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Campaign against fractional reserve banking. Legitimate?

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Joined: 02 Sep 2006
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Location: London , UK

PostPosted: Thu Jan 28, 2010 4:34 pm    Post subject: Campaign against fractional reserve banking. Legitimate? Reply with quote

The campaign against fractional reserve banking. Is it legitimate, or a distraction?

This debate was started in another thread, "Visitng Ron Paul's Fed Free Utopia" [ http://www.breakfornews.com/forum/viewtopic.php?t=5579&start=30 ].
As it's moved away slightly from Ron Paul I thought it should deserve a new thread.

Fintan and I disagree over this topic. I feel it's a core issue, and Fintan does not.

Fintan wrote:
There is also a big campaign against fractional reserve banking. But this is mostly accounting. You could replace it with a 100% funded non-fractional system and it would make no difference.

My understanding is that the difference between fractional and full reserve banking is much more than moving numbers around. But as I have only been studying the subject for a short time, I needed to look more into the facts and do further research. As part of this process I have forwarded parts of our debate over to Joe Bongiovanni [ http://www.economicstability.org/joes-monetary-literacy-course ] who has been studying this subject for over 30 years. Here are some of Fintan's comments that I had big doubts about, and Joe's responses to them:

Fintan wrote:
It is the Treasury and Fed who determine the money supply - not banks.

joe bongiovanni wrote:
No, the money supply is determined by the amount of credit created by the banks[...]All the whole Fed does is gyrate around the Federal Funds overnight rate, and then they let financial instruments be based on the LIBOR. So now, because they canít force anyone to lend or borrow, they cannot have any influence[...]The Treasury is totally guilty of giving up its money-creation powers, but has zero role whatsoever in determining the money supply.[...]if [...] the Fed or Treasury determine the money supply, what about the lions share of the money created over the past fifteen years by the shadow bankers, the M-3??

Fintan wrote:
Right now the way things work is that the US Gov/Fed create say $100 of new money. Then the banks can create another $900 of fractional money to gross this up to $1,000 --and loan this out at retail.

If we insist they can't create this fraction, then they would have only $100 to lend out --the money USGov/Fed created. That would cut current lending by 900%!! To fix this problem, the USGov/Fed would have to create the whole $1,000 itself --and give this to banks to lend.

But the banks would have lost the interest on the fraction they used to create themselves, and because this is used to offset their costs, they would have to raise interest rates on loans and/or charges to compensate.


Yes the profits of the big monopoly banking groups are often obscene, but normal retail banking is a competitive business and the rates of return on capital employed are not particularly exorbitant. Regional banking structures need to make a reasonable profit. Don't throw out the baby with the Wall St bathwater.

joe bongiovanni wrote:
...it is a valid point that the bankers might have to look elsewhere for work, but it is not a valid point that they will charge more interest on loans. One reason they will not be able to charge more interest on loans is because we have provided for the money supply.

There has always been a spread. They will pay interest on term deposits and charge interest on term loans. Isnít that what banks are supposed to do?

Yes, they will need to reduce their costs like the rest of us common peoples. There will be no interest paid on demand deposits.

Fintan wrote:
It was imprudent lending which led to the crash --not structural problems with fractional lending itself. Fix this with much tighter loan risk rules and criteria.

joe bongiovanni wrote:
[It's] the common argument that it was just a few bad actors, no problem structurally, etc..† Itís all part of the confidence game.

Fintan wrote:
We need viable solutions that do more than just move mythical money around. We need a viable way to transition from the current system to a better one. And we need proof it is a better one before we make any move.

joe bongiovanni wrote:
If the top economists of this country [in the 1930s] supported the concept and principle of full-reserve banking, including Henry Simons, Irving Fisher, Frank Graham,† Paul Douglas and even Milton Friedman, I can promise you that it can be done.

The arguement against fractional reserve banking is first a moral one, not a systemic one. Money is vital for civilisation. Without it we will return to small tribes using simple barter. The power to create money, which is what essentially happens in the fractional reserve system, should not be governed by the profit motive. It should be governed simply by the common need of common people to use it.
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