Difference between revisions 416109 and 3078445 on enwiki

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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 [[measures of national income and output|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.[[User:Mydogategodshat|mydogategodshat]] 01:39, 4 Jan 2004 (UTC)

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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.

::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. [[User:Dpbsmith|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....

End of silvery discussion.

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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? [[User:Dpbsmith|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. [[User:Dpbsmith|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

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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. [[User:Dpbsmith|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''" [[User:Gandalf61|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.

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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.

[[User:Dpbsmith|Dpbsmith]] 18:22, 1 Jan 2004 (UTC)

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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"&mdash;i.e. the government says it's legal to use it to pay for stuff. 

:Right? [[User:Dpbsmith|Dpbsmith]] 20:32, 1 Jan 2004 (UTC)

As [[User:Dpbsmith|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 [[User:Dpbsmith|Dpbsmith]] has started to do. [[User:Gandalf61|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." [[User:Dpbsmith|Dpbsmith]] 20:32, 1 Jan 2004 (UTC)

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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. 

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.  [[User:Dpbsmith|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. [[User:Mydogategodshat|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 [[User:Mydogategodshat|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 ! [[User:Gandalf61|Gandalf61]] 13:42, Jan 2, 2004 (UTC)

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== 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:"

[http://www.lewrockwell.com/rothbard/frb.html Fractional reserve banking]

This other article 

[http://www.anti-state.com/article.php?article_id=416 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&mdash;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). [[User:Dpbsmith|Dpbsmith]] 16:06, 2 Jan 2004 (UTC)

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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)'' - [[User:Gandalf61|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.'' - [[User:Gandalf61|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). [[User:Mydogategodshat|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. [[User:Mydogategodshat|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. [[User:Mydogategodshat|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? [[User:Dpbsmith|Dpbsmith]] 04:05, 3 Jan 2004 (UTC)



== Deleted text ==

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

# Fractional-reserve banking, the practice of lending out some fraction of demand deposits at the risk of bank runs.
# Non-convertible and/or partially-backed currency.
# 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.
# Insinuations that Kennedy was assassinated over silver certificates.

I suspect 2-4 would be better placed in other articles. [[User:Populus|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.

== 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? [[User:Dpbsmith|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. [[User:Morwen|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. [[User:Dpbsmith|Dpbsmith]] 17:20, 1 Jan 2004 (UTC)

:That said, I don't think it's a VfD candidate. It is a suitable article topic. [[User:Andrewa|Andrewa]] 10:34, 1 Jan 2004 (UTC)

Continue this on [[Talk:Fractional-reserve_banking]]''' There's now a pretty good discussion in process there... [[User:Dpbsmith|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. [[User:Finlander|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: <small>
::"with [[cash reserve ratio]] of 1/10, every $100 deposited ends up increasing the money supply by $900."</small> 
: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. [[User:Mydogategodshat|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. [[User:Finlander|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. [[User:Mydogategodshat|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." [[User:Finlander|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. [[User:Mydogategodshat|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. [[User:Mydogategodshat|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. [[User:Finlander|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. [[User:Mydogategodshat|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. [[User:Finlander|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. [[User:Mydogategodshat|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. [[User:Finlander|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. [[User:Mydogategodshat|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." [[User:Finlander|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.The text of this document reads:


 Report No. 51 of Reichsfuehrer-SS Himmler to Hitler about mass 
 executions in the east, 1942

 -------------------------------------------------------------------
                               August  September  October  November   

 Prisoners executed
 after interrogation            2,100    1,400     1,596     2,731    
  .
  .
 Accomplices of guerrilla and
 guerrilla suspects executed    1,198    3,020     6,333     3,706    
  .
  .
 Jews executed                 31,246   165,282    95,735   70,948
  .
  .
 Villages and localities
 Burned down or destroyed        35       12         20       92

Source: ''Trials of War Criminals Before the Nuernberg Military Tribunals - 
Washington, U.S Govt. Print. Off., 1949-1953, Vol. XIII, p. 269-272.''
See also: ''Hitler and the Final Solution,'' G. Fleming, University of California Press, Berkeley, 1984, pp.92-93.

This document is presented as evidence of the complicity and approval of [[Adolf Hitler]], regarding the murders that took place during the [[Holocaust]].

See also: [[Holocaust Revisionism]]