Ingenieria

What are the real reasons of this economic crisis?

By Roland Coeurjoly, s3395035

Advanced English Language I

RMIT

12th October 2012, Melbourne

Introduction

In this essay we will discuss the deep causes of the current economic crisis. As a matter of fact, those causes also apply for all past crisis under the fractional reserve system. We will discover all the different stages inboth a saving based system and a credit expansion based system. Finally we will propose some books so that the reader could have a better grasp of this topic and others related with this one.

Fractional reserve and economic crisis

I believe the actual banking system, which is based on privileged banks, is the main cause of the past, current and future crisis in all countries around theworld.

Basics concepts

First of all, we should understand what those privileges are. But it is not possible to understand those privileges without understanding basic concepts about banking such as loans and deposits.

Fractional reserve is the way banking works everywhere around the world. But, we may not know how banking functions.
In the world of banking there are two major entities thatare very important to understand. One is a loan and the other one is deposit.

1-Loans

A loan is a a sum of money which is borrowed, often from a bank, and has to be paid back, usually together with an extra amount of money that you have to pay as a charge for borrowing (Cambridge Dictionaries Online). In this sense, it is clear that the lender renounces temporarily to the availability of themoney, hoping that the borrower will return the first quantity plus the interests.

2-Deposits

On the other hand, a deposit is defined as a “contract by which one person -the depositor- entrusts to another- the depositary- a movable good for that person to guard, protect and return at any moment the depositor should ask for it” (Jesús Huerta de Soto, 2009).
In a healthy system, both of themshould be kept apart because of their nature, but our system is not a healthy one. When I say our system I mean everyone, including Australia, European Union, United States of America and others.

The way fractional reserve banking systems work

Let's look at how the fractional reserve system mixes both.As we previously said, it is a necessary condition to maintain the quantity and quality ofthe deposit so that the customer could withdraw up to the whole deposit at any moment. This condition must be met with each and every customer the bank has. Instead, our banks only keep a little percentage, lending the rest to business and families. The depositary believes that he has available all his money, though. This is a violation of the right of property and as such, it leads to disastrousconsequences. And that is the single reason why we had, still have and certainly will have recurrent economic crisis, with the suffering and destruction involved as far as people and resource are concerned.

Now I will try to explain why the current banking system is evil and why it always leads to economic crisis. This will be done by comparing with a healthy banking system in which in orderto invest it is necessary to save, and no deposits are used to invest.

Effects of an increase in voluntary saving

Let's have a look a the microeconomic effects of investing capital previously saved, which is not the current system, although it is the healthy one. This savings are ended in exactly the same way as we defined loans.

When saving money, it is obvious that it reduces the levelof consume of final goods. Therefore, and due to the law of supply and demand, the prices of those goods go down. We have to take into account that prices are like signals that tell entrepreneurs and business men what to do when the price of something goes up or down. In this case, due to the decrease in the price of final goods, the profits in the consumer sector also do the same. This tells...