Talk:Fractional-reserve banking - Wikipedia

Hi, I tried to remove some of the more confusing references to the Fed in the opening example, as if this is meant to introduce the situation by example it really doesn't work at the moment (being both Americo-centric in stand point and confusing by adding all the Fed information). Any chance of moving the Fed stuff out of the opening example?

note that User:PtAuAg below is a sockpuppet of banned POV-pusher, User:Karmaisking. BigK HeX (talk) 02:00, 30 September 2010 (UTC)Reply

deposit mult 1

This article is highly misleading. Banks do not lend deposits as this article suggests. Banks create deposits, and thus create money, with each loan. Loans create deposits. It is illegal for banks to "loan deposits", because a bank cannot debit someone's account in order to loan it to someone else. Every loan creates a new deposit, and thus, increases the money supply by the amount of the loan. A bank's ability to create deposits is limited by its reserves, but the banking system as a whole, which includes the central bank which creates reserves, has no limit to the amount of money that can be created. 68.150.191.166 (talk) 00:17, 14 July 2010 (UTC)Reply

So this is like saying if I deposit $100, then they keep $100 and loan out $400; instead of the article's example of keeping $20 and loaning out $80? That would mean they created $300 out of nothing. Wouldn't their rates be dramatically different? This would lead to much higher rates for depositors and much lower rates for lendees. Also, wouldn't the whole bank run risk be a moot point? All of the depositor's money would still be in reserve. —Preceding unsigned comment added by 99.62.29.93 (talk) 01:01, 9 September 2010 (UTC)Reply

Yes, but your percentages are greater than 100%. The bank keeps 100$ and then loans out a further new 80$ in addition. The result is that the system in total now has 180$ as money, 80$ of which was newly created by the bank. That 80$ can then go to the next bank, when it is spent, as deposits, resulting in 180$ of deposits, total.

I agree with the above. Fractional Reserve Lending is a legal way that banks create money. If you or I, common people, were to practice this it would be called counterfeiting and we'd be thrown in jail. It doesn't surprise me that people are unaware of this practice and don't believe it. It's basically the reason why the banks have the tallest buildings in every city. Quite simply, they get a deposit, they lend out a greater amount of this deposit and thus our money supply grows. Also, if a bank purchases a government bond, they get interest on that bond as well as the ability to lend out more money through the magic of fractional Reserve Lending

• e.g. $100 government bond is purchased @ %6 interest
• The note is worth $106
• The bank lends out $1000 (10x the amount of the bond)
• PLUS 6% interest on that amount

so... they aren't just making the 6% interest on the original bond but over %1000 interest (%1166) —Preceding unsigned comment added by 174.3.234.10 (talk) 20:04, 20 October 2010 (UTC)Reply

Does it work like this?:

Fresheneesz (talk) 21:49, 8 November 2010 (UTC)Reply

As I understand it, the bank does not keep the 100$. When the bank took in 100$, it had its account at the central bank credited by 100$. After it loans out 80$, these reserves are transferred to the account of another bank. Banks are not free to create as much money as they like. Count Truthstein (talk) 14:34, 10 November 2010 (UTC)Reply

Fair enough. As I understand it, the bank can "lend out" as much money as they want, as long as their deposits (amount lent + original deposits) don't exceed a certain amount determined by the reserve ratio.

But my fundamental question is about real money creation (not M1 money supply) - basically, does this system cause inflation? My current understanding is that, no, banks do not create inflation (even though M1 money supply does go up). The reason this is what I think is because, even though there is more money as deposits, there can never be more money in circulation (because whenever someone makes a withdrawal that puts money into (potential) circulation, money is also removed from circulation and put into the bank's reserves (so that they don't dip below their reserve ratio). Even if they only lend out 80$ from that original $100, this question still stands. Fresheneesz (talk) 19:07, 10 November 2010 (UTC)Reply

The short answer is, "no." The long answer could well be a bit too much over the line for WP:NOT#FORUM. Personally, I thought the Fractional-reserve_banking#Example_of_deposit_multiplication section did a pretty good job of conveying the info. Perhaps, re-read it? (Note that one key difference from your "Banks lends out" example above is that the loan amounts are smaller, but cumulative.) BigK HeX (talk) 22:27, 8 November 2010 (UTC)Reply

I understand the stuff there, and I know that banks have the legal ability to lend out $900 on an $100 deposit. But I'm trying to figure out if this whole situation causes any inflation or not. This table indicates to me that it doesn't. Do you know of any sources I can read that talk about any inflationary effects of fractional reserve banking? Fresheneesz (talk) 00:53, 10 November 2010 (UTC)Reply

The way you say that a bank could lend $900 from a $100 deposit, seems to indicate that your understanding is incomplete, and that you are unaware of the intermediate scenarios that could lead to $900 from the original $100 of base money. Below though, Hipocrite seems to have addressed what may be your central question. BigK HeX (talk) 02:44, 11 November 2010 (UTC)Reply

Yeah, I'll continue the conversation there. There are too many contentious points we would have to discuss to properly talk about the above table. Fresheneesz (talk) 19:51, 13 November 2010 (UTC)Reply

deposit mult 2

The quote here: "The expansion and contraction of the money supply occurs through this money creation process. When loans are given out, the process moves from the top down and the money supply expands. When currency is withdrawn from the commercial banks, causing loans to be called back, the process moves from the bottom to the top and the money supply contracts" suggests a number of things that are confusing. One - is the causality right? How is currency withdrawn from commercial banks when they are loaned out to the hilt? Second - when people repay debt, does the repayment not go to the reserve accounts of the banks? Aren't these repaid amounts now bank capital? In other words is it not the case that when deleveraging takes place, money accumulates in the banks, and so the money 'supply' remains constant? —Preceding unsigned comment added by 83.208.165.249 (talk) 19:29, 29 September 2010 (UTC)Reply

This is misleading, people don't borrow from a bank to put the money into another bank. This would be stupid as the interest you pay a bank for borrowing money is more than you get in interest by depositing it. To look at it in this way is a total fiction. Fraction Reserve Banking (FRB) allows the bank to invest the majority of the money placed in it by usually by lending it to customers at a higher rate of interest than it is paying the customers who deposited the money. This section of the article is misleading and people have the idea that FRB creates money. What would the alternative be? That a bank should not loan out money to other people but pay people interest for it storing the money in its safe? Ridiculous! —Preceding unsigned comment added by Caparn (talk • contribs) 14:17, 17 July 2010 (UTC)Reply

>> I think that the receiving bank is getting money from the supplier of goods/services that the lendee bought with the loan that the previous bank lent out. Omitting that process makes the table simpler. 99.62.29.93 (talk) 01:03, 9 September 2010 (UTC)Reply

Referring to the example: how is $180 out of $100? I just don't understand this. I deposit $100. $80 is loaned out to other people, $20 goes into the figurative vaults,... but where does the other $80 come from? I still do not understand, how is money created here? The loans are always less than the deposits, a difference equal to that original deposit by the Fed. I certainly understand how money is created by the Feds, but I don't get how it is created by the commercial banks. Someone please make this clearer for me. 99.62.29.93 (talk) 01:03, 9 September 2010 (UTC)Reply

It's unclear how you can understand how the Fed creates money, if you're asking this question ... but anyways, if the bank loans out $80 in your scenario, then there's now 1 person who has the $80 loan in his bank account, and the original person who had the deposit totaling $100 in his account. This is $180, which includes bank credit. The bank created money (as bank credit) when it made a loan. BigK HeX (talk) 02:09, 9 September 2010 (UTC)Reply

I understand that the Fed simply prints up money to buy treasury bonds with. That's a completely different process than writing a note which has earned money paid as principal. So as you explain it, the money supply in the economy doesn't expand at all, the debt still equals the deposits. $180 is just the addition of debt and money together, when in actuality it is subtracted. 99.62.29.93 (talk) 04:48, 9 September 2010 (UTC)Reply

There are different measures of a "money supply". But, no, the amount of currency within your scenario did not change, but bank credit in the form of checking account balances is usually counted in money supply measures, so people likely would say that the money supply increased. Deposit Guy has a bank receipt showing that he has $100 available, and Loan Recipient Guy has a bank receipt showing that his account now has the $80 loan in it. Together the two have $180 to spend.

The bottom line is that Banks Can Create Money. It's not a difficult concept, per se, although some people do just find it hard to believe. BigK HeX (talk) 04:57, 9 September 2010 (UTC)Reply

It seems misleading to me to say that they create money. Since every loan is backed by deposits (and some reserves), it's really just a perception of inflation. It would not be any worse than if an individual loaned another individual. The lender would not consider his loan to be the same as cash. People perceive deposits to be like cash in their hands, but it's really a debt owed to them. They cannot spend the money without making a withdrawal (which reduces the amount of debt lent out by the bank). 99.62.29.93 (talk) 05:30, 9 September 2010 (UTC)Reply

It's not misleading to say that banks create money. It's an astounding literal truth. [see: here under "Who Creates Money"]. Also, it is not the same as an individual lending money, because that individual then does not have claim to the money; when a bank loans money, no one loses claim to any money (because it is newly created money). BigK HeX (talk) 05:39, 9 September 2010 (UTC)Reply

That is simply untrue in any common law nation. The basic concept of a contract is consideration, both parties trading something of comparable value. When I lend money to someone, I certainly have a claim to recover it! The only difference is the liquidity. I probably won't be able to get it back as quickly as using a debit card. In the same spectrum, many corporate loans are unable to be called, some might be callable on certain dates, or require premiums to be called, etc.. These call options have an effect on the value of the bond. When a bank lends money, it usually collects the principal back over time. The contract stipulates how much money it gets back (on top of interest). In most cases, the bank will get back all of its principal eventually, they just do not call the loan early. If claims to principal did not exist, there would be no defaults, no risk of runs on the bank and interest rate spreads would be incredibly small.

