Talk:Fractional-reserve banking/Archive 3

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early discussions

There are two totaly different views on what FRB is:

If the bank holds 10% reserve.

The first view: The bank can loan out 90% of the money that is deposided in the bank. Deposit: $1000, Loans out: $900 (Many beleve this here and is in the article now)

The second: The bank have 10% of deposits in relations to loans. Deposit: $1000, Loans out: $9000 (This is beleved by for example Werner, Richard Princes of the Yen (book))

The first is realy strange, the bank would have a hard time earning money when he can not use all the assest, compare to loaning from a friend and not beeing able to use that loan.

The second one gives the bank loads of interest earning.

note: I would like to add that these two views are actually equivalent.

1. A Bank has Deposits of $1000, loans $900 to Person 1. 2. Person 1 buys a Good/Service from Person 2 for $900. 3. Person 2 Deposits the $900 into the Bank. 4. The Bank loans $810 (900*90%) to Person 3. 5. Person 3 buys a Good/Service from Person 4 for $810. 6. Person 4 Deposits the $810 into the Bank. 7. The Bank loans $ (810*90%) to Person 5

The above process of deposits, loans, and economics events continue until Total Deposits approach the limit $10,000 and Total Loans approach the limit $9,000. These amounts correspond to the first view; however, we must remember that only $1000 of the Deposits are "real", the rest has been created by the fractional reserve system so the second is also correct.

Because fractional reserve banking is an issue that can be viewed from several different points of view, I plead the editors to always state the reason for the change of tone and reasoning in the article.

For example the non NPOV "The process of fractional-reserve banking causes inflation because the amount of money supply in the system increases. To the different price indexes the effect comes with a delay. Extensive use of fractional-reserve banking might result in hyperinflation"

was changed to "The process of fractional-reserve banking may cause inflation if the money supply increases too quickly."

I plead the editor to state how increasing the amount of currency does not cause inflation and why it is not important to note that the effect has a certain delay before it shows up on macro-scale. Finlander

Increasing the money supply can lead to inflation, but not in all cases. If money supply increases faster than money demand (or GNE) this will tend to be inflationary. If the growth in the money supply matches the growth in Gross National Expenditure, then it is unlikely to be inflationary. The velocity of money also influences the issue. The reason fractional reserve banking can be inflationary is it has no inherent mechanism to keep money supply in balance with money demand. However, if used properly it can be a useful tool to provide an economy with the liquidity it requires to grow.mydogategodshat 01:39, 4 Jan 2004 (UTC)
I just wanted to add my ("Austrian") view to this:
There is no need for the money supply ever to change. Prices adjust to supply and demand of money just like to any commodity. In other words, whether you have $10,000 and pay $10,000 for your goods or have $100,000 and pay $100,000 for the same goods is totally irrelevant AS LONG AS the money supply doesn't change. IF it changes, it affects people differently depending on where the money is being injected. Ultimately, everybody pays for one person counterfeiting through increased prices, but those who receive the money later pay more than those who receive it earlier. The same is true, if banks issue additional money. Fractional Reserve Banking (in combination with Central Banking) introduces an artificial cycle of boom-and-bust through arbitrary expansion and contraction of the money supply that is entirely unnecessary under a system of sound money.
Money supply and demand for money are closely linked: An increase of money supply causes prices to rise (in a sense, the "demand for money" decreases). Saying "The process of fractional-reserve banking may cause inflation if the money supply increases too quickly" is like saying "The price of a commodity may fall, if its supply increases too quickly."
Dngrs 10:58, 3 September 2007 (UTC)


History

The fully-backed silvery notes discussion:

Agreed. This too is controversial and needs editing. But I'm not enough of an economist to feel happy doing it myself. Actually, the general outlines of what's going on are clear enough. Forty years ago, in the U. S., there was actually a sort of complicated multi-tiered system. You had coins, which were actually made of silver. You had, actually, several different kinds of paper money, although many were unaware of the difference. The commonest bills in low denominations were called "silver certificates" and said on them that they were "redeemable for silver on demand." If I recall correctly, the Treasury seal on them was blue, to distinguish them from Federal Reserve Notes (green seal), which were... whatever they are (all our currency is now Federal Reserve notes), and United States notes which had a red seal, only existed in, I believe, the $5 denomination, and nobody knew what they hell they were. But I digress.
The red seal were original greenbacks which President Lincoln first printed thru United State public bank and a part of the fiat monetary system that lacks the flaws which a private owned central bank has. The money was in circulation until rescently even though no more of those bills was printed when the Federal Reserve was instated 1913. Lord Metroid 07:41, 30 October 2006 (UTC)
According to http://www.john-f-kennedy.net/thefederalreserve.htm and several other google findings, it was John F. Kennedy put the silvery system in place. Quotes from the mentioned web page follows: "On June 4, 1963, a virtually unknown Presidential decree, Executive Order 11110, was signed with the authority to basically strip the Federal Reserve Bank of its power to loan money to the United States Federal Government at interest. With the stroke of a pen, President Kennedy declared that the privately owned Federal Reserve Bank would soon be out of business." ... "When President John Fitzgerald Kennedy - the author of Profiles in Courage -signed this Order, it returned to the federal government, specifically the Treasury Department, the Constitutional power to create and issue currency -money - without going through the privately owned Federal Reserve Bank. President Kennedy's Executive Order 11110 [the full text is displayed further below] gave the Treasury Department the explicit authority: "to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury." This means that for every ounce of silver in the U.S. Treasury's vault, the government could introduce new money into circulation based on the silver bullion physically held there. As a result, more than $4 billion in United States Notes were brought into circulation in $2 and $5 denominations. $10 and $20 United States Notes were never circulated but were being printed by the Treasury Department when Kennedy was assassinated. It appears obvious that President Kennedy knew the Federal Reserve Notes being used as the purported legal currency were contrary to the Constitution of the United States of America." ... etc. I suggest you read it yourself.
As Dpbsmith and Gandalf61 so claim, that fractional-reserve banking of private banks was so common knowledge, yet you say that: "... and nobody knew what they hell they were" All this means is that common people might have an idea of how banks operate, but they sure don't begin understand the banking system as a whole and what the new silvery backed U.S notes would have ment. Anyway the article continues to point out that Kennedy was assassinated shortly after and the new silvery backed notes were soon taken out of circulation. Now there's some good juice for conspiracy theory on the assassination on the light of fractional-reserve banking of private banks. --finlander
Anyway, you had: tier 1, silver in coins. Tier 2, "silver certificates," redeemable in silver on demand. Naturally we had mental pictures of silver ingots, but if our teacher was right all that it meant was that you had a legal right to present a $1 "silver certificate" and receive four $0.25 coins in change. Tier 3 was a bank account: you gave your silver certificates to the bank, they'd lend most of them out in investments, but promised that any time you wanted to withdraw your money they would manage to give you the same number of $1 bills you had deposited. (Now that I think of it, all three kinds of bill said "legal tender for all debts public and private" so I suppose you could deposit silver certificates and the bank would have the legal right to give you your withdrawal in Federal Reserve notes or United States notes...). Tier 4 would be a checking account. In each case, you had flavors of money, all of which were essentially promises by less and less trustworthy agencies as you ascended the ladder, each of which were promises to redeem the next most trustworthy kind of money. My check is my personal promise that I have money "in the bank;" my bank account is the bank's promise that I can withdraw paper money up to the amount I have deposited; my paper money was, in some cases, the government's promise that I could exchange the paper for silver coins.
What you say is very interesting to me. If I understand right, you (well the teacher is) are descripting full-reserve banking here. --finlander
In ordinary life, of course, the system worked and you didn't mentally distinguish tiers 1, 2, and 3. "Money in the bank" was money, and the bank would be happy to give you paper bills or reasonable quantities of coins or anything you liked. And you could get silver coins in change for paper money regardless of the color of the Treasury seal on them.
The non-neutral POV is, of course, what the silver itself represented. The notion that silver and gold are "real" money is, of course, highly political. Those familiar with U. S. history will remember the bitter debates over the role of silver vis-a-vis gold, with the western states in which silver was mined having a strong interest in the outcome. (They wanted the government to establish a legal equivalence of one ounce of gold = eighteen ounces of silver, as opposed to having silver fluctuate according to a market price. In the U. S. we all learn in school about William Jennings Bryan and his famous speech saying "You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.")
There are probably other Wikipedia articles bearing on this point and I probably should read them.
(P. S. I just glanced at the Wikipedia article on Money is not bad at all and presents a lot of this material in what looks to me like a reasonable neutral point of view. Dpbsmith 13:59, 1 Jan 2004 (UTC))
I've taken a look at the Money too, and it does somewhat in economical terms descripe fractional-reserve banking created money, but fails to mention anything of the most important part, that is who has the right to issue it. --finlander
Incidentally, I have a problem with the notion that any kind of money truly represents a durable store of value, at least over periods of more than a few years. I can work so many hours and buy thus-and-such amount of gold with it and store it away. Thirty years from now there is absolute no way to predict what I will be able to buy with that same amount of gold....
As long as the state taxes in one specific currency there will be a continuous demand for that currency and so becomes accepted for money. The value as always is decided by the quantity of the currency available in public and the market. The citizens will with the system itself set the value of the money and so there is actually no need for anything to back anything up. Backing up money is actually quite stupid as there will be few people in control of the money rather then what is intended for a free nation where the public has control over the money. Backing money up with some rare commodity is in principal as stupid as backing up the money with say... The presidents hair, it will create a huge demand for his hair which is hard to get ahold of and hence he will be the one person that can control the whole market. Lord Metroid 07:48, 30 October 2006 (UTC)
I realise I am answering myself but... Not backing the money up and using the fiat money means that the people are at mercy under the state as it controls the flow and ebb of the money supply. While Precious metals stays reasonably about the same amount. It is also important for the philosophy of freedom to trade with property rather than valued paper. Because property always have value and paper are just paper even if it bonds, stocks or fiat money. There is a risk that the bubble explodes. With real property you will always have your property. But noone would want to trade gold for something one can eat at a depression. Because gold is not renewable and no use when you need to food. Lord Metroid 16:09, 10 January 2007 (UTC)

End of silvery discussion.

General developing the article discussion:

Just babbling. The way to improve this article would be, I think, to put in real information about how real banks actually work and what the regulations on reserves are, and why the power that be assert confidently that this is totally safe and sound. The notion that fractional-reserve banking is somehow as scam needs to be dealt with much more carefully and labelled as, excuse me, a fringe viewpoint. If there are banks anywhere, in any country, at any point in history that actually practiced full-reserve banking that needs to be documented. (How would such a bank earn any money, by the way?) Surely the real argument is not whether fractional-reserve banking is OK, but how large the reserves need to be? Dpbsmith 13:59, 1 Jan 2004 (UTC)
I agree on the improve part. Google does reveal several articles on the issue. But one must remember the issue is very old. It simple is not in the modern world discussed anymore. But I don't think the real argument is how "large the reserves need to be" ie. 1/10 or 1/100, it is so to an economic, but whether private banks have the right to perform the act. Both should be mentioned of course. There was actually three privately owned banks having the right to create money. The document money masters also descripe it, but basically you had the first bank, which was abolished by the president, the secound which again was abolished and the modern one which U.S has today, which JFK seems to have challanged.--finlander
Another P. S. If there are recognized organizations or associations that are fighting against the practice of fractional-reserve banking and trying to promote full-reserve banking it seems to me that it would be quite OK and would enhance the article to describe them. Dpbsmith 13:59, 1 Jan 2004 (UTC)
I agree. But this is not an easy task, but some basic material should be found with search engines. But where do you find material that says, acknowledging the process and the issue, that it is acceptable and moral? I.e. someone speaking for the banking system. --finlander

Libertarian viewpoint?:

The initial contributor to the page speaks:

I don't myself think that the article is NPOV, but I believe it's essential that visitors understand the concept and I presented it how I could. Please clarify it if you can.

Fair enough. Dpbsmith 13:59, 1 Jan 2004 (UTC)

The mentioned persons fought against privately owned banks having the right to practice this banking process, that would, as it has, get nations and private persons in debt to the privately owned banks. See quatations from the mentioned persons at: http://www.themoneymasters.com/presiden.htm . National debt of U.S as of today? A little less than seven thousand billion (< 7*10^12).

The quotes at http://www.themoneymasters.com/presiden.htm are about who should have the right to issue currency, especially paper notes. This has little or nothing to do with fractional-reserve banking, and does not support the claim that "Many of the United States of America presidents and founding fathers fought against private banks having the right to perform fractional-reserve banking" Gandalf61 15:07, Jan 1, 2004 (UTC)
paper notes and making currency is exactly how I defined fractional-reserve banking there. Making money without reserves is fractional-reserve banking. When you have the power to issue currency, you have the power to perform fractional-reserve banking. And if you do not have the first, you don't have the latter. But you might have a point in how it is expressed there. --finlander

(my own thoughts:) Basically if you think what printing new money and loaning it with debt means as a whole (macroeconomics), is that the debter gets a provisional advantage over his competitors (and everyone), and hence the competition (nations, corporates) must also loan from the bank and hence everyone gets in debt to the bank, the process of which has not actually done nothing else but change the balance of money distribution in society ie. the bank has lost or invested nothing, only massively gained. I do believe that a 'scam' is a proper term to be presented as it was on the page, i.e. everyone can for themselves decide if it is a scam or not.

What is the most central reason to the Wall Street Crash happening? Banks practised massive fractional-reserve banking, everyone took loan over loan and society seemed to be in a massive boom, new businesses etc. Then suddenly banks increased interest rates and stopped loaning money. Of course businesses went down, people lost their jobs and banks made a fortune. Here's the "natural business cycle" than banks so advertise they are trying to eliminate!

