- Initially, the buyer/employer borrows from the seller/employee (recorded
in payables and receivables accounts).
- When the buyer/employer 'pays' the seller/employee via the banking
system, the bank debits the buyer and credits the seller as part of
a single, self-contained, integrated, indivisable, closed circle of
zero-sum double-entry book-keeping postings.
There are no backward or forward implications. There is no need for
an earlier deposit to provide the bank with enough 'money' to lend to the
buyer/employer. There is no need for the bank to find someone to whom it
could lend the seller's/employee's deposit. In effect, the
seller's/employee's deposit provides the bank with precisely enough 'money' to
lend to the buyer/employer, so that the buyer/employer can 'pay' the
seller/employee, so that the seller/employee can make his deposit - all in
a single, self-contained, integrated, indivisable, closed circle of
zero-sum double-entry book-keeping postings.
Although the global network of owed-wealth is
zero-sum, its capacity to
intermediate individual debts is
infinite. There are no
economic constraints at all. Without
administrative limits (such as a the fractional reserve
requirements), any tinpot bank could intermediate a virtually-infinite number of
virtually-infinite debts as above. The books would balance. Owed-wealth
assets would be equal to owed-wealth liabilities.
However, if any of the owed-wealth assets went belly up, the books would be
out of balance, and the tinpot bank would be unable to honour all of its
owed-wealth liabilities. Hence the need for administrative limits
(such as the fractional reserve requirements).
Originally, with gold-plus-debt finance, many saw the fractional reserve
system as a 'multiplier' or
'catalyst' in increasing the 'money supply' each time
the gold came back in and went out again. In fact, it never was. It
was always a prudential limiting factor, limiting the
total of owed-wealth assets a bank was allowed to administer to a multiple of
gold deposits actually held. More recently, with
debt-only finance, the fractional reserve system is a prudential administrative
limiting factor; limiting the total of owed-wealth
assets a bank was allowed to administer to a multiple of
equity. In all cases, the fractional reserve
system is intended to ensure that if some of the bank's owed-wealth assets
go belly-up, it is the shareholders who suffer rather than the depositors.
Best Wishes
Bank Administratio
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