The scam whereby banks are permitted to lend out money and count the debt as an asset equivalent to cash on hand. This is done under the assumption that by the time the depositors want their money back, the debtors will have paid their loans back with interest enough to cover the difference.

This, along with fiat money, contributes to inflation.

When depositors want to withdraw more of their money than the bank actually has, you get a run on the bank.

A system where people can invest money but still have it on demand. Banks take in deposits from people and corporations and these are listed as the liability of the fanatical institution.

These funds are then loaned out to both individuals and corporations. This earns interest and the loan is considered an asset, since a loan has value. This allows the financial institution to operate giving dividends to its depositors rather than solely charging to keep the money in a vault.

Though most banks do charge for keeping money in checking accounts, due to the low amount often kept in a checking account and the ease with which this can be removed.

There are problems with this system. If depositors become nervous or a large number of them need money at the same time than the bank will have to stop making new loans to bring its reserves back up. This causes economic activity to slow down as the availability of money for investment is reduced.

Worse if the reserves (money on hand) to cover withdrawals is insufficient people may be convinced that the bank is unsound. By withdrawing all their money at once will make the bank unstable even if it was stable before. This is called a run on the bank. Also if the fanatical institution makes too many loans that go bad (are not repaid) then they will loose part of the money of their investors and ultimately resulting in bankruptcy.

To combat this in the US the Federal Reserve Bank was created. Worldwide other types of central banks also perform the same function, under more or less control of their governments

There are many different types of fanatical institutions that use this system. They include:

Banks- Primarily loan money to corporations, though this is not a hard rule.

Savings and Loan Associations- Primarily loan money to the community, though in the USA this rule was relaxed in the 1980's.

Credit Unions- Like a savings & loan, but a Credit Union is a cooperative. Its depositors own the credit union rather than stockholders.

Mutual Savings Banks- A type of bank primarily found in the eastern United States. It is like the credit union in that it has no stockholders, but depositors have no voting rights.

Log in or register to write something here or to contact authors.