What happens to developing nation when there are different militant groups fighting over control and let's say IMF decides to create a little money to the other group? The other one must too get loan, both get in debt and what we have in the end is two bankrupted nations massively in debt to international banks where the weak, i.e. the poor and the children are suffering.

As to what goes to this all being general knowledge, I don't know where you did your schooling but in here Finland the actual banking process, it's techniques and especially the consequences was never ever teached during my comprehensive school, or high school or even in the few Helsinki university course material economics books I've been reading. The books just state that it is the tendency of economy to go in cycles. Perhaps, but you could also say that it is the tendency of people to get in the war. ie. as if there would be no logical reasons why people get in wars.

I can assure to Dpbsmith, that even if banking process would be brilliantly teached in schools, the average person would still be completely unaware and confused of it and hence the 'scam' addition would be apropriate in anycase.

Anyway I believe it's important that natural wikipedia evolution happens to this page as well, as I'm not too used to discussing economics in english and there are, I believe, major flaws in how it is presented. Suggestions anyone? btw. The excellent documentary The Money Masters can be found at indymedia to download, it really ought to be mandatory in elementary school history class. And I don't say that because I believe it to be the ultimate truth, but because it would surely stir up some healthy discussion.

I've written a new start to the article.

I've retained the old article as a section under the title "Objections to Fractional-Reserve Banking." I looked at the old article and rewrote one sentence in a way that I think preserves the meaning while making the point of view neutral.

I believe the old article confuses two different practices. One is the practice of ordinary commercial banks, which in the U. S. lend out 90% or more of their deposits, holding only a small percentage as a reserve to meet withdrawals.

The second refers to the practices of central national "banks" with regard to backing currency with precious metal. In the U. S. and I believe just about everywhere else, all national currency is absolutely and totally "fiat money." It's not that only a percentage of it is backed by precious metal, there's no backing at all. That's been true since, oh, the 1970s or 1980s or so.

Both practices are similar in the way they involve balancing a complex web of trust, but they are not the same thing, and I think the old article mixes them beyond my ability to separate them.

I'm hoping that ultimately the article will present and clearly identify both the reasons why the use of fractional reserves is customary and widely believed to be safe, and the objections to it.

Dpbsmith 18:22, 1 Jan 2004 (UTC)

Figuring out the two-defination problem:

"Fractional-reserve banking is a term referring for the customary banking practice of lending out for investment most of the money deposited with the institution, and holding only a small percentage of the deposits as a reserve to meet demands for withdrawal. The term is used mostly by those who oppose the practice."

I believe you miss the point here, to an extend that does require fixing. Also most of your claims needs some evidence or extension*. Yes, in literal meaning, fractional-reserve banking could also mean that the bank invests what people deposit and only holds certain fraction of it in the vaults. But this is also possible while practising full-reserve banking. When every dollar you have is backed by fixed amount of gold, and so there is certain amount of dollars in existance, bank can still invest by *really* loaning the money, ie. taking it from the reserves and loaning it out with interest (or not interest, but that would be mad to an economic). What you understand by fractional-reserve banking, is that the bank has the right to invest the money you have deposited in. This is not what fractional-reserve banking means and your defination is deceiving and not coherent with the actual practice.

  • "Opponents of fractional-reserve banking thus charge that the practice is deceptive, sometimes going so far as to characterize it as a "scam". It is unlikely that consumers are really that naïve, because simple explanations of the practice form part of the usual U. S. high school curriculum."

You fail to see why fractional-reserve banking is 'deceptive' and in so also get deceived by it. The latter part about U.S schooling I would like to have some evidence on.

"Still, when a consumer deposits money at a bank, it is reasonable to ask what he believes about his ability to withdraw those deposits at any time. Does he believe it to be absolutely certain? Almost certain? Or just extremely likely? If there is a difference between what he believes, and what the practices of the bankers and the government actually achieve, then there is cause for concern."

While that speculation is healthy, it doesn't at all explain why your credit (paper money) perhaps would not be worth anything when you next time visit the bank. If you deposit credit and raise credit, it could not be worth anything and the bank could just print you any amount of credit (paper money) to keep you happy. So once again "missing the point".

I'm going to do some more research on the matter and change the page accordingly. I suggest you do the same.

See below. In the United States, when I "visit the bank," I am visiting a commercial enterprise that has a complex legal relationship with the Federal Reserve. I can't visit the Federal Reserve--well, I can tour it and see big stacks of paper money, but I can't open an account there or deposit or withdraw money from it myself.
There's no issue with "printing money." The bank I visit can't print money. The Federal Reserve can print money, but it isn't a bank in the usual sense and I can't bank there.
The bank I visit can and does lend out most of my deposits, retaining a small reserve to cover depositors' needs for immediate withdrawals. (There's also an insurance mechanism called FDIC which means that small depositors don't get hurt if the bank screws up, or if the Feds don't force them to keep enough in reserve). As I now understand it, you are not taking issue with this.
What you're taking issue with is the fact that the money I deposit at the bank is, itself, fiat money. It is not even partially backed by precious metal. It is not backed by anything at all, except the U. S. government's assertion that it is "legal tender for all debts, public and private"—i.e. the government says it's legal to use it to pay for stuff.
Right? Dpbsmith 20:32, 1 Jan 2004 (UTC)

As Dpbsmith has said, the article and this discussion use the term fractional reserve banking in two different senses. One is the process of "credit creation", under which commercial banks only have to keep a fraction of their deposits on reserve with the central bank, and are free to lend the rest out again. This is the sense in which fractional reserve banking is used at http://www.investorwords.com/5581/fractional_reserve_banking.html, for example, which gives the following definition

"A banking system in which only a fraction of the total deposits managed by a bank must be kept in reserve. The amount of the deposits equals the amount of the reserves times the deposit multiplier."

The other sense refers to the extent to which a central bank, when issuing paper money, needs to (or should) ensure that this paper money is backed by tangible reserves such as gold.

Fractional reserve banking in the first sense is the normal practice of any bank, and I cannot see how a banking system could work without it. Fractional reserve banking in the second sense can only be carried out by central banks. The second sense seems to the be the type of fractional reserve banking to which the original author of the article was objecting.

I think the two uses of the term need to be clearly separated in the article, as Dpbsmith has started to do. Gandalf61 20:07, Jan 1, 2004 (UTC)

Thanks for the link to http://www.investorwords.com/5581/fractional_reserve_banking.html .
With regard to "the extent to which a central bank, when issuing paper money, needs to (or should) ensure that this paper money is backed by tangible reserves such as gold," unless I'm totally offbase Nixon took the United States completely off the gold standard some three decades ago... yep, see Gold Standard#The United States. I don't see how its meaningful to complain of "fractional-reserve banking" when the United States is practicing ZERO-reserve banking. The dollar is not backed by precious metal at all, nada, zip, zero, zilch.
I think the term for the second practice is "fiat money," not "fractional-reserve banking." Dpbsmith 20:32, 1 Jan 2004 (UTC)

The commercial banks fractional-reserve banking:

Do U. S. citizens understand that commercial banks have only fractional reserves?

I made some remarks about its being common knowledge in the U. S. that commercial banks only keep fractional reserves for the money on deposit. Specifically, I said, "It seems to me that we went over this in seventh-grade civics class and that it is hard to imagine that "many are unaware of it." Later, "simple explanations of the practice form part of the usual U. S. high school curriculum." Finlander challenged me on this: "The latter part about U.S schooling I would like to have some evidence on" and "As to what goes to this all being general knowledge, I don't know where you did your schooling..."

Let me address this as best I can currently. I tried to find some examples of educational curricula recommended by various states in the U. S., and while the ones I found make reference to economics and banks and banking being taught at the junior high school (age 12, 13) and high school (14-18) level, they weren't detailed enough to make it clear whether fractional reserves were discussed.

(I personally learned about this in a public school in New York State, I believe at age 14).

But I did find something bearing on the issue. The giant commercial bank, Citigroup, publishes curriculum material for schools to use. I don't know how extensively it is actually adopted, but I think you can assume that Citigroup is part of "the establishment" and very typical of what any sort of mainstream teaching of the subject would be like, if it is taught at all. That is, if anyone wanted to hide or conceal or downplay the practice, Citigroup would. Big corporations frequently publish educational programs or materials, distribute them for free to schools, and hope the schools use them. (They don't do this any more, but when I was in high school, science teachers used to hand out comic books put out by GE that explained how nuclear energy worked and, of course, how safe it was...) Anyway, at

http://www.citigroup.com/citigroup/financialeducation/curriculum/downloads_en.htm

I found a "Citigroup Financial Education Program: Curriculum and Facilitator's Guide." I downloaded the PDF entitled "Basic Banking Services" and found this:

SECTION OVERVIEW Commercial banking, based on the fractional reserve system, has an ancient origin. The system allows a bank to keep a percentage of the money on reserve and use the remaining amount to make loans. Therefore, the two principal functions of today's commercial banks are to oversee deposits (such as checking and savings) and lend money. Their income comes from interest on loans, investments, and various service charges. Many banks in the United States failed in the years prior to 1933. However, since 1933, when the Federal Deposit Insurance Corporation (FDIC) and improved regulation restored depositors' confidence in banks, few people have lost money deposited in banks. Over the years, additional financial legislation and regulations have worked to make the U.S. banking system strong and reliable.

[i believe the gold standard in US was removed around 1932; banks do not loan other people's deposit, they actually create new loan money or credit out of other people deposit out of thin air via fractional reserve system. "The modern international ``fractional reserve banking system is actually equivalent to ``legalized economic parasitism by private bankers. This is the case because, contrary to conventional wisdom, the proceeds of inflation are not actually spendable by the state [1]". Search Google or Youtube for Ron Paul and FED, watch 'Money as Debt' and 'Money Masters' videos]- user:Isis07 sep5,07

So, first of all, I have to retract my remark about the term "fractional reserve system" is used primarily by those that oppose it.

But, second of all, I think this is a reasonable piece of evidence that U. S. banks, at least, positively want high-school students to understand that commercial banks have only fractional reserves. I think you can assume that Citibank's language is a good example of how the subject would be presented in U. S. schools. Dpbsmith 22:55, 1 Jan 2004 (UTC)

In response:

I appreciate your diplomatic tone, but we have to sort a few things out:

Do you understand the difference between the two definations of fractional-reserve banking and how very different their meaning is and how the other one can be considered as a fraud, and as it wasn't legal at the time, actually was a scam historically. Good. Now we have to decide which of the definations is the more often used one. Since the defination the schooling report points to is a very common bank practice, which is very little controversial (only the question whether taking debt of a loan is considered, something which catholic church historically banned) I think it would be good to have a mention of the two definations problem at the top and point the "bank using a fraction of its reserves" to just simply loan and investment. And have the rest of the page discuss the other defination that is used in economical discussion/critic.

Let it also be said that I never doubted that schools teach that banks invest and loan some of it's money from the reserves, but it's the other historically very important meaning of fractional-reserve banking that is not being teached.

Also the claim that "The dollar is not backed by precious metal at all, nada, zip, zero, zilch." is not exactly accurate according to the wikipedia page. It says that U.S doesn't redeem dollars to gold from foreign Governments.

Fair enough? I'l begin to do the changes and you revert back if you disagree or want to improve it.

I have done a bit of a re-write. Hopefully it is more NPOV and more accurate. I considered giving a more detailed description of the deposit multiplier (currency drain ratios,safety reserve ratios, foreign currency reserve ratios, etc.) but I don't know if it is needed. It is hard to know what level of detail the average Wikipedia user is looking for. I'll leave it at that for now:maybe I'll add these later. mydogategodshat 05:31, 2 Jan 2004 (UTC)

Yes, it looks better but makes no sence. According to your description a fraction of the money is kept in reserve and the rest can be lent on until the money in the system runs out. ie. reaches its geometrical sum. But that doesn't create any money by itself, that just increases the entropy in the system. New currency *must* be created ie. new bills printed or in the electrical times a new figures put in a bank account for the money supply to increase. But when does this happen in your writing? Please clarify the text. Also are you absolutely sure there isn't two different concepts mixed up here? See the discussion above^.
Also the claim that full-reserve banking has never been practiced is plain wrong. It has been practised even in the United States of America and also historically in Europe.
Also those book sources that have been used in the article should be separated from the rest. ie. external sources and "see also on the matter" etc.
It's absolutely insane how this topic manages to confuse people. I hope you have the answers to my questions. -- Finlander
I think mydogategodshat is exactly right in his explanation of deposit creation/credit creation. If the central bank issues $1000 in currency, and this goes into a commercial bank as a primary deposit, and the bank then lends on $880 of this and keeps $120 as a reserve, then the money supply has been increased from $1000 to $1880. Only the central bank prints notes, but the commercial banks increase the money supply by lending money on, which in turn creates new deposits. The central bank can (attempt to) control the money supply by varying the minimum reserve ratio. Commercial banks have never practiced full reserve banking (in the sense of keeping 100% of their deposits as reserves) - if they did, they would be acting more like safety deposit boxes than as banks ! Gandalf61 13:42, Jan 2, 2004 (UTC)

Sorting out and identifying points of view

In any argument between responsible adults, it should be possible to reach a stage in which each party is capable of stating the other party's point of view in a way which the other party agrees is accurate. I don't think the discussants on this page are there yet, but perhaps we're getting closer.

I'm trying to figure out, not what is the truth about fractional-reserve banking, but what the term means (or whether its meaning itself is controversial). And I'm trying to figure out what points of view exist in the real world and what they are (on the assumption that the article should accurately reflect this).

I found a couple of interesting links.