Addition: I found within your article the contended money creation process.

"Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time."

This is similar to the current system but still does not create money as long as the loans do not exceed the reserves. Creating a note is just another form of currency for the same money in this case. In the current system, loans exceed reserves, but not deposits. When a note (loan) is created, the reserves are reduced. This still preserves the same quantity of money. In the old system, when a bank wrote a note, they kept the gold in the vault! 99.62.29.93 (talk) 06:12, 9 September 2010 (UTC)Reply

Yes ... if you lend money to a neighbor, you retain a legal claim to recover the money, but that doesn't change much about the money itself obviously being out of your hands once you've lent it. BigK HeX (talk) 07:42, 9 September 2010 (UTC)Reply

I agree that it is misleading (or perhaps confusing is the right word) to say that banks create money. Certainly it isn't the same thing as printing money. Its more subtle than that, and saying banks "create" money, while being certain said a lot, isn't a very helpful statement when trying to explain the system to people. In my opinion of course. Fresheneesz (talk) 02:23, 12 November 2010 (UTC)Reply

I feel that the reference to Modern Money Mechanics should come with some kind of health warning because it is now seriously out of date (1992? 93?). Doing a quick search reveals the document does not contain the phrases "Basel" or "Capital adequacy". The name of the document in itself implies that it is up to date but clearly it is not. Reissgo (talk) 07:27, 14 September 2010 (UTC)Reply

In the last 20 years or so, there has been a change in most jurisdictions on exactly which regulation is binding on the amount of bank lending (and hence the money multiplier). Traditionally, the reserve requirement was the binding constraint, and most textbooks still treat it as such. Under Basel II, capital requirements are now the binding constraint in most jurisdictions (but not all, in some jurisdictions reserve requirements are still binding). However, I am unaware of any textbook that discusses the money multiplier implications of Basel II. This is because such a discussion would be difficult to understand, as Basel II contains many capital classes requiring different capital adequacy ratios, and the resulting money multiplier would be different depending on exactly what classes of assets a commercial bank actually held. Hence, textbooks continue to use reserve requirements to discuss money multipliers, as the formula is simple, and easily understood.

This is not to say that the discussion of the money multiplier process as it stands in the article is incorrect. The fundamental process itself remains unchanged, what has changed is the exact proportion of new deposits that can be lent out. Under Basel II, this proportion varies from bank to bank depending on the types of assets that they hold. Personally, I feel some mention of this would improve the article, but a full treatment would probably be best reserved for the Basel II page, as the subject of fractional-reserve banking and money multiplication is difficult enough as it is, and we should avoid further muddying the waters here. LK (talk) 07:55, 14 September 2010 (UTC)Reply

Whilst everything you've said may be true, it is not really an argument against what I have said. Sure its all very complicated and a full explanation on a wiki page may bee too much detail. But all I am asking for is a health warning. The name of the fed's document implies that it is up to date, which it is not. Reissgo (talk) 09:46, 14 September 2010 (UTC)Reply

How about including "(from 1993, does not include a discussion of Basel II)" to the link? Frankly, I think this is unnecessary, as the fundamental money creation mechanism described in the paper remain unchanged, only the particular regulation limiting lending has changed (from reserve requirements to capital adequacy requirements). But feel free to add a 'health warning' if you think it necessary. LK (talk) 15:06, 14 September 2010 (UTC)Reply

The fact that the gist of the money creation mechanism is approximately correct in that document, does not mean that it should be referenced without a health warning because the information it contains about the limits on money creation are horribly wrong and out of date. That's an incredibly important feature of FRB - not just some minor technical detail. I shall make an edit to the article. Reissgo (talk) 10:00, 15 September 2010 (UTC)Reply

Besides any caveats that article deserves, I'm uncomfortable with its hosting. That makes it hard to verify that it is indeed what it claims to be. Is there a more authoritative link we can use? CRETOG8(t/c) 13:46, 15 September 2010 (UTC)Reply

I think the whole book has been copied to that Wiki project that keeps full-text sources. (WikiSource?) BigK HeX (talk) 13:49, 15 September 2010 (UTC)Reply

It does seem to be, but it's not clear the origin of it there, either. Oof. CRETOG8(t/c) 19:39, 19 September 2010 (UTC)Reply

An essential feature of fractional reserve banking was to place certain limits on money creation. However in the real world today fractional reserve banking in its pure form is rarely (if ever?) practised. The rules controlling the limits on money creation vary from country to country. I propose a new page about the rules *as practised in reality today* governing lending limits in a variety of countries. I have crated a very rough outline of how I see the page in my userspace here: http://en.wikipedia.org/wiki/User:Reissgo/Limits_on_money_creation_around_the_world while it is being prepared. If anyone cares to help out, it would be much appreciated.

What you have on that page currently could (except for the graphs) possibly be fit into a table and added to this article. It would need good references for everything. CRETOG8(t/c) 19:40, 19 September 2010 (UTC)Reply

I suspect that it would grow to become too large. Also, in countries with no reserve requirement it would be misleading to describe their monetary system as a fractional reserve one. It should instead be described as perhaps a credit-money system. Steve Keen says: "We are therefore not in a 'fractional reserve banking system', but in a credit-money one" See http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/.Reissgo (talk) 20:11, 19 September 2010 (UTC)Reply

I think that would be a good offshoot article, but there probably isn't space in this article for it. Also, both full reserve and no reserve banking is a subset of fractional reserve banking (where the fraction is 100% and 0% respectively). So its not really misleading/incorrect. Fresheneesz (talk) 18:32, 5 November 2010 (UTC)Reply

Surely hundred of academics have written articles in peer reviewed journals about fractional reserve banking and the actions of the fed. The fed is a semi-private company. Their publications are hardly likely to be unbiased and they certainly won't be peer reviewed.

Some academics do question the Fed as an institution, whether it behaves correctly, whose interests it serves, etc. However, I'm not aware of any serious doubt among economists that the Fed's publications are factually true, and they generally use the Fed's publications as reliable sources. CRETOG8(t/c) 17:53, 3 October 2010 (UTC)Reply

Ok, lets explore this a little. How about this: "If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money" - this sentence is farcical. This sentence implies that people don't pay for the safekeeping of their money. The payment for the for the safekeeping simply is simply included as part of other types of charges and fees. Its analogous to the following. Imagine a shop that sells cars. Outside the shop is a sign that says "Bay a car and get the tyres free!". This is quite clearly just advertising guff. If an academic was to write a paper on the economics of the shop for a peer reviewed journal, he would not conclude that people buying the cars were genuinely getting the tyres free. Reissgo (talk) 19:06, 3 October 2010 (UTC)Reply

Any time an academic selects some of the Fed's output to quote in a paper, then that quote will itself be peer reviewed. Just because some of the feds output has passed peer review, it does not follow that everything they output is automatically gospel.Reissgo (talk) 19:45, 3 October 2010 (UTC)Reply

This article's talk page is probably too narrow a venue for this as a general discussion. If you really want to pursue the question, you could go to the reliable sources noticeboard or WikiProject Economics talk page. I feel the burden of evidence would fall on you to show that the Fed is not a reliable source. As a general rule, I very much doubt that the peer reviewers of those academic papers are questioning the Fed's material included in the papers, but are in fact taking it as reliable (which is a lower standard than "gospel" I think) and looking at other parts of the papers. CRETOG8(t/c) 20:17, 3 October 2010 (UTC)Reply

Done. Here. Reissgo (talk) 21:36, 3 October 2010 (UTC)Reply

Is there a particular citation which is in question? "Reliable source" isn't boolean, it'll depend on context &c. As a closely observed national financial institution whose effectiveness depends on maintaining a sober reputation, I would personally consider the Fed a reliable source in most of the circumstances they're likely to be cited, but... bobrayner (talk) 21:57, 3 October 2010 (UTC)Reply

Yes, the one starting "If banks did not lend out their available funds..." the link given as a reference no longer works. Information in Wikipedia must be verifiable. If the reference link is not repaired/replaced in the next few days I will remove the quote altogether. Reissgo (talk) 23:59, 3 October 2010 (UTC)Reply

I've fixed the link via a quick google search. Note that it's better to try to fix a reference rather than to remove it when there is a broken link. Also, best practice is to keep broken links so that others may try to fix it in the future. LK (talk) 04:17, 4 October 2010 (UTC)Reply

If it is a published document available offline there is no reason to remove it as a source even if a link to it does not work. See WP:Linkrot. Lambanog (talk) 05:02, 4 October 2010 (UTC)Reply

So, I gather if we're talking specifics, we're talking about the blockquote at the beginning of this section, referenced to this document from the Philidelphia Fed. I think that Federal reserve bank official publications should be treated as reliable sources for explaining the basics of fractional reserve banking. For that particular quote, the only thing I see which could possibly be contentious (I leave open the possibility I'm missing something) is the word "important", which is strictly true, but could be interpreted as "good" as well. I think that small possibly implication isn't enough to want to remove the quote, which is clear and attributed to the Fed. CRETOG8(t/c) 15:54, 4 October 2010 (UTC)Reply

