3. Underlying Friction: Fractional Reserve Banking

Around the 16th century, some of us began to offer deposit accounts to people, who could deposit their gold and receive a paper receipt in exchange. These paper receipts helped people to transact without having to carry physical gold. These people realised customers rarely come back to withdraw their physical gold. So, they started to lend out some of the gold deposited and earned income. This practice became known as fractional reserve banking, as banks hold only a fraction, 1/10 of their customers’ deposits in reserve, while lending out 10/10. For example, a bank holds £1 of tangible value in reserves and claims £10 in deposits. They create £9 fractional money, just with a click, and lend the total £10 to earn income. The more fractional money lenders create to lend, the more inflation occurs, eventually causing the value of cash to decrease and the cost of physical value (e, g. gold, rice, house) to rise. Such big chunk of fractional money in markets disrupts prices of tangible economic production and goods. The quantity of a commodity doesn’t change but the price does, or a company’s stock price changes overnight although nothing changes in the company or broader industry: – GameStop (GME) Short Squeeze, January 2021 – West Texas Intermediate (WTI) Negative Futures on Crude Oil, April 2020 – Beyond Meat (BYND) IPO, May 2019 – Tesla (TSLA) Stock Price Volatility, August 2018 – World Food Price Crisis, February 2008 More money is created through debt than through tangible economic production, which we mistakenly consider normal. The line between fundamental needs like food and housing and non-essentials like fashion and hobbies blurs, leading to high living costs that disproportionately affect the less wealthy. “Money is essentially free for those who have money and creditworthiness, it is essentially unavailable to those who don’t have money and creditworthiness, which contributes to the rising wealth, opportunity, and political gaps.” — Ray Dalio, Founder of Bridgewater Associates