This post is taken from my post on yahoo.
During the economics class, I was surprised we didn't even go into the philosophy behind why fractional reserve banking was required at all. Do we really need banks to match savings and investment?
http://unqualified-reservations.blogspot.com/2008/09/maturity-transformation-con\
sidered.html
There's something very smelly about the fact that depositors cannot withdraw their hard-earned money without the whole edifice collapsing. As for lending for investment, that can still be accomplished by financial intermediaries that match people with excess funds with entrepreneurs, on the understanding that they are risking their money.
True banks serving the warehouse/deposit box function (for essentially security reasons; you don't want to keep 50,000 dollars in your own home) should not engage in all the activities we see now, and only charge for the operating costs of the infrastructure, tellers, security guards etc, while maintaining near 100% reserve ratio.
What do you think?
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Money cannot sit at one place. Just like the way an individual deposits money in a bank to save for future, the bank also does this to save interest for future (growth). As saving increases, investment increases. And investment is good for a country unless misused. We can visualize banks as factories that transform raw materials into final goods for consumptions. Goods here being the investments in various sectors of the economy. The raw materials being money of the depositors. Individuals cannot spend all the money that they earn; first of all there should be goods to consume, and goods will exist in the market either when we produce them or when we import them. Since individuals make a trade-off inorder to benefit from future consumption, they trust the so called bank and lend their money to the bank. Individuals who need money to produce those goods, or to create some services, approach the bank and lease the money for the purpose of present consumption. This transaction between individual-bank-individual builds the banking and financial sector, which stands as crux for development. Thus, to accelerate this circulation of money, banks perform fractional-reserve banking; they keep a minimum amount of deposits with them in order to tackle the risk of borrowing and lending. If banks maintain 100% reserve ratio it is as good as storing your money in the refrigerator and use it whenever you want to.
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