With our current fractional reserve banking system system, if the government want to create P new dollars in order to fund an emergency project, it is inevitable in the long run, whether they like it or not, that the money supply will grow by 10 times P, or should I say M times P, where M is the money multiplier (currently rumored to be around 10 ish). Is this really desirable?
While I'm on the subject, can anyone point me in the direction of a really good argument in support of fractional reserve banking (as opposed to 100% reserve banking)? I've seen all sorts of articles saying "it ain't as bad as people think" in response to criticisms, but I'm struggling to find an article which positively says "its really good and here's why".
Thursday, 25 June 2009
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The only benefit of a fractional reserve system is liquidity and creating currency quickly. I mean, what is more liquid than having your own printing press? Especially versus mining gold and silver. But that is about all as I far as I can tell, and even this creates a whole can of worms. I, personally, will gladly deal with some inefficiencies of gold and silver currency (or any other hard currency that is backed by something real and of believed value) if it gives control back to the market and takes it out of the hands of these notoriously secretive central banks.
ReplyDeleteOn a side note, every time you read or hear that the Fed will do some 'quantitative easing', consider buying some silver or gold as the value of the dollar will drop further. I get called paranoid for suggesting this but the US is in an unbelievable financial mess right now because we have so much debt in a country with decreasing manufacturing. And even if I am wrong, precious metals never lose all value and it is not a bad idea to have some just in case (don't put all your eggs in one currency basket).
“Can anyone point me in the direction of a really good argument in support of fractional reserve banking?” I’m having the same problem. I can’t find anything convincing. George Selgin and Steve Horwitz are two U.S. economics profs who favour fractional reserve, but I don’t find it too difficult to demolish their arguments. See:
ReplyDeletehttp://ralphanomics.blogspot.com/2011/10/george-selgins-flawed-pro-fractional.html
http://www.positivemoney.org.uk/2011/08/steve-horwitz%E2%80%99s-pro-fractional-reserve-arguments/
Having said that, I find most of the pro-full reserve arguments are nonsense as well!
"I find most of the pro-full reserve arguments are nonsense as well" - you should read my book!
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