I was asked to refer this matter to get some independenet editors (not regular contributorsd to this page) to give their opinion on http://en.wikipedia.org/wiki/Wikipedia:Reliable_sources/Noticeboard#Is_the_Fed_a_reliable_source. Looking at the comments of Itsmejudith , Blueboar and Wehwalt it seems that the consensus is that this particular children's educational document is not a reliable source or that an alternative source should be found. Reissgo (talk) 06:54, 5 October 2010 (UTC)Reply

In answer to Cretog8's last comment. The sentence I object to most is: "If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money." I do not believe you can find a peer reviewed document to support that assertion. Reissgo (talk) 12:06, 5 October 2010 (UTC)Reply

I agree. While self-published documents may be used for descriptions of how things currently work, they are not considered reliable as source for information about other entities or speculation. The statement called out is speculation. Yworo (talk) 13:11, 5 October 2010 (UTC)Reply

OK, some total OR and personal (expert) opinion on my part. I hope everyone is aware that commercial banks make their profits by lending out our deposits? That's why they pay us for keeping our money safe. If they can't lend it out, we'ld have to pay banks to hold our money. This isn't pure speculation, consider safety deposit boxes, and the history of full-reserve banks. This is basic and totally uncontentious, and can be cited to some intro macro textbook, but I'ld have to look. Please don't make me go though the bookshelf full of intro macro books behind me. LK (talk) 10:51, 6 October 2010 (UTC)Reply

I would agree with LK's position. I just checked the two textbooks within reach of my desk and they were pretty direct on the point that "Banks make their profits by lending the money that others have deposited with them..."; however, neither textbook specifically addressed the alternative (that if banks couldn't earn money this way, depositors would have to pay for their services) presumably because there's no point exploring such a fruitless scenario in any depth, but I wouldn't worry too much about OR when including what appears to be an obvious conclusion - how else would the running costs of banks be paid? Alternatively, I'd be happy to rephrase; perhaps a simple sentence explaining that banks earn profits by lending out money, and that in cases where the bank can't lend out something deposited with them (ie. the contents of a deposit box), customers generally have to pay for the service instead. bobrayner (talk) 11:43, 6 October 2010 (UTC)Reply

I also find the assertion non-contentious. I'm fairly baffled as to why it seems to have be the source of so much consternation. Actually, I've been largely tempted to restore the statement.... BigK HeX (talk) 12:32, 6 October 2010 (UTC)Reply

Why has the quote been chopped up like that?[2] What is so contentious about that section of the quote that it must be excised and replaced with an ellipsis? Personally, I'd rather keep the whole quote. If somebody feels that part of the quote is factually incorrect, it may be more appropriate to contrast with whichever other reliable source disagrees. bobrayner (talk) 13:44, 6 October 2010 (UTC)Reply

Edited to add: Is there actually another source that disagrees? That would be a good basis for for concerns about the reliability of an existing source. However, one wikipedian's disagreement with a banking regulator's comments about the basic mechanisms of banking would not be a good basis for removing anything sourced from that institution. bobrayner (talk) 13:52, 6 October 2010 (UTC)Reply

The assertion about fees/whatever seems pretty straightforward to me. There is history to support the notion that un-lent deposits of currency required fees [goldsmiths of "ye olden days"], and LK also has the modern example of safety-deposit boxes, so it's not really speculation. I'll probably restore the assertion pretty soon, though I'll allow more time for input here. BigK HeX (talk) 14:20, 6 October 2010 (UTC)Reply

If the fees issue is uncontentious, then there must be a flaw in my "Bay a car and get the tyres free!" argument near the start of this thread. Please tell me the flaw. Reissgo (talk) 15:04, 6 October 2010 (UTC)Reply

I feel that your analogy is flawed because it isn't actually analogous to the economics of banking; it alludes to bundling without actually saying what is bundled. However, argument by analogy is not a particularly strong argument anyway. If you would like to overturn the Fed's comments, do you have anything stronger than a simplistic analogy? A reliable source, perhaps? bobrayner (talk) 15:16, 6 October 2010 (UTC)Reply

It's less like "buy car, get tires free" and more like "rent this storage space, and get tires free in addition to a full refund of all your rental fees".

If an editor's personal misunderstanding of the assertion about fees is the only basis for the objection (as opposed to a reliable source), then the text really should be restored. BigK HeX (talk) 15:16, 6 October 2010 (UTC)Reply

The "Buy a car and get the tyres free!" argument is flawed, although I think I can see where it comes from. You appear to believe that banks primarily make their money off fees, charges, and the like instead of interest on loans. According to my fuzzy recollection of popular press accounts, this view is more correct than it was 30 years ago, but is still wrong. Depository banks make their money primarily off loans. CRETOG8(t/c) 17:00, 6 October 2010 (UTC)Reply

Back to the general discussion--I think that the source is fine, and I like it because it's well-sourced and well-phrased. I think the particular line in question is also uncontentious. I also read the lack-of-consensus on the RS noticeboard to read less as, "this is not a reliable source" and more as a "hmm, maybe you can do better". Since I think Reissgo is mistaken, but is acting in good faith, I'm willing to try to do better. One of us must have an intro money & banking text around which we can use. CRETOG8(t/c) 17:00, 6 October 2010 (UTC)Reply

got one, coming up... CRETOG8(t/c) 17:40, 6 October 2010 (UTC)Reply

How about, "...the only way that banks could cover their expenses and make a profit under 100% reserve banking would be to charge depositors a fee for holding their money (that is, to pay negative interest on deposits)." ^[1] Intermediate college macroeconomics text as the source, says pretty much the same thing. I'd rather go with the bit from the Fed, but there's a quote if it's needed. CRETOG8(t/c) 17:50, 6 October 2010 (UTC)Reply

I believe Lawrencekhoo's contention with the new definition I wrote is with this sentence:

"The remaining demand deposits are backed by loan notes derived from loans given out by the bank."

So my question is: if only a fraction of the deposits are backed by reserves, are the rest of the deposit's backed by anything? If so, what are they backed by? I'm trying to make sense of all the conflicting information about fractional reserve banking thats out there. I believe my definition is/was precisely what fractional reserve banking is, while not conflicting with all the explanations of how it works. Fresheneesz (talk) 18:40, 5 November 2010 (UTC)Reply

Except your explanation was wrong - the rest of the deposits are backed by a priority promise of the bank to give you currency on demand, and insurance from the FDIC, neither a fungible, negotiable instrument. Hipocrite (talk) 19:51, 5 November 2010 (UTC)Reply

Insurance is insurance, not backing. Neither is a promise to pay, backing... just like you can't get a mortgage "backed" by your promise to pay it off.. The whole basis of a banks ability to pay people on demand is because they have the full real value as assets (liquid or illiquid). Those assets include reserves and securities from loans created from deposits. Isn't that what "backing" is? Fresheneesz (talk) 22:46, 6 November 2010 (UTC)Reply

No. The word "backed" has many meanings. I suggest that you are reverting over and over to your preferred version without first getting consensus - or even really understanding what you are writing about - this is problematic behavior, and needs to stop. Hipocrite (talk) 00:39, 7 November 2010 (UTC)Reply

My problem is that you're ignore the fact that my edit is more true to their sources than the definition that was there before. You're claiming that "backed" has many meanings, but you don't mention any of those meanings, and you aren't telling me why my interpretation of the sources is incorrect. I'm certainly open to discussing this and coming to a consensus.

Why don't we start the discussion right now? How exactly did I misinterpret "[Fractional Reserve Banking is] a banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal." ? Fresheneesz (talk) 22:18, 7 November 2010 (UTC)Reply

That sentence is unclear, as it seems to state that if you deposit $100, $8 of it is uniquely "backed" by cash. That's both accurate, and not accurate. It's accurate, in that the bank has only $8 of cash on hand per $100 of deposits. It's not accurate, in that the bank does not promise that $8 to you. Hipocrite (talk) 12:37, 8 November 2010 (UTC)Reply

Policy is that the lead should summarize the article. (See WP:LEAD.) The lead shouldn't introduce anything new, or disproportionately highlight any issue; it should reflect in proper proportion, what is in body of the article. I would suggest that any proposals to change the article lead, start by changing the body; and that any changes in the lead should either follow consensus changes to the body, or change the lead to better reflect what is in the body of the article. Any changes to the lead that doesn't follow these principles is going against policy. LK (talk) 14:07, 8 November 2010 (UTC)Reply

Fair enough Lawrence. Hipocrite: I see what you're saying now. But in fact, that $8 is promised to you - actually the whole $100 is promised to you. You're saying, though, that saying its "backed" doesn't make the meaning of that statement clear, right? Fresheneesz (talk) 21:11, 8 November 2010 (UTC)Reply

I noticed that "backed by" has been changed to "kept as". I think this has the same unclarity that "backed by" has. What about saying that "only a fraction of deposits can be withdrawn on-demand" with the possible qualification "even though all deposits are promised to be withdrawable on-demand". Maybe theres a less long winded way to say this. Fresheneesz (talk) 00:59, 10 November 2010 (UTC)Reply

Or is there a more precise way of saying "backed by" such that the meaning we want is clearly the meaning written? Fresheneesz (talk) 01:00, 10 November 2010 (UTC)Reply

I think my previous questions have confused people, so I want to try to make it more clear. Its pretty clear that FRB increases the money supply, but does FRB cause inflation? Here's a table that describes what I think would happen if the bank decided to lend out a fraction of an original deposit of $100:

Event	Amount in reserve	Value of loan security owned by the bank	Percent in reserve	Amount in original account	Amount In Loanee's account	Total demand deposits
Bank hasn't lent anything out yet	$100	0	100%	$100	0	$100
Bank lends out 90% of the deposit	$100	$90	52.6%	$100	$90	$190
Loanee withdraws $90	$10	$90	10%	$100	0	$100
Depositer withdraws $10 (reserve requirements violated)	0	$90	0%	$90	0	$90
Bank sells a loan note to bring its reserves back into compliance	$9	$81	10%	$90	0	$90

So as you can see, the amount in reserve + the value of the loan securities is always equal to the amount in the original account + amount in loanee's account (ie the total demand deposits). Also, notice that whenever too much money is withdrawn, money has to be taken out of the system to replenish the reserves (this happens by selling some bank assets - ie loan notes).

