Fictional Reserve Banking
Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. It’s used all over the world.
In the United States, that fraction is now zero.
Before 2020, banks in the United States were required by the Federal Reserve (a private bank) to have deposits totaling 10% of the money they lend. The other 90%, they would simply fabricate out of thin air. If the borrower was another bank, they could deposit the new “money” in their own bank and lend out ten times that amount. Legally.
According to Rothbard, fractional reserve banking should be considered to be embezzlement. The bank is technically insolvent, because it cannot pay its debts as and when they fall due – the deposits being due instantaneously at any time. However, unless the customers (depositors) demand too much money at once – or too many loans fail – it can continue running, without the customers ever noticing that their money was gone.
If the bank’s customers lose confidence in the chances of the bank’s repayment, they can decide, en masse, to cash the deposits in. This loss of confidence, if it spreads from a few to a large number of bank depositors is called a bank run. Unless the central bank intervenes or other banks come to its rescue, a bank run is always fatal…
(from the Mises Institute’s wiki)
On March 15, 2020, in an unprecedented move, the Federal Reserve lowered its benchmark lending rate to zero.