The Creature from Jekyll Island: A Second Look at the Federal Reserve

Fractional reserve banking—in which banks keep only a fraction of deposited funds in reserve at any given time, loaning the rest out to generate profit through interest—has been commonplace since at least the early 17th century, and is now the system used by virtually all banks and governmental monetary authorities around the world. Despite its practical benefits as a driver of economic growth, the system has one significant, widely acknowledged drawback: Since fractional reserve banks do not keep all depositors’ funds on hand, they are vulnerable to insolvency if depositors lose faith in the bank’s ability to return deposited money. In such situations, many or all depositors may demand their money back at the same time—a phenomenon known as a bank run—and the demand would then exceed the bank’s existing funds. This crisis occurred on a large scale in the US in 1929 and 1930, helping to precipitate the Great Depression. This risk was recognized in the earliest days of fractional reserve banking, and central banks were established in the 17th century to establish minimum reserve requirements and mitigate the danger of bank runs.

Griffin’s primary argument against fractional reserve banking is that it can encourage what he considers immoral practices.