“Founding the Fed Instead of Ending Fractional Reserve Banking
The Fed was founded under false economic premises–to prevent bank runs by providing temporary liquidity to banks which found themselves unable to redeem their certificates and demand deposits for cash and/or specie. The real cause of illiquid banks–fractional reserve banking–was never seriously addressed. It was assumed that banks had the legal right to invest their customers’ demand funds in loans and that runs were caused by over indulging in this practice. But as Murray N. Rothbard explains in What Has Government Done to Our Money?, loaning demand funds instantly places the bank in an insolvent position, for it cannot redeem all of its demand accounts for cash or specie. Through the process of lending demand funds, the banks have created fiduciary media out of thin air, reducing their reserve ratio below one hundred percent. If the banks do this on a very modest basis, the public may not be aware of the fraud. However, once the rumor starts that the bank is illiquid, there is a literal “run” to the bank to withdraw demand funds. In such a case, even a bank that only modestly lent its demand funds might find itself unable to honor all withdrawal claims and would be forced to close its doors.
(NOTE: Central Banking was established to legitimize counterfeiting fraud, aka – Fractional Reserve Banking)
The Federal Reserve Bank, as the lender of last resort, was supposed to prevent such occurrences by providing temporary, penalty rate loans to struggling banks. Note that there is nothing that a central bank could provide that could not be provided by another private bank. In fact the banking panic of 1907 was stemmed by private bank interventions led by J. P. Morgan. However, Morgan realized that such private bailouts were very risky and presented a case of moral hazard; i.e., that bankers, confident of a bailout by the Morgan banking empire, might book riskier, higher yielding loans. So rather than face the real cause of banking crises and lobby to outlaw fractional reserve banking, the Morgans, Rockefellers, etc.–who did not want to forego the financial benefits of lending demand deposits–lobbied instead for government to create a lender of last resort, a central bank, which we named the Federal Reserve Bank.”