Talk:Fractional-reserve banking/Archive 6

This is an archive of past discussions about Fractional-reserve banking. Do not edit the contents of this page. If you wish to start a new discussion or revive an old one, please do so on the current talk page.

Archive 1

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Archive 4

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What exactly is a fractional reserve bank?

What is wrong about the current Wiki FRB?

It is totally wrong to say a FRB can allow all deposits to be withdrawn on demand. That is clearly not true - it is just blatantly false. Why are we allowing that to read like that??
It is wrong to say that a fractional reserve bank lends available central bank money as the current wiki is saying via a relending model. The relending model is completely false as shown by BOE tuckers comments.
it is completely wrong to imply that FRB exists because of a relending model and would not be a FRB without this model.

2. What is true about FRB

FRB involves the bank not having sufficent highly liquid assets of any kind to enable timely payment of customer withdrawals until it has found a buyer for the illiquid loan book. As Mervyn king points out banks are dangerous organisations - we trade that for community good.
The correct view of FRB appear to be that it levers its available asset base which includes money like bonds that can be bought and sold in a very very highly liquid government and tax payer supported money market where a short term bond is recognised to be defacto money. Clearly they can be used to buy things and clearly they are similarly cash equivalent as a deposit in a private bank is where in reality you cannot get your money on demand when it is a larger sum of money over a few thousand dollars.

3. Capital requirements to regulate FRB are a recognition that "required reserves" in practice have very little influence on credit creation in an endogenous money world created by the decision to control short term money market interests rates via a policy of lending money to banks whenever they want it. LK has been massively resisting this and therefore making progress impossible. Current CB policy is to lend to banks upon request at a price with collateral via 'standing facilities' . We should be looking at the data also and not just what somebody claims in a text book.

The wiki at the moment is a muddle of ill thought out opinions that do not reflect the real world of banking with large chunks being mostly uncited opinion.Andrewedwardjudd (talk) 10:44, 14 April 2011 (UTC)andrewedwardjudd

Competing theories of money creation exogenous and endogenous money

Please move existing endogenous or exogenous comments to this section or say why it is not a good idea.

Seems to me the current wiki before i arrived was written to discredit endogenous money believers as fringe and this is continually repeated in the talk page. If the editors involved were to rewrite that text about heterodox economics it would show some good faith. How can so many central bank economists and university professors be regarded as wacko fringe and so forth?

I had hardly heard of the expression endogenous before to know what it really meant. It appears there are 'new censensus endogenous' people and 'keynsian endogenous' believers who emphasise bank practice and credit creation. I am not sure where 'new keynsian comes' from. Interestingly I read this of Keynes from Tim Congdon a well known UK banking? economist:

keynes tendency to focus on the price of money, rather than its quantity,....he was active in city finance.....and to some extent looked at the monetary situation in the same way as bankers.....Bankers who have to arrange loans everyday, think of the demand for credit as fickle and volatile, while economists who look at a range of monetary aggregates as measured by long-run time series, regard it as continuous and stable.

(Aside: I think wiki wants to be scientific. This idea that consensus is required for science is silly. Science is always mired in controversy. After all the greatest scientists in the world have been wrong for hundreds of years and still deservedly remained giants of all time. But newton knew he was wrong and he knew he had a theory of universal gravitation. The wiki is written as fact and that is not part of the scientific method. While the relending model is written as fact rather than a theory then generations of wiki editors will turn up here and wonder what the hell is going on. many of the comments made recently about weight fringe and so forth are very unbecoming of anything we can consider to be science.)

Editors are putting in considerable effort to discredit endogenous money researchers who do not support a relending model. The BOE clearly think a relending money is a load of baloney. Banks lever up their balance sheets by creating money deposited in their customers accounts they say.

Obviously there have been considerable efforts on the board to get references to credit creation removed. I am not sure why that is so threatening. Banks obviously extend credit rather than loan the depositors money. MMT is something extra to this. For the record i 'emailed' with Warren Mosler and it ended up quite unpleasant - some of this coversation is available over at talk_finance.net

I would like to see it turned into something a banker would be pleased to read because it explains things to him better than he can explain it to himself because mostly he is not thinking about it too much at all, but is rather involved with running a buisiness in a sound manner. However if bank economists genuinely believed the wiki model i think it would be cause for anxiety for all of us. So far it is obvious they do not believe it.

But I really do not want to focus on a debate about these issues. The issue is NPOV where everybody has theories and few people have absolute knowledge in a very complex constantly changing chaotic world.

Wiki should have

3. money creation

3.1 Relending model with money multiplier theory or whatever that theory involves

3.1 Credit creation model with endogeneity of money theory or whatever that theory involves

By the way can i block quote my text to indent it? Thanks in advance Andrewedwardjudd (talk) 09:49, 14 April 2011 (UTC)andrewedwardjudd

The problem I would see with the current endogeneous theories of money is that they are observational. This page should be concerned with the actual mechanics of how the system works, or is believed to work. It is a perfectly valid observation that the money and credit supplies are continuously expanding, but to the best of my knowledge there is currently no clear, coherent and scientific explanation within Economics of exactly what mechanism or mechanisms within the Fractional Reserve Banking system cause this. Mischling (talk) 15:59, 14 April 2011 (UTC)

I tried talking about the mechanics of money creation based on central bank documentation but LK insists that text books are a better source of information. The only reason we are bogged down in endogenous money was because this was the only area left open to us as editors on wiki. — Preceding unsigned comment added by Andrewedwardjudd (talk • contribs) 20:10, 18 April 2011 (UTC)

Can a bank lend money it does not have?

Hello, I am reading a book called, "The Mystery of Banking", by Murray Rothbard. I am trying to grasp a clear understanding of FRB but I've hit a stumbling block. This book gives an example in which someone deposits $50,000 to the bank. The bank then proceeds to loan out $80,000 to someone else, thus increasing the supply of money from $50k to $130k. The book claims the fractional reserve in this example is 5/13, ($50k/$130k) and claims this to be how banks work. I understand from this wiki page that FRB means a bank can loan out money that was deposited in the bank, thus causing it's reserves to be less then it would need to cash out all it's clients. But in the example above, the bank loaned out even more than it had to begin with and therefore truly created money out of thin air. Can banks do that? This makes no sense to me. Who is right, wikipedia or Rothbard? Or are they both right and I'm just misunderstaning something. thanks in advance. The above example is given in Chapter VII-3 of the book. —Preceding unsigned comment added by 24.9.165.150 (talk) 23:56, 13 April 2011 (UTC)

Dont forget there is green folding stuff and then there is money owed to customers. The owed money is deposit money or cheque book money or commercial bank money. All three names the same thing.

Wiki is wrong. But it still comes down to debits and credits. Would you do it yourself? It is not so easy as it sounds Andrewedwardjudd (talk) 01:26, 14 April 2011 (UTC)andrewedwardjudd

Thanks Andrew, it seems such a subtle difference in how it works, since both ways appear to let the bank maintain it's reserves at whatever fraction of it's accounts. Something is still bothering me. Let's say I'm a bank and give you that loan for $80,000 with money that I don't have. You now have $80k in an account that I created with a stroke of a pen, and I did not actually transfer anything from my reserves, I instead created it out of thin air. I now also have a note which says you owe me $80k. Now, let's say you decide you actually don't really need this loan and pay it all back. Does that mean I just made $80,000 from absolutely nothing? —Preceding unsigned comment added by 24.9.165.150 (talk) 02:33, 14 April 2011 (UTC)

The bank only has a 80,000 loan asset because you are repaying the money to end the liability and paying interest. No payments means no asset. Andrewedwardjudd (talk) 12:54, 18 April 2011 (UTC)andrewedwardjudd

That particular claim in the Rothbard book is simply wrong, FRB has been implemented in many different ways but not like that. Banks are subjected to external regulation and inspection precisely to prevent anyone attempting to do something like this. (It may be that Rothbard was basing this on American banking practices in the 19th century which were a complete free for all.) As a thought experiment, imagine that it was true. The resultant expansion of the money supply over the next few months would be hyper-exponential. Mischling (talk) 15:54, 14 April 2011 (UTC)

Banks are levered with respect to their assets. They create customer deposit money Andrewedwardjudd (talk) 12:54, 18 April 2011 (UTC)Andrewedwardjudd

Rothbard is incorrect in saying that an initial cash deposit of $100 into a bank will cause a bank (that was previously not lending because of lack of funds) to increase lending by $1000 (with a 10% reserve ratio). The $1000 lent will quickly be used to pay someone else, who likely deposits it into another bank. This will cause the bank to lose $1000 in reserves which it does not have, since we are assuming that the bank is previously not lending because of lack of funds.

Such a contention is also at odds with the endogenous money view, which holds that money creation is demand driven, and is largely unaffected by the introduction of new money. In other words, an initial cash deposit of $100 will have little impact on bank lending. Banks lend what they do depending on loan demand at the prevailing interest rate.

Rothbard bases his writings on the writings of economists who were describing the period of free banking in the 19th century, when commercial banks printed their own currency backed by gold coin deposits in their vaults. In such a situation, an initial deposit of $100 in gold coins would indeed allow a bank to print $1000 in 'commercial bank notes', if the bank keeps a 10% ratio of gold to outstanding bank notes.

LK (talk) 03:50, 15 April 2011 (UTC)

In practice a bank almost never 'lacks funds'.

A bank with a 10% fractional reserve, and having 1,000,000 reserves and 10,000,000 customer deposits has one million of "required reserves", and zero "excess reserves"

If this 10% fractional reserve bank has a customer wanting a 1000 loan it only needs to borrow 100 "required reserves" before it can give the loan.

Banks dont as a policy "lend their reserves". Instead their policy is to "offer credit for suitable customers and manage the liabilities this creates for them"

The wiki FRB article is as muddled up as Rothbard was

Incorrect sentence in the intro

The following sentence is false whichever side of the exogenous/endogenous debate you are on: "This multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators, and by the excess reserves kept by commercial banks". It is false because the multiple can be *less* than the theoretical maximum. Re-wording it to make it more correct is quite tricky but it needs to be done before putting it back in. Reissgo (talk) 07:36, 15 April 2011 (UTC)

The multiplier is commonly understood to depend on the reserve ratio, excess reserve holdings, and cash holdings by the public.
The usual formula for the money multiplier is: mm = (cr + 1) / (cr + rr)

where cr is the ratio of cash to bank deposits, and rr is the reserve-deposit ratio (incl. excess reserves). This formula is found in most macro textbooks, and is widely accepted.

The multiplier (mm) is the ratio between base money (M0) and broad money (M2). This ratio remains the same whether money is exogenous (i.e. the central bank changes M0 and this changes M2), or money is endogenous (i.e. credit demand determines M2, and the central bank changes M0 in response). The multiplier ratio is the same in either case. LK (talk) 10:00, 15 April 2011 (UTC)

One caveat is that during liquidity traps, when interest rates are near zero, excess reserve holdings are highly flexible. In that case, the multiplier relationship can be highly unstable (such as in the years 2009-2010). LK (talk) 10:14, 15 April 2011 (UTC)

From the main article: "In practice, the actual money multiplier varies over time, and may be substantially lower than the theoretical maximum." - doesn't that contradict the sentence in the intro? Surely its the "theoretical maximum" that is (claimed to be) determined by the formula. Reissgo (talk) 10:47, 15 April 2011 (UTC)

The sentence refers to the "theoretical maximum" of the multiplier, which is 1/rr. Commonly, the money multiplier refers to the ratio of M0 to a measure of broad money (usually M2). Unfortunately, some textbooks refer to 1/rr simply as 'the multiplier', leading to confusion. 1/rr should always be refered to the "theoretical maximum" of the multiplier, and the ratio of M0 to M2 as the actual multiplier. The actual multiplier is simply a ratio between two measures of money, and hence may be unstable depending on the desire of people to hold cash, and of banks to hold excess reserves.

We should probably go through the article and make sure that there is no confusion between these two concepts, 1/rr, the theoretical maximum multiplier, and the ratio of M0 to M2, the actual money multiplier.

LK (talk) 15:10, 15 April 2011 (UTC)

Agreed. There seem to be an inordinate number of different things which sloppily get given the single label "money multiplier". Reissgo (talk) 16:34, 15 April 2011 (UTC)

Isn't the slightly deeper problem here that in most Basel based Banking systems, there is no reserve requirement, and cash holdings by the public are today almost non-existent relative to the total amount of electronic money in the system. The definition in terms of base money to broad money is correspondingly questionable in the absence of reserve requirements - since that destroys the old relationship base money held, and at least in the USA, M2 is contaminated by non-monetary instruments such as money market funds. The best approach might be to state clearly what the economics textbook definition is, and point out that this definition would only be applicable for systems with reserve requirements on all bank accounts. Mischling (talk) 12:01, 15 April 2011 (UTC)

You are absolutely correct. In most Basel II based banking systems, the reserve requirement either doesn't exist or is not binding. The multiplier is no longer related to the reserve requirement or excess reserves, but is instead related to the Basel capital requirements and the desire of banks to be safely above those capital requirements. (The desire of the public to hold cash still does reduce the actual multiplier.) Unfortunately, there is no easy formula for the Basel II multiplier (afaik). This all needs to be fixed and made clear in the article of course. I'm all in favor of that, if we can actually get a colaborative editing environment going. LK (talk) 12:36, 15 April 2011 (UTC)

Sounds like a good idea. Though I doubt it will do much to resolve the dispute at present which is centered around attempts to rewrite the article from a different viewpoint. BigK HeX (talk) 12:32, 15 April 2011 (UTC)

>>>BigK the dispute at present which is centered around attempts to rewrite the article from a different viewpoint

The dispute is because you keep changing the alternate viewpoint to something which is more mainstream. You are refusing to allow the alternate viewpoint to be presented as a minority view and refusing to say why you are doing that. Andrewedwardjudd (talk) 14:50, 18 April 2011 (UTC)andrewedwardjudd

Mediation cabal

This notifies you of my request for mediation to prevent the deletion of

1. My reliable sources, and

2. My attempts to create a neutral point of view:

http://en.wikipedia.org/wiki/Wikipedia:Mediation_Cabal/Cases/2011-04-12/fractional_reserve_banking — Preceding unsigned comment added by Andrewedwardjudd (talk • contribs) 12:21, 18 April 2011 (UTC)

Recent Changes

I recently removed these points from the article:

In the endogenous money model of fractional reserve:

A 10% fractional reserve bank with 10,000 reserves and 100,000 created customer deposits, can comfortably deposit a loan of 1000 into a customers current account if it can borrow 100 reserves.
Rather than lending customer money, the banks are extending credit and then managing the liabilities this creates for them.
Loans tend to lead to reserve creation. This is explainable because, since about 1992, the central banks are supplying reserves on demand to keep the money market cash rate at the desired target rate. Therefore if the banking system is short of reserves due to deposit expansion, the central bank is obliged to supply sufficent money to keep the money market interest rate at the target rate.
The base money multiplier is considered to be a misleading way of describing how banks operate.
Demand for loans from creditworthy customers becomes the driving force for deposit expansion. If a customer wants a loan, the bank can price the loan, and then borrow whatever amounts are required to maintain their fractional reserves.

These points are uncited, and IMHO do not correctly reflect the endogenous money view. Please do not reintroduce them unless they can be properly cited. Also, per the MOS do not use bold to emphasize a point, use italics. LK (talk) 02:43, 19 April 2011 (UTC)

If you could be so kind to briefly describe the endogenous money view -in your honest opinion - it would help facilitate a discussion where i have already articulated my own view.Andrewedwardjudd (talk) 05:16, 19 April 2011 (UTC)andrewedwardjudd

I'd ask that citations be posted here directly for discussion, should an editor desire prefer that any of the points be reinserted into the article. BigK HeX (talk) 02:52, 19 April 2011 (UTC)

At the moment you have not contributed to any discussions here on these topics. In order to enable a discussion it would be helpful if you were to contribute some of your thoughts so these can be discussed. Andrewedwardjudd (talk) 05:08, 19 April 2011 (UTC)andrewedwardjudd

Citations for all of this stuff has been deleted over the last two weeks. Basicly anything that supports this model has been deleted.

Charles Goodhart said in 2007, "[When the] Central Bank sets interest rates, as is the generality, the money stock is a dependent, endogenous variable. This is exactly what the heterodox, Post-Keynesians, from Kaldor, through Vicky Chick, and on through Basil Moore and Randy Wray, have been correctly claiming for decades, and I have been in their party on this." ^[1]

A 10% fractional reserve bank with 10,000 reserves and 100,000 created customer deposits, can comfortably deposit a loan of 1000 into a customers current account if it can borrow 100 reserves.

The bank is initially 'loaned out' with no "excess reserves". To create another 1000 it needs to find 100 "required reserves". Banks are not required to lend out their "excess reserves" when they can instead retain them as "required reserves". Modern money mechanics. Banks with surplus "excess reserves" loan those reserves to other financial institutions - howells P36. Paul Tucker 'banks lever up their balance sheets and create customer money only subject to ensuring they have adequate back ups'. Using information and maths in a simple manner is not original research.

Rather than lending customer money, the banks are extending credit and then managing the liabilities this creates for them.

Paul tucker "Banks...lever up their balance sheets and expand credit at will...This ‘money creation’ process is constrained: by their need to manage the liquidity risk – to which it exposes them. 15 Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence. (Tucker, Paul. 2007.12.03 pages 9-10).

Loans tend to lead to reserve creation. This is explainable because, since about 1992, the central banks are supplying reserves on demand to keep the money market cash rate at the desired target rate. Therefore if the banking system is short of reserves due to deposit expansion, the central bank is obliged to supply sufficent money to keep the money market interest rate at the target rate.

Howells king and Paul tucker "Banks...lever up their balance sheets and expand credit at will...This ‘money creation’ process is constrained: by their need to manage the liquidity risk – to which it exposes them. Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence. (Tucker, Paul. 2007.12.03 pages 9-10).

"The BOE effect monetary policy changes by controlling the price not the quantity of central bank money in the system"^[2], Paul. 2007.12.03 pages 6-7)

The base money multiplier is considered to be a misleading way of describing how banks operate.

Howells goodhart tucker King and Stevens.

From howells book page 241

What exactly^[3]is so misleading about the money multiplier approach?

1. Firstly the base money multiplier contains a number of assumptions that are very easy to make which is of course why it is still embedded in macroeconomics.

2 Secondly, the monetary policy instruments used by central banks for some years now, are based on short term interest rates set by the central bank, not the quantity of base money. The base multiplier model requires it to set the quantity of money, but in the real world we know it sets the price.

3 Thirdly if the central bank sets the interest rates it must then supply the reserves the banks require and this will depend on the demand for loans at the going rate of interest. Therefore the money supply is determined by the economy rather than the central bank.

Demand for loans from creditworthy customers becomes the driving force for deposit expansion. If a customer wants a loan, the bank can price the loan, and then borrow whatever amounts are required to maintain their fractional reserves.

Howells book page 33 "Hence the appearance of the balance sheet: many small short term deposits matching fewer, larger long term loans. But deposits do not cause the loans, rather loans create deposits." Paul Tucker "Banks...lever up their balance sheets and expand credit at will...This ‘money creation’ process is constrained: by their need to manage the liquidity risk – to which it exposes them. Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence. (Tucker, Paul. 2007.12.03 pages 9-10).

Finally Howells had this to say, which of course was deleted also.

"However notwithstanding all of the above, dispite the apparent consensus at the BOE and other central banks, twenty five years after the switch to short-term interest rates, macroeconomic instruction at the textbook level still requires students to learn that monetary policy consists (solely) of exogenously imposed changes in the money stock which transmits itself to changes in demand (and then possibly output but more usually the price level) by some version of ‘real balance effects’. This is wholly at odds with our everyday knowledge of the policy instrument and with what central banks widely believe is the transmission of monetary policy effects" (Howells P et al 2006 page 3).

Peter Howells is Professor of monetary economics at Bristol Buisiness school, at the University of West England and is the editor of the newsletter of the Royal Economics Society.

His books are in their 4th edition and published by the Financial Times of London, in cooperation with various mainstream publishers. Such as Prentice hall and Pearsons Education.

http://www.res.org.uk/society/newsletters.asp

Andrewedwardjudd (talk) 07:30, 19 April 2011 (UTC)andrewedwardjudd

Current coverage of endogenous

Unless I've missed something, the current version of the material doesn't look too contentious to me. Perhaps a tad weighty in the alternative views still, but at present, there might be a decent foundation to work from. BigK HeX (talk) 23:04, 20 April 2011 (UTC)

please let us know why you are deleting items added to the alternative view page. You need to offer more than fringe wacko not mainstream. So far you have offered nothing to discuss on this topic.

could you at least explain what you think should go in the alternative view page so that something can be added which you are not going to delete?

please give an idea of the sort of things you think are suitable to go in there so they can be accurately described without deletion — Preceding unsigned comment added by Andrewedwardjudd (talk • contribs) 18:31, 21 April 2011 (UTC)

Here's something for you to discuss:

"Articles which cover controversial, disputed, or discounted ideas in detail should document (with reliable sources) the current level of their acceptance among the relevant academic community. If proper attribution cannot be found among reliable sources of an idea's standing, it should be assumed that the idea has not received consideration or acceptance" -- WP:FRINGE.

