Is fractional reserve banking legal?

Southend1

John1993 wrote: »

You seem to be being deliberately obtuse. The point I made was that the poor in England today live like kings compared to the poor of centuries past. They live like kings compared to the poor in certain parts of the planet today, too.

How you can possibly go from that to thinking that I was saying the opposite, I don't really know.

You did actually say that there was no entertainment for the poor 50 years ago! I think you'll also find that a much higher proportion of people of all social classes smoked 50 years ago!

So your argument isn't very persuasive at all.

princeofpounds

The OP spammed this nonsense over several threads. Below I copy and pasted my response on one of te other boards. It's not the best-written piece, but the myths about fractional reserve banking seem to catch on amongst people who don't understand what it is, and so this might help interested third parties learn a little. To put it simply, money is never created from nothing, but it can circulate as a loan creates a deposit in the system, which permits a further loan etc. fractional reserve practices actually slow this system, not enable it.

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The critical thing to realise is that lending money creates money. This is not a global money printing conspiracy. It's a natural consequence of lending.

Let's say I deposit money with a bank. The bank then chooses to lend it out to a manufacturer. The manufacturer is borrowing to invest in a new factory, so they pay the money as an advance to a construction company. The constructor does not need to buy all the materials right away, so it deposits the money in a bank. The bank the lends it out, maybe to a farmer who orders agricultural machinery, and the cycle repeats.

The bank isn't printing off fresh money each time. The second time the bank receives money as a deposit it probably doesn't even know where they money came from in the first place. It's probably not even being deposited with the same bank.

The 'same' money can cycle around and get spent as many times as you like, although the time lags in the process and the fact that you have to repay debt eventually as well as create it mean that in practice the process has certain 'natural' brakes that limit its growth, although you can see that in theory this loop could create an infinite amount of money.

Fractional reserve banking is actually a further constraint to this process. At each stage in the process the bank has to hold back a certain proportion of reserves which stay as liquid deposits in the central bank. This is primarily a safety buffer; if the depositors want their money back the borrowers may not be able to return it right away, so keeping a liquid reserve can help deal with such situations. But it also means that this loop of lending and deposit creation has to get smaller on each iteration, meaning there is less potential for money creation not more.

Once again I underline that the process of money 'creation' happens at the level of the entire banking system. Individual banks are not sitting there with a printing press. The deposits that come into their bank each look as fresh and 'genuine' as the last, because they are. Every loan they make is funded by a liability like a deposit; they don't get to just press 'print' and make a loan. It's just that making a loan can naturally create a new deposit.

Finally, I will just note that you are probably 'worse' than a bank in your own lending practices (if you judge money creation an evil, which would be pretty stupid if you actually understand what it is).

If you lend your mate ten quid at the friendly local pub, he will hand it over to the landlord. The landlord might then lend it to one of his regulars, who will then hand it back an buy another drink (or more realistically the note never leaves the till and a tab is created, but it's the same thing economically). Then the landlord might lend his barman an advance on the week's wages, which the barman might use to pay for his cab home. The cabbie might then return to pick you up, and when it turns out you have a packet of cigarettes unopened he might use it to buy them off you.

Ok, it's a bit contrived but you can see that because of all the lending and borrowing between people, you and your local friends have managed to spend 40 quid from just ten pounds. Almost magic isn't it?! Yet you weren't involved in some money printing conspiracy. You were just lending money. And you were worse than the banks because you weren't even keeping reserves. You were shamelessly creating unlimited amounts of money!

Southend1

Good post princeofpounds.

I think one important point that you didn't explicitly state in your post is this....

Money IS debt.

This is how our economy works. And it's why the effects are so catastrophic when more debt is repaid than is created.

afly

I don't really understand the argument. Money is often nothing backed by nothing. Asset supported currency is a relic. They are state backed issuements that we all wish we had more of. Our desire and need to do so drives industry, employment and economies

The whole idea is absurd but it works, why get hung up on this?

borussiaboscombe

Oh dear, it seems some people just dont want to admit what actually happens, i didnt expect these comments to be twisted as much as they have but then again i suppose truth is always stranger than fiction just look up fractional reserve banking on a reputable site it purely shows how with a 10% reserve on a deposit of $100 (as is law in america) a total of $400 is created,(note that the reserve in the UK is only 3%!) and no not by printing, but electronically created, after all some 90 odd % of all money is actually electronic now and there are in fact 7 banks in the uk who CAN print their own money. as for poor getting poorer, im talking about the real poor, the starving millions that we seem to have overlooked.

the proof that money is created is before all our eyes. how much is a loaf of bread now? or pint of milk? compared to 10, 20 30 years ago? the reason is purely the increase in money supply which has devalued it over time therefore requiring more cash to buy the same thing. (inflation)

inherently this system is wrong and can only cause more debt.
Banks go bust because the bigger banks become ever more greedy.

I have to say im very surprised by the comments.

the daftest one is that loans are purely from deposits... think about it, where do deposits come from in the first place? so lets take this back to its inception. how can i deposit money in a bank when it hasnt been created first?

As for conspiracy theories. its nothing of the sort. its the way of the world and has been for hundreds of years

John1993_2

Southend1 wrote: »

Hmmm and you said I was being obtuse!

So come on then, how does the money paid to you by the investment bank come into being?

Issued by the Bank of England, on the whole.

I know that You've bought into the whole "it's not real money" guff, but really, that's just idiocy. When a bank makes a loan it's creating an asset in one column, and a debt in the other. Nothing's being created.

borussiaboscombe

recommend watching Zeitgeist Addendum!

borussiaboscombe

Through fractional-reserve banking, the modern banking system expands the money supply of a country beyond the amount initially created by the central bank.[4] There are two types of money in a fractional-reserve banking system: currency originally issued by the central bank, and bank deposits at commercial banks:[5][6]
central bank money (all money created by the central bank regardless of its form, e.g. banknotes, coins, electronic money)
commercial bank money (money created in the banking system through borrowing and lending) - sometimes referred to as checkbook money[7]
When a commercial bank loan is extended, new commercial bank money is created. As a loan is paid back, that commercial bank money disappears from existence. Since loans are continually being issued in a normally functioning economy, the amount of broad money in the economy remains relatively stable. Because of this money creation process by the commercial banks, the money supply of a country is usually a multiple larger than the money issued by the central bank; that multiple is determined by the reserve ratio or other financial ratios (primarily the capital adequacy ratio that limits the overall credit creation of a bank) set by the relevant banking regulators in the jurisdiction.

From Wikipedia!

John1993_2

It's interesting to note how the "money isn't real" people don't work in finance, and the "money is real enough, and is not a fiction" people do. Do any of you guys wonder why this is? Do you not stop to ask why it's only those who've no experience of finance who come up with

Same way the 1,000mpg carburetor people don't work in engine design, and the "relativity isn't real" people rarely work at CERN.

It's the Dunning-Kruger effect in action.

And please note, a banker choosing not to enter into extended argument with you isn't a sign that you've won, it's a sign that they don't waste time on nutters.

borussiaboscombe

John1993 wrote: »

Issued by the Bank of England, on the whole.

I know that You've bought into the whole "it's not real money" guff, but really, that's just idiocy. When a bank makes a loan it's creating an asset in one column, and a debt in the other. Nothing's being created.

Thats where you are sadly mislead IT IS!