Fractional reserve banking definitely reduces the cost of borrowed money. No doubt about that. That is the problem. It is too easy for the money supply to be expanded and malinvestments created through cheap money.Fractional reserve banking definitely reduces the cost of borrowed money. No doubt about that. That is the problem. It is too easy for the money supply to be expanded and malinvestments created through cheap money. Quote;

Checking my ECONOMICS book of late 1950, written by Paul A. Samuelson, professor of Economics at Massachusetts I. of Technology, he said the Federal Reserve System was set up in 1913, by Congress.  The big banks at that time, were totally opposed to it.  The Federal reserve can dictate what percentage of the deposits must be kept in reserve, and cannot be loaned out.  They can change this as they see fit, depending on the state of the economy at that time.  He stated that the expansion of credit would be 1 to 5 with a 20% kept in reserve.  Below is a page from the above textbook, showing how this is calculated.  The expansion of credit can be limited, by sending out a regulation, making banks hold a higher per cent in reserve.  If a bank holds 100% in reserve there is no expansion of credit at all.  So by requiring the banks to increase their reserves, they can throttle down the expansion of the money supply.  (I am having trouble loading textbook page; I will try something else.)

http://en.wikipedia.org/wiki/Paul_Samuelson