I think that perhaps Finlander's position is similar to the one expressed here, in an essay by one Murray Rothbard which happens to be what I got as the top Google hit when I searched on "fractional-reserve banking:"

Fractional reserve banking

This other article

The Libertarian Case Against Fractional-Reserve Banking

seems interesting to me in trying to sort out points of view. Notice, however, that Gene Callahan identifies both himself and Murray Rothbard as "libertarians." That is, he is a liberatarian taking issue with what he says is a different libertarian point of view.

This gives me the impression that opposition to fractional-reserve banking could be described as a "libertarian point of view." Given the status of the Rothbard article as a high-ranking Google hit, and the status of libertarianism as a significant political camp, it might be reasonable to organize the article with a section identified as "libertarian objections to fractional reserve banking" or something along those lines—if we can agree that can be accurately as libertarian. (Finlander, would you describe yourself that way?)

Both of these articles seem to clearly lay out the cases for "fractional-reserve banking as fraud." The Rothbard article lays out the description in relation to medieval goldsmiths in a manner similar to the way Finlander describes it.

Just my $0.02 (fiat cents made of copper-plated zinc, to be sure). Dpbsmith 16:06, 2 Jan 2004 (UTC)

I did a most simplified simulation of 3/25 fractional-reserve banking on commercial banking level (ie. not printing any money) using natural language.

$1000 Deposit of notes in a commercial bank by Depositer(s) 1. Depositer(s) 1. is now keeping $1000 of his bills in the bank A.

$120 of the bills kept in the vault and $880 invested out.

Borrower(s) 1. borrows the $880 from the bank A thus he is now in debt to the bank A by $880.

Borrower(s) 1. now spends irresponsibly all the money.

All the money ends up in bank B by Depositer(s) 2. Depositer(s) 2. is now keeping $880 of his bills in the bank B.

Bank B now keeps $106 in vault and invests $774.

Borrower(s) 2. borrows the $774 from the bank B thus he is now in debt to the bank B by $774.

Borrower(s) 2. now spends irresponsibly all the money.

All the money ends up in bank C by Depositer(s) 3. Depositer(s) 3. is now keeping $774 of his bills in the bank C.

Bank C now keeps $93 in vault and invests $681.

Borrower(s) 3. borrows the $681 from the bank C thus he is now in debt to the bank C by $681

Borrower(s) 3. Decides to stuff all the money inside his pillow.

Now let's review the situation.

Depositer(s) 1. has the right to raise $1000 from bank A. Depositer(s) 2. has the right to raise $880 from bank B. Depositer(s) 3. has the right to raise $774 from bank C.

Borrower(s) 1. is in debt to bank A by $880 plus interest. Borrower(s) 2. is in debt to bank B by $774 plus interest. Borrower(s) 3. is in debt to bank C by $681 plus interest.

Bank A has $120 in vault. Bank B has $106 in vault. Bank C has $93 in vault.

There is $318,528 of the original money in the banks A, B and C. There is $681,472 of the original money inside the pillow of Borrower(s) 3.

Has the money supply increased? No.

Yes, the money supply has increased - it is now more than $1000. The money supply consists of both notes and coins in circulation and bank deposits (this is in simplest terms - there are various technical definitions of money supply, some of which also include savings accounts and other assets with longer maturities) - Gandalf61 17:24, Jan 2, 2004 (UTC)

What has happened is that banks are making profit of borrowers 1., 2. and 3. as long as the situation continues.

I admit that the direct relation between Borrower(s) and Depositer(s) should be studied in more detail, but basically this just shows what is self-evident: commercial banks exist to make profit on speculation and at the cost of the people who have to loan from the bank.

Commercial banks connect parties with spare funds (depositers) with parties who need funds (borrowers). They make a profit from providing this service. If you can make shoes and people need to buy shoes, you will be able to make a profit by charging more for your shoes than the materials cost you. Banks do the same thing, but with money instead of leather. - Gandalf61 17:24, Jan 2, 2004 (UTC)

Now the other fractional-reserve banking, that is central banks creating new credit ie. printing bills and loaning them to governments and businesses is what I originally intended to point out. But the end result is very similar; the bank makes profit on the cost of the nation and everyone else forced to borrow from the bank. It serves the central banks profit making purposes to cause artificial inflation and deflation in the time of peace, and on the other hand war is the greatest income of profit as whole nations have to take loans over loans when their enemy also does it.

I am not aware of any central bank that "prints bills and loans them to governments and businesses". This is not the function of a central bank. A central bank will set a money supply target, then adjust variables such as interest rates and reserve ratios to encourage or discourage commercial banks to engage in loans (thereby changing the money supply through the credit multiplier), or change the amount of deposits it holds at commercial banks (thereby changing the moneysupply through the credit multiplier). mydogategodshat 01:07, 3 Jan 2004 (UTC)

Dpbsmith, I'l study your $0.02 soon.

Anyway what comes to the actual article, I believe the introduction is good, but later, after the history part, fractional-reserve banking has to be handled separately on the central- and commercial bank levels. Both the posite points (?) and the critic has to be shown.

Finlander, to clarify the relation between the central banks role and the commercial banks role, you might want to research "open market operations". The credit multiplier is inextricably intertwined with central bank operations. mydogategodshat 00:49, 3 Jan 2004 (UTC)
It is possible to convert this into two seperate articles, but I don't see how we would gain by doing this. mydogategodshat 00:53, 3 Jan 2004 (UTC)

How is this different from saying "we're no longer on the gold standard?"

Isn't the criticism of "fractional-reserve banking" by central banks just a complicated way of complaining that currency is no longer backed by gold... or a negligible amount of gold... or a negligible amount of paper redeemable in gold? Dpbsmith 04:05, 3 Jan 2004 (UTC)

No, although critics of fractional reserve banking are also often critics of fiat money. You can have a system under a gold-standard and fractional reserve banking, and you can have a fiat money system with full reserve banking. Fractional reserve banking refers to the practice of increasing the money supply in relation to its monetary basis, regardless of what that basis consists of.
Dngrs 10:58, 3 September 2007 (UTC)


Deleted text

I'm pulling this out of the history section because it is confusing at least four distinct issues:

  1. Fractional-reserve banking, the practice of lending out some fraction of demand deposits at the risk of bank runs.
  2. Non-convertible and/or partially-backed currency.
  3. Early US controversies about private bank notes, which didn't really have much to do with fractional-reserve banking, since banks don't care if they are giving their debtors greenbacks or their own notes.
  4. Insinuations that Kennedy was assassinated over silver certificates.

I suspect 2-4 would be better placed in other articles. Populus 05:56, 3 Jan 2004 (UTC)


When the central bank of England was created in 1694, its main purpose was to manage the government's debt by selling notes; however, it was not long before it started to engage in fractional researve banking. By the end of the 18th century the war with France had created a formidable drain on the countries finances and in February 1797 there were rumours of imminent financial collapse. On Feb 26, an Order in Council "temporarily" suspended the convertability of the pound.
The controversy that ensued has come to be called the Bullionist controversy. For more than 20 years economists and politicians debated. Commitees were established and in 1810 the Bullion Report was released. In 1821 the pound was again fully backed by the Bank of England and continued that way until the first world war.
A related controversy was the Banking school controversy. It occured primarily in England, but also in the US, and lasted from about 1820 to 1850. It dealt with the relative roles (and power) of the central bank and the commercial banks. There were three general schools of thought. The Banking school felt that central banks should be free to issue notes as they felt necessary. The Free banking school felt that it should be the commercial banks that should be free to issue notes in a competitive banking industry unincumbered by central banks or government regulations. The Currency school felt that the issuing of notes should be closely regulated by government through the tight contol of central banks. In England, the issue came to a close with the Bank Charter Act of 1844 which limited the ability to issue notes to the central bank of England.
In the United States of America several presidents and founding fathers fought against privately owned banks having the right to perform fractional-reserve banking. They opposed a privately owned bank having the right to issue new currency. See Thomas Jefferson, James Madison, Andrew Jackson and Abraham Lincoln. Also John F. Kennedy prior to his death signed a Presidential decree, Executive Order 11110, to strip Federal Reserve Bank of its right to loan money at interest to the United States Federal Government.
In the modern world, foundations such the World Bank, European Central Bank, the US Federal Reserve System, and other central banks have the sole right to print new money.

Please could you enlighten me, in what currency does the world bank print money, cos i think the US, UK or whatever other government of the country it printed currency in would be none too happy.

From the village pump

What do people think about the article on Fractional-reserve banking? I'm not enough of an economist or historian to judge, but I vaguely thought that ranting about fractional reserves was goldbug stuff and pretty far out there. Does this article have a reasonably NPOV? Dpbsmith 22:20, 31 Dec 2003 (UTC)

I'm uncomfortable with it, but i'm not an economist either. I do note that neither are any of the people promoting the idea that this is a 'scam' on the web, though. Morwen 22:24, Dec 31, 2003 (UTC)
At best, it's a poor article, full of poor grammar and spelling mistakes. So why don't I just fix it? Well, I'm not convinced I can fix it. It seems a bit POV to me.
Well, the original contributor is apparently not a native English-speaker. Dpbsmith 17:20, 1 Jan 2004 (UTC)
That said, I don't think it's a VfD candidate. It is a suitable article topic. Andrewa 10:34, 1 Jan 2004 (UTC)

Continue this on Talk:Fractional-reserve_banking There's now a pretty good discussion in process there... Dpbsmith 17:20, 1 Jan 2004 (UTC)

end of moved discussion

I believe the article is finally starting to make some sense and not being heavily biased to either naive admiration or over complication(1.) of the banking system, yet still not being prey to my humble tries to present the effort some of the Unites States of America founding fathers put at stopping the independent central bank from forming and the controversy in the morality (what it makes the independent central banks able to do) of the credit creation process. Also the history part could perhaps be moved to history of fractional-reserve banking to keep things more simple, but it is a very integral part in the description of the process.

1. I would like to hear people's (especially someone with better factual knowledge on the matter) comments on how accurately or unaccurately this description lays out the outlines of the money supply increasing bankings process. At least to me it now makes sence and also manages to explain the problematic controversy this topic has arisen having to do with the (alleged) double meaning of the term fractional-reserve banking. Finlander 13:32, 3 Jan 2004 (UTC)

Mydogategodshat, since you originally included the deposit creation multiplier, and now removed it, would you be so kind to either fix it back in to the article in a proper way, or let us all know how exactly it was inaccurate.

You said:
"with cash reserve ratio of 1/10, every $100 deposited ends up increasing the money supply by $900."
That is not true. Everytime $100 is deposited into an account, the money supply doesnt increase by $900. Only primary deposits have a multiplicative effect. Derivative deposits do not effect M1. mydogategodshat 04:36, 4 Jan 2004 (UTC)
You quote me wrong: "This process is described in more detail at deposit creation multiplier, but roughly with cash reserve ratio of 1/10, every $100 deposited ends up increasing the money supply by $900. Respectively cash reserve ratio of 1/6 will increase of money supply by $500 for every $100 deposited."
Yes, I should implicate primary deposit, but I wanted to put all the terms in the new page I created for deposit creation multiplier as not to make the matter too confusing. Perhaps that was a bad choice, but the fact remains that the version, which you quoted and in which I put good a amount of effort into is a lot more understandable than the ugly monster that Populus reverted back to. My effort clearly and logically follows the money and also clears any problems with how people understand different things when they hear the word fractional-reserve banking. Also the indroduction and history part which I believe you did, makes a lot more sense and is a lot more NPOV than the current 'love the banks and do not even try to understand' one. Finlander 05:40, 4 Jan 2004 (UTC)
I know you were trying to simplify the topic, but by illiminating the distinction between primary and secondary deposits the whole thing became inaccurate. mydogategodshat 06:07, 4 Jan 2004 (UTC)
Oh now you know that? But why didn't you then just put the word "primary" where it belongs? ie: "every $100 primary deposit ends up increasing the money supply by $900. Respectively cash reserve ratio of 1/6 will increase the money supply by $500 for every primary deposit of $100." Finlander 06:18, 4 Jan 2004 (UTC)
There was no point in doing that after you erased the paragraph that explains what a primary and secondary deposit is. mydogategodshat 06:45, 4 Jan 2004 (UTC)
Wrong again (in your very words): "The system starts with an initial deposit at a commercial bank. Because of this deposit (called a primary deposit), the bank is holding currency. To make a profit for it's investors, the bank loans this money out. The person who gets the loan spends the money, which will eventually end up deposited in a bank. This second deposit is referred to as a derivative deposit or secondary deposit. Any of these additional derivative deposits increase the amount of the money supply. This process is described in more detail at deposit creation multiplier, but roughly with cash reserve ratio of 1/10, every $100 deposited ends up increasing the money supply by $900. Respectively cash reserve ratio of 1/6 will increase of money supply by $500 for every $100 deposited."
I just didn't think that what I wrote here gave a clear picture of the concepts without the remainder of the definition: In particular what is missing is the notion of multiple iterations. But maybe I am wrong, Maybe people can understand this concept without the complete description. mydogategodshat 10:33, 4 Jan 2004 (UTC)
You should just admit that you have made a mistake. The paragraph made a perfect sence, as a whole, until you cutted the bottom half off. Though, yes, the ending could use better wording. Anyway this is nothing but a pointless quarrel. It doesn't matter what you do or whether you have any change of an opinion, as there will always be the next guy in a row ready to revert at his lack of understanding. Finlander 09:41, 4 Jan 2004 (UTC)
We've already gone through this. It may make perfect sence to you but we have established that the last two sentences as they are written here are incorrect. mydogategodshat 10:33, 4 Jan 2004 (UTC)

In the end, one dollar worth of gold deposited at the central bank might lead to a final increase of $100 in the money supply. The term fiat money is used to refer to money created by this process.