On Wikipedia, the burden of proof is always on the editor who is initially trying to add material [i.e., YOU]. Neither of you has responded adequately to this basic point I've raised previously. I have no desire to address other points until you have resolved this one.

Please present evidence from some reliable source that this idea is generally accepted by the academic community (and not just by post-keynesians or other heterodox advocates). So far, basically all of your sources detail how the view is far from being as widely accepted as the other. BigK HeX (talk) 19:38, 21 April 2011 (UTC)

I think the main problem that BigK was targeting with his deletions was the fact that in much of the content opinions and contested assertions were presented as facts. This is a serious issue according to WP:NPOV. While I myself would probably have preferred to just tag the section and hope it would get fixed at some point, I still think BigK was within his right to delete the content, when the problem is as serious as it was there. I think most things which are stated in a section like the "Alternative views"-section have to be presented as opinions by their very nature, as if they were not contested assertions, they would not be in that section. And I think this especially goes for things which directly contradict things stated further up in the article.TheFreeloader (talk) 19:43, 21 April 2011 (UTC)

what on earth are you talking about? The nature of the minority view is that it will directly challenge the facts of the majority view. The majority view is also a number of opinions. The very nature of the scientific method is about opinions and who can attract the most believers. What you are saying is that no opinion can challenge the opinion of the majority no matter how well cited it is. Do you really mean to say that? Andrewedwardjudd (talk) 20:37, 21 April 2011 (UTC)andrewedwardjudd

No, what I am saying is that opinions should be presented as opinions, not as facts. And most of the content BigK deleted had serious problems in that regard. Although I do think that it would be possible to rewrite a great deal of that content so that could be re-included, if it was done in a manner which respects WP:NPOV and which doesn't get too long or detailed to cause problems with WP:UNDUE.TheFreeloader (talk) 21:48, 21 April 2011 (UTC)

Are the published operational guidelines of the BOE opinions or facts? Do i have to say that the BOE claim they operate real time payment systems but this is not a very widespread belief in the academic community? I only have so many words because of undue. All of my operational stuff was deletedAndrewedwardjudd (talk) 22:37, 21 April 2011 (UTC)andrewedwardjudd

Well, if the assertion is contested by the academic community then it probably shouldn't be written as a fact. But whatever is wrong with just say that the BoE's operational guidelines states such and such. That way you sure don't say anything that's out right wrong. I mean, if you include a reference to the guidelines, at least the fact that they state it in their guidelines is for sure.TheFreeloader (talk) 23:13, 21 April 2011 (UTC)

There is plenty said here about mainstream. The main article has hardly any citations. One is even a dead link and the one with it is not relevant to the table. Very few central banks today have required reserves, but it is verboten to make the correction. Evidently no matter how many citations i bring forwards it will not get changed. It is like a madhouse here. Nobody wants to discuss anything but they sure do want to delete things. Andrewedwardjudd (talk) 23:26, 21 April 2011 (UTC)andrewedwardjudd

Well, I don't see why you shouldn't be able to add information about reserve requirements. Although according to Wikipedia's own article on the subject it's actually five central banks (UK, Canada, Australia, New Zealand and Sweden) which have no reserve requirements at all (although many do have quite low ones). I think in general it will be easier for your for you to get you contributions to stay if you keep WP:NPOV close in mind when writing, especially on subjects which you yourself have a strong opinion on.TheFreeloader (talk) 23:57, 21 April 2011 (UTC)

In the USA the 10% reserve only applies at close of business. Do you have a reference to support it applies anywhere during the day? Andrewedwardjudd (talk) 06:32, 22 April 2011 (UTC)andrewedwardjudd

You've nailed the issue, TheFreeloader. All evidence so far points to this being a minority view, so rewriting the article from this viewpoint is an egregious disregard for WP:NPOV. I don't have an issue with material on endogenous money being included in the article, but the devil is in the details. There are weight issues and attribution that needs to be addressed. BigK HeX (talk) 19:49, 21 April 2011 (UTC)

You want me to present evidence the minority view is widely accepted by the academic community before the minority view can be presented?

Give me something to discuss with you pleaseAndrewedwardjudd (talk) 20:08, 21 April 2011 (UTC)andrewedwardjudd

Yes. Click here (or see [1]). BigK HeX (talk) 20:14, 21 April 2011 (UTC)

I have no idea why you keep referring to the main page. The attempted edit is in the minority view section. Wiki should allow a neutral point of view of the minority if they have quality citations Andrewedwardjudd (talk) 20:24, 21 April 2011 (UTC)andrewedwardjudd

That's not how Wikipedia articles work. In fact, a name has been given to the type of article you're describing, with a "separate section" on a minority view that is written with disregard to the rest of the article -- WP:COATRACK. BigK HeX (talk) 20:32, 21 April 2011 (UTC)

You appear to be deliberately misusing our policy terms. Coat track introduces something that is irrelevant to the topic being dicussed in order to promote some entirely different agenda.

I am presenting the minority view and you are refusing to allow it to be presented.

Andrewedwardjudd (talk) 21:44, 21 April 2011 (UTC)andrewedwardjudd

Let's presume that -- as an editor for far longer than just this month -- that I am pretty familiar with Wikipedia policy. You can either try to learn from what experienced editors are suggesting to you, or you can try to disregard it. What I can tell you for certain is that trying to be a One-Man Crusade For "The Truth" while disregarding the input from numerous other editors does not generally work out too well for the Crusader.

Anyways, for the type of coatrack you've described, see particularly WP:COATRACK#Fact_picking, and probably also WP:COATRACK#.22But_it.27s_true.21.22 BigK HeX (talk) 22:42, 21 April 2011 (UTC)

This is very silly. The essence of coatrack is that the writer makes a dishonest or untrue representation of what he is talking about because of bias. The bankers say they create credit. they believe the simple text book money multiplier is unrealistic. they believe the central banks supply money on demand. They agree with the neokeynsians. There is no coatrack to report that. NPOV requires that there respectable view is reported by wiki - it has nothing to do with the truth. Andrewedwardjudd (talk) 23:02, 21 April 2011 (UTC)andrewedwardjudd

"Removing pointy addition. Appereantly Goodhart and King don't really dispute anything" -freeloader

if the base money is fixed the banks are limited in the amount of commercial bank money they can create if there is a 10% reserve.

But if the central bank loans money on demand then continuing customer demand will always expand the base money supply.

Since you wrote it incorrectly i attempted to point that out to you by changing it.

The central bankers and people who are aware of how modern money systems operate are saying the base money multiplier is wrong in the context of modern banking practices.

Now you have removed it altogether.

The exogenous base money model can only apply in the real world if the amount of base money if fixed to an unchanging amount of for example gold. All the citations are saying that in practice in the real world it cannot apply because banking practices will always force the central banks to add more base money no matter what policy they have - if they have more base money to add.

They are saying that in the real world, 'monetarism' using targetting of amounts of money cannot work and will always fail - if more base money is available to be added.

Andrewedwardjudd (talk) 05:43, 22 April 2011 (UTC)andrewedwardjudd

Well, I don't think I wrote anything incorrectly. I merely added in some links. BigK kinda rephrased the sentence. But it was really yourself who added Goodhart and King to that statement a couple of days ago [2]. But the idea that anybody disputed the upper limited to money supply was added by Reissgo as the very first contribution on alternative views [3].

But now you are apparently against this view. And to be honest, I have read through the reference, and I could not find anything about upper limits to money supply, so I am actually not sure at what inspired the original addition of the statement. But instead of just removing the statement then, you added some passive-aggressive statement which essentially just repeated what is already stated further along in the paragraph. I could only take this statement as being directed at editors to this articles rather than being an actual contribution and therefore saw it as a case of WP:POINT.TheFreeloader (talk) 06:52, 22 April 2011 (UTC)

The section you could not find reads: "Mervyn King and Charles Goodhart are among those who dispute the idea that the money multiplier creates an upper limit on the money supply"

http://en.wikipedia.org/w/index.php?title=Fractional-reserve_banking&diff=425196552&oldid=425193974

Which i believe is wrong. Instead they are saying that modern banking methods makes the money multiplier an unsatisfactory method of describing how money and banking works because it ignores for example the impact of prices and appears to ignore the observation that central banks no longer limit the amount of base money they supply on demand.

Please dont make any more of these silly passive agressive pointy comments.

king and goodhard were added by me because Bigk was insisting anybody who said these things was fringe - which given the available citations is just blatantly false.

Andrewedwardjudd (talk) 11:09, 22 April 2011 (UTC)andrewedwardjudd

No, what I couldn't find was anywhere in this reference [4] where it says anything about upper limits to money supply. And it doesn't really say anything about Goldhart and King either. But if you find somewhere where it says something about King and Goldhart's view on the money multiplier or something else related, then go ahead and add it. As long as you don't write it in that confrontational tone, and the reference actually supports what is being said.TheFreeloader (talk) 13:35, 22 April 2011 (UTC)

1. you are quoting a reference i have never read and i never added.

2. You altered my text and my references and others altered what you had done to produce something that was obviously incorrect in my judgement.

3. Since my work to create that page had been destroyed by other people and was no longer correct and people seemed to object to what i write for reasons that are not clear to me, i then removed everything i had written and left the stuff that was originally there and added a new section for what i wanted to write which had one simple comment.

4. As i made clear before i am not interested in endogenous money theories. I am only interested in correctly describing banking as described by central banking documents

5 I added the credit section in the hope that hostility towards me would be reduced because the contentious endogenous money theory section was not written by me.

6 You removed my latest work while leaving a silly comment in the comment box. And now you appear to want to absolve yourself of all responsibility for your behaviour while making out i am some kind of psycho.

7 I invite you to observe your own passive agressive behaviour before you project that onto other people.

Andrewedwardjudd (talk) 17:04, 22 April 2011 (UTC)andrewedwardjudd

1. The reference I quoted was the one right after the sentence I removed. Per WP:CITE I should have been able to find the source for the statement there. I wasn't, therefore it was free to get challenged and removed by anybody per WP:V. 2. I am not sure what I altered to produce something obviously incorrect, you will have to be more specific. 3. You are not really free to remove content for personal reasons like that, even if you yourself created it. You need reasons specific to the content. 4. Well, but if endogenous money theory describes banking correctly according to your view, then why not use that framework? 5-7. I don't know why you see this bad blood between us, I don't feel any particular hostility towards you, but I am very sorry if I have offended you in any way.TheFreeloader (talk) 17:55, 22 April 2011 (UTC)

In fact it was Bigk wrote the sentence that in my view is wrong "Mervyn King and Charles Goodhart are among those who dispute the idea that the money multiplier creates an upper limit on the money supply" I am sorry i said it was you in the beginning, later i said "2. You altered my text and my references and others altered what you had done to produce something that was obviously incorrect in my judgement"

I then changed it without totally altering the content and pointed out that i had corrected the belief of mervyn king

You then deleted the sentence and sarcastically commented that nobody was disputing anything by saying "Removing pointy addition. Apparently Goodhart and King don't really dispute anything". Obviously they were disputing something and you were being passive aggressive towards me. You must realise there is a dispute. And it is interesting that Bigk does not understand the dispute.

You then further accused me directly of being passive aggressive.

As a suggestion to you, if you are not aware of how you can be rude to people I think you should avoid being sarcastic, which is anger disguised as humour, and avoid accusing people of being passive agressive. I have no desire to have a dispute with anybody. Andrewedwardjudd (talk) 20:00, 22 April 2011 (UTC)andrewedwardjudd

Ironically, the only person I can identify as being incivil (and REPEATEDLY so) is you, User:Andrewedwardjudd. Nearly every one of your comments in the past few days contains an attack or presumption of bad faith to include:

"You appear fixated on driving this agenda of yours"
"people like Lawrencekhoo use their blind belief or vested interest"
"from these ignorant and abusive people"
"Those preventing a neutral point of view are: Lawrencekhoo; BigK HeX; bobrayner"
"You three are gaming the system"
etc... BigK HeX (talk) 20:49, 22 April 2011 (UTC)

Bigk you were abusive towards Reissgo on timed deposits. you were wrong.

Lawrencekhoo was abusive towards reissgo and me at various times, he was wrong and he refused to apologise.

Clearly you and the others are preventing a neutral point of view from being presented

Clearly you use every trick and scheme you can think of to prevent balance to the page

These are just statements of reality as far as i can see. My record speaks for itself as does yours. Andrewedwardjudd (talk) 21:25, 22 April 2011 (UTC)andrewedwardjudd

I find it amazing how you take allegations of incivil behavior on your part, and then DOUBLE DOWN on them. If this is how you deal with disputes, it looks like you have a long road ahead of before you'll be able to edit collaboratively, as Wikipedia demands. Good luck. BigK HeX (talk) 21:35, 22 April 2011 (UTC)

How can anybody edit collaboratively with somebody like you?? You went at Reissgo for months on end and still cannot bring yourself to admit you were wrong:

Money multiplier ref(s)
I agree that it is "common" in teaching materials, but I don't agree that it is taken so seriously within central banks. Reissgo (talk) 20:30, 30 November 2010 (UTC)
Do you even yet have a mainstream source about central banks or even just 1 central bank? BigK HeX (talk) 20:33, 30 November 2010 (UTC)
Andrewedwardjudd (talk) 22:21, 22 April 2011 (UTC)andrewedwardjudd

I stand by every one of my statements to Reissgo. Your repeated insistence that "Reissgo was right" doesn't actually make that a premise that will suddenly be accepted. Worse for you, the fact that YOUR sources also state that the view is a minority view only reinforces my earlier enforcement of WP:NPOV. But, keep giving us your personal assurances instead of just adhering to our fundamental policies, in this case WP:DUE. BigK HeX (talk) 23:25, 22 April 2011 (UTC)

You are unable to be objective. My quality sources say the simple text money multiplier is unsatisfactory/archaic/misintruction/flawed and uninformative and unable to describe the real world of money creation where loans create deposits and causality is reversed, from the simple relending model still being taught to students, and nobody who has ever worked in a central bank would ever use it to model reality.
And Reissgo was totally correct about his idea for term deposits and you told him he was flat out wrong. Meanwhile all you can do is deny it and produce wikilawyering - something wiki does not like.
You have consistantly done everything you could think of to prevent these citations from appearing anywhere on the page by endlessly repeating WP:Fringe.
And not one single time have you made any effort at all to collaborate with anybody to get the so called minority view presented. Andrewedwardjudd (talk) 07:16, 23 April 2011 (UTC)andrewedwardjudd

FRB definition revisited

Currently the page begins

Fractional-reserve banking is the banking practice in which only a fraction of a bank's deposits are kept as reserves (cash and other highly liquid assets available for withdrawal.^[4]^[5]^[6]^[7]The bank lends out some or most of the deposited funds, while still allowing all deposits to be withdrawn upon demand.

Back in November 2010 a few people were working towards improving the text.

http://en.wikipedia.org/w/index.php?title=Fractional-reserve_banking&diff=394905000&oldid=394658401

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) 01:00, 10 November 2010 (UTC)

My suggested version of the text is

Fractional-reserve banking is the banking practice in which only a fraction of customer deposits are kept in the form of reserves of cash and other highly liquid assets, while the remaining fraction of customer deposits are held in the form of illiquid loan assets.^[8]^[9]^[10]^[11]The bank lends out some or most of the deposited funds, while also giving each customer the right to access their money on demand. Fractional reserve banking is practiced by all modern commercial banks.

The important points being that

customer deposits inside the bank are IOU money and a fraction of the customers existing deposits is not kept as reserves which is outside money. They are different monies.
Customer 'withdrawals' involve a conversion of a bank created money or IOU called commercial bank money to base money, so that a customer cannot withdraw 'their money' without conversion.
The main page text at the moment is confusing traditional FRB with regulated FRB where central banks have created cash deposit or Reserve accounts for "required reserves" and easier settlement.

A very robust FRB does not need cash to reassure customers their money is safe providing the bank has a reserve of some form of highly liquid assets such as gold or government bonds or paper cash and the illiquid, long term paying loan book is a good one - but paper cash is just a convenience for those customers who need cash immediately. Reserve balances are not cash - they are cash deposits. Government bonds are defacto cash. Cash, cash deposits and short term government bonds, are essentially equal assets with different maturities.

Wiki is confusing required liquid reserves for prudential/solvency purposes and required reserves for liquidity purposes. A bank with no cash, that has cash deposits can prudentially easily be obligated to loan money to customers, and a bank with no cash that has short term government bonds can similarly prudentially easily loan money to customers. In fact because government bonds are electronically held and tradeable, they are for bank settlement purposes, more liquid than cash, as are cash deposits more liquid than cash for the banks purposes.

If the beginning text is perfectly clear, then the rest of the text becomes clearer.

Andrewedwardjudd (talk) 05:14, 3 May 2011 (UTC)andrewedwardjudd

FRB is written in wikis voice in support of the mainstream relending model

in the page we have an example which Big K specifically said is not in contention,

"The process of fractional-reserve banking has a cumulative effect of money creation by banks, essentially expanding the money supply of the economy."

The wording could be:

"Factional-reserve banks expand the money supply by creating money.

Instead it emphasises a process that is cumulative and 'essentially expands' the money supply.

What are we to understand by 'essentially expands'? It seems a clear reference to mainstream economic belief where private money creation *only* happens via an indirect process where banks relend existing money.

As per Wiki policy these sentences need to be clearly attributed to the model they apply to. Andrewedwardjudd (talk) 08:55, 2 May 2011 (UTC)andrewedwardjudd

You are more than welcome to explain how banks -- even in your endogenous view -- expand the money supply, if not by a fractional reserves system. The statement is NOT in contention.

During the day in the United states, banks are not required to keep reserves and if they have no reserves they can borrow reserves from the federal reserve or they can borrow reserves at near the federal funds rate from other banks.

Banks do not reference their available reserves when making loans as wiki tells us is a fact. Instead they create a loan obligation for themselves which is called extending credit for the loan amount and they use the interbank and central bank systems to pay this money to whoever requires it, where in the process they get borrowings which are called deposits. loans therefore leads to deposit creation.

Ever since central banks began they have targetted interest rates and therefore no matter how many reserves the banks are required to hold they can always borrow whatever they need from the central bank. Academic theory is totally wrong

The banks are still fractional reserve banks - they are not lending their own wealth to customers but instead are backing a fraction of the value of the owed wealth with a smaller amount of liquid assets.

Andrewedwardjudd (talk) 00:29, 6 May 2011 (UTC)andrewedwardjudd

What kind of nonsensical baloney is this?

"mainstream science view is plainly stated, minority views noted in body" - Lawrencekhoo

The level of ignorance on wiki is troubling. Science is not founded on a consensus view but rather is founded on different theories. Consensus views have no place in deciding what is scientific.

Evidently so called mainstream economics can not be called a scientific view while it totally refuses to deal with the various realities that have been high lighted by real world practices that are well known and documented by central bankers and expert economists in that field such as Charles Goodhart and where all people who attempt to point realities are, as Goodhart says 'cast into outer darkness' if they dare to point out institutional realities.

Mainstream economics is a belief system like Christianity. Andrewedwardjudd (talk) 09:11, 4 May 2011 (UTC)andrewedwardjudd

You are free to start a competing Wiki project, if you find the policies here not to your liking. Otherwise, you would do well to accept the policies on WP:DUE, and to accept that Wikipedia content largely reflects the mainstream understanding of topics, with significantly lesser coverage for views that have not gained wide acceptance. BigK HeX (talk) 12:40, 4 May 2011 (UTC)

Your persistent attempt to Right Great Wrongs will not succeed if you have to disregard Wikipedia policy. BigK HeX (talk) 12:41, 4 May 2011 (UTC)

More dishonesty. Only by my efforts have you been forced to alter the text to show that relending is a model and is not the truth and that there is significant credible resistance to this academic model by those who practice banking in the real worldAndrewedwardjudd (talk) 15:52, 4 May 2011 (UTC)andrewedwardjudd

Opinions about the TRUTH have no standing here, we base articles on verifiable content from reliable sources. Please follow our policies, to ensure that the articles reflect with due weight what is currently found in reliable publications.

About this recent revert, I removed the quotes cited as they are meant to comment on, rather than to support the sentences they were attached to. Commentary is inappropriate for an encyclopedia article. Citations are meant to support the text they are attached to, not to comment on them. See WP:CITE for our policy about in-line citations.

