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

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 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