You take $1000 in deposits, and only keep $100 on hand to handle transient withdrawls. Then you earn interest on the $900, what you take on is a non-negligible risk of being caught short on cash. This is the prime cause of inflation (the increase in currency does not increase real-world wealth) and the main mechanism that moves money from the poor to the rich (over generations.) As with any probabilistic variable, the likelihood of ruin approaches 1 as time goes on.

The De Soto book explains mathematically the amount of extra liquidity potentially creatable, with balance sheets.

like for example, if they have $ 10 they can loan out $100.

But really its more convoluted then that because they write lots of loans based on the same money. I read somthing a while ago with balance sheets, illustrating how it works.

but basically where that other $90 comes from is that its created when they loan it out. blip money.

Specific links to legal acts and other information would be wonderful on this.

Check out chapter 2 of the book I linked to for history of the practice and chapter 3 for historical legal analysis.

Rothbard’s ‘Mystery of Banking’ is an excellent (and more lightweight) overview:
http://www.mises.org/Books/mysteryofbanking.pdf
check out the TOC and see if it’s more what you’re looking for.

In general, mises.org is very good for finding this information, although there is a lot of opinionated regular politicking material to sort through.

When you have practices that cause inflation (i.e. fractional reserve banking), you’re robbing a tiny amount from everyone at once.

(1) Encourages unbalanced wealth distribution: “So you might have a mad scramble for gold then a crash when it runs out, or crazy wealth distribution with one lord surrounded by poverty.”
(2) Moral issues around value of work and stores of value: “I mean its money that comes out of thin air and then has to be paid back in interest.”
(3) This might be a stretch, but lack of intent/action harmony: “It comes into existence as debt.”
(4) Unfairness or potential absurdity of business practices: “lend out the SAME money over and over again, collecting insurance on each of these loans. ”

More thoughts:

but with the federal reserve system the money is created with the sole purpose of being lent. It comes into existence as debt.

I know there is a strong historical connection here to Alexander Hamilton, but I don’t recall the details. Can anyone fill me in: I recall this being one of the early arguments *against* having a Federal bank, and what Hamilton was originally *trying* to do… ie, it’s not a flaw, it’s a feature. You can’t fix a system which isn’t actually broken. (That is, which is working as it was intended to)

If you or I do it, it’s a crime, and was considered a crime for bankers in all common law up until the modern banking revolution.

Specific links to legal acts and other information would be wonderful on this.

This is also the same mechanism that finances modern ‘fiat’ currencies. In fact, real fiat currencies would be better, if the US govt printed our currency by fiat, we wouldn’t have to pay interest on it back to the central banks.

More direct links and layman’s summaries of information relating to and explaining this would be wonderful.

Keith, I like the subject of credit ratings! I’ll come back to that as well.

Only banks are allowed to do this, by special provision of the law. If you or I do it, it’s a crime, and was considered a crime for bankers in all common law up until the modern banking revolution.

This is also the same mechanism that finances modern ‘fiat’ currencies. In fact, real fiat currencies would be better, if the US govt printed our currency by fiat, we wouldn’t have to pay interest on it back to the central banks.

I’m working my way through this very interesting book which describes these mechanisms in great historical and technical detail:
http://www.mises.org/books/desoto.pdf

The idea originally for the justification of interest is that it was an “opportunity cost” because, reasonably, the money being lent could be invested elsewhere and made profitable in some other endeavor besides lending.

but with the federal reserve system the money is created with the sole purpose of being lent. It comes into existence as debt.

In paper money systems I think this is offset to a degree by the ability to issue shares which can then change in value, effectively printing money. The effect of usury is then to cause inflation.