Economic Evolution: Darwin's Idiot Speaks

Part 3 of 6

Banking came up with its own methods of inflating the supply of legal tender-fiat money, fractional reserve lending.  A bank comes to know (a version of the dispersal of knowledge of the market) how much of its depositors’ funds would be taken out of the bank on an average temporal basis; the funds not required or taken out by depositors were the reserves.  These funds could be loaned out at interest, a concept many centuries older than the concept of money.  That interest, set by and due to any lender, represents compensation to the lender for the loss of use of those funds for the duration of the loan, as well as an estimate of the loss of purchasing power of those principal funds due to inflation and the perceived risk that the funds will not be returned, plus an additional return on the principal judged reasonable profit by the lender to increase capital and enable further economic activity.  Ongoing repayment of the principal and interest of these loans further secured the banks’…