Because of this, is it fair to say that FRB does not cause inflation? Fresheneesz (talk) 20:49, 10 November 2010 (UTC)Reply

You are ignoring the fact that the Loanee does something with the money. "Inflation" is not the term you want to use - it's "expanding the money supply," and yes, FRB does expand the money supply. Hipocrite (talk) 21:01, 10 November 2010 (UTC)Reply

If FRB worked exactly as described in the textbooks (which it doesn't) then the money supply would indeed inflate up to the limits defined by the reserve requirement - but then after that point it would expand no more. So unless the monetary base gets expanded, FRB will not lead to any further inflation. Reissgo (talk) 11:54, 11 November 2010 (UTC)Reply

"Inflation" is not the best word choice in the context of this thread, as it generally implies "price inflation".

Correct. I should have said "money supply inflation". Reissgo (talk) 13:42, 11 November 2010 (UTC)Reply

Actually, what I'm concerned about it price inflation / money devaluation. Sorry if that wasn't clear. I do understand/agree that the money supply inflates. Fresheneesz (talk) 02:13, 12 November 2010 (UTC)Reply

To bring this to something more relevant with editing this article, I've removed the following excerpt from the "Reason for Existance" section:

A full-reserve banking system with a fixed money supply would result in deflation as the economy grows. However, this deflation is likely to have deleterious consequences if some prices are stickier than others; in particular, wages are often significantly stickier than other prices. Most economists believe that given wage stickiness, the adjustment costs of deflation are significantly higher than an equivalent inflation. As such, mainstream economic thinking prefers the inflation brought about by fractional-reserve banking to the necessary deflation of a full-reserve banking policy regime.^[2]

While lots of that information is probably correct, and is certainly sourced, it's very dubious to me that this has anything to do with fractional reserve banking. It talks about the negative effects of deflation, but it doesn't source anything related to FRB causing inflation. The source itself doesn't mention FRB at all. What it does say is that the Fed can create inflation, which the author of that blog article says is good for society. The Fed can and does cause inflation by printing money, but we should find a source for the assertion that FRB can create inflation in some way. Fresheneesz (talk) 08:31, 12 November 2010 (UTC)Reply

And again, to be clear, when I say "inflation" I mean price inflation / money devaluation. Fresheneesz (talk) 08:32, 12 November 2010 (UTC)Reply

If banks exclusively lent from time deposits, then this would result in a fixed money supply. Also banks could still make money on people's savings. Should this system be described as fractional reserve banking or full reserve banking? If its classed as a form of fractional reserve banking then I believe it should be discussed on the main page. If its classed as full reserve banking then some of the claims made about fractional reserve banking's advantages over full reserve banking will have to be modified. Reissgo (talk) 12:04, 11 November 2010 (UTC)Reply

Your statement is not accurate. In addition, it's not sourced. Hipocrite (talk) 12:40, 11 November 2010 (UTC)Reply

Which part is not accurate? Reissgo (talk) 12:56, 11 November 2010 (UTC)Reply

"If banks exclusively lent from time deposits, then this would result in a fixed money supply." Imagine an economy where demand deposits were banned, and all deposits were time deposits. I deposit $1mm in a 1 year time deposit. The bank lends some of this deposit to Ralph for a year, who uses it to buy a fleet of cars that he's going to rent out and then sell in a year to repay the loan. The person that sold the cars deposits it in a 30 year time deposit. The bank then lends some of that deposit to someone who buys a house. The person who sells the house deposits the money in a 2 year time deposit. Please don't consider making changes to this article without a reliable source. Hipocrite (talk) 13:03, 11 November 2010 (UTC)Reply

I think you are mistaken. With time deposits, you can never have a situation where more than one person can lay claim to (and spend) the same dollar at the same time. Therefore the number of dollars available for spending at any one instant is fixed at the number of dollars you started with. (This is admittedly only true so long as there are no guarantees given by the banks). I will look for a reference though. Reissgo (talk) 14:21, 11 November 2010 (UTC)Reply

You don't know what a time deposit is. Please review our article on time deposit. It is not putting cash in a vault. Hipocrite (talk) 14:52, 11 November 2010 (UTC)Reply

I do know what a time deposit is. I know that time deposits can be lent out. Reissgo (talk) 15:11, 11 November 2010 (UTC)Reply

Your description above does seem fairly strange. It seems you're trying to say that time deposits cannot be used as to contribute to monetary expansion. I'm not sure why you'd make that claim.... BigK HeX (talk) 16:25, 11 November 2010 (UTC)Reply

Say I have $1000 in the bank and have a cheque book. Say someone borrows $900 of that money, and gets given a cheque book and told he can spend up to $900 with that money then we can both go to the market and spend a total of $1900 at exactly the same instant. The spending power in the market has risen from $1000 to $1900 by virtue of FRB. Now contrast this with timed deposits. Now the situation would be that I go to the bank and say to them "take my $1000, keep $100 of it in a demand deposit which you can not lend out, and keep the remaining $900 in a time deposit which you can lend out for up to one year (or whatever)". During the next year I have only $100 of spending power while the borrower now can have $900. The most we can spend at the same instant is a total of $1000. Reissgo (talk) 16:47, 11 November 2010 (UTC)Reply

Hipocrite wanted a reference... I've just found this quote "On the other hand, a genuine time deposit—a bank deposit that would indeed only be redeemable at a certain point of time in the future, would merit very different treatment. Such a time deposit, not being redeemable on demand, would instead be a credit instrument rather than a form of warehouse receipt. It would be the result of a credit transaction rather than a warehouse claim on cash; it would therefore not function in the market as a surrogate for cash." from "Austrian Definitions of the Supply of Money" By Murray N. Rothbard, From New Directions in Austrian Economics, edited with introduction by Louis M. Spadaro. Kansas City: Sheed Andrews and McMeel (1978), pp. 143–56.] Reissgo (talk) 19:40, 11 November 2010 (UTC)Reply

Everything is clearer now. Please don't take what fringe Austrians say as true - it's mostly wrong. Hipocrite (talk) 19:42, 11 November 2010 (UTC)Reply

I've been reading this thread, and I have to interject at this point. You asked for a source, Hipocrite, and he gave you one. Just because you think Austrian economists are wrong, does not make it so. Your opinion isn't want matters on wikipedia - sourcing and concensus are. By dismissing this source without discussion, you're not contributing constructively to this thread. I, personally, would like to hear your thoughts. But you need to write them down for people to take account of them. Fresheneesz (talk) 01:54, 12 November 2010 (UTC)Reply

So the bank lends out your $900 to someone who in turn spends it on stuff, and then the person they buy that suff from deposits it in a 1 year time deposit. The bank then lends out their $900 to someone else who buys stuff. The person they buy that stuff from then deposits it in a 1 year time deposit. Your $900 has now been lent out twice. Repeat however long you want. I strongly advise that you please consult a reliable source for any changes you'd like to make to the article. Hipocrite (talk) 19:42, 11 November 2010 (UTC)Reply

It doesn't matter that the money gets lent out multiple times. The bottom line is that at any one time only one person at a time is allowed to spend it.

Ok, so I have produced an academic paper giving evidence for my case. If you claim that the mainstream disagrees, then it is clearly your turn to show me a paper that refutes my claim. Reissgo (talk) 19:54, 11 November 2010 (UTC)Reply

No, I'm not interested in debating economics with Austrians. Hipocrite (talk) 19:56, 11 November 2010 (UTC)Reply

Your "refutation" is unsourced, so I shall ignore it. Reissgo (talk) 19:58, 11 November 2010 (UTC)Reply

For the record I am not an Austrian economist. I have many disagreements with them. I am a firm believer in the paradox of thrift for example, which Austrians strongly dispute. Reissgo (talk) 20:08, 11 November 2010 (UTC)Reply

Austrian or not, your understand of fractional reserves is flawed. In particular, you said "It doesn't matter that the money gets lent out multiple times", which is clearly incorrect. I have to agree that with Hipocrite, in that edits to the article based on your understanding would likely be counter-productive. BigK HeX (talk) 22:11, 11 November 2010 (UTC)Reply

However long the chain of lending and relending of the same dollar - only one person has the legal right to spend it at any one instant. This is the difference between the use of time deposits and standard FRB. Wiki does not accept original research - so how about you show me your reference for your assertion that the money supply can grow in a system of time deposits. Reissgo (talk) 22:41, 11 November 2010 (UTC)Reply

Perhaps I should clarify that I am only talking about "genuine time deposits" as mentioned by Rothbard. I'm not talking about a system where you can get your money out early with a small penalty. Also there must be no government guarantees about savers not losing their money if the banks fail. Reissgo (talk) 23:00, 11 November 2010 (UTC)Reply

Doesn't matter what Rothbard calls them. If he says that "'genuine time deposits' cannot contribute to monetary expansion," he would be in contention with pretty much any monetary text. Perhaps you're just misunderstanding his meaning, or perhaps he really is making a contention that defies just about any other source. Personally, I think Rothbard's unconventional view of the money supply and idiosyncratic terminology is confusing you in some way, as you are possibly taking a different meaning from his words than he would have wanted. Regardless though, I'm pretty sure Rothbard's rather novel understanding or attempt to re-define the terms would prove largely immaterial to this article. BigK HeX (talk) 23:43, 11 November 2010 (UTC)Reply

It feels to me that we are talking a cross purposes. This thread is not discussing standard FRB, we're not discussing our current monetary system. We're discussing a theoretical system in which banks could only lend from time deposits and not demand deposits. Please read the thread again right from the top. Reissgo (talk) 00:03, 12 November 2010 (UTC)Reply

I've read the thread. Your opening sentence for this thread is flat-out wrong. I'm trying to tell you that I think there's a fair chance the source doesn't say what you think it does; I haven't read it closely, though. I'm guessing you'll have to have far better sourcing than a fringe economist for such a contentious assertion to merit much discussion here. With the sourcing provided so far, unfortunately, I think the assertion you're investigating here would be rejected as being fringe, non-notable and tiny-minority ... basically WP:UNDUE not to mention WP:REDFLAG. I'm not sure I've ever actually seen a clear example of WP:REDFLAG in a talk page discussion, but this one would qualify in my book. BigK HeX (talk) 00:31, 12 November 2010 (UTC)Reply

I'd like to attempt to restart this thread in a more constructive way. I think everyone needs to chiiill.