Also I thought the part about $1 turning into $100 is quite a possible scenario if you consider that the money would be spread by the commercials banks until it all end up in banks vaults. Finlander 16:23, 3 Jan 2004 (UTC)

You do the calculations. For an exogenous change in reserves of $1 to create a total change in the money supply of $100, the reserve ratio would have to be .01 That is unrealisticly low. mydogategodshat 01:59, 4 Jan 2004 (UTC)
Did you even read what I wrote? I basically stated that if first the cenral bank would print extra $9 dollars for every $1, practising 1/10 fractional-reserve banking (which is a very realistic scenario), and then the commercials banks do their magic with cash reserve ratio of 1/10 (which also is a common figure), then one dollar can end up being $100 in the total money supply ie. 1/10 * 1/10 = 1/100 if it is not already clear to you. Finlander 04:21, 4 Jan 2004 (UTC)
Sory, It was not clear that this was a continuation of the example several paragraphs earlier in a different section. mydogategodshat 04:47, 4 Jan 2004 (UTC)
I considered creating a new header-sized topic for it, but I think I made myself perfectly clear even without it: "In the end, one dollar worth of gold deposited at the central bank might lead to a final increase of $100 in the money supply. The term fiat money is used to refer to money created by this process." Finlander 05:48, 4 Jan 2004 (UTC)

I give up. You can all do whatever your wish with the article, Populus, Mydogategodshat and whoever. Yes that's right, just pop in and revert the articles the way you like. Yes I understand now that it is pointless to justify ones action when anykind of ignorant pleb can do whatever she/he wishes.

Wikipedia is excellent, but it is not a good idea to try and introduce any concepts that tax the little unused processor sitting inside most people's heads.

worthless without explaining Bank for International Settlements

Articles on fractional-reserve banking and Federal Reserve and any other major central bank make no sense whatsoever without explaining how the rules of the Bank for International Settlements constrain these practices in these institutions. This is the global rulebook. Criticisms of fractional-reserve banking are sometimes specific to the US because they affect events in the US, and the same for any other central bank: you can't separate criticism of such a fundamental practice from the context in which it has its effect.

I think you're exaggerating. It can make perfect sense to talk in general terms about fractional reserve banking without mentioning the BIS, as fractional reserve banking existed long before the existence of the BIS. Capital ratio regulations are largely based on the work of the Basel Committee on Banking Supervision, and this may be worth a mention, but whilst that committee's work is supported by the BIS, they are not formally a BIS institution. The BIS does not, as far as I'm aware, have any formal power at all over the world's central banks. - Crosbiesmith 20:17, 12 January 2006 (UTC)


"However, if used properly it can be a useful tool to provide an economy with the liquidity it requires to grow.mydogategodshat 01:39, 4 Jan 2004 (UTC)"

this is fundamentally a flawed statement, you could just as easily use the euphemism that "only sugar soft drinks are a useful tool to help young children quench their thirst."

- the point here is that under a full reserve system the money supply could grow at exactly the amount that the issuer (at that time a federal treasury, or government run bank) wished, providing exactly the amount of liquidity, liquidity is related to among other things "flow" of money, which is largely related to acceptance and is not to be confused with expansion of money which is amount based.

So the summation that a fractional reserve system causes inflation is absolutely correct, the system is based on inflation, and debt.


And the theory that this fractional system is a helpful tool for liquidity is absolutely flawed, it is not any more helpful than it is helpful to where a red coat on Sunday instead of a green one on Monday, because it is about as relevant to that point as it is to the original statment.

digitalindustry

.

Tags added

I've added a couple of tags to this article, which appears to have been somewhat overrun by monetary eccentrics. As the intro points out that this is a "near-universal practice", in such a vital and historical area as banking, the fact that over half the article is devoted to "Criticisms" raises a red flag to me as a general reader that something is amiss. Specifically, the "History" section seems to have no reference or consistency with the History of banking article, while the "Inadequate government regulation" section reads like some sort of anti-Federal Reserve pamphlet, with no indication of the nature of the "critics" or how accepted their views are. - Quietvoice 18:10, 20 August 2006 (UTC)

Disputed

I have a dispute tag becourse the article contains two different views that make the article contradict it self in numerous of ways.

In the correct view the first banks had a reserve in gold. For every bar of gold the bank holds the bank could write a bank note for the value of that gold and lend it to loan takers and receiving interest. This is a full reserve system. The bank can only lend out the save amount of bank notes as it has in gold.

Fractional reserve banking is when the bank gives out more banknotes than it has reserves in gold. This causes a multiplier of circulated capital and a inflation. With the hope that all the loaner do not cancel the loans at the same time and tries to get the gold back. This would cause a bank run. Yhe bank don not have gold for all customers.

100% backing means that every bank note has a 100% backing in gold (or other value)

10% backing means that 10% of the bank note has backing in gold. The other 90% is fiat money and has no backing. this is fractional reserve banking.

The wrong view try to imply that it the bank gets $10 in deposits it can gives out $9 in loans. It is impossible to create inflation using this version: The bank actually creates deflation as it keeps money from circulation. Under this model it is impossible to use full reserve banking (100% reserves). Sense that would mean that the bank holds $10 of the $10 in deposits and have $0 dollars to use for loans and thus cannot operate at all. (This is obvious nonces)

This article is a mix of both models resulting in contradictionary statements. The history part is partly correct, but most of the other parts is totaly wrong.

Sources:

--Crash site 23:01, 9 September 2006 (UTC)

When comparing fractional to full reserve banking, it is not kept clear that a reserve is the money kept on-hand for withdrawals from demand-deposit accounts (checking, savings), while the bank may(will) still have additional assests to lend/invest under either model (CDs for example, and the bank's own money). Any profit from fees & intrest goes into this second set of assests. My POV deals strictly with the local bank down the street, and not the high-level banks that only deal with other banks (and countries). The "popular myth" fractional reserve is what I was taught in both high school and Econ101, so I'd like to see where the bank gets the money to create $900 from a $100 deposit. 172.134.2.176 20:54, 19 September 2006 (UTC)


It is indeed strange that there is two diferent views held by high ranking economics. But there is a reason. If the bank could create money this would be a thing the population would not like and thus the population does not now it. This is how Werner explains it.

The creation of the $900 is actually only a number in a computer. The physical money and the didgital is two separate things. The bank creates a new credit of $900 and that money is then deleted after the loaning is completed.

--Crash site 00:42, 27 September 2006 (UTC)

Hi there,

I have no knowledge of this area, but just looking at the logic...

'The wrong view try to imply that it the bank gets $10 in deposits it can gives out $9 in loans. It is impossible to create inflation using this version: The bank actually creates deflation as it keeps money from circulation. Under this model it is impossible to use full reserve banking (100% reserves). Sense that would mean that the bank holds $10 of the $10 in deposits and have $0 dollars to use for loans and thus cannot operate at all. (This is obvious nonces)'

Can I just ask what happened to the original deposit? You seem to imply that thebank burns the deposit when it lends out the money. But the bank still owes money to the depositer. Therefore under full reserve banking, you the depositer would retain their holdings at the bank and money supply would remain unchanged.

That seems to make sense for the simple 'guy saves money/ guy borrows money' scenario. However if the money is not lent out, then it may still be deflationary. As for what happens with the Fed, I don't know, you might be right. How would money in circulation increase if the banks receive money from the Fed but can't lend any of it?

Needless to say if the Fed prints money, gives it to the bank and allows the bank to loan out ANY of it, then money has definitely been released into the system and this increases the money supply, so long as the rate of release is sufficiently high.

I am likely to be wrong since this is all off the top of my head.

Some clarifications that might help / and on Inflation

--JC 11:42, 17 October 2006 (NYT)


First, a clarification in the article must be firmly made differentiating types of deposits. There are 1.) demand deposits - e.g. cash / checking accounts deposits, where the bank client is under the impression said deposit is immediately redeemable upon demand. Then there are 2.) contractual deposits of duration - where the bank client agrees to forgo use of his money for a specific time in exchange for an agreed upon interest payment, ala a 5-year CD.

Therein lies the differentiating factor of fractional reserve vs. full reserve banking. Fractional reserve banks lend out demand deposits and contractual deposits in order to earn interest.

Hereafter - for the purpose of simplification -- I will speak of both systems in a vacuum, absent government regulation or deposit insurance, etc., and generally in terms of the U.S. system.

With contractual deposits of duration such as a CD, the depositor A is contractually giving up ownership of his deposit for a specific time in exchange for a stream of payments during that time. The bank lends out that money at a higher rate of interest to another borrower B for the specified period of time. The depositor A owns a CD, and not his money. At the end of the period, A's money is returned in full. The theoretical risk to A is the Bank's ability to manage its loan portfolio, hence the financial solvency of banks is important to monitor by depositors given that mismanagement of loans would (in a non FDIC world) cause loss of deposits.

With demand deposits, the system is similar on one level, but entirely different on another. Using a simple 10/1 reserve ratio, a deposit of $100,000 requires only a $10,000 to be kept on demand for depositors withdrawing their demand deposits. In this case, depositor A is under the impression that he may at any time call in for use $100,000 from his checking account. Yet the Bank may have loaned $90,000 of A's deposit to borrower B. Borrower B expects full use of $90,000. Borrower B will likely deposit his loan into a demand account for gradual use, and the same multiplying affect takes place with the new deposit, with $81,000 being available for loans and $9,000 on hand for demand. The theoretical potential of expansion (after over 100 iterations of loan and deposit - do a simple spreadsheet to test) of the initial $100,000 demand deposit is therefore 999,999, with the original $100,000 being converted fully from deposit to the 10% reserve.

Now, the system is obviously insolvent should all depositors attempt to withdraw their dollars at the same time. In fact, history demonstrates that this would often happen (for reasons explained later), hence, most private banking industries have demanded that their be a central bank to back the system. The argument is "in order to protect the depositors", but in reality, it is really to protect the bankers system of loaning out and earning interest on 90% of what their depositors' expect to redeem on demand. When there is a excessive withdrawal of demand deposits from one bank, the Federal Reserve is on hand to provide the bank with sufficient fresh bills to cover the shortfall. Those withdrawals are soon enough injected back into the banking system, hence, given the fluidity of the banking systems in developed nations, this tension is temporary and generally equilibrium between banks is restored.

Of course, there is always the possibility that a bank could suffer a massive "run on the bank" for many reasons - bad publicity about loans, fraudulent accounting, etc. In such a case, the central bank will step in and provide liquidity to a point - or, as is common in the U.S., close the bank temporarily and provide an organized bailout funded by fresh Central Bank injection of money supply on credit, ordinarily guaranteed by the taxpayers of the nation. It is important to remember that, in the case of the U.S. dollar, the currency is not guaranteed by the banks, but rather a transfer guarantee supplied by the taxpayer's of the U.S.

The effects of such a system are clearly inflationary in that $ 100,000 of initial deposit, in a worst case scenario, creates $1 million of demand potential. To understand the inflationary effects, one must understand how purchasing power is affected relative to circulating units of currency. The core issue is that, in our example, $999,999 was created out of thin air and its purchasing power is gained entirely at the expense of existing unit holders of said currency who lose purchasing power. That's basic supply and demand law, which tells you that as supply increases, value decreases. In other words, a the numbers of dollars in circulation increase, the dollar's relative exchange value for other items whose supply is not increasing commensurately will decrease: simply, it will take more dollars to buy the same basket goods.

One need only look at the history of the U.S. banking system to see how "official fractional reserve banking" backed by a "lender of last resort" Federal Reserve has enabled inflation. [2] Since 1914, the U.S. dollar has lost over 97% of its purchasing power as measured by the Federal Reserve's own CPI figures</a>. It should also be noted that since the 1980s, U.S.[3] , hence 97% erosion is understated.

It should be noted that such a system benefits huge debtors - such as governments - who are able to pay off debts in the future currency that retains a fraction of its purchasing power.

Inflation is all fine and dandy so long as holders of said currency don't begin to believe that storing the currency is a bigger risk than converting it to something else. (In every respect, this is functionally identical to the old fashioned run on the banks in the U.S. common in the early 1800s when a bank was discovered to have fraudulently issued dollar receipts for more gold than they had in storage, an act later made legal by a change of the banking laws in the 1850s.) Should inflation be perceived to be "out of control", it is likely that a run on the entire system of banks could take place as depositors race to hold more and more of their stored wealth in something other than the currency - preferably something in units that cannot be manufactured out of thin air with zero effort, thus preserving wealth. Such a systematic hyper-inflationary blow-up commonly hits third world nations with governments incapable of fiscal / monetary discipline.

Conversely, fractional reserve banking presents another risk to any economy. Given that money supply is expanded through lending, and given that the economy of a nation then grows dependent on continued expansion of money supply, what happens if everyone starts to suddenly pay off their loans - or if many of them go bad all at once? This leads to the inverse of the multiplier effect, where each loan paid off / written off contracts the money supply - in other words, a deflation. As the money supply shrinks, each unit of currency actually gains purchasing power. This leads to an environment where citizens find they might be paid a lower salary in unit terms, yet purchasing power is not diminished. For those with outstanding loans, this presents a massive problem - they will be required to pay off old loans with dollars that are harder to come by.

The complex causes and affects of either scenario are very elaborate and beyond the scope of this note / subject, but it should not be reflexively concluded that a deflationary environment is bad for an economy, or that by default, central banks should intervene to prevent a deflation from taking place by inflating the currency further. It is the author's opinion that monetary inflation dislocates precious capital destructively (ala the dot com bubble in 1998-2000, the current housing bubble, and even the go-go 1920s), and that such deflations are the necessary restoration of economic order lost during these periods of irrational excess. For more information on that discussion, see the Austrian Theory of the Business Cycle[4].

