How fractional reserve banking destroys capitalism

Posted on September 12, 2010


Banking capital is earned through success in entrepreneurial investment. Bankers are long-established capitalists who can pick out which entrepreneurs are most likely to succeed in the banker’s specialty. Modern banking does not rely on capital, but on unlimited government-backed credit, through which incompetent capitalists take over all capital in the economy and ruin it.

In a free market economy, one comes to own capital in two ways: by originally appropriating and transforming natural resources into productive capital, or by transforming capital goods that one originally appropriates and selling them in return for capital goods. Over time, those individuals who are the most productive and most efficient for the market will come to own the largest amount of capital goods that they will exploit to their full efficiency. They will form the capitalist class.

Some of these capitalists, over very long periods of time, will come to recognize upcoming capitalists with the ability to produce a lot of capital goods. They will use the capital that they themselves have accumulated through their productive talents and lend it to these upcoming capitalists at interest, in the expectation that their productive ability will exceed the rate of interest and that their own capital will grow as a result of their accurate selection of rising capitalists. These individuals will form the banker class. Successful bankers will be selected based on their ability to select successful capitalists, and they will come to control the largest asset banks from which loans are available. Bad bankers will deplete their capital and exit the business.

This process no longer holds under fractional reserve banking. A fractional reserve bank does not need capital, but simply unlimited credit from which to make loans. This unlimited credit is ensured by a central bank, which is protected by a government-granted monopoly. Because a fractional reserve bank has unlimited credit, it does not need to first demonstrate an ability to earn, accumulate, safeguard and employ capital before earning the right to go into the banking business. A fractional reserve bank’s economic power does not rely on any past achievements, but on the protection of government from bankruptcy.

Of course, before the transition to fractional reserve banking is made, it is safe to assume that all of the top banks are excellent capitalists. Once a fractional reserve system is in place, the same banks become fractional reserve banks, and for a time preserve their ability to select capitalists. It is only over the long run that the banks become corrupted and the process of renewing the banking class results in a class of bankers whose main quality is the ability to secure government protection instead of the ability to select capitalists. This becomes, in effect, the “bankster” class.

Things get worse the more political power this bankster class wields, as the unlimited credit granted by the central bank is reduced in interest cost. The banksters can now supply a demand for loans at ever-lower interest rates and drive out of the market all capitalists who attempt to become bankers from their own accumulated capital. This means that fewer upcoming capitalists will be selected for loans and that more incompetent borrowers will be selected. These incompetent borrowers will borrow from the banksters to purchase all capital assets in society, and attempt to earn enough returns to pay the rent to the banksters. Once their attempt inevitably fails, the bank will foreclose on the asset. In this way the banksters use their unlimited credit to purchase all capital in society and ruin it, driving the capitalist class into destitution by making the purchasing power of their savings worthless, and enticing the debtors to make financial decisions they cannot uphold.

Only in a recession that wipes out the entire bankster class and sends asset prices plummeting can the legitimate capitalist class be reconstituted. If the bankster class succeeds at obtaining a bailout that prevents their collapse, then they can use this bailout to complete their takeover of the entire economy and to throw the remaining capitalists into destitution.

The final outcome of this process is that all producers of capital are ruined and unable to direct the economy towards valuable production, and a class of politically connected counterfeiters owns all capital in society without the required competence to employ it to productive use. The result, over time, is economic ruin and the collapse of entire enterprises and corporations, mass unemployment, and poverty.

15 Years Ago, the Combined Assets of the 6 Biggest Banks Totaled 17% of GDP… By 2006, 55% … Now, 63%

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