Talk:Criticism of fractional-reserve banking

Differences between Fiat & Representative currency

Disregarding any other debate on the article, the second paragraph - "Mainstream economists make no material distinction between representative money and fiat currency"... REALLY? Mainstream economists don't see how money convertible to a commodity is materially different than fiat money? Nmcclana (talk) 08:09, 15 September 2008 (UTC)

conventional analysis

The conventional analysis was a mess. It looked like a bunch of answers to the "debt-based" claims, jumbled together in no particular order. I tryed to make it readable without changing its content

I am not an economist, so I might have made mistakes, and would appreciate if someone more knowledgeable took a look to find my mistakes Cold Light (talk) 21:00, 12 September 2008 (UTC)

Ironically, a non-economist has done a very good job of translating the double-speak into plain English. I've added a little detail, just to (hopefully) contribute to the clarity you've brought. Thanks for making the effort. —Preceding unsigned comment added by 165.228.173.164 (talk) 00:59, 13 September 2008 (UTC)

I am somewhat familiar with the criticism of fractional reserve banking and I'll try to work on this piece later. The basic problem with this entry is that the contents do not match the title. The title says it is about "criticism". Yet whoever wrote the content is obviously not a critic him/herself but a believer. So the writer keeps arguing against the criticism which is supposed to be the content of this piece.

This piece should present clearly the whole of the criticism about fractional-reserve banking, without all those asides against the critics. --Rverzola (talk) 20:13, 12 November 2008 (UTC)

What are the claims ???

Reading the article, I think I still don't know what are the claims of the critics of fractional reserve

in the article, I could find just:

"as the money supply and the economy grows, the nation becomes increasingly indebted at the same time"

"transitory and unsustainable aberration from traditional, slower-growing, asset-based monetary systems, with potentially destructive economic effects." (rather vague, right ?)

"debt must grow exponentially in order for the monetary system to remain solvent"

I have also seen the criticism that, for solvency, there is need of exponential growth of GDP (though not in the article)

I think we should compile a list of claims in here, so that they can appear clearly in the article, with arguments against them, and for them, should those exist. (in particular,what are the desctructive effects of claim 2 ?)

So I ask for help in this compilation. Please, however, avoid discussing the merits of the claims here (we can do this afterwards, claim by claim) so that I (and other editors) can actually read the list and use it. Cold Light (talk) 21:37, 12 September 2008 (UTC)

Yeah, I know, it's been beaten up so much there's not much left. If you want to have a crack at this, I suggest you read the following: Brown's Web of Debt, Rowbotham's Grip of Death, The Forgotten War, Murray Rothbard's The Mystery of Banking and Antal E. Fekete's writings, then distill the arguments into this section. All the critics are doing is really re-writing and summarizing Mike's analysis, and adding from stuff from the social credit movement. Ironically they all have exactly the same criticism (even Marx had the same idea). But their solutions are all radically different from each other.—Preceding unsigned comment added by 165.228.173.164 (talk) 01:02, 13 September 2008 (UTC)

I came here to say the exact same thing. This article jumps the gun by trying to refute something which hasn't even been offered. It's ugly. II | (t - c) 19:19, 15 September 2008 (UTC)

If someone were to write a measured, reasonable summary of the claims, it would be useful to incorporate it. But please, a concise, reasonable, NPOV summary of the claims. Concise as in brief.--Gregalton (talk) 19:29, 15 September 2008 (UTC)

Proposed claim addition

This is an off-the-cuff addition of the basics. Help sourcing it would be nice, although I can do it myself later. Begins with a summary of the process:

The central claim of fractional-banking opponents is that a "debt-based monetary system" increases the money supply, leading to inflation and speculative economic bubbles.

When banks lend out the money deposited in them and hold only a fraction in reserve (the reserve ratio), they create money if the assumption that the money lent out is deposited and lent out several times over holds true. This feature allows central banks to temporarily flex or permanently change the money supply through open market operations, thereby affecting interest rates such as the federal funds rate. The money supply is flexed through repurchase agreements of securities on banks' balance sheets, and permanently changed through the outright purchase or sale of securities. When securities are replaced by cash on a banks balance sheet, the bank can lend out more, and as the borrowers spend the new money, it is deposited in banks which will lend it out again. Mainstream economists believe that an increase in money supply, typically temporary, is important to stimulate the economy during recessions to avoid bank runs, deflation, and other problems. Mainstream economists also believe that the money supply must be periodically increased in a growing economy to avoid deflation; if an economy produces more goods but less money exists, deflation is expected to occur. Central banks aim for predictable consistency in the price index.

The Austrian Business Cycle Theory holds that the periodic expansions and recessions of the business cycle are largely due to the flexing of the money supply by central banks. (I could be wrong) This view is not well-regarded by mainstream economists, and dramatic recessions and speculative bubbles precede central banking (see list of recessions in the United_States). These recessions were often exacerbated by the lack of central banking, with its ability to flex the money supply. Milton Friedman and Ben Bernanke attribute the Great Depression to faulty policy in the Federal Reserve, but they believe this policy did not increase the money supply enough.