I hate to say it, but you managed to merge both version in that text, you stated that the bank needs to keep 1 out of 10 dollars, only being able to lend 9 of them, and at the same time, stated that banks may lend out more than they receive, in you own words "an act later made legal by a change of the banking laws in the 1850s". You cant have both at the same time. --Striver 14:36, 24 October 2006 (UTC)
Actually, a single bank must keep 1 out of 10 deposited dollars but after the other 9 dollars are lent out, they get deposited in another bank. Now the second bank has its reserves increased and is also able to offer more loans. The aggregate affect is that more money is lent out by all banks than exists as the sum of dollar reserve deposits in all bank vaults. So both statements are true. The first is true with respect to a single bank, and the second is true with respect to the cascade of loans by all banks collectively that is triggered when the original amount was injected into the system. --riromero 17:20, 24 October 2006

Page re-write

I will take on the task of re-writing this page from the start. With the numerous edits that have been made it has become inherently self-contradictory and impossible to understand as a result, as many on this talk page have commented.

I should just add that my background is in banking operations and audit, so I do come from a fractional reserve background and agree with it in principal. I am also fully aware of the objections to the system, particularly those made by Murray Rothbard and, while I disagree with them, I can understand them and will incorporate them into the piece.

The point I will emphasise, however, is that fractional reserve is almost universal in developed country banking systems and so the objections to it should not predominate over Wikipedia conveying a full understanding of the system, with critisisms noted and analysed, but contained as critisisms.

The other point to make is that, while the US a large part of the financial global system, it is not the majority, so discussions of US policy, while useful for examples, should be in other, more relevant and focussed, articles. These will be linked to where appropriate.

Please hold off any further major edits until I have re-written this. I will have it completed by Saturday 28 October.

Andrew Reynolds 02:43, 25 October 2006 (UTC)

Whoops, over-running a bit - this is a monster. I will need a couple more days. Andrew 17:20, 28 October 2006 (UTC)

Too hard for the moment - too much to do elsewhere. The changes in the last few days have improved it in any case, so I will leave it for the moment. Apologies. Andrew 13:56, 30 October 2006 (UTC)

–

Just a general comment

Not to make your lives more difficult, but I think one of the dominant assumptions of the discussion on Fractional Reserve Banking needs to be called into question: the notion that fractional reserve banking leads to a multiplying effect. Apparently, the effect is generated in the following fashion: money gets deposited and then a hefty proportion of that deposit leaves the bank in the form of a loan; in time, this loan amount ends up returning to the banking system in the form of a deposit, and then the process is repeated with this incrementally smaller deposit, and so on. Use any ratio you want, but the one that seems current, here, is 1/10. Consequently, as the process repeats itself, the limit of factorial expansion approaches the value of the denominator of our ratio, which is 10. Thus a $100.00 deposit would become in time $1000.00, and a $1000.00 deposit would become in time $10,000.00, and so on. At least, this is what the ongoing discussion, here, seems to be asserting concerning the multiplying and inflationary effect of fractional reserve banking. I contend that this assumption is completely erroneous. Let me attempt to clarify: the slight of hand that the resoning in this discussion is playing on you lies in ignoring what happens to the moneys loaned, namely, that it enters into a process of exchange for goods and/or services, and that as such the circuit of its travels through the money system is thereby brought to a halt. To quote an email I sent to a friend of mine, "...the $900.00 that the bank loans out from the original $1000.00 deposit is not the same as the $900.00 that comes back to the banking system as a result of the first $900.00’s getting spent. The two are logically distinct categories; there is no identity at issue. Here is how the process actually transpires: I deposit $1000.00. The bank loans out $900.00 of that $1000.00. Yes, on deposit, in reserve, there remains only $100.00. But that isn’t my $100.00, it’s the bank’s. From my perspective, I still lay claim to my original $1000.00 plus, in addition, the interest that I will make by lending my money to the bank. Here, it is important to note that the substance of the transaction is not the travel that the tokens of money or bullion will make, but the contract that says that my account at the bank is worth $1000.00 and whatever interest the bank has agreed is mine for putting my cash in circulation as a loan, not to anybody, but to the bank itself. Now comes the bank’s loan: someone borrows $900.00 from the bank, which my original deposit underwrites. The money that I had taken out of circulation by depositing it was $1000.00; the money that is now going back into circulation is $900.00, for a net loss out of (not an increase in) the circulating money supply of $100.00. Now the $900.00 gets spent, that is, $900.00 worth of goods and/or services comes into the possession of the borrower. An exchange has taken place: $900.00 worth of real (because originally earned by my labour, which produced that much in goods and/or services) potential goods and services is swapped for an immediate rendering of actual goods and services. Nothing has been created or annihilated in this transaction. Still, there remains only $1000.00 of currency at issue. Now the seller who receives the $900.00 is not receiving "MY" original $900.00, but "HIS" $900.00 "IN EXCHANGE" for goods and/or services that he has just sold. Nothing has been created or annihilated here, only exchanged. Now the seller takes his cash to the bank, with the emphasis on "HIS CASH." Like me, he gets the same deal: the bank borrows his money and pays him interest, and the cycle is repeated. I still have my original $1000.00 plus interest; the first borrower still owes $900.00 plus interest to the bank, and holds $900.00’s worth of actual goods and/or services; and the seller who sold to the borrower got his $900.00 in exchange for goods and/or services rendered. Nothing has been created, here, and nothing has been lost. The money in circulation still matches its equivalence in goods and/or services actually in existence in the market, and the loan’s eventual repayment corresponds to goods and /or services as yet but eventually to be produced by the borrower. This, however, is not to say that money is not sometimes created out of nothing -- but that is perhaps for some future comment.

Norm, 15November 2006, 15h43 209.167.194.156 19:56, 15 November 2006 (UTC)


Comment

Yet the multiplier effect still applies to the above example. What will the seller do with the $900 he receives for his goods and/or services? He will likely deposit that money at some bank. Or to make it more complicated, he could deposit $100 which represents his profit, and spend $800 to restock his goods. The entity who restocked the original seller would receive $800 and deposit that in a bank. You can see that we can go on and on, but the result in aggregate is the same. $900 will be deposited by the seller(s) of the goods and/or services pf which $810 then can be loaned out again after the reserve requirement is met. The multiplier effect is not invalidated by the example above. —Preceding unsigned comment added by 76.90.10.255 (talk) 11:22, 26 November 2007 (UTC)

Videos-Documentries

I came across these two videos tonight. Very detailed history of the US Federal Reserve up to its current monetary system. (my own opinion: Slightly conspiracist. States in plain terms the threat of the potentially nefarious power to print money in private hands; private bodies other than the citizenry. However, very informative.)

http://video.google.com/videoplay?docid=-2665915773877500927 http://video.google.com/videoplay?docid=-8753934454816686947 —The preceding unsigned comment was added by Michael.gorham (talk • contribs) 02:27, 4 December 2006 (UTC).

Supposed loaning of demand deposits and national banks reserve accounts with the Fed

I paraphrase much of this from the book "Debt Virus: A Compelling Solution to the World's Debt Problems" by Jacques S. Jaikaran. The most common misconception, that I still observe to be present here in this discussion, is that a typical bank loans out its customers' deposits. This is simply not true. Let's say a member bank of the Federal Reserve System (any national bank, for example Bank of America) has never made a loan. They collect ten $10,000 USD deposits for a total of $100,000. Pretend at this moment that the bank has a zero balanced account open with the Federal Reserve. They can take the $100,000, and deposit it into their account with the Federal Reserve. This is now their "reserve" amount. At a 1/10 minimum reserve level, I can walk into this bank, request a loan for $1,000,000, and receive it. The one million is created "out of thin air" and added to the M1, which is the transactional liquid money supply of U.S. dollars. If someone else then walked into the bank for a $10,000 loan, the bank, without another $1,000 deposit on hand, could do one of the following:

1. Sell assets (including U.S. bonds) to gain the $1,000 and deposit this into their reserve account 2. Borrow $1,000 from another bank or lending institution and deposit this into their reserve account. 3. Borrow $1,000 directly from the Federal Reserve at the discount rate (5.25% in April 2007). 4. Deny the potential borrower their funds.

Going back to the one million dollar loan; as I pay back the principle that money is REMOVED from the M1. The bank keeps the interest on this loan. So, without inflation in the picture, after paying back on a zero percent interest rate loan the money supply remains the same. The problem occurs at the macroeconomic level with interest. If the bank chooses option 3, or even the governments of the U.S. (both state and federal) choose to borrow money from the Federal Reserve, this money is made out of thin air by the Fed. The fed does NOT debit any account; they're making money out of nothing and lending it at interest.

The problem comes in the fact that if there are $1 Billion USD in existence (the [Money_supply#United_States M3] ) and ALL of this billion is created as debt at 10% interest to the Fed then where in the world can $1.1 Billion come from at the end of the year? There are, of course, only two options, borrow another $100 Million from the Fed (again, at interest) or default on the loan. Dr. Jaikaran contends that since the Fed will not introduce debt-free money into the economy, except small amounts used to pay its own expenses, not even to the U.S. government by which it obtained its charter to operate, that this is the root cause of the boom-bust economic cycle of expansion, inflation, recession, and depression (repeat ad infinium). Another issue to think about is "who owes the Federal Reserve." They are a privately held corportation which sells shares of stock. To whom do they sell these shares? The member banks. The U.S. government usually orders most of the Fed's yearly net income to be given back to congress; most not all. So, after our national banks accure interest on money that cost them little to nothing (just the cost of processing a loan application, which is usually a fee anyway) to create from zero raw resources, and after the national banks charge other fees to their customers, they also end up getting a share of the net income generated by what? The Fed loaning a zero resource, zero expense, intrinsically valueless object at interest to the national banks and the government (i.e. the tax payers; the Fed extends credit to the U.S. government based on the security that they can pay back the loan because they collect revenue from tax payers). So the larger national banks, those who hold more of the Fed's stock, recoupe the interest they lost in borrowing from the Fed at the discount rate, AND get a little extra by taking some of the interest that the governments owe.

That ends the paraphrase. Now, can anyone validate that banks actually loan out customer deposits? This tends to not make sense to me. How would the money supply grow by such a large amount if this were the case? In other words, if the only way the M1 grew was by the Fed giving loans to the member banks, this could not explain the rapid, huge increases in the M1. Not only that, but it doesn't make sense by the fact that the Fed destroys the principle that the member banks and the government pay back. Basically, if only the Fed could create money out of thin air, then the M3 money supply would be:

M3 = (The amount of M3 on hand at the end of 1913) + (the principle owed by the member banks) + (the principle owed by the governments of the U.S. and any foreign lenders).

That amount is too small to be true...

--Blue666man 20:46, 19 April 2007 (UTC) on 19 April 2007.

Rothbard on Fractional Reserves

The addition of Murray Rothbard's assertion that fractional reserve banking is fraudulent and inflationary completes the degradation and corruption of this article. Rothbard and his followers see no difference between fractional reserve banking and counterfeiting, despite the fact that the bank puts its name on the money it issues, recognizes that money as its liability, holds assets against that money, and stands ready to buy back that money with its own assets.

All bank notes are redeemable in lawful money on demand

It is irrelevant that the bank recognizes the money as a liability if it doesn't have the funds to meet the obligation.


A bank might issue $100 in a checking account, against which it holds $25 in greenbacks and $75 in bonds. The bank can use the $75 in bonds to buy back $75 of its checking account dollars. Then it will have $25 in greenbacks backing $25 in the checking account. The bank has $25+$75=$100 in funds backing $100 in checking account dollars. Furthermore, customers voluntarily do business with the bank, knowing that it operates on fractional reserves, and knowing this means that sometimes the bank won't have enough cash on hand. A counterfeiter, on the other hand, issues $100, against which he holds nothing. In spite of this, Rothbard's followers stubbornly, foolishly, and fanatically insist that fractional reserve banking is tantamount to counterfeiting.

Fractional lending is a powerful tool

A hammer can drive in nails or cause your thumb to throb. Counterfeiting is ancient, some of the first artifacts of money are fakes. Bonds are nothing but formal IOUs. Fractional lending --whether it be in gold, dollars, sheep, or salt-- means that an economy has a greater value in IOUs than the value of the property they represent. That is why it is called FRACTIONal reserve banking. These are the facts, and believe or not the Earth does revolve around the Sun. It seems Murray Rothbard's argument against the practice creating money out of nothing is rooted in simple economics.

If I gave you an IOU for $50000 would you accept it, probably not from a stranger. However, just to continue this line of thought, lets say that you do accept it. A few weeks pass and you want the dollars, well as it turns out, I do not have, nor have I ever had the money. You would be angry. What just happened was fraud. If anyone did this it would still be illegal, and banks are no different. If banks had the property assets to back ALL their liabilities, no one would care that worthless paper was the medium of trade. If the government than gave the banks a line of credit to cover emergency government spending (here is where the bonds come it), few would care.

What makes it "counterfeiting" is that lenders, whether they are banks or not, create notes (IOUs) in the form of government issue fiat currency in excess of the net total of all the property they possess, including government bonds. This is counterfeiting, keep in mind that governments have always been a prime counterfeiter of money; whether it was debasing the coins, or printing notes like they were going out of season. Just because the government wants to spend its self into an abyss of debt and lets the lenders off the hook, does not magically change the economics. I am not supporting any point of view, just listing the facts. It is a fact that fractional-reserve banking is, for lack of a better word, fraud.

