Silicon Valley Bank Failure Highlights Dangers of Fractional-Reserve Banking

The History and Dangers of Fractional-Reserve Banking in the United States

For decades, people have warned about the dangers of fractional-reserve banking, and the recent ordeal of Silicon Valley Bank (SVB) has brought renewed attention to the issue. Essentially, fractional-reserve banking is a system of bank management that only holds a fraction of bank deposits, with the remaining funds invested or loaned out to borrowers. Fractional-reserve banking (FRB) operates in nearly every country worldwide, and in the U.S., it became widely prominent during the 19th century. Prior to this time, banks operated with full reserves, meaning they held 100% of their depositors’ funds in reserve.

However, there is considerable debate on whether fractional lending occurs these days, with some assuming that invested funds and loans are simply printed out of thin air. The argument stems from a Bank of England paper called “Money Creation in the Modern Economy.” It is often used to dispel myths associated with modern banking. Economist Robert Murphy discusses these alleged myths in chapter 12 of his book, “Understanding Money Mechanics.”

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Author: Jamie Redman

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