I have no objections to including the citations and the quotes, as long as they are used properly. I believe they are appropriate for the section on money creation in the body of the text. However, they should be attached to sentences that actually reflect what they are saying.

--LK (talk) 03:56, 5 May 2011 (UTC)

In reality you would not allow a change to the text to support the way fractional reserve banking is practiced where short term loans are being used to create longer term loans where there is a maturity mismatch build into the practice of FRB and where the amount of available 'cash' is not the only part of the process of fractional reserve as you are demanding is the case by telling me your opinion is more important than those of central bankers. My references clearly support the text i attempted to add where a fractional reserve bank backs depositors claims with highly liquid assets such as gilts and other quality securities, rather than only reserves as you are insisting is the truth. Most people realise the banks hold very few reserves and even wiki talks about deposits being invested in securities and other investments.

You refused to allow the text to be changed and now you have deleted the citations and in so doing you no longer have any challenges remaining to your own strong opinion

All this wikilawyering talk about Due and Cite and 'our' policy is just garbage to hide your behaviour and ensure your opinion is protected.Andrewedwardjudd (talk) 06:32, 5 May 2011 (UTC)andrewedwardjudd.

Wiki is wrong on the most basic part of fractional reserve.

1. We all agree the banks create iou money called commercial bank money and in a 10% fractional reserve they are limited to how many IOU's they can create relative to the reserves they possess.

2. Any 10% bank with 1017.1 reserves and 10,000 deposits has levered its ious relative to the available 1017.1 reserves, and has 1000 required reserves and 17.1 excess reserves. The nature of the at least 10% reserve is that the bank can manage most day to day circumstances without assistance.

3. But, if there was one 10% bank in the world it can easily create IOU money for customers and be levered with respect to the available reserves - that is the essence of fractional reserve.

4. Multiple banks operate in exactly the same manner

5. the bank in 4. is not obliged to lend out the excess reserves to customers. It can keep the 17.1 reserves as required reserves and create another 171 of customer deposits and still have a 10% reserve of 1017.1 and deposits of 10171 and have zero excess reserves.

How many different people have to be quoted to tell you that banks create credit while managing their liabilities using lines of credit and wholesale deposits at LIBOR in their favour and so forth etc etc.

Come on! put it together please. Andrewedwardjudd (talk) 08:53, 9 May 2011 (UTC)andrewedwardjudd

Andrew, wiki cannot be a place to do original research into topics - although widespread disagreement such as you see on this Talk page may well indicate that such research needs to be done. The FRB page has to reflect current economic theory, such as that is. If you want to do research into how fractional reserve banking actually works, then you need to go the academic route. Such research is urgently needed - but this is not the place. If you do, bear in mind there are multiple regulatory systems in use today, and historically, and behaviours often differ between them.

With respect to your example here, most current banking systems no longer use deposit reserve requirements. Typically, and this includes American banks, lending (and any associated money creation and destruction) is determined by capital reserve requirements. When deposit reserve requirements were used, it was typically in conjunction with gold standard regulation. In that system, reserves were a required percentage of deposits, so representing a bank with an excess of reserves over deposits would be somewhat nonsensical. It's only happening in the current American system because the federal reserve is paying interest on the reserves, and there isn't a reserve requirement on most American Bank accounts. Mischling (talk) 17:24, 10 May 2011 (UTC)

Mischling, ::Please dont confuse simple information already published, with 'original research'. The editors here are preventing banking from being described as documented by researchers and central banks.

Because there is no current consensus by researchers. While the central bank researchers tend to be more informed about the system than regular economists, there is no consensus from all central bank researchers.

Required reserves are still mandatory in the USA on transaction deposits. But they are not required during the day when the banks want to make loans and the banks can borrow later to replenish reserves before the end of day. Meanwhile Wiki is full of required reserves limiting loans and it cannot be changed to reflect the crystal clear comments from central bankers and others.

In Basel systems, capital requirements limit loans not reserves. However there are banking systems with strict reserve requirements, China and Brazil noticeably - the behaviour of their systems doesn't match the textbook predictions either, but inter-bank lending is only one problem with the textbook example, the absence of loan defaults and loan repayments are also issues.

The US pays interest on reserve balances to bring the US into alignment with the same practices elsewhere, where a corridor system is used to control the market rate with respect to the policy rate, with proven better results.

Er no. The US pays interest on reserve balances in order to bail out the US Banking system after the 2007 collapse. To the best of my knowledge no other system does this.

the words "Excess reserves" still applies today and has nothing to do with the gold standard. Even if there are no "required reserves" banks will still have "excess reserves" available for lending to other financial institutions.

The reserve requirement is a mandated percentage of a bank's deposits, and reflects a required difference between the amount if can lend, and the amount it has on deposit. Having banks hold that money at the central bank was just a way of keeping them honest. A bank can lend to anyone, including other banking institutions, it doesn't have to have excess reserves to do this. Mischling (talk) 00:34, 12 May 2011 (UTC)

Andrewedwardjudd (talk) 06:43, 11 May 2011 (UTC)andrewedwardjudd

Please dont reply inside my comments as neither myself or another reader can easily follow the conversation or reply to it.

Interest is paid on cash deposits at the central bank in the UK, Australia, NZ, the USA and all of the so called industrialised countries who all operate a 'corridor system', between the lower 'deposit rate' and the higher 'standing facility rate' or 'discount window prime rate' to stabilise the market cash rate with respect to the policy rate. Timothy Geithner announced the changes to the US system saying it was to prevent the Fed funds rate falling to a lower level than the target rate set by the FOMC. Therefore when the US does raise interest rates the market cash rate will have a floor of the deposit rate regardless of how many central bank reserves the banks are holding. Yes, many people on blogs and so forth said it was a stealth bailout of the US banking system, but his comments were not unreasonable.

The meaning of "excess reserves" applies also in a banking system that has no "required reserves", because without a "required reserve", in theory all central bank money held by the bank is "excess reserves" which can be lent to other financial institutions for a profit greater than the deposit rate paid by the central bank. The nature of the credit crisis was that many banks had lent all of their "excess reserves" to other banks and had no other highly liquid assets like government bonds via which they could easily get central bank reserves required to meet their payments. Most people hearing of banks lending their "excess reserves" at LIBOR on an overnight basis, would assume the bank had a meaningful reserve and was lending the excess but that is not the case.

As described by Goodhart for the last 30 years, if the central bank of China or Brazil, set higher and higher required reserves and have an interest rate target then there is no 'strict reserve requirement', because the banks can borrow whatever reserves they need and the final cost amounts to a minor tax on the banks of little important in slowing credit creation. Textbooks, and many academic economists writings have no connection to reality according to Goodhart.Andrewedwardjudd (talk) 06:28, 12 May 2011 (UTC)andrewedwardjudd

A suggestion to help resolve this relending model difficulty

Currently on wiki FRB the following loan example is not shown as being impossible in the text but the table of lending a 100 deposit as 90 81 implies it is impossible, and also the interpretation of modern money mechanics has been strongly described as saying it is impossible.

Are we only misunderstanding each other or do we fundamentally disagree?

The example. A US bank with 10,010 central bank money of 5000 vault cash and 5010 cash deposits at the federal reserve has 100,000 transaction deposits only and is using 10% reserve as required by US law. Under the two week reserve maintenance schedule it has agreed with the federal reserve it is required on average to have 10% of transaction deposits held as reserves. So it can go over and under 10% providing each second friday it has averaged 10% over the two week maintenance period.

The bank has 10,010 "required reserves" and 10 "excess reserves".

A customer arrives who wants to borrow 100 cash. The bank has cash of 5000 on hand and will need an average required reserve of 10,010 if the loan money is deposited at the same bank and an average required reserve of 10,000 if the cash leaves the bank. So if the 100 cash leaves the bank the bank will have 4900 cash and a temporary "reserve insufficiency" of 90, where it knows it can borrow 90 later in the day if it wishes, even though by law it is not required.

Does mainstream economics believe the bank will proceed with this 100 loan or does mainstream economics require that only 9 or 10 can be loaned?

If people here do not feel qualified to answer on behalf of mainstream economics i am prepared to write to significant mainstream economists until i get an answer that is definative one way or another.

If we get agreement it is possible, then we can incorporate the example into the text so that the impact of the relending table is balanced against what can happen in practice using the processes already described on the wiki FRB. Andrewedwardjudd (talk) 06:07, 5 May 2011 (UTC)andrewedwarjudd

NPOV noticeboard

Just a note to announce that a case has been opened on the NPOVNoticeboard. Reissgo (talk) 10:59, 6 May 2011 (UTC)

Money lent to a bank in the form of outside deposits arriving at the bank becomes the banks asset to assist the banks allowable activities. The inside deposit money created by the bank for the lender, is a liability for outside money.

If you lend a private company your money without taking security then that money belongs to the private company, and their machinery and buildings and so forth bought with your money belongs to them. You become an unsecured creditor unless you took security for the loan to the bank.

For example a covered bond holder is a senior depositor and if the bank fails they will be paid out ahead of the ordinary depositors. Covered bond holders loans are secured on a premium pool of the banks best loans.

An ordinary depositors claim is only secured on the banks ability to have sufficient liquifiable assets, after the senior bond holders have been paid out, and government guarantees have been paid.

Meanwhile editors here appear totally clueless how a bank operates.

http://en.wikipedia.org/w/index.php?title=Fractional-reserve_banking&diff=428548788&oldid=428547389

"money borrowed by the bank is not "the bank's property"
"Confusing and unclear way of saying the same thing"
"Please try not to add misleading phrasing"
"Deposits == "assets" of the bank? Yeah, right. reverting silly obfuscation"

It is just simple accounting that the customer money becomes the banks asset and it would be fraud to say otherwise. The ordinary depositors are unsecured creditors in a private firm who are last in line behind higher ranking more knowledgeable investors. Andrewedwardjudd (talk) 08:43, 11 May 2011 (UTC)andrewedwardjudd

Actually, simple accounting would tell you that deposits are liabilities on the bank's balance sheet, as they are loans which have be paid back. And besides, I think it's really not that relevant for the most basic understanding of fractional reserve banking to know how deposits are recorded on a bank's balance sheet. I also think it's misleading to call depositors unsecured creditors, seeing as most banking systems have some form of deposit insurance external to the individual banks.TheFreeloader (talk) 15:28, 11 May 2011 (UTC)

You are muddling things up. Central bank money "outside" deposits borrowed by the bank are the banks assets and commercial bank money "inside" deposits created by the bank are the banks liability. They are different monies - same deposit word but different monies and different meanings.

On deposit insurance, prior to this financial crisis, it was 25,000 in the euro area about 35,000 pounds in the UK and 100,000 in the usa. In the euro area it is now 50,000 and 250,000 or 200,0000 in the USA. It is not a normal state of affairs that governments are offering higher insurance to prevent the collapse of private banking systems and some of the government guarantees have already been removed.

It is just a legal fact that customers with ordinary deposits in a bank are unsecured creditors of a private business and it would be misleading to say otherwise. If it were misleading then the covered bond holders would not need the special privelidges they enjoy as senior depositors to ordinary depositors. Obviously large value deposits held by other banks are only partially covered by many of the government guaranteesAndrewedwardjudd (talk) 20:52, 11 May 2011 (UTC)andrewedwardjudd

I don't understand the first part on several levels. First I don't understand what you mean by inside and outside deposits. Second, I don't understand why you want this in the lead, WP:LEAD says that a lead should have a concise definition of the subject and a summary of the body of the article. The definition you try to insert is confusing and unclear, and it is not reflecting what is in the body of the article. Third, and most importantly, I don't see where the reference are for this definition, WP:LEADCITE says that one should be able to find sources for what is said in the lead in the body of the article. I don't see where the definition you want to include is discussed in the body of the article.

To the second part I can just say again that I think it's misleading to call depositors unsecured creditors, when most often at least part of their deposit is backed by the full faith and credit of the country the bank is in. Also, from what I know the priority of deposits in case of bankruptcy varies from jurisdiction to jurisdiction. I just don't see why these intricacies are needed for understanding the basics of what fractional reserve banking is, which is what the lead should provide. But in any event, you need references for this too, as I don't see it discussed in the body of the article.TheFreeloader (talk) 10:16, 12 May 2011 (UTC)

I am using outside and inside money in the same context as James Bullard of the St Louis Fed who is a voting member of the FOMC.

http://research.stlouisfed.org/wp/2000/2000-027.pdf

"agents may have incentives to hold both privately-issued (a.k.a. inside) and publicly-issued (a.k.a. outside) circulating liabilities".

However the current wiki refers to

the outside circulating money called central bank money which can be part of the banks assets and
the inside circulating money called commercial bank money which is created by the bank and used by customers to settle their transactions, which in reality is only a promise of outside money.

Wiki says "When a deposit of central bank money is made at a commercial bank, the central bank money is removed from circulation and added to the commercial banks' reserves (it is no longer counted as part of m1 money supply). Simultaneously, an equal amount of new commercial bank money is created in the form of bank deposits"

Obviously the deposited money does not belong to the customers with 'deposits'. The customers get a created money which is promissory only, but is an effective money using the banks systems where other customers are happy to receive additional credits of inside money via which they can claim outside money if necessary.

My desired change is just a simple observation that the word "deposit" used in isolation leads to misunderstanding that cannot be clarified while people mix up the different useages of deposit in an interchangeable manner, as if there is only one kind of deposit, and naive members of the public and people who should know better, do not know how a bank actually operates.

As you point out WP:LEAD says that a lead should have a concise definition of the subject and a summary of the body of the article. The current "concise definition" is muddled, misleading and reflects banks marketing language before it reflects a clear definition that introduces the reader to the 'what is' of FRB.

I realise it is wiki policy that articles should be written in clear language so that unsophisticated average users and even children can understand the articles. At the moment the lead is mostly mythology or spin, where so far it is not possible to change the body and not possible to change the lead - no matter how good the citations are.

As for deposit insurance, in the wider context, deposit insurance does not cover the larger amounts of money owed by banks to other banks and in places like Australia, deposit insurance is already removed for wholesale interbank loans.

As i have already stated the government guarantees for higher amounts over the last few years have been exceptional and in the case of the Irish example have not helped create massive runs on their entire banking system as lenders realised the banks had almost no chance of repaying their money without additional bailouts. Why does wiki have to act to reassure frightened investors their money is safe with the current language about central banks protecting depositors and banks from failing when we all know banks can fail leading to uncertain and frightening consequences and the governor of the BOE describes banks as dangerous organisations?

As Goodhart and others keep pointing out if people insist on ignoring the realities of banking they create entirely useless research. Why does wiki have to be part of that fiasco when there are quality citations available to balance popular opinions? Andrewedwardjudd (talk) 21:26, 17 May 2011 (UTC)andrewedwardjudd

Agree with Freeloader. User:Andrewedwardjudd's latest edits seem to involve an awful lot of counter-productive obfuscation. BigK HeX (talk) 16:35, 11 May 2011 (UTC)

off topic commentary

For the record, after bigk's unjustified and confused attack on my honesty, above, where Bigk seems unable to understand simple bank accounting, Lawrencekhoo removed my comment about bigk's silly behaviour, and posted this piece of wikilawyering in my user talk,

Although everyone is welcome to contribute constructively to the encyclopedia, you are reminded not to attack other editors, as you did on Talk:Fractional-reserve_banking. Please comment on the contributions and not the contributors.

I have reverted your lastest unhelpful and unnecesary personal attack.[5] You have been here long enough to learn our rules. Kindly stop the personal attacks. --LK (talk) 06:31, 12 May 2011 (UTC)

Andrewedwardjudd (talk) 08:30, 12 May 2011 (UTC)andrewedwardjudd

First paragraph fails because editors are preventing a simple explanation of banking.

The first paragraph does not deliver a direct simple definition of the subject Fractional-Reserve Banking. It seems to dance around talking about features and selling points of the designers of the banking system. Why is it called fractional? A previous author answered that question with "(a number less than unity)", for crying out loud. Please write assuming your audience are not morons. Please do not waste the readers' time with overly wordy and incomplete definitions. Just because your contribution is free, does not mean that that contribution cannot rob a person of valuable time and energy. — Preceding unsigned comment added by 75.166.66.241 (talk) 12:19, 12 June 2011 (UTC)

I agree, it's quite unclear what the first paragraph is actually saying. I'm reinstating the old wording. If it is felt that some points need to be elaborated further on in the first paragraph, it will have be done in a more clear fashion. The goal of the first paragraph of the lead must be to give a clear and simple definition of the topic at hand, per WP:MOSINTRO and WP:MOSBEGIN.TheFreeloader (talk) 19:30, 12 June 2011 (UTC)

A number of editors here are preventing a crystal clear presentation in the first paragraph. For example a depositor is an unsecured creditor of a private firm. The bank cannot possibility allow all of the depositors to withdraw their money on demand. The fact there may be tax payer supporter guarantees for *some* depositors is irrelevant in introducing the concept of fractional reserve banking. The introduction should be simple. Additional complexity can be added later. No good comes from tax payers being the gaurantor of their own money when the banks have been allowed to create such huge leverage. Andrewedwardjudd (talk) 02:42, 13 June 2011 (UTC)andrewedwardjudd

How money is "created" is not explained

The Money Creation section along with it's table merely shows the how the deposit transactions add up to $500 and then jumps to the conclusion that this is new money created. It is stated that $400 is "created". However, it is also clear from the table that only the original $100 actually exists in the system; $10.74 + $89.26. The values in the Amount Deposited column are transaction amounts; NOT the amounts left-over in the reserves after a subsequent loan is made. It is not clear why the sum total of transaction credits without the debits represents new money created. This defies logic unless there is some relevant fact not being elucidated.

For instance, if $100 was circulated 1000 times through a town's retail stores, there would be 1000 * $100 = $100,000 in transactions, but that does not mean $99,900 in new money is created. There is still only $100 in the system. What would motivate anyone to add-up all the transactions and refer to that sum as new money???

75.166.66.241 (talk) 08:58, 13 June 2011 (UTC)

If you deposit 100 in a bank then the bank keeps possession of the 100 you gave them and creates an entirely new amount of money for you which the bank ensures you can use to buy things where you are using the banks financial resources and creditworthiness to make that possible. Meanwhile the bank has the use of the 100 to support the banks other activities such as lending. Therefore money creation begins with the deposited cash and the customers owed money deposit. In your town example there is only one amount of 100 circulating. At the bank there is the cash of 100 and the banks created money deposit which can be used to buy things using the banks creditworthiness. The 100 can be in the banks safe and yet the 100 deposit money can be spent, so it definately is money by definition. In your example once 100 is in a safe there can be no spending of 100. Andrewedwardjudd (talk) 14:54, 13 June 2011 (UTC)andrewedwardjudd

But, is it not true that the bank cannot cash notes for more than it has reserves for? If I immediately write a check for $100, then the bank can no longer use any of that $100, right? Let's assume that I am the only account holder of this bank. So, they can't really spend all of my money if I have spent it first, and if they spent it first and then I write the $100 check, then they are in trouble, right? They can't just cash that $100 check if they don't have it, right?

Also, when exactly or what specific action results in the creation of money?... or is it a side-effect of some sort? It's still too vague. 75.166.66.241 (talk) 16:59, 13 June 2011 (UTC)

You are correct that a private bank cannot create the national currency. They create what is called cheque book money or deposit money.

The essence of the banks operation is that you are not the only customer the bank has so there is not generally customers wanting access to all of the banks cash money. It is a fractional reserve bank. Even so, even if you were the only customer, if you have a cheque book and a cheque guarantee card you can make purchases and the cheque gets cleared later when if necessary the bank borrows the money needed to settle, and if you want the cash, which generally you do not, the bank can borrow the cash - which means the bank has now got a new deposit of 100 to replace yours.

For the bank the act of money creation is the act of writing down your deposit entry in the banks books. You can still spend that deposit money using the banks systems. But the bank holds central bank money, which is a different money entirely. You hold commercial bank money or deposit money.Andrewedwardjudd (talk) 19:51, 13 June 2011 (UTC)andrewedwardjudd

That still doesn't sound like new money is being created if the bank borrows to cover it's debt. I think the following is a good way to get to the bottom of this: Printing new money and injecting it into the money supply causes inflation. Does the supposed money that is created by banks also cause inflation?67.6.248.180 (talk) 23:04, 17 June 2011 (UTC)

The banks generally have lines of credit with each other. Eg they have the ability to borrow at LIBOR say, from their counterparties on demand up to a certain limit. Therefore if you get a loan from bank AAA at LIBOR + 2% and you pay a customer at bank BBB then the effect is that AAA gets a deposit at AAA from BBB costing AAA LIBOR. But this is a net interbank loan amount of zero between the banks. There is no actual interbank loan money coming from BBB. The money was already owed by AAA to BBB and due to travel to BBB. BBB allows an interbank loan to cancel the requirement of AAA to pay BBB, and BBB does not need to pay to AAA. But AAA has to pay interest to BBB. So no matter how it is recorded at BBB, the effect of the loan in this situation is that it created a corresponding new deposit at AAA costing LIBOR.