All that being said I do not blame the banks. Accrual capitalistic economics is, not in it's self evil, just powerful. N0 D1C4 16:12, 2 September 2007 (UTC)


Two 'views' of fractional reserve banking are not equivalent

The two "views" of fractional reserve banking are not equivalent. [true, rothbard is correct] If person A deposits $1000 into an account at bank A, then bank A can loan out up to $980 of that (with a 2% reserve requirement) to person B. Person B is taking the loan out to buy something, not to just have extra cash laying around. So person B gives there money to person C for goods and services. Person C wants to deposit his money, but in order for the two "views" of fractional reserve banking to be equivalent, person C would have to deposit his money into bank A. Person C might find that bank A gives too low an interest rate on his deposit, or he might find that bank A has excessive fees, and person C could very well decide to put his money on deposit with bank B. [but there is nothing to stop c putting it in bank a...] So what? Bank A is still competing for person C's deposit with other banks, its really not relevant what the source of person C's money is. which is why bank a can use the money issued by itself as a deposit for more loans

The amount of deposits that a bank has is related to their ability to compete in the market for depositors, not some magical ability to conjure up money. For every credit there is an equal an opposite debt, you can't just create credit out of nothing [if we all paid back our debts what would happen to the money supply?]. That won't happen. There isn't enough money for us to pay back all our debts. ok, if we paid back some of our debts what would happen to the money supply? For the federal reserve to make money they have to exchange that money for federal bonds for which they receive no net payment in interest. And when that money is created, it goes into the account of the person who deposited the bond, not the bank itself. [the money creation part happens when the bank starts lending based on that bond...] Money is also created by the purchase of bonds by the Fed. yes, but not as much as by the member banks

If you want a real financial catastrophe lets get back on the gold standard. Imagine years and years of deflation, what do you think that will do to debtors? Inflation is good for people who owe money, [and bad for everyone else] bad for people who are owed money [unless you are a bank who has borrowed the money]. If you'd truly like to hand the country to the robber barons then returning to the gold standard is the way to go. [you can have fractional-reserve-banking with a gold standard and full-reserve banking without a gold standard] And if you don't think loans can be a good thing, try to start a business bigger than a lemonade stand without one. [perhaps businesses should pay the market rate instead of being subsidised by the state]

I'm not quite sure what you're getting at there. When a person takes out a loan to start a business they generally get the loan from a private bank or investor, not the state. we are subsidising low rates with the reduced purchasing power of the dollar

And fractional-reserve banking with the gold standard reduces to the same thing - you're still going to end up with their being more money than there is gold to back it. If I deposit $1000 worth of gold in the bank, then the bank loans lout $900 worth of gold to a customer who then spends the money, both myself and the person who receives the money from the loanee will have a certificate representing a claim on $900 of that gold. With a 10% reserve, there could be as many as 10 times as many claims on the gold as there is actual gold. Fiat money just takes this to the next logical step - get rid of the gold. It makes the system a lot more flexible, and if you want to keep your money saved in gold or other things with intrinsic value, you're still quite free to do that. yes, but you can get rid of fractional reserve banking without having a gold standard

At least one of the editors of the 'fractional reserve' article has based his contribution on conspiracy theory mythology (as opposed to the conspiracy theories which really are true) [why does there need to be a conspiracy?]

User:SpidermanTUba 01:51, 20 September 2007 (UTC)

Disputed

I have a dispute tag because the article contains two different views that make the article contradict it self in numerous of ways.

In the correct view the first banks had a reserve in gold. For every bar of gold the bank holds the bank could write a bank note for the value of that gold and lend it to loan takers and receiving interest. This is a full reserve system. The bank can only lend out the save amount of bank notes as it has in gold.

Fractional reserve banking is when the bank gives out more banknotes than it has reserves in gold. This causes a multiplier of circulated capital and a inflation. With the hope that all the loaner do not cancel the loans at the same time and tries to get the gold back. This would cause a bank run. The bank don not have gold for all customers.

100% backing means that every bank note has a 100% backing in gold (or other value)

10% backing means that 10% of the bank note has backing in gold. The other 90% is fiat money and has no backing. this is fractional reserve banking.

The wrong view try to imply that it the bank gets $10 in deposits it can gives out $9 in loans. It is impossible to create inflation using this version: The bank actually creates deflation as it keeps money from circulation. Under this model it is impossible to use full reserve banking (100% reserves). Sense that would mean that the bank holds $10 of the $10 in deposits and have $0 dollars to use for loans and thus cannot operate at all. (This is obvious nonces)

This article is a mix of both models resulting in contradictory statements. The history part is partly correct, but most of the other parts is totally wrong.

Sources:

—Crash site 23:01, 9 September 2006 (UTC)

I don't think you're quite correct in saying that one one view is right and one view is wrong, Crash site: both are correct views of quite-different phenomena. However, though what you present I finally grasp why the confusion exits. It's all in the names, not the concepts. What you present here is an example of fractional-reserve banking, preceded by an example of "fractional-reserve money" (I'm not sure what the real name for that is, which is why I too had confused it with factional-reserve banking).
Bottom line: it's the difference between issuing paper money with less metal/etc. backing it than the face value, and loaning money multiple times resulting in a multiplication of total ledger amounts. —AltiusBimm 18:19, 30 November 2007 (UTC)

When comparing fractional to full reserve banking, it is not kept clear that a reserve is the money kept on-hand for withdrawals from demand-deposit accounts (checking, savings), while the bank may(will) still have additional assets to lend/invest under either model (CDs for example, and the bank's own money). Any profit from fees & interest goes into this second set of assets. My POV deals strictly with the local bank down the street, and not the high-level banks that only deal with other banks (and countries). The "popular myth" fractional reserve is what I was taught in both high school and Econ101, so I'd like to see where the bank gets the money to create $900 from a $100 deposit. 172.134.2.176 20:54, 19 September 2006 (UTC)


It is indeed strange that there is two different views held by high ranking economics. But there is a reason. If the bank could create money this would be a thing the population would not like and thus the population does not now it. This is how Werner explains it.

The creation of the $900 is actually only a number in a computer. The physical money and the didgital is two separate things. The bank creates a new credit of $900 and that money is then deleted after the loaning is completed.

--Crash site 00:42, 27 September 2006 (UTC)

Hi there,

I have no knowledge of this area, but just looking at the logic...

'The wrong view try to imply that it the bank gets $10 in deposits it can gives out $9 in loans. It is impossible to create inflation using this version: The bank actually creates deflation as it keeps money from circulation. Under this model it is impossible to use full reserve banking (100% reserves). Sense that would mean that the bank holds $10 of the $10 in deposits and have $0 dollars to use for loans and thus cannot operate at all. (This is obvious nonces)'

Can I just ask what happened to the original deposit? You seem to imply that the bank burns the deposit when it lends out the money. But the bank still owes money to the depositor. Therefore under full reserve banking, you the depositor would retain their holdings at the bank and money supply would remain unchanged.

That seems to make sense for the simple 'guy saves money/ guy borrows money' scenario. However if the money is not lent out, then it may still be deflationary. As for what happens with the Fed, I don't know, you might be right. How would money in circulation increase if the banks receive money from the Fed but can't lend any of it?

Needless to say if the Fed prints money, gives it to the bank and allows the bank to loan out ANY of it, then money has definitely been released into the system and this increases the money supply, so long as the rate of release is sufficiently high.

I am likely to be wrong since this is all off the top of my head.

Vandalism and Mindless Trivial Edits

Please edit from this version carefully. This is a very clear version that has recently been altered/vandalized. Removing the first section (with graphic) in particular is destructive as this first section is one of the best, clearest explanations of frb in existence. —Preceding unsigned comment added by 210.87.15.130 (talk) 07:27, 16 December 2007 (UTC)

Define "Reserves"! (or "banking" for that matter)

Some people who have commented on Fractional Reserve Banking seem to be under the impression that "reserves" simply refers to "money supply reserves" that a bank keeps to be able to pay back money it has borrowed from its costumers under a loan banking system. If that were the case, nobody could disagree with it. What they forget is that even fiat money is backed by something, namely the so-called "reserves", which are NOT a reserve of money supply, but its monetary basis (called "high-powered money" in the article - which doesn't have to be gold, it just has to be "different" money; it can be, and usually is, itself fiat money). When critics of Fractional Reserve Banking talk about "reserves", they mean the monetary basis for the money supply under what is essentially a deposit banking system. Fractional Reserve Banking is fraudulent, because it backs up an amount of money in the money supply with a fraction of that amount in the monetary basis.

Another important source of confusion is that many people think the money circulation starts with them: "I deposit $1000.00." However, as is clearly stated in the article: "A bank note is always an evidence of debt and none may be in the hands of a depositor until someone has written a check for cash to a lending institution to obtain them." In other words, the process starts with the bank: The bank creates(!) $1000.00. In fact, it creates as much money as it is allowed to do, being limited only by what has misleadingly been called "the Reserve Requirement". It doesn't need to print the money, exactly for the reason that only a fraction of it (a totally unrelated fraction) is ever needed in cash. So the answer to the question "Where does the bank get the money from to increase the money supply?" is simply this: It creates it out of thin air with the flick of a pen. Fiat money - let there be money.

Dngrs 10:58, 3 September 2007 (UTC)

Sigh. Anybody can create "money", inasmuch as money is defined by how it is used: as a representation of value. If my services are in well-known and constant demand, I can create money by writing a "Harris-note" which is an IOU for one hour of my time. If that thing trades on the open market for a certain value in other goods and services (gold, silver, whatever), then I've managed to create money out of thin air, as it were, just by my promise, my well known skill, my good reputation, and certain assuptions related to my health (redeemability of my credit-money).

Now, when I go down to the bank and ask for enough credit to buy a house, and they give it to me, I think everybody agrees that money is created in the act. But exactly at what point is the new money created? If I wrote out a wheelbarrow of "Harris-notes" and the bank took them in exchange for a house which (for some reason or another) the bank had title to, then there'd be no question that *I* had created the new money, and managed to buy a house with it! Or that the money had been created by myself and the bank in a joint act. Almost like counterfeiting, except that I promise to replace the funny-money with good money, later (i the meantime the bank keeps the funnymoney in the vault, along with my deed).

Of course, instead, in the real world, the bank saves me all of this effort, by pretending that I did all that work: instead of the wheelbarrow of Harris-notes, the bank takes a stack of signed documents from me which are basically equivalent, and promise a similar repayment and redemption of the Harris-notes over coming years, at a given rate, in terms acceptable to the bank. Again, the bank will take silver, gold, federal reserve notes, or whatever I can trade my personal FUTURE time for. But it's my FUTURE time that I'm agreeing to trade, make no mistake. The bank can't demand this value or redemtion from me, at more than a certain rate. So it's clear that it's still "Harris-notes" that are the money being created in the act, even if I don't actually create them one-by-one. It's MY future work that I'm mortgaging, even though it's secured by the house, in case I violate the promise to pay. In the case of a credit card, we don't even have a house, and the bank still gives me money in exchange for a promise.

Now, for the people screaming conspiracy and fraud, so far as I can tell, they're just folks who've looked at the banks and noticed that they don't have enough value in titles to real property or other kinds of money (gold, federal reserve notes, whatever) to actually secure all the money which has been created in the act of lending. In other words, they hold a lot of Harris-notes and Joe-Blow notes and so on from all kinds of people, and have so many, that they'd be in all kinds of hell if all these people suddenly dropped dead tomorrow. Well, yes. That's because part of money-creation (credit-money, here, obviously) involves IOU's, which involve promises to work tomorrow if you only will give me gold or silver today. There are a lot of people out there who've mortaged large parts of their future lives and time, and the banks have allowed them to do this without any security at ALL (all that credit card debt, for example). There needs to be a system to allow this, and to spread the risk around, so that the various IOU Joe-notes and Harris-notes, etc, are fungable and usable as actual money right now, by Joes and Harrises who need a lot of money for a big expense (like buying a house or starting a business). That's essentially what banks DO for a living. Fractional reserves are the CONSEQUENCE of that. If they didn't exist, the urge for people to write IOU's on their future labor and have a place to exchange them, would CREATE fractional-reserve banks. SBHarris 23:53, 7 December 2007 (UTC)


