Talk:Fractional-reserve banking
Fractional-reserve banking is too important a fact of economic life to be without entry in citizendium. Please extend the stub.
--Janos Abel 06:01, 23 April 2007 (CDT)
Notes for editing later tonight: http://www.lewrockwell.com/rothbard/frb.html - Rothbard on fractional reserve http://www.lewrockwell.com/north/north86.html - Gary North on Mises on frb http://www.federalreserve.gov/monetarypolicy/reservereq.htm - federal reserve on reserve requirements http://www.federalreserve.gov/monetarypolicy/0693lead.pdf - history of reserve requirements
Criticism or controversy?
I removed the sentence about the controversy because that's not the way the controversy usually plays out. The Lew Rockwell links above are incredibly skeptical of fractional reserve banking, and I will rebuild the controversy based on them. Anthony Argyriou 17:27, 8 May 2007 (CDT)
- Anthony, I put in that sentence as a marker for a section on critical views of fractional-reserve. (I am not familiar with the Lew Rockwell critique but will read up on it.)
- I also note that you do not believe fractional-reserve is to do with money supply. This makes me wonder if you are aware of the fact that around 95% of the US money supply (and over that in the UK) is created by this means. -- Janos Abel 11:22, 4 June 2007 (CDT)
I put the marker back. It is critiquing fractional-reserve from a different angle. -- Janos Abel 10:48, 25 June 2007 (CDT)
Growth of the money supply
I don't know how you got the impression that I believe that. I didn't put much directly into the article about fractional reserve banking's role in the money supply, and I did remove the not-really-true statement that changes in the reserve requirement are used to control the money supply. By and large, they're not. The money supply is controlled by buying and selling government bonds to depositors at the Federal Reserve. Anthony Argyriou 13:09, 4 June 2007 (CDT)
- Anthony, I said that "...you do not believe fractional-reserve is to do with money supply" and you seem to be confirming this. I do not know I you would be interested in discussing the issue further, but the key question is "where does the money to buy government bonds comes from in the first place?"
- Paul Samuelson explains in the thirteenth edition of Economics how banks "transform one dollar of reserves into many dollars of money", pp.237-243. -- Janos Abel 13:42, 4 June 2007 (CDT)
- That initial dollar comes from the government. They create it out of thin air. (Used to be, they'd print it, but accounting transactions are cheaper.) The fact that that dollar multiplies to make 10 or 20 or 30 more dollars in the money supply is a function of fractional-reserve banking, no matter what the multiplier rate actually is. Changing the reserve requirement, and thus the multiplier rate, is dangerous, as that will lead to shocks in the money supply. It's far safer to just print new accounting entries, and let them multiply at the existing rate. Anthony Argyriou 13:50, 4 June 2007 (CDT)
- You seem to be saying that if I have one dollar, that was originally created by the government. Yes. But when I deposit that one dollar, the bank will create, i.e. lend out, an extra nine (credit)dollars to somone else, thereby increasing the money supply by an extra nine dollars (10% reserve ration), no? -- Janos Abel
- That initial dollar comes from the government. They create it out of thin air. (Used to be, they'd print it, but accounting transactions are cheaper.) The fact that that dollar multiplies to make 10 or 20 or 30 more dollars in the money supply is a function of fractional-reserve banking, no matter what the multiplier rate actually is. Changing the reserve requirement, and thus the multiplier rate, is dangerous, as that will lead to shocks in the money supply. It's far safer to just print new accounting entries, and let them multiply at the existing rate. Anthony Argyriou 13:50, 4 June 2007 (CDT)
How does the money supply grow?
Yes, exactly. But in the larger scheme of things, when the government wants to increase the money supply, it almost always does so by printing more dollars, rather than by changing the reserve requirement. In theory, changing the reserve requirement from 10% to 9% would allow an 11% increase in the money supply, as banks could lend out a little more based on the reserves they already had. But it's a rather crude way to do so, unless the reserve requirement is specified to many decimal places. It's much easier to just print money, and let the existing reserve requirement allow the creation of the additional money. I've seen the claim in economics texts that the reserve requirement can be adjusted to change the money supply, but I don't know if that's actually been done any time recently anywhere. Anthony Argyriou 17:07, 5 June 2007 (CDT)
foreign exchange reserves in the globalized economy?
Is there a place in this article to consider a country's shifting needs regarding the level of foreign exchange reserves it maintains? Nathaniel Dektor 21:17, 26 June 2007 (CDT)
- Perhaps, but I don't know. A government holds foreign currency for the same reason it holds gold - to create confidence in its own currency. (Secondarily, it may hold other currencies to help pay off its debts denominated in foreign currencies.) I don't know enough about the history to know if it is particularly important to fractional-reserve banking, or how globalization is affecting it. Anthony Argyriou 22:55, 26 June 2007 (CDT)
- I just read a study indicating developing countries have responded to the instability of world financial markets since trade liberalization by greatly increasing their foreign exchange reserves. It's interesting because the opportunity costs of holding larger reserves offsets, for those countries, the World Bank's estimates of the benefits of trade liberalization. This seems to me the contemporary, larger scale analog to banks' reserve policies discussed in the article. Nathaniel Dektor 12:04, 27 June 2007 (CDT)
- THe two situations may be similar, but they're not equivalent, unless the developing countries are holding foreign currencies specifically for the purpose of backing their own currency. It seems like what you're asking about would belong in an article about foreign exchange reserves, or international trade. Anthony Argyriou 16:04, 27 June 2007 (CDT)
- Actually, they hold foreign exchange reserves specifically to be able to fend off speculative attacks on their currencies. Lessons learned from the Asian financial crisis and Russia in 1997-1998. A speculative attack is basically the globalized version of a "run on the bank." Nathaniel Dektor 17:51, 27 June 2007 (CDT)
- THe two situations may be similar, but they're not equivalent, unless the developing countries are holding foreign currencies specifically for the purpose of backing their own currency. It seems like what you're asking about would belong in an article about foreign exchange reserves, or international trade. Anthony Argyriou 16:04, 27 June 2007 (CDT)
- I just read a study indicating developing countries have responded to the instability of world financial markets since trade liberalization by greatly increasing their foreign exchange reserves. It's interesting because the opportunity costs of holding larger reserves offsets, for those countries, the World Bank's estimates of the benefits of trade liberalization. This seems to me the contemporary, larger scale analog to banks' reserve policies discussed in the article. Nathaniel Dektor 12:04, 27 June 2007 (CDT)
Economic and social implications
I should like to link an article on banking with one that I am drafting on Financial economics and it would help if I knew whether it is intended to extend this article beyond the present organisational description to an explanation of how banks operate and how they affect the economy and people's lives. To make sense to modern readers, what I have in mind should enable the interested reader to understand the moral hazard that arises from state protection of banking systems and its connection with the current subprime lending crisis. This could, of course be dealt with in a separate article if it is not intended to cover it in this one - in which case I should need to create a different link.
Should I start a new article or link to this one?
Nick Gardner 16:34, 7 March 2008 (CST)
Revise and update ?
I am not sure about the literal accuracy of this article, but I am convinced that is so far out of date as to seem obscure and misleading to modern readers. The inclusion of the paragraph on the gold standard will strike most readers as idiosyncratic, and to refer to the Austrian explanation of the Great Depression and not to the more widely-accepted monetarist explanation seems strangely biassed. I suggest that we need to choose between a major revision and update, and outright deletion. Nick Gardner 15:07, 18 January 2010 (UTC)