Reissgo - I believe your main question is: Are time deposits a form of fractional reserve banking? Should discussion of time deposits appear in this article? - is that right? If so, because time deposits aren't redeemable on demand, then they aren't a form of FRB, and so don't need to be mentioned on the page.

BigK, Hipocrite - Would you agree with that assessment?

The idea related to time-deposits contributing to monetary expansion might be something to discuss on the talk page of that article. I generally agree with the idea that money that is only redeemable by one person at one time cannot contribute to monetary expansion, but I'm not sure that is necessarily the case with time-deposits, because of the way banks may use those time-deposits as the basis for further loans. Fresheneesz (talk) 02:08, 12 November 2010 (UTC)Reply

Time deposits and the money multiplier

To understand this issue, it's necessary to understand that there are as many money multipliers as there are measures of money. The money multiplier is defined as the ratio of broad money (M1, M2, M3, etc) to M0 (money issued by the central bank). There's a multiplier associated with each measure of money. (There's an M1 multiplier, M2 multiplier, etc.) Since each measure is different, each multiplier is different.

Suppose that checking and savings accounts are forbidden, and only time deposits allowed. Then M0 = M1 = M2, and the multipliers associated with M1 and M2 would be equal to 1. Fresheneesz is correct in that there is no money multiplication in terms of any money measure smaller than M3. However, M3 (which includes time deposits) would be larger than M0, and hence, when measuring broad money by M3, there would be secondary money creation.
LK (talk) 04:55, 12 November 2010 (UTC)Reply

"Reissgo - I believe your main question is: Are time deposits a form of fractional reserve banking? Should discussion of time deposits appear in this article? - is that right?" - Yes. But also, if it is not a form of FRB then presumably it should be classed as full reserve banking. And if that's the case then some of the claims made about the advantages of FRB over full reserve banking need to be modified. I'm not entirely clear about LK's position. LK: would you say time deposits constitute fractional reserve banking or full reserve banking? Reissgo (talk) 09:06, 12 November 2010 (UTC)Reply

It's a grey area, but I lean towards calling it FRB, as M3 is a standard measure of money, and time-deposits can usually be withdrawn (with some penalty). We should look to some reliable source to answer this issue, but I'm afraid it's a question largely ignored by the mainstream literature. I believe I've seen descriptions of Full-Reserve banking that include 'no re-lending of deposits', which would imply that this situation would definitely fall into the category of fractional reserve banking. In any case, we shouldn't have a discussion of this situation on the main page, unless it becomes seriously discussed in reliable sources. LK (talk) 10:30, 12 November 2010 (UTC)Reply

"and time-deposits can usually be withdrawn (with some penalty)".. this may be true in practice - but my whole case revolves around a system where time-deposits can not be withdrawn early at all, penalty or otherwise. If they can be withdrawn with a penalty then the situation is very close to ordinary FRB and the money supply can be inflated to levels higher than the monetary base.

You talk about reliable sources. What if we have a situation where I find a famous Austrian economist that supports my case in a serious journal... but the mainstream have simply ignored it and not even attempted any refutation... or none of the wiki editors can find a mainstream refutation... what do we do then? Reissgo (talk) 12:17, 12 November 2010 (UTC)Reply

I just found a reference to support my case in an article criticizing Rothbard! - see here. In it he says "I have no argument with excluding small denomination time deposits as part of money supply". Ok, so this and my previous reference are not the world's greatest, but so far the score is 2-0 to me. Reissgo (talk) 17:03, 12 November 2010 (UTC)Reply

I hope we consider any reliable source, mainstream or not. In this case, the source talks about time-deposits being part of the money supply, but doesn't mention fraction-reserve banking, or reserves in any sense. So the question I have is: Should something be considered Fractional-reserve banking solely because it increases the money supply? I'm inclined to lean toward 'no' on that question. Even if time-deposits can be withdrawn with some penalty, should that really be considered "on-demand" if there is a penalty associated with it? If so, "on-demand" could extend to almost any illiquid asset, right? Fresheneesz (talk) 17:17, 12 November 2010 (UTC)Reply

Whether "genuine" time deposits constitute fractional reserve banking is I think arguable either way. I think that the convention is to refer to such a system as full reserve banking but I can not think of a reference off hand. If time deposits constitute full reserve banking then the claims that FRB is better than full reserve banking because it allows banks to act as intermediaries between lenders and borrowers, is false. Reissgo (talk) 17:52, 12 November 2010 (UTC)Reply

Just found this: "The amount of cash kept in the bank’s vaults ready for instant redemption is called its reserves. Hence, this form of honest, noninflationary deposit banking is called “100 percent reserve banking,” because the bank keeps all of its receipts backed fully by gold or cash." - from here: http://mises.org/Books/mysteryofbanking.pdf. This shows that a system of genuine time deposits is indeed full reserve banking. Reissgo (talk) 21:57, 12 November 2010 (UTC)Reply

I would be more inclined to call time-deposits "zero-reserve" banking (although the withdrawal on demand part doesn't apply), because banks don't (or aren't required to) keep any reserves on time-deposits. This source says that no reserves are required for time-deposits (although I'm not sure how reliable that info is since they also say no reserve requirements are required for savings accounts either - I didn't think that was the case). Fresheneesz (talk) 22:45, 12 November 2010 (UTC)Reply

Regarding:

he says "I have no argument with excluding small denomination time deposits as part of money supply".

and This shows that a system of genuine time deposits is indeed full reserve banking.

I don't have the inclination to elaborate much at the moment, but, given the content he's quoted on the page, Reissgo is attempting to use sources to say something they do not. BigK HeX (talk) 07:15, 13 November 2010 (UTC)Reply

BigK, you need to check yourself. Please assume good faith and argue on the points, not on the person. Thanks. Fresheneesz (talk) 19:49, 13 November 2010 (UTC)Reply

"Checking yourself" would be good advice for you to take. With absolutely no incivility, pointing out what I saw as an inaccurate use of sources IS discussing the issues. I'm not sure what prompted your comment, but it's certainly both unnecessary and inflammatory. BigK HeX (talk) 21:47, 13 November 2010 (UTC)Reply

I have given two references that both state that time deposits should not be considered part of the money supply. This means that in a system where loans can only be made from time deposits, there would be no mechanism for increasing the money supply over and above the monetary base. Any time you attempt to raise the money supply by $X by making a loan, you first have to tie up $X in a time deposit and so remove it from the money supply before it can be lent out. Reissgo (talk) 08:49, 14 November 2010 (UTC)Reply

RE: "there would be no mechanism for increasing the money supply over and above the monetary base"

This is already wrong, as far as I know, but .... just for the sake of argument, what exactly happens in your time deposit scenario when the term on the deposits expires and all of the depositors (who entered into transactions with loanees) decided to withdraw and hold cash? BigK HeX (talk) 16:29, 14 November 2010 (UTC)Reply

You say "all the depositors" as if they all expire at the same moment, this will not be the case. Anyway, nothing in particular would happen. I don't know what event you are concerned about. Reissgo (talk) 17:12, 14 November 2010 (UTC)Reply

It doesn't matter whether the terms expire at the exact same second. But ... OK, let's presume the term on the time deposits is 3 days. Are these short-term time deposits also supposed to somehow lead to a "fixed money supply"? BigK HeX (talk) 20:39, 14 November 2010 (UTC)Reply

BigK HeX brings up an interesting point. Obviously, the economic effect of having term deposits of 3 days would be nearly indistinguishable from normal savings accounts. I can see nothing productive in arguing about what length of time is neccesary before time deposits become different from saving accounts and money market accounts. In any case, the discussion so far is all speculation and OR. The statement that fractional reserve banking (vs full reserve banking) allows banks to serve as financial intermediaries is sourced. Unless equally good sources contend otherwise, there is no disagreement about this issue in the literature, and there should not be a discussion of this issue in the article. Some discussion in the article about Full Reserve banking may be appropriate, but not here. LK (talk) 03:13, 15 November 2010 (UTC)Reply

BigK - wouldn't it be fair to say that once the term of the time deposit is up, then those account turn into normal frb bank accounts? Before the term is up, I don't think its really valid to call it FRB. None of you guys have commented on that point. Does anyone disagree? Fresheneesz (talk) 08:44, 15 November 2010 (UTC)Reply

I'm not sure of the position you hold, but I think everyone else has made rather clear objections to Reissgo's assertion. If I haven't been explicit before, I will say that the minor complication of time deposits does nothing on its own to eliminate fractional reserve banking or that would prevent changes in the money supply. Also, the claim that, "If banks exclusively lent from time deposits, then this would result in a fixed money supply, is quite extraordinary and easily falls under WP:REDFLAG IMO. Though there may be some impact on lending statistics, I believe that fundamentally the FRB process is little changed if time deposits are used instead of demand deposits. BigK HeX (talk) 09:25, 15 November 2010 (UTC)Reply

To answer your question Fresheneesz, the deposit would be rolled over into another 3-day term deposit. The normal money creation and multiplier process would take place. To make it clearer, consider a situation where savings accounts are outlawed but 1-day term-deposits allowed. Such a system would be practically indistinguishable from the situation where savings accounts are allowed. LK (talk) 11:30, 15 November 2010 (UTC)Reply

I'm not sure it makes sense that a 3-day time deposit would roll into another 3-day term. That would mean that a person could never withdraw their money without paying a penalty. Regardless, I don't thin Reissgo's suggestion falls under WP:REDFLAG. Its not that radical. I do believe it would constitute OR, and I don't think the sources have enough information to tie this to this article.