Mainstream economists do acknowledge the increased risk of speculative bubbles and inflation from poor central banking policy. Milton Friedman has argued that the control over the money supply by individuals should be relinquished and replaced with a consistent rate of growth in the money supply of between 3 and 5%. (Something I read in Cap&Freedom, but it seems like it should be more tied to economic growth ...)

This covers the basics, and maybe it places too much emphasis on central banks and Austrian business cycle theory. Still, I think it would be decent to begin this article with the basics. There are a lot of misconceptions surrounding how central banks work, how the money is actually created, how long it is created, and why it is created. It seems more accurate to say that when the central bank "extends credit" or "flexes the supply" when its actions are temporary. Of course, we need to work on what is objectionable about fractional-reserve banking outside of the central bank element, or else this might as well be called "criticisms of central banking".

I also wonder whether the gold standard and central banking are necessarily mutually exclusive, as the critics seem to think, and I think they aren't. However, I would agree that banking can't really operate on a full reserve, because lending is no longer possible. According to critics the Bank of Amsterdam operated like this, but it might be misleading to call it a bank at this point. Interesting article, though, as are Adam Smith's comments on it. II | (t - c) 06:43, 16 September 2008 (UTC)

It's OK. I'd give it a bare pass. To be blunt, it's a very shallow analysis. Your small camera is pointed at a tiny corner of the big picture. Mainstream economists also focus their tiny camera on the "plumbing" of the monetary system, whereas "debt-based" critics focus on the economic, social and environmental effects this system of debt-money creation has. In order for the central banking/frb system to work, someone has to be the "sucker" who gets into debt in order for the "debt money" to be created. Who is that sucker? What does he/she buy with the new debt money? A car? A house? A new bag? And who gets that newly-created money (i.e. who gets rich off debt)? What does that system of money creation do to the economy? Michael Rowbotham is probably the best at teasing out the implications of this system of money supply. For an Austrian view, see this excellent piece by Robert K. Landis. If you summarized Landis's analysis you would better capture the key issues of the "debt-based" claims, to which (they allege) the mainstream is willfully blind. Willfully blind, like a blind man leading a blind man leading a blind man...over a monetary cliff (interestingly, the first blind man always tends to pull away at the last second leaving the others to fall, but all along says he was blind and couldn't see it coming. Like Greenspan retiring a year before the 2007 credit crunch). It's funny how credit markets work, isn't it? It's especially funny (bordering on hilarious) to see who gets picked as a "favorite" (and is saved from bankruptcy by the taxpayer) and who gets left to be slaughtered. It's always good to have friends at the Fed when the pretty, fey game of musical chairs stops and the bullets and blood start flying. - 165.228.245.66 (talk) 03:19, 17 September 2008 (UTC)

I think the term "sucker" needs more justification. Is a corporation that borrows at 5% to build a factory that earns 10% a "sucker"? —Preceding unsigned comment added by Gmatht (talk • contribs) 12:43, 10 November 2008 (UTC)

"Sucker" = Someone who goes into debt to finance consumption spending or speculative short term investment (gambling?) on Ponzi-like credit instruments or lives off unsustainable, indebted consumption spending. Examples: indebted consumers...investment bankers...hedge funds...private equity "barbarians"...property developers...shopping center owners. "Investor" = someone who borrows to build a profitable, strong cash-flow positive, sustainable business. Examples: Steve Jobs...solar energy technology companies...paper/plastic/glass recycling facilities (richest woman in China owns cardboard recycling plants)...new companies that extract valuable nutrients from sewage and human waste (posphates etc) and turn these into fertilizer (I hate to say this, but even human corpses and dead animals are valuable for the extraction of phosphates)...water purification plants...organic farmers. The key difference between a "sucker" and a true "investor" is the time horizon of each. If you have the time horizon of a mayfly, your "investments" will last just as long. - AntonioMustDie (talk) 11:07, 19 November 2008 (UTC)

innapropriate use of neutrality notice here

'The basic debate' and 'basic nature of system' sections contain only descriptions of attributed and referenced arguments, except for the unreferenced claim represented by paragraph four of 'the basic debate'. The description of arguments is neutraly put. The neutrality notices seem to be applied to the arguments themselves, rather than the desciption of the arguments. This use of the notice is entirely innapropriate as the arguments are not being proposed in the paragraphs but merely described. Neutrality cannot be an issue for these sections on an 'equal space' basis either as the large 'conventional analysis' section puts the mainstream alternative positon. Whereas neutrality might or might not be an issue for the whole article, the separate notices for these sections are entirely innapropriate as things stand. ALSO -as the article is about criticisms, said criticisms should be put before counterarguments are presented. ie. the 'conventional analysis' section should FOLLOW the critisms, rather than precede them. ALSO -I'll second 68.144.81.206 in asking what the deal is with all the scare-quotes? Are they there for a reason? Actually I'll second all of 68.144.81.206's points. Won't make changes as I am not an ecomomist, but proper presentation should not be any harder just because the issue is contentious. It would be nice if someone more expert in this area could take a few minuites to tidy this article though. 60.242.91.158 (talk) 08:47, 28 September 2008 (UTC)