Money creation by banks is a poorly understood process both by the lay person and by many economists. The lending method is obviously wrong but money from thin air is also very highly misleading. Money creation still only involves debits and credits.

If the banks are regulated to have a fixed leverage to the amount of fiat money they hold then they could not create more inflation of the money supply via loans than the amount of inflation of fiat money created by government. Andrewedwardjudd (talk) 05:28, 18 June 2011 (UTC)andrewedwardjudd

Andrew, since this topic is already hard to understand, please answer my question yes or no before giving your explanation. Reading your explanation requires some contextual understanding in order to understand the ambiguous parts of it. If you start off with 'yes', 'no', or even 'it depends', it would help me to know where you are coming from. The question again is: Does the supposed money that is created by banks also cause inflation? Or, put another way, does a fractional reserve banking system directly or indirectly cause or contribute to inflation. Thank you, Al 67.6.248.180 (talk) 16:51, 18 June 2011 (UTC)

The answer is yes no and it depends on how the banks are regulated and supported by government. If the government were the only providers of money/spending power they would still need to regulate the ability of people to buy things and have the ability to tell the people there is no more money. In todays system peoples spending is regulated by an interest price set by the governmentAndrewedwardjudd (talk) 19:31, 18 June 2011 (UTC)andrewedwardjudd

Thank you. You answered "yes". Now if you can please explain how: How does the supposed money that is created by banks cause inflation? What is the step-by-step process? As I already mentioned, the sum of all loans in the article's chart is just a sum of transactions. Summing the quantities of each time the *same* $100 changes hands does not mean *new* created money has been added to the money supply. Just because 10 people pass $100 down the line doesn't mean $1000 now exists. It's just a chain of lenders and borrowers. Also, as I responded before, if a bank borrows money (presumably from money that already exists in the economy either in the central banks or commercial banks) to cover it's debt, that also is not newly created bonafide money added to the economy. These previous statements of mine are only to illustrate my logic based on my knowledge. If I a wrong, please show me where. However, one does not need to be an economist to know that the absolute test as to whether or not new money is actually created and added to the money supply is if that money immediately causes inflation the same as if a counterfeiter has added counterfeit money to the economy. You answered yes to this and this is the the whole reason for my questions and the only thing I am trying to understand. Thanks in advance for your reply. Al 67.6.248.180 (talk) 21:04, 18 June 2011 (UTC)

I already explained to you that you are mistaken to interpret that chart as the same 100 changing hands, If 81 arrives at bank 3 for example the first depositor has 100 to spend. and the second depositor has 90 to spend. In your town if 81 arrives at person 3, it is only possible for the first person to have 19 to spend. Andrewedwardjudd (talk) 23:04, 18 June 2011 (UTC)andrewedwardjudd

Andrew, first let me say that I didn't start this conversation to be personally tutored for my sole benefit. I wanted to try and help the authors of this article to find a clearer way to explain these topics. But, you aren't even taking care enough to proof-read your responses which is probably part of the reason this thread has continued as long as it has without any clarity on this issue accomplished at all. For example, you say "In your town if 81 arrives at person 3, it is only possible for the first person to have 19 to spend." This is almost unintelligible. First of all, you've already stated (the well-known fact) that if the bank needs money to cover it's withdrawals to meet reserve requirements, then it will borrow it. So, how does this first person only have 19 to spend??? But, I don't even know if this is what you are saying because your reply seems to be a minimal effort response. I'm also surprised that that's all you said. Even if I have the interpretation of the chart wrong, you should have continued to answer my question instead of acting though the fact that you said anything at all qualifies as a complete and thoughtful response. It seems like you are expecting me to figure out one or more logical connections before I can fit your response into a full response that directly answers my question. This conversation has not been productive at all and I'm starting to wonder about your qualifications to contribute to this article. Richard Feynman said, "If you can't explain something in simply, then you probably don't know what you are talking about." I'm not accusing you; I'm simply asking you; but you may give up now I suspect. When I or other members of the public ask economists to explain this, we always receive what amounts to mumbo jumbo. I've given you every opportunity to clarify this but either you can't or you won't. 67.6.248.180 (talk) 00:00, 19 June 2011 (UTC)

I had not realised your example involved a banking system and 1000 cash transactions. I assumed there was no bank involved. Such an example can give you no information about a credit based system which can only function if people are owed money.

The beginning point of money creation is that the bank does something that involves somebody somewhere being owed 'real money'. Eg 100 cash deposit is followed by 90 lent as cash. This involves a person being owed 100. 100 owed and 90 lent. 190 total money. 100 real money. The bank only has a reserve of 10. it has 10 central bank money to support 100 deposit money. The bank however does not need to have 100 deposited for it to have 10 reserves and 100 created deposit money. The 100 is simply owed to a customer and does not require real money for that to be possible.Andrewedwardjudd (talk) 05:52, 19 June 2011 (UTC)andrewedwardjudd

Awful.67.6.248.180 (talk) 19:55, 19 June 2011 (UTC)

Reference "Controls on Fractional-Reserve Banking"

The section Risk and prudential regulation as the text:

Proponents of prudential regulation, such as minimum capital ratios, minimum reserve ratios, central bank or other regulatory supervision, and compulsory note and deposit insurance, (see Controls on Fractional-Reserve Banking below); (emphasis mine)

However there is no "Controls on Fractional-Reserve Banking" below, what should this refer to. And shouldn't it be a link? Webhat (talk) 13:11, 25 June 2011 (UTC)

The amount of money created

I quote from the article: "the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400." It seems to conflict with: "In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $400 of commercial bank money." Because commercial bank money = total deposits = $500. The same goes for: "$400 of commercial bank money is created virtually through loans." Because $500 commercial bank money is created, keeping the $100 central bank money in reserve. — Preceding unsigned comment added by 94.215.135.27 (talk) 14:16, 2 August 2011 (UTC)

The combined effect of loan interest and fractional reserve banking

Thank you everyone for the detailed account of fractional reserve banking. There was one related area that I'd really like to have read more about: When you have created money through repeated lending of a fractional reserve, and you charge interest on all those loans, where does the money to pay the loan interest come from? Without being an expert or dusting off my math skills, it seems like the only 'solution' is for a certain portion of the population to accumulate an ever increasing amount of debt, which may be offset/delayed to some extent by economic growth (hence the built in drive for growth).

I realize the issue of where the money comes from to repay debt interest isn't intrinsic to fractional reserve banking, but it does appear to be multiplied by it. I'd be very curious to hear some views on the relationship between cumulative debt and fractional reserve banking. Joehudson (talk) 20:32, 17 June 2011 (UTC)

Interest for loans simply comes from the existing money supply, and gets paid back out by the bank to the economy. The bank is not accumulating or sucking money from the economy in normal operation. A bank is simply a set of books that exist in an economy whereby people transact amongst each other across the books. The books cannot accumulate money, and the banks do not accumulate large amounts of cash in normal circumstances. Andrewedwardjudd (talk) 05:12, 18 June 2011 (UTC)andrewedwardjudd

Thanks Andrew. I'm struggling to see how it works without an ever growing money supply.

Let's say a central bank issues a total of $100, i.e. the sum of M0 is $100. This is distributed amongst commercial banks and multiplied by the money multiplier, let's say 10, so there is $1000 of M2 in the economy. But so long as that M0 is floating around the economy and not returned to the central bank then the base rate of interest is accumulating on it right?

Let's now say that due to the reserve requirement, M2 can't go much above $1000. But where that M2 - M0 ($900) is also loaned to individuals or businesses and not directly exchanged for assets like land, raw materials or business ownership, then interest is also accruing on that money, at the rate the bank sets, right? A bank may make a loan to someone secured by certain assets that they have and their income, but where does the money to repay the interest actually come from? $100*k + ($900-o)*n + o > $1000, no? (where k is the base interest rate, o is the amount of money the commercial banks exchange directly for assets and so don't earn interest on, and n is the commercial banks aggregate lending rate. k > 1, n > 1, o < $900)

Surely with this system either the banks end up owning all the real assets or the central bank has to keep issuing new loans of M0 to cover the old loans, which are then passed onto people and businesses and so the debt increases. Isn't this what necessitates perpetual economic growth? If I misunderstand, please enlighten me. Joehudson (talk) 13:18, 18 June 2011 (UTC)

1. The 100 fiat does not get multiplied to be $1000, but rather there is $100 fiat and 1000 claims for fiat. M0 is the 'real money' and m2 are claims for the 'real money'. The claims only exist in the banks books and get traded amongst customers of the same bank. Between banks the banks have to settle in real money terms.

2. You are in the economy with the bank. Whatever money you pay to the bank in interest does not get removed from the economy, because the bank exists in the same economy.

3.If there is a stable economy the banks earn money from fees and enabling trading between sellers and buyers, where sellers get credits for real money.

4.1The 'created money' loans create a liability for the bank. which is either immediately called upon by real money moving to another bank or person so that real money is lost by the bank or the 'created money' is recorded in the banks books for later payment in real money terms causing the bank to make a loss later.

4.2 For a particular loan of 'created money', loan repayments replace the banks losses caused by them paying out real money, or they end the banks outstanding liabilities created when the bank loan was made

5. Interest for the loan comes from the economy and is paid out by the bank to the economy in wages profits purchases and investments Andrewedwardjudd (talk) 17:15, 18 June 2011 (UTC)andrewedwardjudd

Thanks again for your reply. Unfortunately your points don't make it much clearer for me. Specifically, as far as I can see, if the money in an economy is created first by the central bank as debt with interest, then that interest can't be paid without either creating more money (taking another loan to cover the old loan) or giving up real assets to cover the debt. And, it seems to me, that this simple fact is what necessitates perpetual inflation.

Regarding some of your numbered points, I understand how loan repayments cover a banks liabilities. My question is really where does the interest on those loans come from? You say 'the claims for real money only exist on the banks books and get traded amongst customers of the same bank'. My understanding of m2 (broad money) is that this is the money available for trade in the economy, and is a multiple of m0, due to fractional reserve banking. (So with a fractional reserve requirement of 10% m2 could tend towards $1000 with only $100 of m0.) It's not paper money, but it is on people's balance sheets and it is available for trading. In your point 5 you say interest for loans comes from the economy, but the financial size of the economy is bound by m2, plus valuation of real assets (afaik) and m2 only covers the initial value of all the loans, not the interest - unless of course the supply of money is further increased. So again it seems like ultimately in order for interest to be repaid the m0 money supply must increase, or assets be given up. Can anyone show me how that conclusion is wrong? (Maybe I'll just have to do some more maths after-all to clear things up in my head.) Joehudson (talk) 18:16, 18 June 2011 (UTC)

I see what you are saying now. For many decades the central bank has supplied money in whatever quantities the economy requires at an interest rate price it sets relative to inflation. So each day of operation the central bank is receiving interest rate money and it uses this to pay for its operations and the rest goes to the government to spend. The banks then earn money from the economy to pay for the interest. All of the borrowed money is still in the economy, unless the central bank choses to hold some money as an asset from interest earnt.

On the other points are you clear there are two different types of money where one is just a claim or IOU for the other?

A bank is no different to a loan shark in a pub with a pocket book, he takes deposits and pays better interest than the banks do, he can offer cash loans or credit money loans where you transact across his books. He has a pocket with cash in it and a pocket book with the rest of the created money in it. You pay him interest on the loans and he pays interest on deposits and spends the rest on his living expenses and investments.

You appear to be saying that M2 is something more than it actually is? The loan sharks created money is just not part of the official money supplyAndrewedwardjudd (talk) 20:20, 18 June 2011 (UTC)andrewedwardjudd

Let's look at an example:

person A deposits $100 in a bank.
With a reserve fraction of 20%, the bank can lend $80 to person B. Let's say the interest rate is 10%.
Person B deposits the $80 in the same bank. Now the bank has again $100 in cash, but in order to support the $180 in demand deposits, they have to keep $36. So they lend $64 to person C.
Person C keeps the cash in his home, so the chain stops here.
Now, after a year, person B owes the bank $88, and person C owns the bank $70. But person B has only $80 in deposit, and person C has only $64 in cache. B needs $8 more, and C needs $6 more. Where will they get it?
One option is that they convince person A to give them some money, for example, in return to doing him some service he wants. In this case, no new money is created - A will have $86, B and C will both have 0, and the bank owner have $14 - totally the original $100.
Another option is that B and C give the bank some of their assets, if they have some.
If B and C have no assets, they will go bankrupt and will not be able to pay the interest. The bank owner can try to threat them, throw them to jail. etc. In any case, no new money is created.

Hope that helps. --Erel Segal (talk) 11:17, 19 August 2011 (UTC)

Could the final example paragraph relating to "M0" and "M1" under "How it works" please be improved? That paragraph is quite confusing, for instance "this is how a bank can copy 90% of "M0" money to make "M1" money" doesn't seem to make sense, since 90% of $1000 is $900, it's unclear to a layperson like myself how this "90% copying" produces $18,997. The precision of the M1 figure suggests that it is the result of a clear mathematical calculation, and not merely illustrative, but the mathematics behind it is nowhere to be seen. Thanks! --1.142.226.136 (talk) 23:55, 1 April 2012 (UTC)

Sentence too long

Quote: "Though not a mainstream economic belief, a number of central bankers, monetary economists, and text books, have said that banks create money by 'extending credit', where banks obligate themselves to borrowers, and then later manage whatever liabilities this creates for them, where if the central bank targets interest rates, it must supply base money on demand to meet the banks reserve requirements, after the banks have begun the lending process[10][11][12][13][14][15][16][17] and that rather than deposits leading to loans, causality is reversed, and loans lead to deposits".

This sentence is extremely long and hard to understand. Can someone please rewrite it? Thank you! --Erel Segal (talk) 08:26, 19 August 2011 (UTC)

Additionally, the entire paragraph titled "Criticism" is unclear, especially this passage: "Adherents of the non-mainstream Austrian School claim that fractional-reserve banking, by expanding the money supply, will lower the interest rates compared to a hypothetical full-reserve banking system, although this idea has been criticized within mainstream economics.[45][46][47] Austrian adherents argue that the presumed discrepancy will affect the role of the interest rate as the price of investment capital, guiding investment decisions. One of the proponents of aspects of the business cycle theory, Friedrich von Hayek, shared in the Nobel Memorial Prize in Economic Sciences for 1974.[48] Hayek accepted that bank credit and fractional reserve banking — even if they contributed to business cycles — were necessary as "the price we pay for a speed of development exceeding" that which would otherwise be possible, and that "financial institutions have never been prohibited from holding fractional reserves."[49]"

It is not clear, why this is a criticism? And what is the opinion of Hayek - is he for or against fractional banking? And how is all this related to the business cycle? --Erel Segal (talk) 10:18, 19 August 2011 (UTC)

Money creation table

Forgive me for asking, but shouldn't the "Deposits" column of the money creation table actually be negative? Whilst a loan by a bank is an asset, deposits (i.e. loans to a bank) are liabilities. So, excluding interest, loans + reserves = total deposits should be the basic situation. So, in the model, what is happening is that the initial $100 created by a (basically a) mint then attracts assets of $457 in security on loans from its debtors. Or am I missing something obvious? I mean, it just seems to me no different than if someone invests $100 in a shoe shine stall and then attracts $457 in custom.--Red Deathy (talk) 07:47, 26 August 2011 (UTC)

Changes to the opening paragraph

The first few sentences of this article were changed because they were factually incorrect. Fractional reserve banking does not mean that only a fraction of the customer's deposits are held at the bank. It means that only a fraction of the customer's deposits are held as reserves (cash and coin and other reserves - ie. government securities, deposits at the Central Bank etc..). Also, banks do not lend their customer's deposits to others - this activity would be illegal. A bank cannot loan your deposit to someone else. Loans create new deposits, and that is one of the ways that commerical banks create money (google the term deposit expansion, as this concept is taught in any introductory economics course, and is also discussed in the article itself). Chdouglas (talk) 16:24, 1 October 2011 (UTC)

Number One Provocation for Wall Street Protest

** Formal Request **

In the interests of accuracy please revise the example: http://en.wikipedia.org/wiki/Fractional_reserve_banking#Example_of_deposit_multiplication.

Please provide an example which uses 10% as the reserve ratio, as that more closely reflects the current 10% value in use: http://en.wikipedia.org/wiki/Reserve_requirement#Historical_changes_in_cash_reserve_ratios

One may ask, "In the interests of providing a sufficient example, while conserving page space, why does it matter?"

And the answer is for "social magnitude" and "incriminating clarity" upon the following reason.

** Unspoken Deception **

Banks earn usury interest by loaning 10 imaginary dollars for every 1 dollar that it actually has on hand!

And those earnings are not divided by 10 on the back side!

Imagine oneself exchanging $1 and receiving $10 in purchases, or imagine exchanging 1 hours of labour and receiving compensation for 10 hours of labour!

Is there any wonder how banks earn $35 billion a quarter and how the banking system can award 5000 employees greater than 1 million dollars in annual bonuses?

Does the method earnings give new meaning to the definition of theft as "Taking something from someone else that is not yours?"

What veil of illusion has shrouded the foundations of reason that the perpetrators of the scheme should fabricate a rejection of their gains multiplied 10 times upon money that it is not theirs as envy for free market capitalism?!

** Proposed Revision **

"The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 10 percent of it, or $10, and sets it aside as reserves, and then loans out the remaining 90 percent, or $90. At this point, the money supply actually totals $190, not $100, because the bank has loaned out $90 of the central bank money, kept $10 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.)."

GeMiJa (talk) 18:48, 11 October 2011 (UTC)

Putting aside that this is your mere opinion, it doesn't seem to be a genuine problem per WP:AGENDA. Wikipedia isn't the place to right great wrongs and neither social magnitude nor incriminating clarity are goals of the Wikipedia project. I don't object to the example being changed or improved, but not on the weak basis you have put forth. John Shandy` • talk 20:47, 11 October 2011 (UTC)

What do you mean "Putting aside that this is your mere opinion."?! Is there something incorrect about the example? Otherwise there is nothing ambiguous about it!! If a revision of the example is not agreeable, then at least a direct statement that the US reserve ratio is 10.3% seems reasonable - per http://en.wikipedia.org/wiki/Reserve_requirement#Historical_changes_in_cash_reserve_ratios GeMiJa (talk) 23:34, 11 October 2011 (UTC)

My comment about your opinion is in reference to all of the irrelevant, sensationalist, point-of-view junk you posted in addition to your proposed revision (e.g. unspoken deception, what veil of illusion, shrouded the foundations of reason, perpetrators of the scheme, fabricate a rejection of their gains, envy for free market capitalism). Such drivel makes it difficult to assume good faith because it appears that you are here to rant, and while passing through, to suggest a change that merely suits your rant.

Why do you insist that the example, which is a general example of fractional reserve banking (independent of any particular country or central banking system), use the current reserve requirement of the U.S. Federal Reserve? Why wouldn't it be appropriate to use the reserve requirement of Turkey, or the United Kingdom? Aside from that, why do we even need to mention the current reserve requirement of the U.S. Federal Reserve in an article that is not about fractional reserve banking in the U.S., but rather about fractional reserve banking in general? The actual reserve requirement ratios of various countries are better suited to the reserve requirement article. The example of fractional reserve banking in this article uses example values for its variables, and that is perfectly okay. It doesn't warrant any need for change, and the reasons you've given to support your request that it be changed to use 10% are particularly weak. John Shandy` • talk 03:50, 12 October 2011 (UTC)

Unrelatedly to the above rant, when I read this article I was dismayed to find that it did not list a typical requirement, nor did the article make it obvious that this information was available at [[6]], and I think someone should correct this lack of information. — Preceding unsigned comment added by Shades97 (talk • contribs) 01:22, 22 January 2012 (UTC)

I've just added a tidbit to the reserve requirements section which notes that countries adhere to varying required reserve ratios and that they've changed over time to help clarify this. Cheers, John Shandy` • talk 05:09, 22 January 2012 (UTC)

Banks do not lend deposits. They create them.

I have altered the opening paragraph once again, because someone still keeps trying to state that banks lend deposits. Banks do not lend deposits as this activity is illegal. Banks cannot loan your deposit to someone else. Banks create deposits through loans and purchases of securities etc.... The loan, or security, is an asset of the bank, and the corresponding deposit it creates is a liability. That is how they balance on the bank's balance sheet, and that is how double entry accounting works.

