If I get a loan from Bank A, then I use that loan to pay a person who deposits the IOU into Bank B. Bank B will go to Bank A and demand the money in cash because it's a competitor bank. If bank A has zero cash on hand they immediately hit a bank run, so basically bank A wants to keep a certain ratio at all times.
Thus through the existence of competitor banks, banks are NATURALLY incentivized to keep a reserve ratio. A reserve ratio enforced by law is not necessary in a capitalist economy with healthy competition. Competition prevents banks from going crazy with creating money out of thin air via loans. The removal of the reserve ratio by the government is relatively inconsequential.
However this natural regulation through competition is negated by the existence of an entity without competition. The central bank. The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. Low interest rates are what caused inflation and high interest rates from the central bank are what are now being used to stop inflation.
So in this case Bank A can now borrow a bunch of money from the Central Bank thereby increasing it's reserve ratio allowing it to lend more money out. In a sense, the central bank is essentially the entity where the fractional reserve ratio actually matters.
The central bank is unregulated so they can print money to loan to other banks however much they like. Thus a bank run on the central bank is impossible. The ratio in this case matters more as a metric that correlates with inflation.
Thus through the existence of competitor banks, banks are NATURALLY incentivized to keep a reserve ratio. A reserve ratio enforced by law is not necessary in a capitalist economy with healthy competition. Competition prevents banks from going crazy with creating money out of thin air via loans. The removal of the reserve ratio by the government is relatively inconsequential.
However this natural regulation through competition is negated by the existence of an entity without competition. The central bank. The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. Low interest rates are what caused inflation and high interest rates from the central bank are what are now being used to stop inflation.
So in this case Bank A can now borrow a bunch of money from the Central Bank thereby increasing it's reserve ratio allowing it to lend more money out. In a sense, the central bank is essentially the entity where the fractional reserve ratio actually matters.
The central bank is unregulated so they can print money to loan to other banks however much they like. Thus a bank run on the central bank is impossible. The ratio in this case matters more as a metric that correlates with inflation.