A View From Middle England - Conservative with a slight libertarian touch - For Christian charity and traditional belief - Free Enterprise NOT Covert Corporatism

Wednesday, October 06, 2010

All In This Together - Part 2

Following on from my first posting in this theme, I came across this section on the BBC News website called "Money Worries". The top question is very pertinent indeed. Someone called Patrick Howard from Bristol asks this simple question, no doubt asked by many, many others. He asks this, "What I fail to understand is where exactly has all the money gone? Huge amounts of it must still be out there in the banks. It can't have vanished into thin air, can it? Please explain?" He gets this answer -

This is a great question and deserves a very long answer, but there isn't the space. However, in brief, money is not really 'money' at all nowadays; it is a "promise of value". When we use our credit cards at the shops, we don't actually hand over any money, we merely promise a transfer of value from our bank to the shop's bank (quite often the same bank). But what has happened over the most recent years, as banks have overstretched their lending capacity, other banks have decided that the "promise of value" (in the form of a debt i.e. mortgages) is not a good risk to take in the main because the "promise of value" could not be backed up by hard cash. Banks lend much more than the deposits held by depositors; it is a system called the fractional reserve banking system and means banks can gear up many times more than the deposits they hold. This works well when value is added to the system, but has failed miserably as institutions have found the "promise of value" in the debts has turned sour. So, the money has not actually gone anywhere - it was never there in the first place!

Never there in the first place. WOW! Perhaps George Osborne, instead of tinkling with the debt crisis, could get real and launch a root and branch clearout of the banking system. Money should be somewhere. Should be accounted for. But it is not. How many more Mr Howards are sitting wondering where the money has gone?

The BBC needs to deliver its public service remit by telling more about Fractional Reserve Banking. Its fractional all right. But there are no reserves to speak of and the word banking hardly counts.


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