I think its probably time to come to an actionable consensus about this thread so it doesn't go on indefinitely or devolve into bickering. Fresheneesz (talk) 23:00, 15 November 2010 (UTC)Reply

Fresheneesz, I wonder if you've ever had a time deposit at a bank? If not, I should explain that on the day the time deposit comes due, you are given the choice to roll it over or withdraw the deposit without penalty. You can specify which to do before hand, but you can always change your instruction on the day the time deposit is due. So, 1-day time deposits that automatically roll over unless you specify otherwise (e.g. by going to the bank to ask for the money) is practically indistinguishable from a passbook savings account that does not allow ATM withdrawals. LK (talk) 10:05, 17 November 2010 (UTC)Reply

Gotcha, that makes sense to me. Thanks. Fresheneesz (talk) 23:42, 18 November 2010 (UTC)Reply

Maybe I should have made one thing clearer - the banks would not be able to lend long term unless it had sufficient long term time deposits. If a bank agrees to lend out a large sum of money for ten years when all its savers have only deposited money in time deposits for a few days, then this is dangerous. The bank would be relying on finding a continuous stream of new savers as old savers were lost. If new savers didn't come along the bank would be busted. In the system I am talking about, banks would only be able to lend $X for Y years if it had $X already on deposit where the terms were Y years or more. Reissgo (talk) 15:45, 15 November 2010 (UTC)Reply

Resolution recommendations

On the assertions prompting this thread, I'd suggest that the sourcing is not strong enough to support inclusion. BigK HeX (talk) 23:30, 15 November 2010 (UTC)Reply

I'm going to surprise your here and agree! It seems that the debates over different monetary systems have been taking place for centuries and much of the good writings on the subject are in books rather than online. What I have managed to learn about full reserve banking has largely been from lectures and word of mouth. Without the work being online, it it very hard to find the original definitive sources. Having said all that, I am on the case, and hope to come back with a really good source before too long. Reissgo (talk) 09:31, 16 November 2010 (UTC)Reply

Good luck. I've always found the thought of full reserve banking to be intriguing. It's possible that you'll run into theoreticals by researching the Sharia Law Banking systems that do already exist. BigK HeX (talk) 13:20, 16 November 2010 (UTC)Reply

I found this document http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf. It proposes a system of full reserve banking. Pay special attention to the part on page 8 starting with the heading "Investment Accounts". Reissgo (talk) 20:41, 17 November 2010 (UTC)Reply

Too bad they are not explicit in that section on the key difference needed for an "Investment Account" to differentiate itself from the time deposits that you brought up earlier. BigK HeX (talk) 20:30, 17 November 2010 (UTC)Reply

I see no difference at all. They are just choosing a different label for the same thing. The document appears to support everything I have claimed from the outset. The only question now is whether this document is a reliable source or not. Reissgo (talk) 20:41, 17 November 2010 (UTC)Reply

It does not support your contention. This time I have examined the source, and you, most certainly, do not understand it accurately, if you think it supports your earlier assertions. BigK HeX (talk) 22:14, 17 November 2010 (UTC)Reply

My main claims were made at the start of this thread: "If banks exclusively lent from time deposits, then this would result in a fixed money supply. Also banks could still make money on people's savings." I now make the additional claim that this corresponds to full reserve banking. This is three claims in total. Which one(s) do you believe this paper does not support? Reissgo (talk) 23:45, 17 November 2010 (UTC)Reply

Pretty obviously your paper does not necessarily support assertions on time deposits, since it does not address time deposits. Remember that this equivalence between time deposits and the paper's "Investment Accounts" is an (inaccurate) presumption that you proposed. It is still left to you to actually show that "they are just choosing a different label for the same thing", instead of only presuming as much. Once you understand the paper's "investment accounts" more accurately, I think the matters here will be cleared up. BigK HeX (talk) 02:37, 18 November 2010 (UTC)Reply

What is the difference between the "Investment Accounts" described in the paper and time deposits? By the way, having looked at the qualifications of one of contributors, Professor Werner, it is clear to me that this is a reliable source. Reissgo (talk) 08:31, 18 November 2010 (UTC)Reply

A few points.

1. This whole issue is largely ignored in the literature, hence including discussion of it in this article is WP:UNDUE. One article is not adequate to argue for inclusion of a topic. When this issue is actively discussed in respected journals, or in textbooks, then we can include some discussion in the article.
2. A (non-invited) submission to a government banking commission is not a reliable source, as it comes close to being self-published. It is similar to an 'amicus brief', which are not reliable sources; I could write and submit such a submission myself.
3. The investment accounts proposed in the paper are unlike fixed deposits in that customers cannot 'break' them early. This is unlike the usual case where customers can withdraw their money early with a penalty.
4. The paper proposes that reserves need not be kept against these investment accounts. This is unlike the current situation where reserves must be kept against fixed deposits.
5. The claim that "If banks exclusively lent from time deposits, then this would result in a fixed money supply" is incorrect for two reasons:

• Firstly, if one considers short term time deposits as part of money supply (either as a component of M2, as in the US, or as part of M3 as in some other countries), money multiplication still occurs, and there would still be secondary money creation by the commercial banking system.
• Secondly, if one considers only cash in circulation and demand deposits as money supply (M1), then the creation of time deposits would shrink the money supply (M1), as banks must hold reserves against these time deposits, pulling cash out of circulation.

LK (talk) 09:55, 18 November 2010 (UTC)Reply

I could argue about points 3, 4 and 5 but it is not worth the effort because I see I can never win against point 1. Obviously LK won't allow anything here until it has become mainstream. The "mainstream" had it all wrong with respect to the last crash. They should hang their heads in shame. The people that were warning of the crash should be held up on a pedestal and listened to. I urge anyone that has come here to research monetary systems to watch the video on this page: http://www.debtdeflation.com/blogs/2010/11/15/why-credit-money-fails/ Reissgo (talk) 11:15, 18 November 2010 (UTC)Reply

There were lots of mainstream economists warning about the potential for a crash as well. Look at it this way: a cargo-cultist could have predicted a crash as well based on, well, something cargo-cultist. The eventual accuracy of that prediction does not demonstrate cause and effect or relevance to the subject, hence undue.Gregalton (talk) 13:14, 18 November 2010 (UTC)Reply

Even if we disregard the warnings from the current crop of mainstream economists and presume that they "had it all wrong", we still generally go with any overwhelmingly common explanations if they exist in the academic literature. Wikipedia discourages attempts to Right Great Wrongs.

In any case, you are simply wrong in your assertions here. While you could disbelieve that, you might take this discussion as an indication that your understanding of full reserve banking (and probably fractional reserve banking) are at a level where their application would be counter-productive to articles on Wikipedia. I say this knowing that you mean well. I suggest you look through more of the literature. Drop by my talk page, if you like. BigK HeX (talk) 13:40, 18 November 2010 (UTC)Reply

I agree with Reissgo that the source he found does indeed talk about time deposits as they are defined, and that the source supports his assertions.

On LK's numbered points:

1. Issues "largely" ignored in "the literature" do not qualify as having undue weight. You're misrepresenting wikipedia's undue weight policy, which says that viewpoints should be reported "in proportion to the prominence of each viewpoint". You are, contrarily, saying that these viewpoints should not be reported on at all.
2. Sources have varying levels of reliability. The fact that it is an official submission puts it a nice big step above blogs - which have been widely used as relatively reasonable sources on wikipedia.
3. I disagree that the papers failure to mention edge cases makes its definition of an "Investment Account" different from a time deposit. Certainly the definition of a time-deposit is still the definition of a time-deposit even if it leaves out a full paged discussion of edge cases, implications, and common usage.
4. The article Reserve_requirement explicitly says the opposite if your point here - "the required reserve ratio in the United States was ... zero on time deposits and all other deposits." I have also personally seen one or two external sources (that I won't spend the time looking for) that state the same thing.
5. I don't want to argue your point 5 right now, since I'd like to establish that it makes *sense* to discuss this topic logically (rather than being told its undue weight, OR, or not relevant - which I disagree with). I'll happily come back to this point when we agree on your first 4 points.

I have disagreed with Reissgo's assertion that this topic should appear in this article - and I continue to disagree (simply because I don't see any evidence [or logic] that time deposits can be described as FRB), but I do find major issue with the arguments BigK and LK have presented against it.