Further, deposits do not need to be deposited at another bank for the expansion of the money supply to occur. This is simply a model used to explain how banks create money through the process known as "deposit expansion". However, evidence by research by the Federal Reserve and in countries that do not have reserve ratios demonstrates that reserves actually follow deposits, not the other way around. In other words, banks will create deposits and get the reserves necessary to cover those deposits at a later point in time by borrowing the reserves from the Central Bank or another commerical bank. This means that reserves don't limit the amount of money in existence, because if the demand for money exists, banks will create the loans, and the reserves will increase correspondingly. In other words, the deposit expansion process described in elementary economics text has the causality backwards. Chdouglas (talk) 21:28, 15 October 2011 (UTC)

When writing articles we are supposed to report what reliable sources say, even if they are wrong, rather what we believe to be true. I notice that you did not provide any sources for your changes and therefore will revert, because your edit is original research. TFD (talk) 22:36, 15 October 2011 (UTC)

Anyone with an elementary understanding of economics and the accounting of banking knows that banks don't lend deposits. But if I must reference the statements, then I will. 68.150.179.95 (talk) 01:05, 16 October 2011 (UTC)

"1. Banks create money by creating new checking deposits for borrowers when making loans."

68.150.179.95 (talk) 01:05, 16 October 2011 (UTC)

http://ecedweb.unomaha.edu/ve/library/hbcm.pdf — Preceding unsigned comment added by 68.150.179.95 (talk) 01:09, 16 October 2011 (UTC)

"Creation of Credit: A unique function of the bank is to create credit. Banks supply money to traders and manufacturers. They also create or manufacture money. Bank deposits are regarded as money. They are as good as cash. The reason is they can be used for the purchase of goods and services and also in payment of debts. When a bank grants a loan to its customer, it does not pay cash. It simply credits the account of the borrower. He can withdraw the amount whenever he wants by a cheque. In this case, bank has created a deposit without receiving cash. That is, banks are said to have created credit. Sayers says “banks are not merely purveyors of money, but also in an important sense, manufacturers of money.”"

"Derivative Deposits: Bank deposits also arise when a loan is granted or when a bank discounts a bill or purchase government securities. Deposits which arise on account of granting loan or purchase of assets by a bank are called “derivative deposits.” Since the bank play an active role in the creation of such deposits, they are also known as “active deposits.” When the banker sanctions a loan to a customer, a deposit account is opened in the name of the customer and the sum is credited to his account."

"The creation of a derivative deposit does result in a net increase in the total supply of money in the economy, Hartly Withers says “every loan creates a deposit.” It may also be said “loans make deposits” or “loans create deposits.” It is rightly said that “deposits are the children of loans, and credit is the creation of bank clerk’s pen.”

http://www.newagepublishers.com/samplechapter/001636.pdf

Chdouglas (talk) 01:34, 16 October 2011 (UTC)

Your first source is a high school textbook which does not meet rs and the second source is a chapter from a book which has no description, so I cannot tell whether or not it is rs. In any case, this article is about fractional reserve banking and you need to supply sources about that topic. TFD (talk) 02:35, 16 October 2011 (UTC)

A text book isn't a sufficient source?

If you were to bother to look, the other link I provided above is from the University of Nebraska

Here then: "Loans Make Deposits"

http://www.mu.ac.in/arts/social_science/economics/eco23.pdf

And just so you know, the following is on the Wikipedia article on money creation: "When a commercial bank loan is extended, new commercial bank money is created."

The following is posted at Texas A&M university if you bother to check.

"Banks create money whenever they make loans. The process is that the bank creates a liability (deposit) to pay for an asset (loan)."

http://faculty.tamu-commerce.edu/dfunderburk/231/notes/DepositExpansion.htm

I am talking about fractional reserve banking, because that's how the system operates. Banks cannot loan your deposit to someone else. It's illegal. They cannot debit your deposit in order to credit someone else's. Each loan creates a new deposit. The loan (or purchase of a security) is accounted as an asset to the bank, and the corresponding deposit that the loan (or purchase of security) created is accounted as a liability to the bank. That is how double entry accounting works. Chdouglas (talk) 14:12, 16 October 2011 (UTC)

You need a source that specifically talks about "fractional reserve banking", otherwise adding your sources is synthesis. If you believe that no sources use the term, then nominate the article for deletion. TFD (talk) 15:36, 16 October 2011 (UTC)

"Most of the money in the United States today (measured as M1 or M2) is created by banks."

The subject of fractional reserve banking and deposit expansion are the same subject. That is how commercial banks create money. Chequable deposits are considered to be part of what economists call M1,and commercial banks create this money when they purchase securities, create loans and other activities. Every loan creates a deposit, just as every repayment of a loan destroys a deposit. That is how money is created and destroyed in a fractional reserve banking system. The government creates M0, or the monetary base. This base only comprises a small percentage of the money supply (about 4% of M1 in Canada). The other 96% is created by fractional reserve banks, who only hold a fraction of the deposits they create as reserves. This is not "original research", and you cannot have an article on monetary expansion without cross referencing it to fractional reserve banking. They are the same subject, because our commercial banks create deposits in a fractional reserve system, and that is how most money is created. This is taught in every introductory economics course. That's where I referenced the material from. The article is simply WRONG when it states that banks lend deposits. This statement is misleading. The bank cannot lend your deposit to someone else. A bank CREATES deposits when it makes a loan. And as long as it has enough reserves to maintain liquidity (many countries, like Canada, do not have required reserve ratios), then they will continue to create deposits. Chdouglas (talk) 16:13, 16 October 2011 (UTC)

If fractional reserve banking and deposit expansion are the same thing, then please provide a source that says that. Arguments like the ones you are presenting are just original research and cannot guide us in developing the article. TFD (talk) 17:09, 16 October 2011 (UTC)

"The Fractional Reserve Banking System A fractional reserve banking system exists when the amount of reserves banks must keep on hand is less than the amount of their deposits. In the U.S., banks must keep a fraction of their assets as bank reserves – cash plus deposits with the Federal Reserve, which is the nation's central bank. Banks issue loans with the funds that are not held in reserve; in doing so, they expand the nation's money supply."

http://www.investopedia.com/study-guide/cfa-exam/level-1/macroeconomics/cfa15.asp#axzz1axg78v2i

The following is from a workbook produced by the Federal Reserve and is a demonstration of deposit expansion in a fractional reserve banking system:

"The purpose of this booklet is to describe the basic process of money creation in a "fractional reserve" banking system.

http://www.rayservers.com/images/ModernMoneyMechanics.pdf

"The fractional reserve banking system allows banks to expand the money supply by making loans." Fundamentals of Economics - William J. Boyes, Michael Melvin.

http://books.google.ca/books?id=dmfJmMODxfYC&pg=PA315&lpg=PA315&dq=fractional+reserve+banking+and+deposit+expansion&source=bl&ots=_NB3iQ3Njn&sig=hXZqMrtF0stz1lYbyRv_LFF_oxw&hl=en&ei=VR6bTsPxB8fjiAKt36ziDQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CCMQ6AEwATgK#v=onepage&q=fractional%20reserve%20banking%20and%20deposit%20expansion&f=false

Now, if you refuse to change the wording of the opening paragraph given all the references that I've supplied at your request, I must assume that you are purposefully trying to be deceitful on the subject in order to sow confusion. Chdouglas (talk) 18:21, 16 October 2011 (UTC)

I believe this is a semantic misunderstanding

First of all Chdouglas, I want to convey to you that reliable sourcing is important. The Four Deuces (TFD) was not assuming bad faith on your part, but all editors are required to supply full references and citations for reliable sources in support of their edits. It is how we make sure that "junk" isn't being inserted into an article. To not use any references and merely write "off the cuff" or from "common knowledge" is to engage in original research (of the very weakest kind, too), and Wikipedia does not publish original thought, but instead seeks to characterize the existing reliable literature on any given topic. Plus, we must be considerate of the fact that some readers may wish to see where something comes from, such as the source for a fact (no matter how well-known the fact is). This is part of producing articles that are encyclopedic, and that is why TFD has been pressing you hard to cough up reliable sources. TFD is an editor of good character and he is not trying to pick on you, so please don't react in any hostile way.

Now, I believe this to be a misunderstanding resulting from unfortunate semantics that rise from the nature of the topic's sophisticated use of terminology. There is truth to what Chdouglas is saying, in that money creation occurs from banks creating deposits as liabilities simultaneously as they create loans as assets. Reserves are composed of (a) required reserves and (b) excess reserves. The amount of a bank's excess reserves implies something about the amount of loans it can safely make (and therefore the amount of deposits it can safely generate). Excess reserves and deposits are like two sides of the same coin (excess reserves being the asset side and deposits being the liabilities side). It's true that banks don't "lend" a portion of a person's deposits to someone else, but through converting its excess reserves into new loans a bank is essentially "lending what resulted from deposits" from the assets perspective, and those new loan issues generate an equivalent amount of new deposits from the liabilities perspective, to be withdrawn, spent, etc.

However, it is indeed correct to say in the article's lead that fractional reserve banking is a type of banking whereby the bank retains only a fraction of the customer's deposits as reserves. The bank lends out most of the deposited funds (mechanically, excess reserves are converted to loans, but excess reserves are but the asset perspective of deposits). The lending takes the form of new deposits that a borrower can withdraw; essentially, deposits are indeed being lent because you need more deposits in order to have the excess reserves available for conversion into new loans.

I believe the confusion arises from a misunderstanding of semantics between a mechanical interpretation (from a double entry accounting point of view) and an essential interpretation (from more of an economic point of view). The following are reliable sources which support both Chdouglas's nuance and the present verbiage in the article's lead.

Xi, Ning; Ding, Ning; Wang, Yougui (2005). "How required reserve ratio affects distribution and velocity of money". Physica A: Statistical Mechanics and its Applications. 357 (3): 543–555. Retrieved 2011-10-16.

Modern banking system is a fractional reserve banking system, which absorbs savers' deposits and loans to borrowers. Generally the public holds both currency and deposits. As purchasing, the public can pay in currency or in deposits. In this sense, currency held by the public and deposits in bank can both play the role of exchange medium. Thus the monetary aggregate is measured by the sum of currency held by the public and deposits in bank in economics. When the public saves a part of their currency in commercial banks, this part of currency turns into deposits and the monetary aggregate does not change. Once commercial banks loan to borrowers, usually in deposit form, deposits in bank increase and currency held by the public keeps constant. So loaning behavior of commercial banks increases the monetary aggregate and achieves money creation.

Money creation of commercial banks is partly determined by the required reserve ratio. In reality, commercial banks always hold some currency as reserves in order to repay savers on demand. Total reserves are made up of ones that the central bank compels commercial banks to hold, called required reserves, and extra ones that commercial banks elect to hold, called excess reserves. Instead of appointing required reserves for each of commercial banks, the central bank specifies a percentage of deposits that commercial banks must hold as reserves, which is known as the required reserve ratio. The role of the required reserve ratio in money creation is illuminated well by the multiplier model.

Let me reproduce an example from Mishkin, Frederic S. (2006). Economics of Money, Banking, and Financial Markets, 8th edition. Boston, MA: Addison-Wesley. ISBN 978-0-3212-8726-7.:

The Fed conducts an open market purchase of a $100 bond from the First National Bank. The Bank finds it has an increase in reserves of $100, but assume the bank does not want to hold excess reserves because it earns no interest on them.

First National Bank

Assets Liabilities

Securities -$100

Reserves +$100

Since the bank has no increase in its checkable deposits, required reserves remain unchanged, and the bank's additional $100 of reserves means that its excess reserves have increased by $100. The bank makes a loan, setting up a checking account for the borrower and putting the proceeds of the loan into the borrower's account. In this way, the bank alters its balance sheet by increasing its liabilities with $100 of checkable deposits and at the same time increasing its assets with the $100 loan. The excess reserves were converted into loans, which in turn created deposits.

First National Bank

Assets Liabilities

Securities -$100 Checkable deposits +$100

Reserves +$100

Loans +$100

The bank has created checkable deposits by its act of lending. Because checkable deposits are part of the money supply, the bank's act of lending has, in fact, created money.
In its current balance sheet position, the First National Bank still has excess reserves (because the deposits created are excess reserves on the assets side of the balance sheet), and may wish to make additional loans. However, these reserves will not stay at the bank for very long, because the borrower took out a loan not to leave $100 idle at the bank, but to purchase goods and services from other individuals or businesses. When the borrower makes these purchases by writing checks, they will be deposited at other banks, and the $100 (of deposits created as liabilities, and of excess reserves recognized as assets) will leave First National Bank. A bank cannot safely make loans for an amount greater than the excess reserves it has before it makes the loan. The final resulting T-account is:

First National Bank

Assets Liabilities

Securities -$100

Loans +$100

Assuming the borrower purchased $100 worth of services, the provider of those services then deposits $100 at Bank A. Assuming bank A presently hold no excess reserves, its reserves now increase by $100, as do its checkable deposits.

Bank A

Assets Liabilities

Reserves +$100 Checkable deposits +$100

If the required reserve ratio is 10%, this bank will now find itself with a $10 increase in required reserves, leaving it $90 of excess reserves. Because Bank A (like First National Bank) will not want to hold onto excess reserves, it will make loans for the entire amount that it can. Its loans and checkable deposits will then increase by $90, but when the borrower spends the $90 of checkable deposits, they and the reserves at Bank A will fall back down by this same amount. The net result is that Bank A's T-account will look like this:

Bank A

Assets Liabilities

Reserves +$10 Checkable deposits +$100

Loans +$90

If the money spent by the borrower to whom Bank A lent the $90 deposited in another bank, such as Bank B, the T-account for Bank B will be:

Bank B

Assets Liabilities

Reserves +$90 Checkable deposits +$90

The checkable deposits in the banking system have increased by another $90, for a total increase of $190 ($100 at Bank A, plus $90 at Bank B). In fact, the distinction between Bank A and Bank B is not necessary to obtain the same result on the overall expansion of deposits. If the borrower from Bank A writes checks to someone who deposits them at Bank A, the same change in deposits would occur.
Bank B will want to modify its balance sheet further. It must keep 10% of $90 ($9) as required reserves and has 90% of $90 ($81) in excess reserves and so can make loans of this amount. Bank B will make an $81 loan to a borrower, who spends the proceeds from the loan. Bank B's T-account will be:

Bank B

Assets Liabilities

Reserves +$9 Checkable deposits +$90

Loans +$81

So, a more important question to ask is what verbiage in the lead article is most appropriate for communicating the function of fractional reserve banking to readers who may or may not understand double entry accounting, and who may or may not be familiar with the intricacies of commercial lending. Thoughts? John Shandy` • talk 19:02, 16 October 2011 (UTC)

Hello John, my frustration was with the fact that, not only is the opening paragraph incorrect, but that it was not referenced at all. When I tried to correct the opening paragraph, I was the one who needed to reference the material.

I see that you are a graduate student, and probably quite familiar with economics.

I don't think this is a question of "semantics" whatsoever. Banks cannot lend anything. They create deposits/money. That is the role of banks in the economy. They create deposits not only through loans, but through purchases of securities, ordinary business expenses, and payment of interest on deposits. The confusion lies in the fact that banks have to compete for deposits, because they are in reality competing for reserves.

On a "higher level", I would argue that the process of "deposit expansion" as ordinarily taught in economics texts is erroneous. Banks do not "lend" excess reserves. Excess reserves are merely reserves in excess of the legislated reserve/deposit ratio, or if not legislated, the reserve/deposit ratio that banks are comfortable posessing for liquidity purposes. In fact, much new research shows that the causation of the "deposit expansion" taught in ordinary economics texts has the causality backwards (see Steve Keen etc.), and in fact reserves follow deposits, not the other way around. In other words, banks create as many deposits through loans or other activities as they deem prudent, and then obtain reserves from the Central Bank or other commercial banks.

But, back to the original argument in terms of the opening paragraph, I would suggest that the word lend be replaced with create, because I believe it is essential that people understand that banks create deposits in a fractional reserve banking system.

Back to you.

Chdouglas (talk) 21:20, 16 October 2011 (UTC)

I don't think anyone is disputing that banks create deposits (and thereby money), but banks do "lend" to people borrowing money from the banking system. Whether they lend from existing funds or fabricate new funds (by adding loans to the assets side of the balance sheet and adding deposits to the liabilities side) seems to be a matter of semantics. I do acknowledge that they can create deposits as a result of other means that weren't specified in the example I gave. What difference does it make that banks have to compete for deposits, and through that method compete for reserves? Taking the example into consideration, it's clear that excess reserves arise from receiving deposits from money already created in the system, when a person deposits funds into a bank. It's also clear that excess reserves (or other types of assets on a bank's balance sheet) enable the bank to create entirely new money (by fabricating deposits). It appears to be a closed, rather than open loop. To amass more excess reserves you must acquire greater deposits, and to create new deposits you must accumulate greater excess reserves (or do any of the other things that enable you to create new loans and thereby fabricate new deposits). With regards to your comment "reserves follow deposits, not the other way around. In other words, banks create as many deposits through loans or other activities as they deem prudent, and then obtain reserves from the Central Bank or other commercial banks," that sounds about like what I originally learned about money and banking, but it seems trivial, especially if a bank deems it prudent to not create more deposits than the amount of excess reserves it holds.

I don't see how this could be anything but a matter of technicalities and semantics. You said Banks do not "lend" excess reserves. Excess reserves are merely reserves in excess of the legislated reserve/deposit ratio, or if not legislated..., but from a double entry accounting point of view given the example I provided, it is quite apparent that excess reserves are transferred from the bank's reserves asset account to a loans asset account when a bank decides to loan more funds. Whether it's called "lending excess reserves" or not seems of little consequence. It appears that Steve Keen is a post-Keynesian economist, and so of course someone such as he who criticizes an array of neoclassical economics is going to offer a point of view alternative to the mainstream. But will focusing on his minority point of view in the lead add useful clarity for a reader?

If there is "much new research" that "shows that the causation of the 'deposit expansion' taught in ordinary economics texts has the causality backwards" (and that it matters in any meaningful way), then it shouldn't be difficult to search a subscription database and dig up tons of scholarly publications from researchers investigating money creation and fractional reserve banking (at your local public library, your school/university's library (if you're a student), Google Scholar, Google Books, etc.). So far the sources you've provided merely verify what is said in the sources I have provided (that banks create money by creating deposits as a result of making loans); they appear to say nothing to the effect that banks don't lend funds through the conversion or depletion of excess reserves. Data wins all arguments. John Shandy` • talk 00:46, 17 October 2011 (UTC)

The reason that the word "lend" is confusing is that many people still believe that banks receive deposits and actually "lend" those deposits to someone else. That simply isn't true, and perpetuates a common myth. The fact is that banks create deposits with each loan, purchase of security etc.

Excess reserves do not have to derive from taking in more deposits. Banks can borrow reserves from the Central bank or other commercial banks. This action does not increase the amount of deposits at the bank borrowing the reserves unless they choose to increase the amount of loans, or purchase securities etc.... Banks can increase their reserves without increasing their deposits.

The excess reserve account is not an account that is on the bank's balance sheet as an asset. In other words, banks are not transferring an asset to another when they "lend" money. This is what most people deem "lending" something to someone else. If I have a car, which is my asset, I can lend that car to my friend. However, the bank is not "lending" an actual asset when it loans money. It is creating an asset (and a liability). There is a huge difference, and like I said before, the word "lend" only leads to confusion in the matter when there are a great many people who do not understand that banks create deposits/money with each loan.

I used Steve Keen as an example of research that shows that money is actually an endogenous variable as opposed to an exogenous one as is taught in the theory of "deposit expansion". I can't find the article now, but I will post it here when I do, but it is research from the Federal Reserve in the U.S. which also demonstrates that reserves follow loans, and not the other way around. The reason that this is important is that demonstrates how little control the Central Banks have over the money supply.

Chdouglas (talk) 01:47, 17 October 2011 (UTC)

I'm not sure I understand what you mean when you say "reserves follow loans." It seems like the mechanics aren't in dispute, because I agree with what you're saying about the events that take place throughout the process (although I have been ignoring special cases and exceptions to the rules). Rather, it seems that colloquial understandings of the process are erroneous in labeling the process as "lending," right? Yet, this seems to me like it would not be a simple misunderstanding of fractional reserve banking, but a profound misunderstanding. And if it is so compelling or material, then I should think it would readily appear in scholarly publications such as peer-reviewed journals, textbooks, or books vetted by reputable university presses to correct the misunderstandings once and for all. We ultimately have to adhere to the preponderance of what reliable sources have to say on the matter. I can't guarantee much on my end for now as I have a busy week ahead of me. John Shandy` • talk 03:04, 17 October 2011 (UTC)

I'm really sorry in advance, but Chdouglas, I got to ask, are you the same person as User:Javalizard who was making some very similar statements and arguments over at money creation and a few related articles awhile ago? I'm asking because this whole idea does seem to be shared between these two accounts and because looking into yours and their contributions it does seem like you guys alternate months in your editing. Volunteer Marek 03:14, 17 October 2011 (UTC)

Hi Marek, sorry, but I don't know who "Javalizard" is. The idea that banks create deposits is common knowledge taught in any introductory economics course, and of course is basic bank accounting, so I'm not surprised that someone else has "similar" ideas. Banks cannot lend deposits to someone else. Each loan creates a new deposit. Chdouglas (talk) 22:31, 17 October 2011 (UTC)

John, the fact that banks create deposits does appear in text books, and is common knowlege. I've supplied several sources that are from universities in the United States, as well as a workbook published by the US Federal Reserve. I could quote as many sources as you like.

