Bron Suchecki: Fractional reserve bullion banking — Part I

by Chris Powell, GATA Dear Friend of GATA and Gold: Perth Mint research director Bron Suchecki today begins a series of commentaries about how the fractional-reserve bullion banking system works and the risks involved with it, and he importantly acknowledges that the system is terribly unstable and would “melt down at the drop of the hat” if it lacked “government protection.” But informative as it is, Suchecki’s first installment does not address a question that is of much greater interest. That question is, of course, why governments would protect such a system in the first place, as by lending central bank gold reserves. Such protection isn’t as obviously required as ordinary deposit insurance in the commercial and savings bank system. Facilitating the operations of the jewelry industry is hardly compelling as national policy. As for the explanation for gold lending that is sometimes given by central banks themselves — to earn a little money on a supposedly dead asset — it long has been made ridiculous by gold lease rates of 1 percent or less and it has been getting more ridiculous in recent years as central banks have created virtually infinite money on their own authority and have bestowed it practically without charge on politically favored financial institutions. So why do governments afford such protection to the fractional-reserve bullion banking system? GATA maintains that the this protection means to rig markets — not just the gold market but all major markets, as all major markets take cues from the gold price if they aren’t actually controlled by the gold price: Maybe Suchecki will have another explanation for the protection of the fractional-reserve bullion banking system by governments. But any explanation at all may be appreciated. CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc.

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