Fresheneesz (talk) 00:00, 19 November 2010 (UTC)Reply

Certificates of time deposits could be circulated instead of cash. TFD (talk) 03:06, 19 November 2010 (UTC)Reply

Fresheneesz, WP:Undue applies here, it states "Generally, the views of tiny minorities should not be included at all." The issue at hand is whether a banking system that allows only lending from time deposits, i) should be considered fractional or full reserve banking, and ii) whether it will or will not multiply the money supply. There is no discussion of this issue in the reliable sources, and so there should be no discussion of this issue in the article.LK (talk) 03:33, 19 November 2010 (UTC)Reply

I think your assertions about reliable sources and undue weight are a little bit tautologistic. I would appreciate a tiny bit more logical discussion, and less wiki lawyering. Please?

In any case, I do agree with you that this discussion doesn't belong on this page. Fresheneesz (talk) 19:39, 19 November 2010 (UTC)Reply

@Fresheneesz: To agree that this paper supports a notion about time deposits is to fundamentally misunderstand fractional and full reserve banking. Editing a related article while holding such a misunderstanding would be counterproductive. BigK HeX (talk) 05:31, 19 November 2010 (UTC)Reply

Thats your opinion BigK, and your opinion doesn't constitute truth. I could say the same thing about your misunderstanding of the article. How bout we stick to discussing the issue rather than calling me an idiot in not so many words? Fresheneesz (talk) 19:39, 19 November 2010 (UTC)Reply

Just more generally -- the economic literature is often full of intriguing hypothetical systems, custom tailored to accomplish X, Y, and Z, and address concern U, V, and W, without doing R, S, T. One economist who was right about the crash and often proposes such systems is Robert Shiller. While it's fine to place Shiller on a pedestal and listen to him, if you're so inclined, this does not mean we should go about inserting all the theoretical ideas that have ever popped into Shiller's mind into every article where they may be relevant. We shouldn't overhaul the article on government debt because Shiller's hypothetical growth-indexed bonds, if adopted, would change the characteristics of government borrowing. That's not to pass judgment on the merits of his idea, it's just another perspective, not anchored to this particular article and the tensions of Austrians, to consider as analogy. --JayHenry (talk) 05:23, 19 November 2010 (UTC)Reply

I agree with JayHenry's assessment here. Talking about the hypothetical implications of a hypothetical change is probably not what wikipedia should report on. However, to frame it in such a way as to say something like "time-deposits do not change the money supply" is perfectly valid, and tho it doesn't state that "a system where only time-deposits were allowed would result in a fixed money supply", it does imply such a thing. Never the less, I think this is a topic for the Time deposit article, not this one. Fresheneesz (talk) 19:39, 19 November 2010 (UTC)Reply

With regard to: "I have disagreed with Reissgo's assertion that this topic should appear in this article". At the start of this thread I was not sure whether time deposits should be classed as fractional or full reserve banking. But I have become convinced that the consensus is that it should be classed as full reserve banking. So maybe it does not need to be described in the main article directly. But the claims made about the advantages of fractional reserves vs full, need to be altered. In particular this sentence: "Full reserve banking, on the other hand, does not allow any deposited money to be invested" is plain wrong... and appears to be unsourced. Reissgo (talk) 13:42, 19 November 2010 (UTC)Reply

Exactly how are you convinced that there's any sort of consensus to support that time deposits "should be classed as full reserve banking"? It doesn't really make much sense to classify them as either, but if you absolutely did have to "classify" them, it wouldn't be full reserve banking. Also, the sentence you believe is flawed is not; as I've noted before, your understanding seems to be where the flaw lies. While you are in the process of researching these topics, it could be more productive if you perhaps took a break from raising matters here without a high quality source that directly supports your contentions. For the time being, I'd suggest sticking to clear, reliable, mainstream academic sources for discussion on this talk page, as anything less seems only to just add to your confusion. Please consider just doing more research for the time being, as none of your points here have been accurate. BigK HeX (talk) 15:25, 19 November 2010 (UTC)Reply

I have supplied three references in support of my argument and have had anther editor state how he thought that one reference supported pretty much all of what I have been saying. You have supplied no references at all to support anything you have said. Reissgo (talk) 16:33, 19 November 2010 (UTC)Reply

You have not supplied three references to support what you have been saying. I checked one of them and have already informed you that you are not representing it properly. If you're counting the Rothbard stuff, then I won't bother to read that one, as it wouldn't pass muster anyways. So, again my advice to you is to stick to mainstream academic sources which directly support your assertions if you'd like to raise issues on this talk page ... just for the time being. Once you have a better grasp of the topic, you'll be in a much better position to judge sources of less quality. Right now, your arguments are flawed and editors are taken away from other tasks to address the flaws that are being buttressed by low quality sources. I've stated that the proposed edits are not based on an accurate understanding, which doesn't leave me much else to add here, so I'll likely exit this thread. But if you decide to hold off on these issues on the article talk page, feel free to drop by my talk page as you continue your research. It seems you have a keen interest in these topics, and Wikipedia can certainly use help in advancing the state of these articles, but at the moment that's not what is happening. BigK HeX (talk) 17:03, 19 November 2010 (UTC)Reply

"I checked one of them and have already informed you that you are not representing it properly."

BigK, you are not the source of truth. Informing people of your opinion is near useless without logical discussion. Please realize that you are not the economics god. I would greatly. greatlygreatly, appreciate giving me and Reissgo some assumption of good faith, stop wiki lawyering, and please try to make this discussion as helpful and efficient as possible. Fresheneesz (talk) 19:39, 19 November 2010 (UTC)Reply

This response is not really very civil. BigK Hex has every right to review a source and see if it supports your assertion. And if it doesn't, he has every right to politely say so, which he did. This kind of spew in response is uncalled for, definitely violates our civility policy, and verges on violating our no personal attacks policy. Please comment on the the content and not the editor. Yworo (talk) 19:46, 19 November 2010 (UTC)Reply

I agree that I am becoming a little frustrated with this conversation. I am trying to be as civil as possible. But please realize that BigK has mad many such asserts that he seems to think should be taken as truth without discussion. Such things as:

• "is clearly incorrect"
• "edits to the article based on your understanding would likely be counter-productive"
• "Your opening sentence for this thread is flat-out wrong."
• "Reissgo is attempting to use sources to say something they do not."
• "you, most certainly, do not understand it accurately"
• "your understanding of full reserve banking (and probably fractional reserve banking) are at a level where their application would be counter-productive to articles"
• "To agree ... is to fundamentally misunderstand fractional and full reserve banking"
• "none of your points here have been accurate"

None of those assertions were backed up by any explanation on his part. Hes also thrown around WP:UNDUE, WP:REDFLAG, WP:NOT, not-notable, and Right Great Wrongs (are the ones I noticed). I imagine, Yworo, that you would like a clear, civil, and meaningful discussion that resolves efficiently. Thats exactly what I want. However I find some of the tactics being used here counterproductive and inflammatory. I would appreciate any help you can give to this conversation in making it more civil Yworo. And of course I welcome your input. Fresheneesz (talk) 01:52, 20 November 2010 (UTC)Reply

Actually, I agree with BigK Hex. If your understanding is correct, you should easily be able to find multiple mainstream sources which say precisely what you assert. Wikipedia doesn't permit original research or the synthesis of multiple pieces of data to arrive at a conclusion. What you are presenting really seems like original research to me. So whether or not you are "right" is much less important than whether you can find mainstream reliable sources that make clear statements on the topic. Yworo (talk) 01:59, 20 November 2010 (UTC)Reply

*I* am not asserting anything at all. In fact, I have agreed that this topic does not belong on this page. Have you read this thread? Its a tightly bound ball of wikilawyering and unfounded assertions. My only goal here is to establish that we should be having a logical conversation in this thread, rather than argue about semantics, policy, and whether the ideas we present on this talk page have sources.

Why can't we all just focus on improving the *article* rather than bickering about policy? Fresheneesz (talk) 02:02, 20 November 2010 (UTC)Reply

"*I* am not asserting anything at all."

Well..... "I agree with Reissgo that the source he found does indeed talk about time deposits as they are defined"

Also, I'm pretty sure my statements have covered quite a lot more than just Wikipedia policy.

As a final comment, I have not engaged much in any forum-style debating of the topic, since I've already been quite clear that I feel that the sources presented wouldn't be useful no matter the veracity of the claims regarding time deposits. (Heck ... even the guy on the Mises website shot down Reissgo's claim about time deposits.) So ... if this discussion really must be continued, please find mainstream academic sourcing that says "If banks exclusively lent from time deposits, then this would result in a fixed money supply" and then I will happily engage in more detailed discussion. Of course, I believe there's a zero percent chance of being able to find reliable sourcing that says any such thing, mostly because I see no way for such a statement to be accurate. With the current state of sourcing, I maintain my belief that encouraging less article talk page discussion and more individual research in the matter is the most productive way forward. BigK HeX (talk) 05:08, 20 November 2010 (UTC)Reply

Partial Resolution

It looks like we all agree on one thing: this discussion does not belong on the Fractional Reserve Banking page. Lets move this discussion to Time deposit, and for god's sake please continue it in a reasonable and efficient manner. Its frustrating to see this conversation go on so long - half of the discussion is arguing about whether or not we should be discussing it. Stop wasting your time and get down to the point.