The following is from the Bank of Canada:

"Commercial banks and other financial institutions provide most of the assets used as money through loans made to individuals and businesses. In that sense, financial institutions create, or can create money."

http://www.bankofcanada.ca/about/backgrounders/canadas-money-supply/?page_moved=1

The fact that banks create deposits/money with each loan is not in dispute.

The idea that reserves follow deposits is not taught in ordinary economics texts, but certain groups of schools of economic thought teach that money is an endogenous variable (eg.Circuitism, Chartalism, etc..) and new research into this area actually demonstrates that the theory of deposit expansion, as taught in universities has the causality in regards to reserves and loans backwards. Loans do not follow increases in reserves, increases in reserves follow increases in loans. In other words, if there's a demand for deposits, banks will make the loans, and get the reserves after. Or alternatively, if the Central Banks produce more reserves through open market operations, banks may not correspondingly increase the amount of deposits created through loans. This has important monetary policy implications because if it's true, Central Banks have far less control over the money supply through open market operations that we are led to believe.

Regardless, the openining paragraph is confusing and misleading, especially to those who erroneously believe that banks lend your deposits to someone else when banks make a loan. A loan involves the creation of a new deposit, and that is not in dispute. That is how banks create money. Chdouglas (talk) 22:31, 17 October 2011 (UTC)

It seems we need sources that discuss that then, rather than just discussing the part about banks creating deposits to create money. We need good sources that talk about how banks create deposits in response to increases in demand for deposits. For future reference, I would advise that the next time you find yourself having to explain this to someone, choose different phrasing than "follow" 'cause that really threw me for a loop; now I understand that you're saying the need for reserves increases as the demand for deposits increases, due to a bank creating new loans to service the demand for deposits. So, I understand what you have been getting at. But, it seems to me that what people describe as "lending deposits" is just their colloquial way of saying "banks loan money in the form of new deposits" (which banks create to service the demand for deposits). I must admit this whole thing still seems somewhat blurry. Regardless, if the endogenous money view is of a heterodox or non-mainstream school of economic thought, it would have to be characterized as such in accordance with WP:NPOV and we cannot give it undue weight. John Shandy` • talk 23:01, 17 October 2011 (UTC)

Hi John, sorry if I was unclear, but written communication is not nearly as good as verbal. I want to be clear on two points.

1) The fact that banks create money is not an "endogenous" theory of money, but is in fact the vast majority point of view. I know that the term "lend" deposits is a "colloquialism", but the reason I don't like this term is that it continues to perpetuate the myth that banks take your deposit, and loan it to someone else. You would be amazed how many people believe that, and do not understand that banks create deposits/money.

2) I admit that the "endogenous" theory of money is a minority view (for now) and that this theory would need to be regarded as such in this article, but this was not my main point, and I'm not seeking to push this in the article. What I really want to do is change the opening paragraph to state that banks create deposits, instead of what what it states now - that banks lend deposits. The word "create" adds much more clarity to the subject matter than the word "lend". Chdouglas (talk) 00:13, 18 October 2011 (UTC)

Banks don't create deposits, the deposit of funds by customers into banks create deposits. However, I see the point you're trying to make. I've edited the lead, hopefully this answers your objection. LK (talk) 10:16, 18 October 2011 (UTC)

Well the literature actually argues that deposits (as liabilities) are created both (a) when a person withdraws deposits to pay for something and the receiver deposits those into a different (or the same) bank which creates excess reserves (as assets), and (b) when a bank makes loans and sets up an account and fills it by creating "new" deposits as a balance sheet liability so that a borrower can start doing things like (a) with the loaned funds. I've given an example of this above from a book by Frederic Mishkin. Lending seems to me to be what people describe the overall process as, while creating deposits appears to be a mechanical technicality of double entry accounting. That's why I don't quite see a meaningful discrepancy and why Chdouglas's change strikes me as puzzling. John Shandy` • talk 15:44, 18 October 2011 (UTC)

LK - talk about circular reasoning! You're claiming deposits create deposits?

The Central Bank (or whoever they authorize, like the Royal Canadian Mint in Canada) creates cash and coin, but this is but a fration of the money supply. Who creates the rest of the money supply? Are you claiming that depositors create the money? Wouldn't that be counterfeiting? Are you claiming that when a bank makes a loan that a new deposit is not created? How does the money supply increase? Chdouglas (talk) 17:12, 18 October 2011 (UTC)

Hi John - Of course deposits have to increase by an equivalent amount of a loan (or purchase of security). That is how double entry accounting works. But in doing so, banks increase deposits/money with each loan (or purchase of security). Many people believe that banks take our deposits, and lend it to somone else. In order for this to be true, the bank would have to debit our deposits and credit another's whenever they made a loan. That's not the mechanics of a bank loan. Banks create a new deposit with each loan, and are therefore creating money. When the loan is repaid, there is a correpsonding decrease in the size of the loan and deposit, and that is how money is destroyed. If the rate at which loans are being granted is greater than the rate at which they are repaid, the money supply expands and vice verse. Chdouglas (talk) 17:25, 18 October 2011 (UTC)

Chdouglas, I dislike the way you preface your arguments by belittling the other person, this is against a fundamental pillar of Wikipedia, our policy of Politeness. Please treat the others here with respect. I have a PhD in Economics, I've taught intro and intermediate Macro for several years, and I've worked in commercial banks and central banks. As far as I can see there's nothing seriously wrong with the article as it stands. If you want something changed, state clearly and succinctly what you want changed, and back it with a reliable source. These walls of text are meaningless. --LK (talk) 06:08, 19 October 2011 (UTC)

LK, if pointing out the circular reasoning in your argument is "belittling" to you, then perhaps you need to be a little less sensitive. I did not call you any names, and I also see you did not respond to one of my questions. You merely tried another logical fallacy (argument from authority), and then try to silence me with Wikipedia policy. Why don't you simply answer my questions? If I'm wrong, it should be easy to prove. It's actually pretty easy to prove the opposite, because the only way banks would not be creating deposits with each loan would be if they actually debited another's deposit when they made loans. This is illegal. Every loan results in an increase in assets (the loan), and liabilities (the deposit). Since bank deposits are considered part of the money supply, banks create money by creating deposits through loans.

"In the normal course of their operations, banks create money" (Blomqvist, Wonnacott, and Wonnacott, "Economics First Canadian Edition"pge. 201)

"The actual process of money creation takes place primarily in banks." (Federal Reserve, "Modern Money Mechanics")

"Commercial banks and other financial institutions provide most of the assets used as money through loans made to individuals and businesses. In that sense, financial institutions create, or can create money."

http://www.bankofcanada.ca/about/backgrounders/canadas-money-supply/?page_moved=1

"The process by which banks create money is so simple that the mind is repelled." (John Kenneth Galbraith)

Chdouglas (talk) 14:15, 22 October 2011 (UTC)

I don't think LK is arguing that banks don't create money; indeed, the article already supports the idea that banks create money. It seems to me that you are hung up on the terminology used to describe the process. Banks create money via lending. Mechanically, they may not lend others' deposits, but it is their lending activity that creates money. This is again why I don't think there is a meaningful discrepancy in what you propose versus what the article states. John Shandy` • talk 16:24, 22 October 2011 (UTC)

Hi Shandy, if nobody is disputing the fact that banks create deposits through loans etc...., why do you and other insist on using the term "lend" instead of "create"?

The problem is that many, if not most, people believe that banks take in deposits, and then turn around and lend those deposits to someone else. By using the term "lend" in this article, Wikipedia is perpetuating this myth (whether purposefully or inadvertently). If nobody is debating that loans create deposits, and banks create money, then why the objection when I changed the word "lend" to "create". Lend is more ambiguous, and leads people to believe the myth that I just stated above. Banks create deposits is, in my opinion, a clearer and more accurate statement of the process.

Chdouglas (talk) 16:44, 22 October 2011 (UTC)

The statement that 'the action of depositing money into a bank creates deposits' is not a circular argument, if you believe it is, you should review the meaning of 'circular argument'. You seem determined to twist others words around to insult them. I remind you again, this breaks our policy on policy on politeness.

You seem to have a WP:OR belief that deposits have nothing to do with lending. If that's the case, riddle me this, why do banks even bother to take in deposits, if doing so doesn't enable them to lend?

All these arguments are beside the point. We are not here to argue about issues to determine what is the WP:Truth. Wikipedia is about summarizing for articles what is in reliable sources. You have so far not provided any sources for any of your statements. Until you do, don't expect any further responses. LK (talk) 02:23, 24 October 2011 (UTC)

LK, I've provided numerous sources, from Economics texts, to the Bank of Canada and the U.S. Federal Reserve etc....

"The fractional reserve banking system allows banks to expand the money supply by making loans." Fundamentals of Economics - William J. Boyes, Michael Melvin.

http://books.google.ca/books?id=dmfJmMODxfYC&pg=PA315&lpg=PA315&dq=fractional+reserve+banking+and+deposit+expansion&source=bl&ots=_NB3iQ3Njn&sig=hXZqMrtF0stz1lYbyRv_LFF_oxw&hl=en&ei=VR6bTsPxB8fjiAKt36ziDQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CCMQ6AEwATgK#v=onepage&q=fractional%20reserve%20banking%20and%20deposit%20expansion&f=false

"Banks create money whenever they make loans. The process is that the bank creates a liability (deposit) to pay for an asset (loan)."

http://faculty.tamu-commerce.edu/dfunderburk/231/notes/DepositExpansion.htm

"Loans Make Deposits"

http://www.mu.ac.in/arts/social_science/economics/eco23.pdf

In answer to your question in regards to why do banks take in deposits - Banks compete for deposits because they are in fact competing for reserves. If bank A makes a loan, and creates a corresponding deposit, and if the person or business who acquired the loan writes a cheque against that deposit, and that cheque ends up in bank B, then there is a tranfer of reserves from bank A to bank B in the amount of the cheque through the clearing process at the Central Bank. If bank A loses reserves to bank B, then it must either borrow more reserves from the Central Bank or the another commercial bank, or call in some of its loans if it is to maintain the same reserve/deposit ratio.

Chdouglas (talk) 00:59, 25 October 2011 (UTC)

Why would banks compete for reserves unless it allows them to make a higher profit. And banks profit from lending, so .... LK (talk) 10:09, 26 October 2011 (UTC)

So? Banks make a profit like every other business by having their revenues greater than their expenses. Interest on loans is part of their revenues.

The discussion is whether banks create deposits through loans, and the answer is unquestionably - yes! That is how double entry accounting works. Therefore, the first paragraph is confusing when it states that banks "lend" deposits. Banks do not lend someone's deposit to someone else when they make a loan. Banks create new deposits when the make a loan, therefore, the word "create" is a more accurate description of the process than the word "lend". Further, the statement that banks "lend deposits" perpetuates the common myth that banks take in deposits, and lend those deposits to someone else. Banks create deposits through loans to individuals and businesses, purchase of securities etc....

Chdouglas (talk) 16:32, 30 October 2011 (UTC)

Great, so we agree that there's nothing incorrect about the article's lead. You just feel that there should be some clarification or demystification to improve the message the lead attempts to convey, right? It seems that your issue may be that you are interpreting the verbiage in its most literal sense. Is there a "common myth that banks take in deposits, and lend those deposits to someone else"? What if most people interpret it the way myself or LK do? While from a double entry accounting perspective, banks do not mechanically lend deposits, "lending deposits" seems to be the preferred phrasing for describing the process to someone who wouldn't know what double entry accounting is or who wouldn't even know what a balance sheet is. The bank's received deposits become excess reserves, and its loans become created deposits; in the middle of those steps, on the assets side you have something happening (usually involving securities or reserves, etc.) that enables the bank to make the new loans. If I were explaining it to a layman, I'd probably say "lending deposits" because, while it's true that banks create deposits, they do so as a result of their lending activities.

Further, you've given plenty of sources that say banks "create deposits," and that's not in dispute. What you haven't given are sources that really and truly support your argument that "reserves follow loans" or that banks "compete for reserves." John Shandy` • talk 23:48, 30 October 2011 (UTC)

There is disagreement over the article's lead. Lending deposits merely mystifies the process for people who do not understand double entry accounting, because they do not understand that new deposits are created every time a bank makes a loan. The term "lend" merely perpetuates this myth. The proper term would be create, because that's what banks do, and by choosing not to use this term, Wikipedia is intentionally perpetuating this myth. The article should clearly state that every loan results in the creation of a new deposit, and that is how banks create money in a fractional reserve banking system. This fact is poorly understood by the majority of people, and it's not in dispute as you state above.

Loans create deposits. And the article should clearly state this fact.

As to reserves following deposits, I already said this is a "minority" view at this time, and I'm not interested in putting that statement into the article. I just want the article to clearly state that every loan involves the creation of a new deposit. By stating that banks "lend" deposits, this leads the vast majority of people to believe the myth that banks take in deposits and then turn around and loan those deposits to someone else. That is not how banking works.

Chdouglas (talk) 15:17, 5 November 2011 (UTC)

Again, if such a myth is common, then shouldn't it be readily documented by economists and bankers? What are the reliable sources that suggest such a myth exists, is commonly perpetuated, and is problematic for our purposes? Don't get me wrong. I am all in favor of improving the article's clarity. It just seems like this is a superfluous revision to make to the lead. The article already communicates that money or deposits are created as a result of banks' lending activities, albeit in various wordings. The mechanics of double entry accounting don't contradict the lead's use of lend either.

Side note: Fortunately, the article already does give duly weighted credence to the minority view that banks first obligate themselves to borrowers and later manage those liabilities, so that's taken care of in the first paragraph of the Money creation section.

I'm trying to be helpful, but I guess I may just not be fully understanding how your proposed revision will necessarily improve clarity. It'd be great if a few more editors could weigh in. John Shandy` • talk 17:32, 7 November 2011 (UTC)

Hi Shandy, sorry for the delayed response, and I know you're trying to be helpful. Maybe I can clarify my problem with the opening paragraph in more detail.

I find the following statement in the article highly misleading:

"Funds deposited into a bank are mostly lent out"

This sentence makes it sound like banks take in deposits, and then lend those deposits to someone else. As we've already agreed, this is not how banking works. Loans create deposits.

The fact is that most people have not studied economics formally, and even those that have, often have a poor understanding of money creation and bank accounting. I would like to see the above statement either taken out, or changed to show that loans create deposits. It is a more accurate description of the process than the confusing statement above. Thanks. Chdouglas (talk) 16:21, 19 November 2011 (UTC)

From: Sceptical-H

It seems to me that one purpose (or at least one function) of a Wikipedia entry is to enable someone coming across an unfamiliar concept to find out what it involves and how it should be used.

A complicating factor is that some concepts are routinely misused, misapplied or misunderstood. This is the case with Fractional Reserve Banking. What Fractional Reserve Banking is (as defined by the economists who constructed the models from which it is named), what people (including other economists) are describing when they use the term and how banking actually operates in the leading industrialised nations are all totally different things. This is the challenge for this article to untangle.

I feel that this article attempts to cover too much. It describes an economic model of banking which, as a model, is uncontentious, which undoubtedly served as an adequate description of the operation of actual banking systems at some stage in the past and which properly merits a Wikipedia entry of its own. It then purports to describe modern banking systems in the terms of this model. This is contentious, as previous discussion demonstrates. If modern banking operated under the fractional reserve system, then all central banks would impose reserve ratios. They don't. Instead, they impose capital adequacy ratios, the so-called Basel accords on which the fractional-reserve model remains silent. Reserve ratios address bank liquidity, capital adequacy ratios address bank solvency. Today's risks and problems with banking are perceived to be of a different order from those of the early decades of the last century when gold was the reserve currency. In the heyday of fractional-reserve banking, deposits were of cash which became the property of banks and could be lent out to customers. Nowadays, deposits are transfers of electronic records which may, or may not be accompanied by transfers of balances at the central bank. These cannot be lent out to customers. Then, reserves could be drained because gold was a universal currency, nowadays, reserves cannot be drained because central bank reserves are a private currency exclusive to the clearing banks and a few other financial and state institutions. Then, the problem was liquidity, now it is solvency.

ChDouglas is correct that the modern banking paradigm is the creation of bank credit by the extending of advances against the signatures of borrowers on loan repayment undertakings, to create new deposits. There are both liquidity (how and when the loan will be spent) and solvency (whether the loan will be repaid) issues to be considered here and banking systems have evolved new procedures to deal with these. These are fully documented in "Where does money come from" by Ryan-Collins et al. (2011) a publication of the new economics foundation in the UK, with a foreword by Professor Charles Goodhart, one of the world's foremost monetary economists. This book explains in detail how modern banking differs from the fractional reserve model. It does not give the modern system a name, but introduces its detailed description with the words "In the next sections, we go through the credit creation process by private banks and the relationship between private banks, the central bank and the payment system." (p.55) This should provide authority for the designation "credit-creation banking" to describe the modern system.

I suggest that the current article should concern itself with a description of the fractional-reserve banking model, how a banking system in accordance with that model would operate and when, or whether, such systems did operate. There should be a new article on Credit-creation banking describing the features of a system where banks operate as ChDouglas describes and, perhaps, a third on Modern banking to consider the extent to which elements of fractional reserve and credit creation systems are combined in actual banking systems.

As a start, I propose the following reworded introduction. New text is in italics, light text in square brackets is to be deleted:

Fractional-reserve banking refers to [is] a form of banking where customers deposit funds with banks which the banks then lend out to other customers, keeping [ banks maintain reserves (of cash and coin or deposits at the central bank) that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps] only a fraction (called the reserve ratio) of the quantity of deposits as reserves. Some of the funds lent out are subsequently deposited with another bank, increasing deposits at that second bank and allowing further lending. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money. [Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank.] This process of successively depositing borrowed funds and lending on a fraction of those deposits causes the level of deposits to grow to a multiple of the original deposit. That multiple (called the money multiplier) is determined by any [the] reserve requirement or other financial ratio requirements imposed by financial regulators, and by the excess reserves kept by commercial banks.[1][2]

In a system of fractional-reserve banking, [C]central banks would generally mandate reserve requirements that require banks to keep a minimum fraction of their demand deposits as cash reserves. This both limits the amount of money creation that occurs in the commercial banking system,[2] and ensures that banks have enough ready cash to meet normal demand for withdrawals. [Problems can arise, however, when depositors seek withdrawal of a large proportion of deposits at the same time; this can cause a bank run or, when problems are extreme and widespread, a systemic crisis. To mitigate this risk, the governments of most countries (usually acting through the central bank) regulate and oversee commercial banks, provide deposit insurance and act as lender of last resort to commercial banks.]

[Fractional-reserve banking is the most common form of banking and is practiced] Fractional-reserve banking results in the growth of customers’ deposits at a rate greater than the growth of banks’ reserves, and banking systems where this occurs (and this is the case in almost all countries), are commonly referred to as fractional-reserve banking systems. However, the mechanism of monetary growth in modern banking systems is different from the deposit-lend-redeposit mechanism of fractional-reserve banking and modern banking is better described as credit-creation banking(citation 1). [. Although Islamic banking prohibits the making of profit from interest on debt, a form of fractional-reserve banking is still evident in most Islamic countries.]

(Citation 1). Ryan-Collins, Josh; Greenham, Tony; Werner, Richard; Jackson, Andrew (2011), “Where does money come from? A guide to the UK monetary and banking system”, nef (new economics foundation), pp.55 et seq.

Sceptical-h (talk) 17:53, 10 April 2012 (UTC)

Quotes

A new editor has added several quotes that appear to be more about banking in general than specific to FRB. They are near the 3RR line and have been warning. I'm starting this in hopes they'll use the talk page to discuss the edits that 2 editors have reverted now. Ravensfire (talk) 01:41, 12 March 2012 (UTC)

In regards to removing statements in the Criticism section: — Preceding unsigned comment added by AmourReflection (talk • contribs) 03:03, 12 March 2012 (UTC)

The quotes from Henry Ford and Thomas Jefferson are contextually banks of the United States. The U.S. banks were originally based on the Bank of England, of which is also a fractional reserve bank. Throughout human history, banking systems around the world use, and still use a fractional reserve system see http://eh.net/encyclopedia/article/grossman.banking.history.us.civil.war.wwii

The wikipedia article on banking concedes that "Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit." (http://en.wikipedia.org/wiki/Bank#See_also).

