Reply #5: Okay, I'll get down to basics for a second then. Fractional reserves are necessary.

[Kagemusha]

No matter how you account for assets, be they actual precious metals or other things of value, without fractional reserve banking, the supply of money would be so stingy and low that economic activity considered routine today would be starved of liquidity. Yes, to some degree, cutting the amount of money would simply raise the value of that money, but in the real world, greasing the wheels of the economy ('maintaining liquidity') is about credit. The economy depends on a large amount of credit for simple convenience, to reward people enough - with a minimum of defaults, bankruptcies, fraud and so on - that they are willing to go out on a limb and generate economic resources, be they physical goods or numerous services such as legal services, medicine, education, data management, and so on. Yes, there's some insecurity built in, but it's shared insecurity, and most of the time, it works out.

The alternative to this shared insecurity is great security at the cost of far less general economic activity, because money is so precious that no one will spend it unless they are absolutely certain of getting a positive result.

Plus, at its heart, banking is about managing the distribution of credit (based on fractional reserves) in a way that intelligently puts money into the economy to generate wealth. It doesn't always work out. It can't always work out. But the system is literally about managed risk. The whole nature of the financial system simply supports this objective in the bank-friendliest manner possible, but attempting not to overdo it and create greater problems.

It's simply the nature of banking, and rejecting it because there's not enough physical gold to support it isn't the point - if there was more gold, the price of gold would drop, and we'd still have fractional banking, because it's not about the bullion, it's about the allocation of economic resources. Money is just a token system to achieve this.