All in favor of moving this discussion to Time deposit, please say so. Fresheneesz (talk) 19:39, 19 November 2010 (UTC)Reply

The discussion shouldn't be continued elsewhere. Without decent sources, it should not be continued anywhere. IMO, that is the most efficient manner in which to handle this discussion. Editors have expressed a pretty clear objection to the sources presented (and, at least one -- if not all -- of the weak sources presented do not even support the assertion on time deposits anyways). BigK HeX (talk) 04:44, 20 November 2010 (UTC)Reply

I can see an argument for moving this discussion to time deposits, but am not keen because it looks to me as though not many people visit that page. Also the outcome of this thread has major implications for the wording of this FRB page so it is highly relevant. Reissgo (talk) 15:18, 20 November 2010 (UTC)Reply

I think I have found a RS. How about "100% Money" by Irving Fisher 1935? Reissgo (talk) 23:21, 20 November 2010 (UTC)Reply

I doubt it would support the assertions which brought us here, but, as a source, Fisher's book seems far better than the Rothbard stuff (although the book wasn't written for peer-review, IIRC). What part of the book are you referring to? BigK HeX (talk) 00:13, 21 November 2010 (UTC)Reply

I don't have a copy of the book (yet). I am going by a description of the book here: http://www.cobdencentre.org/2010/01/100-money-irving-fisher/ Reissgo (talk) 09:51, 21 November 2010 (UTC)Reply

By the way, the governor of the bank of England used the fisher book as a reference in a recent talk, so it must be well respected. Reissgo (talk) 09:55, 21 November 2010 (UTC)Reply

Yes, I know its only a blog, but it does reference a highly qualified author. http://www.worldnews.blog-city.com/the_myth_of_fractional_reserve_banking_and_the_monetary_mult_1.htm Reissgo (talk) 13:27, 20 November 2010 (UTC)Reply

It would be helpful if editors aren't asked to bother with obvious non-RS's. Also, please don't take this the wrong way as I'm sure that you mean well, but the article talk pages are not a forum for advocating The Truth™ (or links to such). BigK HeX (talk) 16:27, 20 November 2010 (UTC)Reply

I know that the article is not a RS, but I put it there just in case any passer by may know of a RS that supports the statements made. The arguments made tie in nicely with the work of Prof. Steve Keen. So I think they are probably true.

I think that the way FRB is taught in the textbooks is analogous to the way "electron shells" are talked about in chemistry. The experts know its just a crude approximation that is used in teaching, the experts know that the real story of chemical bonds work in a different way. The article gives a RS for the quote "Almost all who have worked in a Central Bank believe this view is totally mistaken", this tells me that there may be some suitable RS, central bank documents that tell the truth. My posting is an appeal to anyone to find such documents. Reissgo (talk) 17:42, 20 November 2010 (UTC)Reply

Sadly I do not have access to "JSTOR" to get hold of the paper, but just looking at the first page here shows that we have some errors on the main page. I suggest this *is* a reliable source. Reissgo (talk) 19:45, 20 November 2010 (UTC)Reply

The blog merely quotes Charles Goodhart - and does not pretend to represent his analysis. TFD (talk) 20:30, 20 November 2010 (UTC)Reply

Goodhart's paper is about the amount of control a central bank has over monetary aggregates, and argues it's less than monetarists believe, but I don't see what it supposedly undermines in this article. His paper follows fairly logically and uncontroversially from this sentence in the article: "In practice, the actual money multiplier varies over time, and may be substantially lower than the theoretical maximum." Now, if the article suggested that the multiplier was invariable, and that central banks focus only on controlling M0 (which none do) and therefore control broader money, we'd have problematic claims that Goodhart's paper would undermine. But this article doesn't make the claims Goodhart is refuting, so what are we concerned with? --JayHenry (talk) 21:51, 20 November 2010 (UTC)Reply

Yes, Reissgo, this article and the textbook explanation is essentially wrong. The "money multiplier" doesn't really exist. The correct description, sometimes called "post Keynesian" is that held by "endogenous money" theorists, horizontalism, modern monetary theory, circuitism etc referred to at the bottom of Money creation. One can find several recent publications of the Fed (& other central banks, I think) that deny the relevance of the textbook theory & support the endogenous theory. I'll dig them up when I have time. Banks' lending is constrained by their capital, not their reserves. What is odd is that as far as I can see, and although the people who get it right usually don't point it out enough for my taste, the better theories were at times dominant and are much older - going back to Henry Dunning Macleod. See Schumpeter's History of Economic Analysis for some history to 1950. As an anon at the top of the page notes, deposits don't create loans (banks don't lend out the money they get from depositors), loans create deposits (in return for their IOU to the bank, borrowers are granted loans in the form of a bank deposit, which then goes through the economy as the borrower spends the deposit, resulting in other deposits). A good ref is Wray's Understanding Modern Money p 107 et seq. The Myth of the Money Multiplier. As he says, "The money multiplier concept reverses the direction of causation: changes in the money supply cause changes in bank reserves and the monetary base, not vice versa."John Z (talk) 07:07, 21 November 2010 (UTC)Reply

"One can find several recent publications of the Fed (& other central banks, I think) that deny the relevance of the textbook theory & support the endogenous theory. I'll dig them up when I have time."... if you can find something from the fed that would be fantastic. I don't see how the wardens of this page could dismiss that. Reissgo (talk) 09:46, 21 November 2010 (UTC)Reply

I see no problem with adding some discussion of the post-keynesian theories of endogenous money, as long as it's properly sourced and, it's made clear that these are heterodox views held by a minority of economists. LK (talk) 10:46, 22 November 2010 (UTC)Reply

It is my contention that the "textbook" explanation of money creation is simply a "convenient teaching tool". I suspect that central bankers themselves know full well it is such. Now I may be right or wrong in this assertion... but there is a way of determining this. If I am wrong, and the "textbook explanation" is genuinely taken seriously, then there will exist recent, refereed papers in serious journals defending it against some of the many criticisms. Would anyone like to suggest an example or two of such papers? Reissgo (talk) 15:08, 22 November 2010 (UTC)Reply

It certainly can be fun to debate personal speculation, but, unfortunately, the article talk page is not a forum to explore your curiosity on monetary matters (and, if I may be so bold, I'd also suggest that the Mises forums may not be the most appropriate place to seek a thorough view, either). The explanation of deposit multiplication in the article is quite well-sourced. If you wish for the text to be rewritten in some wholly different manner, then please specify exactly which of the article's source(s) you are challenging, and post for us here page numbers of exactly which reliable source (of equal or greater quality) you believe supercedes the article material. IMO, it is far more productive to come to the article talk page with the assertions pulled from high-quality sources, than to request that editors do your legwork for you based on what you "suspect". I'm definitely not trying to be mean, though I feel the need to be straightforward that there's been quite a bit speculation and persistence in poor-sourcing going on for this article recently. BigK HeX (talk) 16:05, 22 November 2010 (UTC)Reply

What would even be the purpose of the conspiracy that's being alleged (as I gather, to foist a fake textbook explanation and hide the real way that fractional reserve banking works)? Moreover, as I just started following this discussion, to an outsider it's completely inscrutable what changes to the article are being sought. I gave the Goodhart paper a read, thinking I could help out, as I at least have no incentive for this article to foist a fake explanation on people (and again, I don't exactly see who does) but it didn't seem to contradict anything here. Could someone explain the purported flaws to me? --JayHenry (talk) 04:32, 24 November 2010 (UTC)Reply

I had intended not to return to this thread until I had collected some better evidence (which I don't have yet), but since you've asked the question I guess I should answer it. The main article gives the impression that a loan can not be made if the loan would take the bank over the limits imposed by the reserve requirements. But the reserve limits apply on average over an extended period. The result is that the loan can be made, breaking the limits temporarily, then the reserves can be sought later. Of course the loan creates more money than is required to fulfil the reserve requirements, so for the banking sector as a whole reserve requirements do not place a limit on credit expansion. Reissgo (talk) 09:02, 24 November 2010 (UTC)Reply

Re: "What would even be the purpose of the conspiracy that's being alleged". I'm not alleging any conspiracy. Just like it is not a conspiracy that chemistry textbooks use electron shells as a teaching aid. It could also be a plain old error. When I was studying neural networks years ago, there was a very basic error that kept being repeated in books on the subject. Nobody could figure out a way to stop the error being propagated! The authors were just copying from each other. Reissgo (talk) 17:39, 24 November 2010 (UTC)Reply

If I may, I think two things make this a complicated topic. One, is that fractional reserve banking has different implications for individual banks and what it means for the banking system as a whole. If you and I went out and started a bank of our own, we would find the so-called "textbook explanation" to be a very relevant constraint on operating the Bank of Reissgo and Jay (BRJ, N.A., Sioux Falls, S.D.) We would indeed need deposits or some form of funding to make loans, and we would only be able to make a finite amount, from the dollars we receive. I think it's appropriate to first tackle the issue from this perspective. The first challenge then is what the implications are for the system as a whole. We should almost think of this as a separate topic. (Perhaps we could have the "textbook explanation," which remains the most relevant thing for explaining how FRB works from the perspective of a bank, and then have a section in the article on "systemic implications" or somesuch, that discusses where some of these more complex issues arise.) The second challenge is that an institution like Bank of America with a ~$2.5 trillion balance sheet that's not primarily deposit taking (nevermind the securities dealers which are not really deposit taking at all), has a radically more complex balance sheet with so many more things going on. the constraints of fractional reserve banking on an average bank have little resemblance to the complexity of capital regulations on the megabanks. So I might summarize the second issue as being that the "textbook explanation" is not wrong, but more that it's just not useful for describing the implications for more complex banks. --JayHenry (talk) 18:50, 24 November 2010 (UTC)Reply