I request the editor of the fractional reserve system article to find me a reference of a major bank in the United States that Henry Ford & Thomas Jefferson are implicating that did not use the fractional reserve system. The term "bank" and "fractional reserve" are inseparable in the context of existing banks in United States history. — Preceding unsigned comment added by ArmourReflection (talk • contribs)

Dear ArmourReflection: You have helped me reiterate my point. The article is about fractional reserve banking, not about banking in general. Essentially all U.S. banks use a fractional reserve system. Your argument, in effect, is that the material about critiques of banking should go here in this article, since all such banks are fractional reserve banks. My point is that the critiques that should go in this article should at least relate to this particular aspect of banking -- not to banks in general.

Example: In an article on let's say, Billy Bob's Barbeque Restaurants (a name I just made up), a general critique about restaurants by someone who doesn't like restaurants probably would go better in an article on restaurants in general, not in the article on Billy Bob's Barbeque Restaurants. The mere fact that all of Billy Bob's restaurants are indeed "restaurants" does not change that.

Dear Famspear, The example of a name of restaurant does not apply here unless the title of this article would need to be something like "'Bank of America' Fractional Reserve System", but the article is not named accordingly, it is titled "Fractional Reserve Banking" and the discussion is a method of banking, not a specific name of a bank. Fractional reserve is an inherent method of banking just as a gasoline engine is an inherent method of motion for an automobile. Henry Ford & Thomas Jefferson were critics of the method of banking (fractional reserve), and this method of banking is the fractional reserve system is their criticism (citations provided). Your example is based on name only, not on functionality, the article is a functional description of banking, not on a specific bank name. We are talking about the methods of banking, not the name of banks. AmourReflection (talk) 03:23, 12 March 2012 (UTC)

I do have another problem with the material as it was presented, but we can discuss that later. Famspear (talk) 02:50, 12 March 2012 (UTC)

For the record, this is the material that was added by ArmourReflection:

The quality of "M1" money supply created by banks is highly dependent on the collective competence, or incompetence, of lending institutions. When banking institutions, & the collateral asset appraiser's used by banks, collectively ignore the performance of collateral returned to the bank due to unpaid loans, they put the "M1" money supply at undue risk causing severe asset inflation, followed by severe asset deflation.

The banker's ability to effectively copy and multiply money using fractions of deposits without verification of collateral performance of loans is effectively legalized counterfeiting (or near equivalent to a privatized government money printing press) whereby their fiduciary duties to the depositors are ignored, of which is difficult for a small business person to be able to cooperate or compete with rationally. If banks give out loans that are not proven to make rational business sense (asset performance, not just performance of mortgagor, or recent asset sales history), they are effectively producing a money "shell game", where they have a theoretical infinite return on money if accounting costs (which can be automated by computer software) are removed, and their profits are based on none of the banks own resources other than the accounting system itself.

The fractional reserve banking systems of the world are fundamentally old and antiquated, and obfuscated to the common person as recognized by a prominent American businessman named Henry Ford:

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

-Henry Ford(see The Foundation Economy by Fred Eggerton)

A prominent American President was also a notable critic of private banks:

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

-Thomas Jefferson (in the debate over the Re-charter of the Bank Bill, Year 1809)

In 2008, the fractional reserve banking bailout was a result of banks generally ignoring collateral performance of assets making the "M1" money supply effectively worthless (How much utility evidence is present that demonstrates the asset actually generates income over the life of the loan. Verification of income covering operating costs). The banker's ignorance of asset performance over the life of the loan allowed them to get bailed out by the United States government because they were labeled as "too big to fail", and where in some cases, executives received bonuses during the bailouts for their own incompetence. The Deregulation of the fractional reserve system and the resulting collective private banking profiteering (copying fractions of "M0" money to make & multiply "M1" money) while ignoring collateral performance ultimately caused the value of the "M1" money to collapse. For the 2008 fractional reserve bank failure, just as in the Great Depression, banks failed in their fiduciary duty of the depositor's money.

Fractional reserve banking was deregulated in the late 1990's by a bill authored by Republican leaders in congress and signed by a Democratic president, Bill Clinton, as a compromise, and as predicted by one congressman, it would collapse, and it did in 2008.

Fractional reserve systems concentrate wealth, and multiply it, making it more difficult for individuals who lack the power of fractional reserve banking to compete fairly, especially if the bankers get subsidized by the government when they fail while the small business person does not get this benefit when they fail.

The dependency on a fractional reserve system artificially creates unemployment due to the fact that when the system collapses the circulation of money also collapses. There is no rational basis for preventing labor forces from doing work when they are perfectly capable and skilled at working to do work that is in demand. The dependence on an unstable & fragile fractional reserve money supply that merely concentrates and multiplies entities of wealth, is detrimental to continuous and full utilization of available labor to generate assets of higher utility and to satisfy demand. Although there are some common benefits for severe economic down turns, such as re-educating or re-allocating of under or non-performing labor and much greater efficiency of existing asset utilization, there are also significant down sides. During periods of the Great Depression or Great Recession, a significant problem of highly valuable and skilled labor as well as assets can become idle and unused (vacated) for years causing other severe economic inefficiencies, even while demand for services and products exist (with or without fractional reserve money), but can not trade due to lack of the flow of the fractional reserve money.

Based on Henry Ford's ideas, economic cycles do, and can, produce positive change, but their artificial restriction and control on labor can be the ultimate cause of revolution in society due to its tendency towards plutocratic support.

The true value of a fractional reserve system comes to light upon the collapse of the "M1" money supply, where it's lack of societal value or utility as a useful asset or useful means of transferring products and services becomes dysfunctional, due to it's lack of flow is no longer practical.

Before fractional reserve systems, bartering systems existed, although impractical, there was no economic cycle generated by the human invented money accounting systems. The invention of fractional reserve systems solved the problem of bartering complexities, but created a new problem, commonly known as unemployment ("employment" being defined in fractional reserve systems as trading work for fractional reserve currency), of which did not exist with bartering systems. (see Macroeconomics: an Introduction, December 19th, 2008, Charles R. Nelson)

More discussion to come.... Famspear (talk) 02:56, 12 March 2012 (UTC)

First, most of the material is unsourced. Second, the portions of the material that ARE sourced seem to relate to banking in general, and not to the fractional reserve aspect of banking. Third, to the extent that the material can be properly sourced, it arguably would go better in the article Criticism of fractional reserve banking. Famspear (talk) 03:04, 12 March 2012 (UTC)

Now, here is the revised material, as it was most recently posted:

The fractional reserve banking systems of the world are fundamentally old and antiquated, and obfuscated to the common person as recognized by a prominent American businessman:

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

-Henry Ford

(Attributed to Henry Ford by Charles Binderup (March 19, 1937), Congressional Record—House 81:2528. The quote is preceded by "It was Henry Ford who said, in substance, this", which indicates that this is likely just a paraphrase, not an exact quote.)

"The people must be helped to think naturally about money. They must be told what it is, and what makes it money, and what are the possible tricks of the present system which put nations and peoples under control of the few."

-Henry Ford

(My Life and Work, Doubleday, Page & Company, 1922, p. 179)

A prominent American President was also a notable critic of private banks: "And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." Thomas Jefferson, letter to John Taylor (28 May 1816)

In this form, the unsourced material has been removed. The sourced material, of course, still relates to aspects of banking in general. Nowhere is the fractional reserve aspect of banking mentioned by Ford or Jefferson. Famspear (talk) 03:08, 12 March 2012 (UTC)

Dear Famspear, the term used by Ford & Jefferson is "banking system" is an adjective to system (bank), which describes a characteristic of "bank". That characteristic is a method of going about the process of banking, fractional reserve banking, what other form of banking system do you believe Ford & Jefferson were thinking of? If you know of one and can provide a citation, then I can agree with you, but as of yet, I know of none that Ford & Jefferson would be thinking of other than the fractional reserve system of banking, it is the same system of banking that existed in their time in history that exists today.AmourReflection (talk) 03:37, 12 March 2012 (UTC)

Dear AmourReflection: The issue is not what kind of bank Ford and Jefferson were thinking of. They obviously were thinking of banks that use a fractional reserve system. These are the only kinds of banks involved, and fractional reserve banking was indeed the system used both then and now. There is no need for me to provide citations about something you and I agree about.

Again, the point is that the arguments they were making in the quotes were not about the fractional reserve aspect of banking. I would argue that it is up to you, as the person arguing in favor of inclusion of the material in the article, to demonstrate that the material you want to introduce actually does relate to the topic under discussion. I would suggest that you look for material by Henry Ford and Thomas Jefferson where they critique fractional reserve banking -- not just the concept of banking generally. Famspear (talk) 04:08, 12 March 2012 (UTC)

Dear Famspear, How about this: "It is the innate conservation of the people that has kept our money good in spite of the fantastic tricks which the financiers play - and which they cover up with high technical terms."-Henry Ford (p. 179 My Life Work) "fantastic tricks" is none-other than the fractional reserve system, there is no other prevailing system of banking that exists. Further on p. 177 of Henry Ford's book "My life and work" "..the Federal Reserve System for a time put into their hands an almost limitless supply of credit...Therefore, I personally want to discover whether we are operating under the best financial system." The U.S. Federal Reserve System is a fractional reserve system, what else do you think it is? In case you don't realize that the Federal Reserve System that Henry Ford mentioned, it is a Fractional Reserve System, have a read here of the Federal Reserve Act of 1913: http://www.federalreserve.gov/aboutthefed/section19.htm AmourReflection (talk) 05:19, 12 March 2012 (UTC)

Section 2 of Federal Reserve Act, Reserve requirements: "Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy-- in the ratio of not greater than 3 percent (and which may be zero) for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C); and in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum (and which may be zero), for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C). Each depository institution shall maintain reserves against its nonpersonal time deposits in the ratio of 3 per centum, or in such other ratio not greater than 9 per centum and not less than zero per centum as the Board may prescribe by regulation solely for the purpose of implementing monetary policy."AmourReflection (talk) 05:19, 12 March 2012 (UTC)

"...Henry Ford, now in his seventies and increasingly autocratic and unreasonable, refused to bail out his son. He had a long-standing antipathy to bankers and could not quite grasp why banks should be allowed to use the money he deposited for making risky loans--'It's just as if I put my car in a garage and when I came to get it, I found somebody else had borrowed it and run it into a tree,' was the way he saw it" Liaquat Ahamed's Lords of Finance(p.442). AmourReflection (talk) 05:19, 12 March 2012 (UTC)

Dear AmourReflection: You still seem to be trying to convince me that U.S. banks use the fractional reserve system. And I keep telling you that we're already aware that the U.S. banking system is a fractional reserve system. I already know how banks work, and so do lots of other people who edit here at Wikipedia. I already know how the Federal Reserve System works, and so do lots of other people here at Wikipedia. Instead of re-hashing this non-issue, please address the concerns we're raising here on this talk page. Famspear (talk) 18:34, 12 March 2012 (UTC)

Dear Famspear, At least we agree that "bank" or "banking" means "fractional reserve banking", but we don't agree on the reason of exclusion of the critical quotations of Henry Ford and Thomas Jefferson in the article "fractional reserve banking" that is criticism of the "bank" or "banking" system which is equivalent to "fractional reserve banking". Please clarify reasons for not including the quotations, because clearly I am missing something in your arguments or reasoning of exclusion when "bank" or "banking" = "fractional reserve banking". You did mention a separate article dedicated to criticism but that section only has a small paragraph of which is highly unbalanced (lacking neutrality as a whole article) in light of the entire article "fractional reserve banking" itself. My argument is to balance the article of "fractional reserve section" in the criticism section (or add a Quote section) needs to be much more substantial than a small single paragraph of criticism with one link, where the entire articles is multiple pages long.AmourReflection (talk) 20:13, 12 March 2012 (UTC)

Well, no, "bank" or "banking" does not "mean" fractional reserve banking. What we are saying is that all banks today (at least in the U.S. operate using the fractional reserve system. That's not the same as saying "banking = fractional reserve banking." The operation of a bank involves more than just the concept of fractional reserve banking. What I would suggest is that you look for examples where Jefferson or Ford (or whoever) made a critique of the fractional reserve system aspect of banking. You might be able to find some. Famspear (talk) 00:42, 13 March 2012 (UTC)

Dear Famspear, have a read below, ample evidence of criticism by Henry Ford of the fractional reserve system:

"There is evidently, then, a method of administration for which severe critics might even use the word 'manipulation,' by which the plain provisions of a banking law, whatever they may be, may be, if not evaded, then somewhat adapted." -Henry Ford (In Reference to the Federal Reserve Act of which in Section 2 mentions fractional reserves, see Volume 3, Chapter 57, "The International Jew"). "What the people of the United States do not understand and never have understood is that while the Federal Reserve Act was governmental, the whole Federal Reserve System is private. It is an officially created private banking system.

Examine the first thousand persons you meet on the street, and 999 will tell you that the Federal Reserve System is a device whereby the United States Government went into the banking business for the benefit of the people. They have an idea that, like the Post Office and the Custom House, a Federal Reserve Bank is a part of the Government's official machinery.

It is natural to feel that this mistaken view has been encouraged by most of the men who are competent to write for the public on this question. Take up the standard encyclopedias, and while you will find no misstatements of fact in them, you will find no direct statement that the Federal Reserve System is a private banking system; the impression carried away by the lay reader is that it is a part of the Government.

The Federal Reserve System is a system of private banks, the creation of a banking aristocracy within an already existing autocracy, whereby a great proportion of banking independence was lost, and whereby it was made possible for speculative financiers to centralize great sums of money for their own purposes, beneficial or not.

That this System was useful in the artificial conditions created by war — useful, that is, for a Government that cannot manage its own business and finances and, like a prodigal son, is always wanting money, and wanting it when it wants it — it has proved, either by reason of its inherent faults or by mishandling, its inadequacy to the problems of peace. It has sadly failed of its promise, and is now under serious question.

Mr. Warburg's scheme succeeded just in time to take care of war conditions, he was placed on the Federal Reserve Board in order to manage his system in practice, and though he was full of ideas then as to how banking could be assisted, he is disappointingly silent as to how the people can be relieved.

However, this is not a discussion of the Federal Reserve System. General condemnation of it would be stupid. But it is bound to come up for discussion one day, and the discussion will become much freer when people understand that it is a system of privately owned banks, to which have been delegated certain extraordinary privileges, and that it has created a class system within the banking world which constitutes a new order. ... Money is the last mystery for the popular mind to penetrate, and when it succeeds in getting "on the inside" it will discover that the mystery is not in money at all, but in its manipulation, the things which are done 'in an administrative way.'

The United States has never had a President who gave evidence of understanding this matter at all. Our Presidents have always had to take their views from financiers. Money is the most public quantity in the country; it is the most federalized and governmentalized thing in the country; and yet, in the present situation, the United States Government has hardly anything to do with it, except to use various means to get it, just as the people have to get it, from those who control it." -Henry Ford (Volume 3, Chapter 59)

The Federal Reserve System may not be a bad system, in spite of the fact that it yields government monetary functions to private financial corporations, but there are all sorts of testimony that it has been badly manipulated. Mr. Warburg, the reader will remember, spoke about certain things being "overcome in an administrative way," showing that there was a certain amount of "play" or loose motion in the system which could be manipulated either way. The fact remains that the country went swimmingly through the war by reason of the assistance of the System, and is coming very lamely through the Peace, as the result, monetary experts say, of the hindrance of the same System. Mr. Warburg, whose name was so prominently connected with the advertisement of the glory of the System, must also stand being mentioned in connection with the criticism. ... Whatever money we are said to have as the per capita in the United States, it is a false statement. The money per capita should always be figured on the basis of money in circulation. The statistical "per capita" is not always in circulation. Less than half of it, as a rule. The rest is being juggled.

Whatever the gold in the country, the wealth is still greater. There is more wealth in the United States than there is gold in the world. One year's products of the farms of the United States exceeds in money value all the gold in the world.

Yet, under our present system, the burgeoning bulk of the country's wealth must pass through the narrow neck of Money. And the Money must pass through the still narrower neck of Gold. And the controller of the Gold, under our present system, controls the world. There is more wealth than there is money; there is more money than there is gold; money exists at the pleasure of gold; wealth moves at the pleasure of money. Whoever sits at the neck of money, opening or closing as he will, controls the movement of the world's wealth. And the world's prosperity depends on the movement of that wealth. When wealth stands still and does not pass from hand to hand, the world's circulation has stopped; the world becomes economically sick. The scarcity of cash in hand has led to Credit. Credit is a form of barter. It is a form of dealing by which many transactions are carried on, only the final one being cleared in money. It is a device which has its dangers, in spite of the efforts of apologists to exploit its advantages. But one thing the system of Credit indubitably does — it allows the money masters to hang on to the Cash. When the world is caught, it is caught with paper, not with Cash. The Cash is always in the hands of those who extol the advantage of the Credit System. Who holds money holds power, and will hold it, until real barter or real money comes in fashion again.

People say, "Well, the prices were too high." Certainly they were too high, but who and what made them too high? It was the generosity with which money was supplied by the private Federal Reserve System. There was plenty of money. People say, "Well, the shrinkage is only in paper values; the real value of the product is still there." Certainly, but when you live under a system in which "real" value and "money" value are so intimately intertwined that it affects your bread and butter, the tenure of your farm, and the steadiness of your job, it is pretty hard to separate the two. Moreover, when your prosperity was due to the readiness of a group of men to let out money, and your adversity is due to the unwillingness of the same group, and your own welfare and your country's welfare is thus see-sawed up and down without any reference to natural law but solely upon determinations taken in committee rooms, you naturally inquire, "Who is doing this? Where is all the money gone? Who is holding it? Here is the wealth of the country; here is the need of the country; where is the money to transfer the wealth to the need? Every condition remains as it was, except money. ... The speculative banks, it has been discovered, were able to borrow money at six percent, which money they loaned at as high as 20, 25, and 30 percent.

Federal Reserve deflation created a scarcity which speculative banks utilized. The Federal Reserve policy took the money out; New York banks borrowed the money taken out and loaned it at tremendous rates — rates which people paid to stave off the ruin caused by the moneyless condition which the ill-measured deflation process brought on.

And all this time the Federal Reserve System was in the best financial condition of its whole career. In December, 1920, it had 45 percent of its reserves, which was a higher reserve than it had in December, 1919. But at this writing (July, 1921) the reserve has reached 60 percent.

The money is in New York. Go out through the agricultural states, and you will not find it. Go into the districts of silent factories and you will not find it. It is in New York. The Warburg Federal Reserve has deflated the country. A System that was intended to equalize the ups and downs of financial weather has been used "in an administrative" way to deplete the country of money.

The Federal Reserve Idea was doubtless right; if it had not been, it could not have been established. But it has been manipulated. It has not been a "federal" reserve; it has been a private reserve. It has been operated in the interest of bankers and not of everyone in general. Capable of being used to carry the country gradually back to a natural flow of business and to a natural level of prices, it was used to bludgeon business at a critical time and to bludgeon it in such a way that money-lenders profited when producers suffered.

If that is the fact, there is no American banker but will say that the method was wrong; economically wrong, logically wrong, commercially wrong, if not criminally wrong.

Today the Federal Reserve boasts of its own reserve as if that were a sign of national economic health. With the country struggling to live, the Federal Reserve ought to be low, not high. The height which the reserve has reached is a measure of the depth of the country's depression.

If the Federal Reserve would let out a part of that flood of money — a high financial authority suggests that less than 10 percent would do it — it would be like an infusion of blood into the nation's veins.

Kuhn, Loeb & Company, the Speyers and the other Jewish money-lenders have money for Mexico, Norway, Germany, and all sorts of commercial companies being organized to do business overseas, and it is American money. The Warburg Federal Reserve System has been badly misused, badly manipulated, and the country is suffering from it.

Still, the people know not what to do. Money is still a mystery. Banking is still sacrosanct. What would be perfectly apparent if done in ordinary business intercourse with a $5 bill, is exceedingly complicated when the sum is five millions and the parties are (1) country banks, (2) Federal Reserve banks and (3) Wall Street speculative institutions. Yet they are only Tom, Dick and Harry with a $5 bill, after all.

