Ron Paul: Banks Should Stop Hiding from Free-Market Regulation





by Ron Paul

Last week my subcommittee held a hearing on fractional reserve banking and the moral hazard created by government (taxpayer) insured deposits. Fractional reserve banking is the practice by which banks accept deposits but only keep a fraction of those deposits on hand at any time. In practice, nearly 100% of deposits are loaned out, yet depositors believe that they can withdraw the full amount of their deposit at any time. Loaned funds are then redeposited and reloaned up to the limit of the bank’s reserve requirements, compounding the effect.

As Murray Rothbard put it, “Fractional reserve banks … create money out of thin air. Essentially they do it in the same way as counterfeiters. Counterfeiters, too, create money out of thin air by printing something masquerading as money or as a warehouse receipt for money. In this way, they fraudulently extract resources from the public, from the people who have genuinely earned their money. In the same way, fractional reserve banks counterfeit warehouse receipts for money, which then circulate as equivalent to money among the public. There is one exception to the equivalence: The law fails to treat the receipts as counterfeit.” *

While mainstream economists extol this “money multiplier” as a nearly miraculous process that results in a robust economy, low reserve requirements actually enable banks to create trillions of dollars of credit out of thin air, a process that distorts the structure of production and gives rise to the business cycle. Once the boom phase of the business cycle has run its course and the bust commences, some people will naturally look to hold cash. So they withdraw money from their bank accounts in order to hold physical currency. But bank deposits consist of a huge amount of credit pyramided on top of a small of amount of original cash deposits. Each dollar of cash that is withdrawn unwinds the multiplier, resulting in a contraction in credit. And if depositors en masse attempt to withdraw more funds than are available in reserves, the entire of house of cards comes crashing down. This is the very real threat facing some European banks today.

Since the amount of deposits always exceeds the amount of reserves, it is obvious that fractional reserve banks cannot possibly pay all of their depositors on demand as they promise – thus making these banks functionally insolvent. While the likelihood of all depositors pulling their money out at once is relatively rare, bank runs periodically do occur. The only reason banks are able to survive such occurrences is because of the government subsidy known as deposit insurance, which was intended to backstop the stability of the banking system and prevent bank runs. While deposit insurance arguably has succeeded in reducing the number and severity of bank runs, deposit insurance is still an explicit bailout guarantee. It thereby creates a moral hazard by encouraging bank deposits into fundamentally unsound financial institutions and contributes to instability in the financial system.

The solution to the problem of financial instability is to establish a truly free-market banking system. Banks should no longer have a government backstop of any sort in the event of failure. Banks, like every other business, should have to face the spectre of market regulation. Those banks which engage in sound business practices, keep adequate reserves on hand, and gain the confidence of their customers will survive, while others fall by the wayside.

Banking, like any other financial activity, is not without risk – and the government should not continue its vain and futile pursuit of trying to eliminate risk. Get government out of the way and allow the market to function. This will result in a more stable system that meets the needs of consumers, borrowers, and investors.

* Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, Alabama: Ludwig von Mises Institute, 2008), p. 98.



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111 Comments:

  1. You have to see our raised garden beds ...Our garden is going crazy..How do we stop the plants from growing???? Go to my channel ...... MrUrbangreen

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  2. What the fuck is that supposed to mean?

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  3. What the fuck is that supposed to mean?

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  4. is that why you're "captain caveman?"

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  5. There isnt going to be any more power companies !! :) and yes there is such a thing as free!! Go outside and God gives you free love in the form of sunlight.

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  6. There isnt going to be any more power companies !! :) and yes there is such a thing as free!! Go outside and God gives you free love in the form of sunlight.

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  7. Wrong, it is possible! It just takes time and a group effort from enough people to create a start/example... after that, the people who want to live like that will just join/copy the system.

    This will never happen over night, although it is acomplishable!

    We would've had a long time ago a free world/country/region if governments/corporations wouldnt try and forcefully regulate/stimulate it, so that a few have an advantage over others....

    Thats why its important to educate your fellow humans

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  8. who's going to work for the power companies? are you going to pay them in potatos? are you advocating communism? there is no such thing as "FREE."

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  9. The ever 1st American to challenge the Jewish 'owned' American financial structure.

    Wish I was an American to cast my vote in Ron Paul's favor!

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  10. The ever 1st American to challenge the Jewish 'owned' American financial structure.

    Wish I was an American to cast my vote in Ron Paul's favor!

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  11. i propose a new system !! with NO money !! And FREE ENERGY FOR ALL !! And Legalize freedom !! Do you realize just how dumb it is to pay for electricity?

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  12. i propose a new system !! with NO money !! And FREE ENERGY FOR ALL !! And Legalize freedom !! Do you realize just how dumb it is to pay for electricity?

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  13. soo you are only 11 years old. Well stick around long enough and you might learn a thing or two. First thing to know is.. DON'T TRUST A POLITICIAN !! They are ALL compulsive liars !! They do it soo much they don't even know when they tell the truth. AND ABOVE ALL !! THEY DON'T contribute or create or build anything !! All that you will ever get from them is BS talk about NOTHING of any importance !!

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  14. soo you are only 11 years old. Well stick around long enough and you might learn a thing or two. First thing to know is.. DON'T TRUST A POLITICIAN !! They are ALL compulsive liars !! They do it soo much they don't even know when they tell the truth. AND ABOVE ALL !! THEY DON'T contribute or create or build anything !! All that you will ever get from them is BS talk about NOTHING of any importance !!

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  15. says an 11 year old
    born 2 April 2001
    watch your language kid. :)

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  16. you're hilarious! :) ...coming from a guy called captain caveman! hahahaha
    so what do you propose, captain caveman?

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  17. No there is nothing Ironic about it. I am not a fucking politician !! ITS CALLED KNOW THY ENEMY !!

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  18. No there is nothing Ironic about it. I am not a fucking politician !! ITS CALLED KNOW THY ENEMY !!

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  19. that's kind of ironic because you are listening to it. are you a politician? if you're interested in politics doesn't that sorta make you one?

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  20. HEY RON PAUL !!! FUCK YOU !! ASSHOLE POLITICIAN !! SCUMBAG !!! I can say these things to you because you are what you are !! A POLITICIAN !! DO US ALL A FAVOR AND PUT A GUN IN YOUR MOUTH AND PULL THE TRIGGER !!

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