Today, my friends, we are going on a wild journey to understand the way modern banking system works... and why it doesn't.
First let's start with a little history recap, forgive me for crumping a 1000 years of economic history in a few paragraphs:
Originally, metal was money. But holding large quantities, not to mention transporting it, was very dangerous. So banks became a thing - they would hold your metal for you, and give you a piece of paper, a receipt, which you can later use to get your metal back. Templar banks were a good example of that.
At some point those receipts became popularly credible and people begun exchanging goods and services for those receipts, while metal was taken out of banks less and less, but was still exchanged for receipts at 1:1 ratio.
More time has passed, and banks realized that as people exchange receipts more and more, and most metal they have is not being withdrawn. So they started loaning some of other people's metal that they had for profit, knowing that they still have enough metal to meet requests for withdrawals. And so fractional reserve banking was born. Receipt supply increased, while the value of metal remained the same. As a result, they begun issuing loans for amounts at 3:1 or even 5:1 ratio compared to the amount of metal they actually had. One could say they were making money out of thin air, while in reality what drew them profits was... confidence, because everyone believed that if they have a bank receipt for metal, bank would honor it.
Fast-forward to less prosperous times, and the chickens begun to roost. As more people begun withdrawing their metal, banks begun to run out. Some went out of business and people that weren't fast enough to withdraw their metal on time were left with nothing. Confidence was gone and people were too scared to put their metal in the bank again.
Then came in the governments. They liked banks and their impact on the economy as it stimulated other businesses, so they decided to bring back confidence by issuing rules on banks and lowering rates of exchange to 2:1 or 3:1. And slowly, confidence became growing back and people started bringing their metal to banks again.
Over time, as confidence continued growing, rates started going back up again to 5:1 or eve 10:1 ratios. Amount of loans grew, so did the businesses and people's confidence grew as they were exchanging those receipts so much that metal was barely even withdrawn anymore. Biggest problem for the government at that point was dealing with fake/fraudulent receipts, so government decided to make its own which everyone in their countries could recognize. Metal was still in banks, but almost never withdrawn, while most money people had was in form of receipts for that metal.
As the time passed, governments realized that its dangerous that banks issue loans for such high amounts and could potentially go out of business, as the the magic money they made were based on confidence. So the government took all the metal from the banks, promising citizens that its merely keeping it safe for them, along as they continue trading and exchanging government-issued receipts.
And so they did, for generations: confidence in paper receipts grew and over decades and decades people begun to forget that real money is metal, while paper receipts are just, well, that. As confidence in paper grew, governments became greedy and begun dictating that those receipts represent less metal (first half, then third, then fourth, etc.), but as this process happened gradually and over time and people continued using the receipts to the point where most governments simply announced that those receipts are, in fact, money and due to their high confidence in paper people just went with it.
As this progressed, governments themselves fell into this trap and begun issuing more paper "money". As a result hyperinflation happened, and public confidence in paper money plummeted, people would stop exchanging goods and services for paper and held confidence in things they could actually hold and control: like metal and or food.
Governments didn't like that, not one bit. First of all it is far easier to tax and regulate paper then metal and food, not to mention that the gravy train of free money left the station along with consumer confidence. First they tried to bring consumer confidence by force and of course it didn't work. So governments promised that from now on paper would be backed by metal or by paper that can't be hyperinflated - and as it now relied on confidence in other things then paper itself, it worked, at least for the time. Then as governments got greedy (this happens quite often) they introduced fiat currency, which is backed by government itself.
Because of that, governments no longer could go on printing spree like they used to, so they begun printing currency in small increments, and doing it in the way that majority of public wouldn't notice, but would gradually devalue the currency their citizens hold over years and decades. But nothing lasts forever, and now we see public lose its confidence in currency yet again. This is the stage in which we are now.
There is clearly a problem - many people don't realize that their currency has no real value, since only metal does. The real value of USD, EU, pound and others is nothing more then... confidence that you can exchange it for something. This is it. If significant part of the public decided to ditch USD for one reason or the other, then its over. And here we go to the caviat of the problem.
Governments cannot afford to admit that we are in hyperinflation, because they know public would dump their fiat currency. Which explains why we hear legacy media come up with more and more extraordinary explanations from rising prices, from supply-chain breaking up to other things, while in reality it because government can't stop the money printers.
Why do governments do that? Well, because inflation is how the government is slowly stealing wealth from its citizens. But there's more to that then just that.
Before 1913 US government would create its own money. However, after Federal reserve was established, which would let US government borrow money with interest, that it would pay via taxpayer-funded bonds. In addition, contrary to popular belief its not just FR that can create money out of thin air - most banks can do that as well, provided that they don't issue loans that exceed their own money by a certain threshold. Majority of money in all circulation is created in that manner. And here's where fractional reserve banking comes into play again. Now banks can have X amount, issue loans for Xx10 and whoever receives this loan will pay it back to the bank with interests or forced to do so by the government, while if a bank fails... then again taxpayer's money is used to bail it out. Banks always win.
Without a doubt, this is a monstrous and inhumane system, that is generating misery, corruption and economic, social and political instability in society. Without a doubt, the growing discontent will create popular demand for changes in the monetary system, as the veil is falling, primarily due to us living in hyper-information age.
So how should current banking system be changed? I think that we are long overdue to rethink this problem and best bet is to rely on metal again. We need to abolish federal reserve and either ban or severely limited fractional reserve banking, while simultaneously bringing back gold standard to maintain public confidence in currency.
In conclusion, I'll leave some of the very interesting articles that I found while researching this subject:
https://mises.org/library/inflation
https://www.lewrockwell.com/2021/09/...onetary-curse/