Why devalue the dollar to subsidise debt?
Somebody has to. Anytime anybody loans a dollar against somebody's future work (extends credit), the dollar has been devalued to the extent that there is risk the future work will not occur. Do you want to stop extending credit to people? And if you do, what units of value are you going to do it WITH? It's credit in terms of SOMETHING valuable, or else it's not credit. If you loan somebody gold that you have on deposit for somebody else, you thereby somewhat devalue gold. That's the whole point of interest-- do you think the gold just mysteriously should grow it, by sitting down there in the dark like mushrooms? There's nothing special about paper money, as somebody above explained. It's just a standin for anything of value, from gold to somebody's promise to pay gold, to somebody's promise to pay gold in the future, to somebody's promise to do work in the future. SBHarris 01:36, 9 December 2007 (UTC)
My position is that a full-reserve system would be preferable. It would have to be a fiat currency because it is too late to go back to a gold standard (the government don't have enough gold for that). Under a full-reserve system you would still be able to extend credit and you would be able to charge interest. The problem with the fractional-reserve system is that the currency is devalued every time a loan is made (permanently if the loan defaults). I'm not sure I agree with your statement that "If you loan somebody gold that you have on deposit for somebody else, you thereby somewhat devalue gold" surely you devalue the gold receipts not the gold?
Well, yes and no. Suppose I have 100 oz of gold in the vault and 100 certificates which we all agree stand for it (are redeemable for it anytime). Now, I also have a gold mine, and observe that I expect to have 200 oz of gold by next month, and propose to issue 200 certificates, with the proviso for the second 100 that you can't redeem them until next month. However, to sweeten the deal, I'll give you 100 of them for 90 oz worth of your goods and services-- thus in effect making you my creditor. Even though I'm the bank, you understand. And have the gold. And let's say it all works out and you (or somebody else you gave them to) comes in, in a month, and gives me the extra 100 certificates and get your 100 oz of freshly mined gold, and we're both happy. Now, in the meantime, while those extra "gold bond" or "gold-money-market" certificates were circulating, have I devalued the gold I hold? Or have you? We both understood we were issuing "money" against goods and services that didn't exist yet, because we hadn't done the work. So was this fraud? Because it is pretty much fractional reserve banking. Everybody knows what's going on. In fact, suppose I don't even put a withdrawal restriction on the gold you can redeem, but just say you can get it anytime-- and if everybody comes in to get their gold at once, I have deal with the government that if there's a run on my gold reserves, I can borrow 100 oz from THEM for a month, until I can replace it from my goldmine. How, now? SBHarris 01:29, 10 December 2007 (UTC)
When I come to redeem my gold bond am I entitled to ask for actual gold or are more gold certificates legal tender for all debts, public and private?
I accept the argument is a fair one, the situation you describe with the bank being something like a gold mine does reflect the reality of banking. The difference (apart from substituting "work" with gold) is that the bank is in debt not the customer. But it makes a difference if the customer can demand actual gold. Otherwise we have no choice but to take the bank's credit.
Yes, or the central bank's credit, which is the credit of the country, if it's a "legal tender" note. As you may know, there are some countries like Scotland that don't even have any fiat money (legal tender). They function entirely on banknote credit money. In the US the situation is interesting. For just about a century, from the early civil war to 1963 when the US went off the silver standard, two types of notes circulated side by side. Before the Federal Reserve existed, a bunch of federal government-backed banks issued notes backed by US bonds (ie, by the US government's promise to pay, basically like a T-bill). These US banknotes were the first "greenbacks" and were declared legal tender in 1862 or so. They were unsecured by specie, so were not representative money. Alongside them, however, circulated the gold certificates and then the silver certificates that were that type of money, and that finally disappeared and were entirely replaced by the federal reserve notes after 1964. However, during that century, if you had one kind of note you could always find somebody willling to trade you for the other kind, so a century of side-by-side circulation failed in having "bad money drive out good". Or else the US legal tender notes were seen to be just as good, even if not specie-backed. A big government's power and promise to tax and pay is, in a sense, even more reliable than a bank's promise to give you gold out of their vault. The bank can be robbed or go out of buisiness. Less likely so a powerful country like the US. US federal reserve notes are actually, if you think about it, backed not by gold, but by plutonium. I'm only half kidding. The Commies are right that we're plutocrats. But not in the way they think. SBHarris 22:38, 24 December 2007 (UTC)

Merge

Should Debt-based monetary system be merged here? -- Kendrick7talk 03:39, 3 January 2008 (UTC)

There's a lot of the same conspiracy stuff in both. For example, the entire article above calls credit money (i.e., bank notes that aren't representative money) by the nonstandard and unlinked term "debt money". Sort of like pessimists insisting a thing be called "half-empty". SBHarris 17:35, 5 January 2008 (UTC)

How would a bank loan money to consumers and businesses if it had to keep everything in reserve?

I think the article is ruined beyond salvation, so I will not even attempt to clean it up. I got a question for the conspiracy theorists, Ron Paul fans and proponents of full-reserve banking: How would a bank loan money to consumers and businesses if it had to keep everything in reserve? As for the article, it would probably be better off being blank or linking to a Google search on the topic. Ekonomics geek (talk) 20:19, 5 January 2008 (UTC)

If the bank is unable to make the loan itself, it would ask depositors if they wished to lend money to the business. Orangedolphin (talk) 19:42, 8 January 2008 (UTC)
The banks in a "full-reserve" system back all loans up by "hard" assets such as gold. The reserves for "full-reserve" banking are different than the reserves for "fractional-reserve" banking. I think the proponents of fractional-reserve banking wish to return to the Gold Standard, which would be financial suicide. --EGeek (talk) 20:22, 5 January 2008 (UTC)
I think you are confused about both of these. Fractional-reserve banking: you give the bank $10 for safe-keeping, it loans $9 to someone else at interest. Full-reserve banking: you give the bank $10, it's required to hold all of it. Gold standard is a somewhat orthogonal issue, but modern banking systems are fractional-reserve and not on gold standard. Ekonomics geek (talk) 23:24, 5 January 2008 (UTC)
The first sentence in the Full-reserve banking article does a little better explaining this, but the source is not an easy read to most people. I'll try to find something a little better. --EGeek (talk) 03:18, 6 January 2008 (UTC)
Ekonomicsgeek - don't give on wikipedia just yet. I've been trying to learn how this stuff works and I believe I can contribute to this article in an objective way that also includes sources to explain things. Wikipedia is still relatively young and I think many things throughout wikipedia will improve as time passes. Analoguni (talk) 01:01, 6 January 2008 (UTC)
Banks are supposed to earn revenues through service fees and investment returns. Once these revenues are the bank's priopriety, it can lend it at whoever it wishes. --Childhood's End (talk) 19:43, 11 January 2008 (UTC)

Graph Showing Expansion of Money Supply

Zenwhat, why do you want to keep the graph that shows an expansion of the M1 money supply? The data that supports the graph was deleted due to WP:NOR violation. If we keep it, I suggest moving it to the "A bank can lend the money immediately" section. --EGeek (talk) 20:36, 5 January 2008 (UTC)

the table isn't original work. I gave the source for it. It's from the New York regional reserve bank of the US Federal Reserve System. See http://en.wikipedia.org/wiki/Talk:Fractional-reserve_banking#here_is_the_source_for_the_table
"Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity." This is from http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html Analoguni (talk) 00:56, 6 January 2008 (UTC)
Can we move it to that section then? It is out of place at the top of the page. --EGeek (talk) 02:46, 6 January 2008 (UTC)
Sure. Zenwhat (talk) 03:56, 7 January 2008 (UTC)
Actually, wait. I was wrong. The chart isn't using the same numbers. But yes, as I said, it reflects mainstream economics. It's called the "money multiplier." See Money_creation#Money_Multiplier. Zenwhat (talk) 03:58, 7 January 2008 (UTC)
Then a link to Money_creation#Money_Multiplier might be more efficient for the article. --EGeek (talk) 04:26, 7 January 2008 (UTC)

I have noticed that the "How it Works" section is evolving into a duplicate of the money creation article. Does anyone reject to updating the money creation article with this information, since its well sourced and more detailed, and provide a link to money creation? --EGeek (talk) 20:25, 9 January 2008 (UTC)

"Lending more than you have is fraud"

Is there some way to put a stop to this nonsense? A bank does not lend more than it "has." It receives deposits, the deposit is lent out, and this in no way constitutes fraud. This is absurd. I think someone would have noticed if it somehow constituted fraud.--Gregalton (talk) 19:20, 26 December 2007 (UTC)

First, that is a common misconception, that banks lend out money from there deposits. This simply not the case; their deposits do not go anywhere. Banks do not lend money, they "create" it out of the borrowers promise to repay, then charge interest to the borrower on the "money" they just "created" a nanosecond ago. The process has been called the mandrake method. It is essentially "accrual accounting" where future revenue is credited as payed, even before the loan is repaid.
Second, banks are permitted to create "check book" money usually at a 9:1 ratio of deposits.
Third, the debt created can be converted to Federal Reserve Notes. Basically swapping one IOU for a Government debt IOU.
Fourth, because banks are able to re-lend out the interest and due to the multiplier effect, a loan at 12% interest actually takes in 120% of the principle.
Lastly, what banks do is literally government sanctioned counterfeiting; the ultimate result is that the inflated currency ALWAYS becomes worthless.

N0 D1C4 (talk) 02:36, 27 December 2007 (UTC)

Your last sentence makes the point nicely, thanks: both points are just opinions w/o references, as was the fraud allegation. Neither have a place in the article (and thank you for removing it).--Gregalton (talk) 05:45, 27 December 2007 (UTC)
OK, what are we agreeing or disagreeing on here? There is one fact that I'd like to know, and if this entire article was replaced by this sole fact, then the article would be better for it: How much can a bank lend out as a proportion of its savings deposits? Answer accompanied by a reputable online reference showing what this ratio is in a major western nation (USA, UK, etc...), please. Gantlord (talk) 19:04, 3 January 2008 (UTC)
Maybe this is what I'm looking for... http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html Gantlord (talk) 19:24, 3 January 2008 (UTC)
Yes, that is what you're looking for. However, I have heard claims that banks are allowed to immediately lend out at a 1:9 ratio and I've been looking for a source but haven't found one yet. People say that a bank can do this immediately because it is theoretically possible for one person to make a $100 deposit, then get a loan for $90, then deposit that $90 into the bank, then get another loan for $81. Since it is theoretically possible for a person to do that, some people claim that the bank can just start off with the 1:9 ratio immediately and skip all those steps in between. Like I said, I've been looking for a source to confirm this but haven't found one yet. Analoguni (talk) 01:09, 6 January 2008 (UTC)
I suppose a bank could do that to create 10 times their money but why would they do it? At that point they would have exhausted their ability to loan. They would only have 10% in reserves and could no longer loan more money. The bank absolutely can't just loan 10 times the assets they have. If they did your little trick, they would have to have a willing borrower who took the loans but also deposited those back in the bank. Why would the borrower do that? In the end neither party has an advantage. I can loan myself $100 and deposit that back into my fictitious bank and do it again and again. I could claim to have a billion + 100 dollars in deposits and a billion dollars in liabilities. What would I gain from it? I couldn't turn around and loan a billion to a third party167.1.150.177 (talk) 15:27, 24 January 2008 (UTC)
 —Preceding unsigned comment added by 167.1.150.177 (talk) 15:23, 24 January 2008 (UTC)

N0 D1C4, the claim that "banks lend money from their deposits" is mainstream economics. Please, do not violate WP:FRINGE amd WP:NOR, even if you believe such fringe theories are correct. Zenwhat (talk) 04:49, 5 January 2008 (UTC)

