Basics of Trading and Finance (Part 17) : Solution to the Problem of Fractional Reserve Banking with Cryptos (Another Two Major Problem of Modern Economic System)
Intro
IntroAs a moderator of the Tron Fan Club community, I regularly write various tutorials on crypto blockchain and Tron related matters. The main purpose of these tutorials is to make our new users aware of these topics. In continuation of that I am writing tutorials on trading and finance. Hope you can easily learn some details of trading and finance through this tutorial series.
In the last post, I highlighted two problems with the current banking system and the modern monetary system. In this series mainly related to investment finance and trading, I will explain the problems in detail in the first two posts, then in the following posts I will discuss its implications and various solutions. So let's look at a couple of problems today.
Another important weakness of the banking system is the introduction of fractional reserve banking systems by the banks. Different types of digital currencies have made our work easier as well as giving bankers a leg up in doing fractional reserve banking which is called the multiplier effect. Banks keep making repeated loans to the deposits held with them. Only a small part of the deposit they keep in reserve and the rest almost the whole of it repeatedly increases the deposit of the same person to different institutions and gives loans. This is called Fractional Reserve Banking which is one of the main weaknesses of the banking system in the current economic sector. If the banking system was not like this then commercial banks could not create money. But because of digital money, banks can create money like central banks. Because one money is lent several times. If this system was not in place, the customer's deposit would have been guaranteed. But due to fractional reserve banking, if all the depositors withdraw their money, then it will not be possible for the bank to repay it. That is, it is a process to go through. For example, there is some water in a pond, sometimes when it rains, it fills up a little, and when it rains less, it gets a little empty, but it never dries up. This is exactly how banks survive through fractional reserve banking but it would not have been possible if everyone had withdrawn their money.
Another problem is digital currency. In the digital currency system only some numbers are shown to us. When we deposit money in an account we are shown only digits. This makes fractional reserve based systems even faster when working with digital currencies i.e. only certain numbers are communicated to depositors. So much family money is being written in a message or a piece of paper and it is working without having to keep any currency. Because of this, fractional reserve banking has accelerated further.
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The post drops light on the susceptabilities of the financial system, especially the risks of fractional get financial as well as the arrival of electronic money. Fractional get financial allows financial institutions to develop cash out of slim air, running the risk of depositor's funds. Digital money worsen this magnifying the rate along with range of fractional book techniques.
You said truth and these two are the major problems. Thank you for sharing the solutions and I think this is the best solution. keep sharing such information.