I’ve listened to the podcast before. I’ve also seen other videos and read about fractional reserve banking. I’ll respond from memory. I’ll read up on it later to compare. I remember disagreeing with Elliot, but I have to rewatch his video and read to compare exactly what Elliot says and what the literature says.
It used to be that you had a deposit account and a savings account. I might have this terminology wrong.
Deposit accounts were liquid and had 100% reserve. You put the money in and it stay there ready for you take out at any time. So you would pay a storage fee on it and get no interest on it.
Savings accounts were less liquid. You put money and the bank loans it out. You get paid interest but since the money is lent out you can’t get whenever you want. You’re essentially just lending the money out to the bank. It’s not that exactly the money you lend out has to be returned. What you get back isn’t determined by how the money you lent out did as an investment. The bank pools all the money and pays out from the pool. The important thing is that money that is being handled by the bank can’t be used for both investing and being able for withdrawal at any point in time. This way money doesn’t pop out of nothing.
Fractional reserve banking blurs the line between deposit accounts and savings accounts. There are no true deposit accounts around anymore. There are savings accounts where your money is less liquid but you get a higher interest rate.
Fractional reserve banks create money like this:
I put in $100 in a deposit account. The bank is allowed 10% reserve. Which means they can lend out $90. It’s a deposit account so I can withdraw the money immediately. I do that and spend it. Result: $90 was created by the bank and entered circulation.
The banks created money but they didn’t actually print anything. I think the money they created is called “fiduciary media” by Mises and austrians. 100% reserve people call this fraud. I think Mises says this is the reason we have boom bust cycles. It is how we have expansionary credit.
There are arguments that this would fail in true laissez-faire capitalism where there is no central bank to bail out the fractional reserve banks, which are very prone to bank runs. They also argue people would choose 100% reserve banks because fractional reserve banks would be devaluing their bank notes. It would be like choosing to money in a currency that doesn’t get inflated vs. one that does.