Ok...so I am going to bite.

Fractional reserve banking is the process you described. Give the bank $100, it is then legally obliged to only keep X%, let's say 10%. Hence, why most - if not all - banks today are vulnerable to a 'run on the bank', because banks never have 100% of outstanding liabilities immediately liquid.

However, that being said, you make it sound as if those banks are lending/giving that money to rich Saudi princes who squander it. They are not. They are lending it to entrepreneurs that have built a business to X point that want to expand. Those entrepreneurs take that money at a relatively low interest rate (in America anyway) and invest it into their company, believing that the return they can generate is higher than the interest they pay.

Those entrepreneurs in turn hire people and when they are successful, they pay themselves a lot of money. They can also sell the business at some point in the future.

All the while, they pay back the bank the principal + interest and they have their business. This is the way it should work and this is the way it works about 80% of the time.

The other way fractional reserve banking works is that those same banks, end up using some of those funds to invest. They invest in a diversity of assets - stocks, gov't debt, etc.

They also invest in an asset class known as 'Alternative Assets'. You know what type of fund is a major beneficiary of raising money from banks and large financial institutions by fulfilling the alternative asset type category? Venture Capital funds.

Sure, you can argue that there is a bubble in Silicon Valley, but VC funds have been - undoubtedly - a major part in the major creation of MANY things we take for granted today. From Fairchild Semiconductor to Apple to Intel to Facebook, Twitter, Microsoft (eventually), Cisco to FedEx, UPS, McDonalds, Burger King, to many others in between.

Guess who got rich along the way? All those founders + many employees. Not just in earning good wages, but also in stock options and experience for their next job.

So let's just cut this crap about fractional reserve banking being the bane of society.

Sure, fiat currency, can and does lead to inflation - but inflation is the cost of technological advancement.

If there was no fiat currency, we (the ENTIRE world) would have gone through the worst depression we have ever seen - rather than just a 'Great Recession'. It would make the 1930s look like a blip in the radar.

It is precisely because the fiscal and monetary authorities were able to take those drastic measures to save the global economic system, that we can even be discussing this today.

It's also easy to dismiss the crisis as being caused by Wall Street, but...again...progress and advancement comes with a price.

Also, if you hate fiat currency so much and you think the world would see less recessions as a result of going back to the gold standard or backed by some finite amount of money, how about you take a look at history for a sec: http://en.wikipedia.org/wiki/List_of_recessions_in_the_Unite...

As you can see, the list of recessions before 1960 is pretty extensive.

America 'broke' the Bretton Woods system in 1968 - http://en.wikipedia.org/wiki/Bretton_Woods_system - and that essentially marked the end of using a reserve currency backed by a physical good (gold). Since then, there have been recessions but they haven't been as severe as many before the great depression.

The 1800s were absolutely BRUTAL when it comes to economic recessions. Going through that list, it feels as if almost every year was a recession. Kinda insane.

I apologize if this reply comes across as very terse and perhaps facetious, but I am SICK and TIRED of people bashing the current fiat system when there is no other viable alternative in sight. Every system has it's drawbacks, and has its pros. The fiat system is one where the global economic systems evolved into it - not because bankers wanted to get rich, but because policymakers realized that by being able to print more currency on-demand, it would soften economic pullbacks. What this 2008 credit crisis has shown us, is that they were DEAD right. We can debate the causes of the crisis until the cows come home, but what cannot be debated is that the policymakers (from Hank Paulson, Geithner, Bernanke, Sheila Beir, Jean-Claude Trichet, Mervyn King, and everyone else around them in their jurisdictions) made the right choices and used the right tools - because the world economy has truly been saved from possibly the worst recession we have ever seen. The only thing worse than what could have been, is what could have been had America defaulted on it's debts - but that's another argument for another day.

Oh, and when the Fed prints new money and earns interest on that new money, if they earn any profit you know who gets that? You. The taxpayer. It's called seigniorage - http://en.wikipedia.org/wiki/Seigniorage . At the end of the Fiscal year, if the Fed has profited from it's monetary activities during the year, it writes a fat ass check to Uncle Sam. Sometimes in the $50B range. Imagine ANY corporation paying a tax bill that large.

Edit: Although this isn't terribly up-to-date, ehre is a nice paper explaining seigniorage and how much the US gov't made over the last 50 years up to the 90s - https://docs.google.com/viewer?a=v&q=cache:iB65wWXSx3oJ:...

Edit 2: Here is a nice summary of the Feds performance and how much it paid over to the US Treasury in 2009 and 2010 if anyone wants to debate their performance, oh and this is ON TOP of them saving the world economy (basically single handedly) - http://www.marketwatch.com/story/the-feds-annual-profit-surg...