spend about the same. Unfortunately, if everyone saved their money until they had enough wealth stored up to justify the level of personal confidence needed to shop til they drop the multiplied effect of our thrift could ruin the economy. If you and I and all our neighbors save every dime we can then no one will buy anything except the basic necessities. If we don t buy anything but basic necessities, most of us won t have jobs or make any money. Result? Compulsive savings can reduce consumer confidence to about zero. If the multiplier effect applies to whatever meager savings we fearfully accumulate, the savings themselves will actually plunge our community deeper into poverty. Each dollar we save might cause a negative impact on our economy equivalent to the loss of $5. Result? Our thrifty community may remain mired in subsistence-level poverty reminiscent of old Scotland. But if bankers used fractional reserve banking we could seemingly have our cake and eat it too. In other words, with fractional reserve banking, we enjoy two apparent benefits:
THE NATURE OF MONEY
www.antishyster.com
227