How the Fractional Reserve Banking System works

The Fractional Reserve Banking System is mainly known as the system were banks lend more money than they really have. According to the movie, this system is the one in charged of creating money by charging the people with interest in the loans they gave. Banks get the 10% of the money invested in it and they really have small quantities in it, so that is why all the people cannot take all their out of the bank at the same time; if they do it, it will created the famous bank runs of the 1930´s. Some of the advantages of the Fractional Reserve System are is that it allows banks to generate income on the funds deposited. Every time your bank borrows from you to make a loan to another bank customer, it gets to charge interest on the loan, pocketing the interest.

Although this Reserve Banking System has improved, it still has some disadvantages for the people. One disadvantage is that it puts banks in an awkward position when it comes to liquidity. "While banks aren't required to retain their deposits on hand, they have to be able to redeem deposits upon request." 





















Photo Credit: http://www.worldsocialism.org/


Citations: 

McMahon, Mary, and Bronwyn Harris. WiseGeek. Conjecture, 26 Feb. 2014. Web. 05 Apr. 2014. <http://www.wisegeek.com/what-is-fractional-reserve-banking.htm>.

"Education Resources." Classroom Economist: Fractional Reserve Banking. N.p., n.d. Web. 05 Apr. 2014. <http://www.frbatlanta.org/edresources/classroomeconomist/11fr_banking_transcript.cfm>.