Why so many banks?

Inhabitants of downtown Everett (Wash.) cannot escape the proliferation of banks, which dominate entire intersections. Instead of establishments providing retail goods and services, we have financial institutions on nearly every corner. (I wrote about this phenomenon in a previous post.)

A few weeks ago I sat down with an economist. I had walked past several banks on my way to the restaurant. So I posed this question: Isn’t banking a racket? With no pause, he replied quickly in the affirmative, adding “the fractional reserve system.”

As the linked article describes, banks are required to keep only a fraction of the dollars they lend in reserve. The article gives an example of a person depositing $100,000 in a bank. Assuming a 10-percent reserve requirement, the bank can then lend out $90,000. In turn, the lent money is deposited in the same or another bank—and so on.

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Did you catch that last figure? It’s $1 million!

Now you, dear depositor, realize paltry interest on your money. But your bank extracts huge returns.

The lesson here may be obvious. If you want to get rich quick, start a bank.