Given "bank credit" can be exchanged for physical currency at any bank, why would it matter if the issuing bank has deposits (the recipient can always go to another bank)? Orangedolphin (talk) 19:40, 8 January 2008 (UTC)
Deposits (unlike reserves) are irrelevant to a bank's ability to make loans because deposits are not a loan to the bank. Orangedolphin (talk) 18:08, 11 January 2008 (UTC)
So all those banks that spend advertising dollars to persuade people to deposit money with them are just burning money then? That money has to come from somewhere. It mostly comes from deposits because they are the cheapest. Money from other banks (including the central bank) are more expensive. --EGeek (talk) 18:46, 11 January 2008 (UTC)
Fractional-reserve banking enables banks to increase the money supply. Orangedolphin (talk) 19:14, 11 January 2008 (UTC)
Fractional-reserve banking enables money creation through loans. The bank can not create more money unless it has money to loan. It must use money from deposits or loans from other banks (commerical bank or central bank). The bank must pay interest on loans from other banks; therefore, banks prefer deposits because they are the cheaper. --EGeek (talk) 01:46, 12 January 2008 (UTC)
The point about fractional-reserve banking is that the bank can lend more than it has borrowed. Otherwise it would be full-reserve banking. Orangedolphin (talk) 16:55, 12 January 2008 (UTC)
That is incorrect. A bank can only lend what it has; however, it can and does lend more than it holds in reserves. The only requirement of full-reserve banking is that it hold 100% reserves. Depending only banking regulations, the bank can manage deposits and loans to hold more than 100% reserves; thus, enabling the bank to lend money out. I thought this was pretty clear in both the fractional-reserve banking and full-reserve banking articles. Please let me know if this is not the case. --EGeek (talk) 18:28, 12 January 2008 (UTC)
I'm having trouble understanding the distinction you make between deposits and reserves. When I take money out of the bank is it deposits or reserves? Orangedolphin (talk) 18:49, 12 January 2008 (UTC)
When you make a withdraw from a bank, you are withdrawing your deposits. Since the liability of the bank to pay those deposits also decrease in the amount you withdraw, the required reserves will decrease by the current reserve ratio (i.e. 10%). --EGeek (talk) 19:33, 12 January 2008 (UTC)
Let's say a bank has a reserve ratio of 10% and the required ratio is 0%. If the bank makes a new loan, it must first borrow the money to do so. So, given that the bank has simultaneously loaned and borrowed the same amount is the reserve ratio affected? Orangedolphin (talk) 21:35, 12 January 2008 (UTC)
At that point in time, the capital inflow (money coming in) equals the capital outflow (money going out); thus, the reserve ratio is unaffected. Due to the risks of performing this financial maneuver , a higher than normal interest rate will be demanded from the borrower; therefore, due to competitive forces, banks desire the use of deposits instead of bank loans.
At the accountant's point of view, the loan coming in is both a cash asset and a liability. When the bank issues the loan, the cash asset becomes a non-cash asset in a form of "accounts receivable". The reserve assets or the deposit liability are not involved in this transaction. --EGeek (talk) 22:48, 12 January 2008 (UTC)
So when a bank makes a loan the reserve ratio is unaffected? Orangedolphin (talk) 13:49, 13 January 2008 (UTC)
If the bank uses deposits to make the loan, then no. --EGeek (talk) 19:31, 13 January 2008 (UTC)
What happens to the loan when the customer wants their deposits back? Orangedolphin (talk) 21:41, 13 January 2008 (UTC)
Nothing. Current deposits and reserves do not effect loans already issued. --EGeek (talk) 23:12, 13 January 2008 (UTC)
Where does the money come from to make the loan if the deposits have been withdrawn? Orangedolphin (talk) 15:51, 14 January 2008 (UTC)
It comes from the not-yet-withdrawn deposits or from the bank's other liquidities. The banks are not restrained to use only deposited money to make loans, but deposits are among, if not the most profitable source due to their high NIP. --Childhood's End (talk) 16:11, 14 January 2008 (UTC)
Assuming the not-yet-withdrawn deposits and the bank's other liquidities are already committed to bank loans, where does the money come from to make the loan if the relevant deposits have been withdrawn? Orangedolphin (talk) 16:44, 14 January 2008 (UTC)
I would guess that this is the kind of situation that the rules about bank reserves seek to avoid. The loaned money is already committed so it need not come from somewhere at this point. Problem would be with meeting the withdrawal demands. The banks use liquidity policies to manage their liquidites levels in order to make sure that they can always meet their short-term obligations such as deposit withdrawals, but liquidity crisis can happen and in the worst cases, the bank may need to sell assets or open lines of credit at other institutions such as the central bank. Techically, at this point, there would be intense public relations management to avoid a run on the bank, which would make the crisis worst, and regulatory agencies will be involved in an attempt to avoid deposit insurance payments and more importantly, loss of public confidence in the system. --Childhood's End (talk) 18:39, 14 January 2008 (UTC)
If customers are not able to withdraw their money because it has been used in loans, this would be a version of full-reserve banking (where deposits have been used in making loans...) not fractional-reserve banking. Orangedolphin (talk) 00:45, 21 January 2008 (UTC)
No. Deposits can be used in each. The only difference is that full-reserve banking requires that the bank hold at least 100% of the deposits, while fractional-reserve banking only requires a fractional amount such as 10%. --EGeek (talk) 05:53, 21 January 2008 (UTC)
I don't understand this. Could you explain a bit more? Orangedolphin (talk) 01:21, 23 January 2008 (UTC)
No. It would actually be the absolute opposite of full-reserve banking. In such a system, deposits are always fully secured and can always be withdrawned exactly because the bank must hold 100% reserves. The bank could only make loans with non-deposit liquidities. --Childhood's End (talk) 14:25, 21 January 2008 (UTC)
Why would depositors be unable to withdraw their funds (deposits are not a loan to the bank)? Orangedolphin (talk) 01:21, 23 January 2008 (UTC)
The bank cannot lend money it does not have; therefore, if the reserve ratio is under the required amount, then the bank can not issue another loan unless it borrows money from another bank. In the case of deposit withdraw that causes the reserve ratio to drop under the required amount, the bank would also need to borrow money from another bank. As more money is required(demanded) in the system, interest rates raise and slow down the number of loans issued. --EGeek (talk) 19:58, 14 January 2008 (UTC)
So the ability to make a withdrawal would be contingent on the bank's ability to borrow money from elsewhere? Orangedolphin (talk) 00:45, 21 January 2008 (UTC)
No. The bank holds the liability; therefore, if a depositor wants to withdraw, the bank is obligated to withdraw the deposits. The bank decides how to keep reserves on hand. --EGeek (talk) 06:02, 21 January 2008 (UTC)
But what if the bank has loaned the money to a customer? How can the bank return the money to the depositor, unless they ask for the loan back? Orangedolphin (talk) 01:21, 23 January 2008 (UTC)
So if a bank is in breach of the reserve limits it needs to borrow more money? Orangedolphin (talk) 19:58, 13 January 2008 (UTC)
It needs more money to bring their reserves up to the required ratio, so it might have to get a loan from another bank if it can not receive more from deposits. --EGeek (talk) 20:51, 13 January 2008 (UTC)
Uh, what makes you think so? Fed banks lend money to other banks at prime rate, and the money they lend is backed by nothing other than US treasury securities. Nobody has deposited ANYTHING to back it. It's backed by the power of the US government to tax you IN THE FUTURE. That's it. SBHarris 17:40, 5 January 2008 (UTC)
Deposits most emphatically are loans to (liabilities of) the bank. From its customers. See bank deposit: "the term deposit is actually used by the banking industry in financial statements to describe the liability owed by the bank to its depositor, and not the funds (whether cash or checks) themselves, which are shown an asset of the bank." (N.B. Yes, there is a distinction between a loan to the bank and a deposit, depending on the legal system, but the economic system is a loan).--Gregalton (talk) 18:19, 11 January 2008 (UTC)
If a bank lends 90% of my deposit and I withdraw my funds does the bank have to call in the loan? Orangedolphin (talk) 19:14, 11 January 2008 (UTC)
The bank will return funds equal to what you withdraw, not your funds. The ratios/limits applicable to what a bank can lend are determined upon the assumption that at this ratio x:y, the bank is normally able to refund deposits on demand since not all deposits are withdrawned at the same time. Further note : the system is not infaillible though, and up to certain amounts, most deposits are insured. Thus, when the next run on the banks happen (and they will imo ), governments (i.e. taxpayers) will cover a part of the total deposits made, while the uninsured part of the deposits will be lost. And as to the insured part, it also remains questionable wether the government would be able to meet its obligations. --Childhood's End (talk) 19:38, 11 January 2008 (UTC)
Deposit insurance is to protect against balance sheet insolvency, it has nothing to do with fractional-reserve banking. Orangedolphin (talk) 01:18, 22 January 2008 (UTC)
Deposit insurance is to protect depositors against bank failures to honor their public deposit liabilities. Failure to honor a deposit can essentially only happen in a fractional banking system since with full reserves, theorically, banks could not default on these obligations. --Childhood's End (talk) 02:09, 22 January 2008 (UTC)
Banks can still go insolvent in full-reserve banking. Orangedolphin (talk) 01:21, 23 January 2008 (UTC)
If bank deposits are a loan to the bank how does the present system differ from full-reserve banking? Orangedolphin (talk) 21:25, 11 January 2008 (UTC)
Legally, bank deposits are not loans to the bank. But banks are given the privilege to treat them as if they were and to use the money as if it was loaned to them, even if this puts your deposit at risk. In a full-reserve banking system, the bank would be under the obligation to keep 100% of the deposits which would thus be 100% safe. --Childhood's End (talk) 22:08, 11 January 2008 (UTC)
If deposits can be withdrawn on demand how are deposits relevant to a bank's ability to make loans? Orangedolphin (talk) 16:55, 12 January 2008 (UTC)
That's pretty obvious; because depositors do not all ask for full withdrawals at the very same time, so the bank is always left with large amounts of deposited money. --Childhood's End (talk) 17:44, 13 January 2008 (UTC)
Why does having large amounts of deposited money affect whether the bank can make loans? Orangedolphin (talk) 18:35, 13 January 2008 (UTC)
Because in a fractional-reserve system, the bank can lend it? --Childhood's End (talk) 18:44, 13 January 2008 (UTC)
Can the bank still lend it if the customers withdraw their deposits? Orangedolphin (talk) 19:23, 13 January 2008 (UTC)
The class resumes today. Please take the time to assimilate what you have learned so far. --Childhood's End (talk) 20:28, 13 January 2008 (UTC)
So, have you assimilated [5] ? --Childhood's End (talk) 16:14, 14 January 2008 (UTC)
See above. Orangedolphin (talk) 16:44, 14 January 2008 (UTC)

Archiving of discussion here

Could someone start the archiving process here? Perhaps an automated process?--Gregalton (talk) 18:20, 11 January 2008 (UTC)

See Help:Archiving a talk page. --Foggy Morning (talk) 06:09, 12 January 2008 (UTC)
Thanks muchly. Is there any objection to (consensus for) using an automated archiver on this page?--Gregalton (talk) 15:39, 12 January 2008 (UTC)
Sounds fine to me. Thanks for the good work. Orangedolphin (talk) 16:52, 12 January 2008 (UTC)
Trying with the Miszabot template. We'll see if it works. I've set it to 45 days so this will only clear out really old stuff (for clarity - only parts of the talk discussion that have not been touched in 45 days will be archived). We'll see how it goes. If any problems, please leave a note here. I have not put an archive box on this page yet - want to see how it goes, but if someone else puts the box up, all the better. Thanks.--Gregalton (talk) 17:20, 12 January 2008 (UTC)
I'm afraid I seem to have done the bot request okay, but screwed up the archive box. Any ideas on what I did wrong?--Gregalton (talk) 08:37, 13 January 2008 (UTC)
Think I fixed it with a cludgy hack. Hope this is acceptable (I don't think it should require any fixing).--Gregalton (talk) 19:32, 13 January 2008 (UTC)

problem in "How it works"

"Since loans are paid back with interest, there is not enough money available in the money supply to pay back all of the loans. New money must be created outside of the money listed in the table in order for all of the loans to be paid back in full plus interest. "

Now, I'm no expert, but I'm fairly sure that this is a very non-mainstream view held only by a small number of people. Others? --Jason Catlin —Preceding unsigned comment added by 72.43.26.238 (talk) 16:11, 27 January 2008 (UTC)

How would the interest be paid if there is no money in the system to pay it? Orangedolphin (talk) 00:23, 28 January 2008 (UTC)
Agree. It's nonsense.--Gregalton (talk) 17:16, 27 January 2008 (UTC)

This isn't nonsense. That sentence is just incomplete. It depends on how much interest the bank charges on a loan. There is a specific amount of interest charged on the loan that would have the system break even. In the case of the 20 percent reserve rate system, this number is 25 percent. If the banks charge less then 25 percent interest on the loans then there will be an excess amount of money available in the system to pay back all of the loans plus interest. However, the initial depositor in the system has to lose money. Ultimately, any interest charged by the banks must come from the initial depositor. If the banks charge more than 25 percent interest on the loans, then there isn't enough money available in the system. Everyone's deposits will have been completely drained and there will still be more debts to pay back. Analoguni (talk) 21:42, 27 January 2008 (UTC)

Is there any reason this article particularly merits a section of links on "the Libertarian perspective?"

I don't see why this should be split out. Any relevant points and links should be integrated into the article.--Gregalton (talk) 13:51, 18 December 2007 (UTC)

Bumping the question up a bit - anyone willing to state why a Libertarian viewpoint on banking should be of particular relevance?--Gregalton (talk) 21:55, 24 December 2007 (UTC)
The article is currently being revised by many editors independently. It will take a bit of time for the wrinkles to get ironed out. N0 D1C4 (talk)
That's not much of a reason to keep as a separate section, particularly given the borderline content of this section.--Gregalton (talk) 22:23, 24 December 2007 (UTC)
So far, no argument put as to why this merits a separate section, but willingness to revert deletion of a section that is not encyclopedic, and not justified in this article. Why is a libertarian viewpoint of particular relevance here?--Gregalton (talk) 18:12, 26 December 2007 (UTC)
As far as I know, the libertarian argument has to do with the government regulations over banks. Libertarians are generally opposed to any type of government interference, especially in economic matters. I'm not so sure if it's safe to say that libertarians tend to be opposed to fractional reserve banking, but it's pretty safe to say that libertarianism is opposed to government regulations over private banks. Milton Friedman is probably a good example. He has stated before that he would prefer that the federal reserve did not exist. By having a government regulate fractional reserve banking, people show a lack of confidence in the ability of free markets to regulate banking. Analoguni (talk) 03:44, 27 January 2008 (UTC)

"Purpose" subsection

The purpose subsection of the article should be restrained the the Federal reserve citation. I find that the upper part essentially consists of original research and has little to do with the system's purpose. Here's what I would delete :

"Fractional reserve banking provides a system that expands and contracts the money supply. In order to have an understanding of how the money supply is expanded and contracted, one needs to understand that there are two types of money in a fractional-reserve banking system[1] :

  • central bank money (physical currency)
  • commercial bank money (money created through loans)
When a loan is supplied with central bank money, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence. To regulate this process governments have created central banks that control how many new loans can be created. This aspect of fractional reserve banking is what leads to criticisms of the system."

i- The first sentence is true but that's not the system's purpose. ii- The distinction between central bank money and commercial bank money can be helpful at some point but not in the purpose section. iii- And the last paragraph makes little sense if any at all; "money creation" is not contingent on whether loans are supplied with central bank money or not, and governments have not created central banks mainly to regulate this process. I will add cn tags while this discussion is carried. --Childhood's End (talk) 14:39, 22 January 2008 (UTC)

I agree that the name of the section does not match its content, but I do not see why that is a reason to delete the content. Just change the name of the section to match the content. In response to your third point, I agree that central bank money or commercial bank money can be used to create commercial bank money. In response to your third comment, most "money creation" in a fractional reserve system is from the money multiplier effect, and if the central bank's purpose does not involve regulation of the money supply, then what is its purpose?
In response to your recent edits, please understand that this section is not a contrast of full-reserve banking; however, I do agree that banking system elements not exclusive to fractional reserve banking should be moved to the appropriate article on banking. That entire last sentence should be moved to the criticism section or deleted.
I remember this section with much more citation with explanation within the citation. I guess it got deleted. I will look for it when I have time. --EGeek (talk) 20:02, 22 January 2008 (UTC)

I created the purpose section and put that information in it because I think it's necessary to explain why fractional reserve banking exists in the first place. The Federal Reserve explains it pretty well with the quote I put in there but I thought it was incomplete without a little information on just what the creation of money involves. Fractional reserve banking creates a second type of money and I thought it would be a good idea to put in a quick summary of what this second type of money is right there in the purpose section, then show how it is created in the 'how it works' section. I've since created a subsection that shows the two types of money. I also changed 'purpose' to 'purpose and function' which I think is a little better. As far as the information about government regulations goes, I thought it would be necessary to point out because unregulated banks can still use fractional reserve lending. See free banking. And for the sentence about criticism, I thought it should be included because it's true that some people don't believe in government regulations over businesses and banking is a private business. Also, since I noticed a lot of discussion about what the criticisms are and since this seems to be a controversial topic, I figured a quick summary of the criticisms would help things out. The information I added about the 3 functions that fractional reserve banking provides helps to clarify things and I think it's better to keep it there for simplicity and clarity. My goal was to be both as brief and as thorough as possible and I think this is apparent since a lot of information is summarized in that small section. Analoguni (talk) 23:17, 26 January 2008 (UTC)