The matter is somewhat affected by the gags that are placed on many men competent to criticize. High officials are more or less tied up, by campaign contributions in which all financial concerns have an interest. Legislative officials are, too many of them, indebted to these same interests. A schedule of the private debts of some of the men who have aspired to the Presidency in the last eight years would be very illuminating — almost as illuminating as a schedule of the names of Jews at whose homes they stayed while on journeys through the country. Men who are thus tied up with the present financial system cannot say what in their minds they know." -Henry Ford (Chapter 61, Volume 3, "The International Jew")

It is challenging for anyone with rational thought that the above statements by Henry Ford are not criticisms of the fractional reserve system when explicit fractions of reserves are as percentages are stated, and abuses of it thereof, can not be made more clear.AmourReflection (talk) 03:05, 13 March 2012 (UTC)

I propose, based on the ample evidence above, that the cited quotes above, per your edit (above), pasted below so easier to find, are brought back into the article:

The fractional reserve banking systems of the world are fundamentally old and antiquated, and obfuscated to the common person as recognized by a prominent American businessman:

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

-Henry Ford

(Attributed to Henry Ford by Charles Binderup (March 19, 1937), Congressional Record—House 81:2528. The quote is preceded by "It was Henry Ford who said, in substance, this", which indicates that this is likely just a paraphrase, not an exact quote.)

"The people must be helped to think naturally about money. They must be told what it is, and what makes it money, and what are the possible tricks of the present system which put nations and peoples under control of the few."

-Henry Ford

(My Life and Work, Doubleday, Page & Company, 1922, p. 179)

A prominent American President was also a notable critic of private banks: "And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." Thomas Jefferson, letter to John Taylor (28 May 1816)

AmourReflection (talk) 03:31, 13 March 2012 (UTC)

If you are unable, or unwilling to accept the above critical quotes of Ford & Jefferson of the fractional reserve system, than I am willing to make the quotation below as an alternate quote from Henry Ford:

"The Federal Reserve Idea was doubtless right; if it had not been, it could not have been established. But it has been manipulated. It has not been a 'federal' reserve; it has been a private reserve. It has been operated in the interest of bankers and not of everyone in general. Capable of being used to carry the country gradually back to a natural flow of business and to a natural level of prices, it was used to bludgeon business at a critical time and to bludgeon it in such a way that money-lenders profited when producers suffered.

If that is the fact, there is no American banker but will say that the method was wrong; economically wrong, logically wrong, commercially wrong, if not criminally wrong.

Today the Federal Reserve boasts of its own reserve as if that were a sign of national economic health. With the country struggling to live, the Federal Reserve ought to be low, not high. The height which the reserve has reached is a measure of the depth of the country's depression.

If the Federal Reserve would let out a part of that flood of money — a high financial authority suggests that less than 10 percent would do it — it would be like an infusion of blood into the nation's veins." -Henry Ford (Chapter 61, Volume 3, THE DEARBORN INDEPENDENT, issue of 16 July 1921, "The International Jew") AmourReflection (talk) 03:47, 13 March 2012 (UTC)

I think the criticism section should focus on explicit criticisms of specifically the fractional reserve banking mechanics/aspect of modern banking - not on central banks or in this case, the Fed. Most of the quotes I see you've suggested are merely declarations alleging that the Fed is a poor idea, an arm of thievery, or that banking establishments exist to swindle the future. While these are indeed criticisms of centralized banking, they're not really criticisms that address fractional reserves. I actually think these criticisms are rather worthless for the purposes of this article. What good is a criticisms section that would mostly list a bunch of prominent historical figures who happened to say something negative about the Fed, or about centralized banking, in mere passing? That's not useful at all, so I don't think we should strive for something like that. I think the criticism should primarily contain well-explained criticisms of the mechanics of fractional reserve banking or its effects on economies, for which the best sources would be economists' journal articles and academic monologues that treat the subject. Plus, we have to keep in mind that the Federal Reserve is just one example of a centralized bank that exercises fractional reserve banking, so we should try to consider non-U.S. perspectives/systems/criticisms. John Shandy` • talk 19:17, 3 June 2012 (UTC)

Dear Mr. Shandy, Henry Ford explicitly discusses the mechanics, a reserve fraction of 10% is explicit, and he also recognized that the reserve idea is 'doubtless right', so it is a balanced criticism, it is not a worthless criticism as you claim, it is a practical and real criticism of a private system that effectively multiplies currency via an accounting scheme that still exists in modern day banking, and Ford recognized the scheme for what it is. Henry Ford is also not exclusively talking about central banks, he points out that the banks hold a 'private' reserve, not a 'federal' reserve, and that the label 'Federal' is evidently publicly misleading. The criticisms are not worthless as you wish to say, it identifies critical fundamental effects on the economy, and the impact it has on businesses. Your point about non-US perspective is well taken, and if you dig into the source of the reference for Henry Ford's quotation, you will also recognize that Henry Ford was focused on not just the United States, but the world, particularly international banking. I recommend you read the reference and understand what Ford recognized. This is a good discussion, and I will hope that you are able to identify some good references in regards to Henry Ford's view of the international banking system. History provides a lot of insight on modern day banking, of which really has not effectively changed much. We still have effectively the same system in the U.S. since the Federal Reserve Act. I also recommend you research other critical quotations such as from Thomas Jefferson.

Your quote of Henry Ford that you pasted here on the talk page does not say anything about 10% in terms of reserve ratio - Ford simply talks about infusing the economy with 10% of its total reserves (those are two different figures). I have obtained the source (here for free should anyone else like to look at it) and read a fair bit of Vol. 3 Ch. 61, and will spend some time with it, but it mostly seems like a very long-winded Anti-Semitic polemic written by Ford. Why is Henry Ford's view on Jews and the Federal Reserve notable as a fractional reserve banking criticism (as opposed to a criticism of the Federal Reserve, which is what it actually is)? I see that The Dearborn Independent is rather notable, having reached a circulation of 900,000 by 1925 before being ended 2 years later, so the publication itself seems notable. The chapter being cited without its title is titled "Jewish Power and America's Money Famine" - doesn't really sound like a respectable or reliable source for a nuanced criticism of fractional reserve banking.

At the least, I disagree that this source (or selective quote) would best serve the wiki within the criticism section of this article, rather than say, the Federal Reserve System article or something like that. Ford is just ranting about Jews, monetary policy, the Fed, and the Fed's behavior, not really discussing fractional reserve banking itself. In fact, one might glean from parts of Ch. 61 by Ford that he would have been okay with the system if not for the perceived co-opting of it to benefit private financial corporations - for example, when Ford says The Federal Reserve System may not be a bad system, in spite of the fact that it yields government monetary functions to private financial corporations, but there are all sorts of testimony that it has been badly manipulated. Mr. Warburg, the reader will remember, spoke about certain things being "overcome in an administrative way, " showing that there was a certain amount of "play" or loose motion in the system which could be manipulated either way. (Pg. 489).

Also, your addition of that quote has been reverted several times now by multiple editors. The content's relevancy/fitness for this article's very specific topic is clearly disputed and you have not reached a consensus, yet continue to reinsert it. I ask that you respect the customs of Wikipedia, in this case the very good guidelines of the Bold, Revert, Discuss cycle. It also gives others time to participate in the discussion. John Shandy` • talk 21:49, 3 June 2012 (UTC)

Dear Mr. Shandy, I have found that editors dislike Henry Ford's criticism based on their own arguments that have nothing to do with fractional reserve banking, from anti-antisemitism, vandalism, etc, and your argument is based on preference of wanting to add discussion on international banking, and arguing that historical context is not related, but none, including your points, are unable to justify removal of the quotation because the arguments are not focused on the article at hand: fractional reserve banking. It is being disputed and being removed by people, including you, who do not like the criticism, not by people willing to read the reference in detail and not by people who have recognized the reference exists, and is justified as relevant to fractional reserve banking. When you argue that 10% means something else, it is the banking reserve fraction, is it not? What else do you think it is? Please elaborate on what you mean by it is meaning something else? When you say things like Ford's statement is "worthless" in your earlier edit comment, can you explain to me how your statement of "worthless" is "neutral" in regards to Wikipedia's standards, or are you trying to paint a picture based on your own life experience and non-neutral treatment of Henry Ford's quotation? The quote has been reverted by you and other's who dislike criticism and who dislike the historical contextual details provided in the reference itself. The title of the section is "Criticism" is it not? If you are criticizing a critic, then you need to state more specifically with good measure the reasons that the criticism is wrong, inaccurate or not useful, otherwise there is little basis of your criticism of the criticism. You have tried, and others have well, all mostly to points unrelated to fractional reserve banking. Thus far, on all the reversions, I have yet to see any criticism of the criticism that carries any substantial weight in justifying removal. I would like to see criticism of the criticism with references, page numbers etc, that argue your points, thus far I have seen very little in this regard. Most of the criticism of the critical quote has been statements not relating to the article itself: fractional reserve banking. Henry Ford is talking about a reserve fraction and the fractional reserve system in general, and the article is about the fractional reserve system. How are these two not related and not relevant? You must argue your points that justify removal, and provide references in your arguments that clarify how Henry Ford is not talking about the fractional reserve system before I would consider removal. I have yet to see any significant contrarian evidence that supports that Henry Ford is not discussing a fractional reserve banking system. I see no substantial justification for the removal of the quotation other than bias against the criticism. If you can find references that suggest that Henry Ford is not talking about fractional reserve banking in the quotation, than I will consider removing it, so I am patiently waiting for someone to provide a solid reference I can analyze in regard to their point. I am open to removal, just make the removal justified by objective arguments other than personal bias.

I didn't remove it because I didn't like it, I removed it because it does not appear to be particularly relevant. I already explained why, but let me attempt again. Ford is criticizing the Federal Reserve, mostly because he believes it is an incarnation of Jewish control over monetary affairs, and his criticism takes aim at a co-opting of the monetary policy by private corporations who would seek to manipulate the Fed - this is very clear if you read Henry Ford in context, and he lays this out quite clearly at the onset of Chapter 61.

When I said that Ford's criticism is worthless, I wasn't attacking it. Rather, I was trying to say that it has no value for the purposes of an article on fractional reserve banking. Ford's criticism is levied at specifically the Federal Reserve and at Jews. The Federal Reserve does not solely represent fractional reserve banking or a centralized bank - it is but one incarnation, and Ford is mostly critiquing the Fed's policy during the earlier 1900s, not the underlying system of how commercial banks create money by holding a fraction of deposits in reserves at the Fed. Plus, I pointed out Ford's remark that the Federal Reserve System may not have been a bad system, but that he perceived it to allow private financial corporations to manipulate government monetary functions.

With regards to the 10 percent, this is what Ford states: If the Federal Reserve would let out a part of that flood of money -- a high financial authority suggests that less than 10 percent would do it -- it would be like an infusion of blood into the nation's veins. If he were using 10 percent as the required reserve ratio (the percentage of deposits commercial banks must hold in reserve at the Fed), then his sentence wouldn't make any sense. The fractional reserve in fractional reserve banking is basically the percentage of deposits banks must hold in reserve - the rest (the 90%) may be lent to borrowers by the commercial banks. Ford must be talking about 10% of the total reserves being held at the Fed (the aggregate of all of the commercial banks' total reserves). He's basically saying the Fed should act in such a way that they infuse the economy with 10% or less of the Fed's total reserves (so, in essence, that would mean changing the required reserve ratio, exercising open market operations to buy/sell Treasury securities, or adjusting the federal funds rate/discount window rate, such that the Fed then holds 10% less in its total reserves. Ford was definitely advocating against the level of reserves the Fed was holding at that time, but he was not saying that the reserve ratio (the "fractional reserve" per dollar) was or should be 10%. I hope this helps clear things up.

Part of your response sounds like you're not assuming good faith on my or other editors' behalf - we are not trying to sabotage your edits and we have legitimate and reasonable concerns. We also do not have to provide citations to refute Ford's criticism because his criticism isn't what's at issue. What's at issue, is why you think it's a good fit for the criticism section of an article about fractional reserve banking in general. For one, I'm trying to understand why you propose adding Ford's quote in this article, rather than in the Federal Reserve System article. Secondly, the source you've provided is really only a reliable source for Ford's opinions on the Fed and on Jews. But then, why is Henry Ford's point of view notable? If Mark Zuckerberg criticized Jews and the Federal Reserve, would his criticism be notable or particularly relevant to this article? In essence, we have to avoid giving Henry Ford undue weight (whether too much or too little), per WP:UNDUE and WP:NPOV. John Shandy` • talk 00:35, 4 June 2012 (UTC)

Dear Mr. Shandy, You (et. al.) are giving Henry Ford too little weight by attempting to paint his perception as irrelevant. How does it not appear to be "particularly relevant" when the economic impact of the automobile and banking is enormous, and removing the perception of his contribution leaves an enormous gap in the fractional reserve banking concept. The criticism is reliable and the reference is reliable. Ford's experience in the automobile industry is extraordinary, and the automobile industry is highly associated with fractional reserve banking as the amount of cars sold is indisputably associated with the banking reserve fraction, unless you can find me a national economy that doesn't finance vehicles.

The criticism is not under a Federal Reserve article because Henry Ford quote is specifically discussing a reserve fraction: 10% and whether the reserve fraction needs to be high or low. Certainly it could be under both, but his quote is more pertinent to the problem of reserve fraction and whether it needs to be high or low. How does a reserve fraction of 10% not make any sense to you as meaning the required fraction of reserve the banks are required to have? If you would read Ford's statement in the prior paragraph, he stated that "the federal reserve ought to be low, not high." To argue your own point, Ford would have to contradict his prior paragraph. The money supply is simply increased by the lower reserve requirement, and Ford recognized this. This money supply is not from the Federal government, it is multiplied by private banks (legally copied as fractions multiple times), and the lower the fraction the greater the supply of money in circulation. If the reserve fraction were zero, the money supply can approach infinity, but that is another topic. You are clearly misinterpreting Ford's comments, because in order to use your argument that the Federal government produces the money by releasing it is incorrect and would contradict the 2nd to last paragraph of the quote from Ford, since as the % drops the money supply increases exponentially. Your argument would contradict that as a release percentage.

For the other information surrounding Ford's quote in the reference, I agree, it gives context, but the focus is not on the context, it is on the fractional reserve article. We can increase layers of contexts to the point of going to the origin of religion, but these are not substantially relevant to the specific quote Henry Ford made about the fractional % of reserve, and about how to set this fraction amount, high or low. He also recognized the impact on business based on this reserve fraction and that is stated in the quotation. I still do not understand how you believe this is not relevant to fractional reserve banking, or are you distracted by the evidence that Henry Ford associated himself with Adolf Hitler and why World War II started?

Your example of metaphorically having "Mark Zuckerburg being critical of Jews" is not relevant to this article if Jews are discussed in the quotation cited, however, if Mark explicitly discussed banking reserve fractions of 10% and whether this reserve fraction needs to be high or low and he had experience with finance and banks, then yes, absolutely would it be relevant, but it is even more relevant to Henry Ford and his ample dealings and experience with banks and the banking industry. Your argument is like saying that because a library has a book on "The Wizard of Oz", and a book on "How Money is Multiplied" written by the same author, that because the author wrote about "The Wizard of Oz" does not mean his book about "How Money is Multiplied" is irrelevant. They are both relevant, and in historical context Henry Ford's influence and dealings in the banking industry can not be under stated. Certainly, his association with Adolf Hitler may cause individuals great disdain and dislike for the association to have a great desire and tendency to want to remove the quote because of this association and are biased because of it. I would hope to see better arguments for the removal of the quotation, as it is clearly highly relevant. You may wish and desire it to not be relevant because of the contextual associations, but the context can also point to higher levels of understanding of why the fractional reserve % setting has a large impact on the fractional reserve system, after all, if the reserve fraction is zero, the money supply becomes infinite, and perhaps why wars of theocracy and plutocracy start, and how the military industrial complex is fed by this machine, but that is a whole other topic.AmourReflection (talk) 03:00, 4 June 2012 (UTC)

I see your point about the 10%, but Ford's wording clearly states that he thinks the Fed's total reserves should be lowered by 10% (not be 10%). Regardless, Ford's remarks amount to a critique of monetary policy, not of the system of holding only a fraction of deposits as reserves. Even if Ford was specifically advocating a target percentage for the required reserve ratio, it amounts to a criticism of monetary policy, not necessarily a criticism of the act of holding a fraction of deposits as reserves. His criticism has to do with how much he thinks the banks should hold in reserve, not whether they should hold only a fraction of deposits in reserve. That is far less of a criticism of fractional reserve banking and much more a criticism of the Fed's monetary policy at that point in time, because if Ford thinks banks should hold a significantly smaller percentage of deposits in reserve, then he would have to be an advocate of fractional reserve banking as he is advocating that a lower fraction be held. John Shandy` • talk 08:48, 4 June 2012 (UTC)

Dear Mr. Shandy, now you are attempting to narrow the discussion down to only the last two paragraphs of Ford's quote. Certainly he is talking about the private reserve banking fraction, and yes, he is arguing both in support of fractional reserve banking and against it. If you read the first sentence he recognized the "Federal Reserve" is not a federal reserve, it is a private reserve, and when the reserve fraction is controlled by private bankers, by lowering the fraction, the private bankers are fundamentally given the legalized power to print money. If a citizen did this, it would be fundamentally illegal counterfeiting. You need to understand that Ford understands both sides of the equation of desirable and undesirable characteristics of the fractional reserve system and how the fractional reserve setting (money supply control mechanism) effects the money supply. If the fractional banking reserve fraction is set to zero, it is like giving private bankers infinite money, of which ultimately artificially concentrates wealth for private bankers and against business. If you read his second paragraph in the quotation, he also recognizes the ease of manipulation of the fractional reserve system. If you are given the power to have a low reserve fraction, say zero, than the money supply can explode to infinity, but in a very skewed manner, and you have the power to print as much money as you wish, this is the private banking power he recognized as having two effects, one being that it increases the money supply that will help businesses, the other, it distorts (skew's artificially) the money supply to be in the hands of bankers and not in the hands of businesses when the reserve fraction is high as it "bludgeons business at a critical time and to bludgeon it in such a way that money-lenders profited when producers suffered." He also recognized, that there is no "banker but will say that the method was wrong; economically wrong, logically wrong, commercially wrong, if not criminally wrong." Now if you are a banker, and I suspect a lot of individuals who disdain Ford's quote are who wish to remove it from this page likely because of this, and who disdain his recognition of a system that provides keys to a private bankers to print money ad nauseam, wish to have this quote removed, because it effects their power to print money at will, get it wrong, and get a bonus and a bailout for getting it wrong. If we take into consideration how in recent history, namely 2008, private bankers of the fractional reserve system were given bailouts and bonuses for messing this fractional reserve system up. It is abundantly clear and relevant that Henry Ford is accurate in present day history, that the system is clearly being "manipulated", but it's the only system we currently have and that is why Henry Ford also recognized that the "Federal (private fractional) Reserve idea was doubtless right; if it had not been, it could not have been established. But it has been manipulated; it has been a private reserve." — Preceding unsigned comment added by AmourReflection (talk • contribs) 20:07, 4 June 2012 (UTC)

You need to stop assuming bad faith, or assuming that I'm employing some kind of tactic to narrow the discussion or distort Ford's statements. I am not a banker, and the other editor who confronted you about your insistence on including this, Famspear, is a tax accountant, not a banker - even if we were bankers, that wouldn't matter and wouldn't be enough to justify your presumptuous, and quite frankly pitiful attack on our objectivity. The fractional reserve is held by, but not determined by commercial banks (in fact, they usually hold more in reserves than required by the required reserve ratio). Ford's suggested decrease in the total reserves is a move toward the direction of 0%, not of 100%, and lower reserves means the commercial banks can lend a greater percentage of their deposits and so how does Ford's suggestion put private bankers who are perceived to be manipulating the Fed in check when they have a clear benefit from it? Reading Ford in context, it appears he has little qualms with fractional reserve banking in and of itself, and that his frustration is with the Fed, the Jews involved in creating or working for the Fed, and financial institutions and commercial banks who would manipulate the Fed, and the level of reserves held by banks at the Fed at that time in history (although Ford's proposed solution is inconsistent with the problem he defines at the onset of the chapter).

I see that 2 more editors have reverted your insertion of the source and that you have again reinserted it. Indeed, I count that seven editors have reverted your insertion of the Ford quote. Yet, you continue to reinsert it. It hurts other editors' ability to maintain an assumption of good faith on your behalf when you ignore Wikipedia's customs and keep inserting material that is clearly the subject of an unresolved content dispute. John Shandy` • talk 17:04, 7 June 2012 (UTC)

Dear Mr. Shandy, indeed, the Ford statement is very unpopular, particularly for those individuals involved with money, but just because it is unpopular does not justify objective removal. Can you explicitly state which Wikipedia's customs are being violated? Is there an explicit rule that says if a quotation is unpopular it must be removed? Is it a custom of biased unpopularity that warrants removal that you are citing of 7 removals that lack objective reason as justification for removal? I would like to understand what is unresolved here. I have seen arguments of religious persecution, arguments that claim that 10% is not a fraction, ironic arguments of being historically irrelevant, arguments stating Ford is economically incompetent, but I have yet to see any substantial argument that is objective nor substantial as grounds for removal. Your latest argument that claims Ford "believes it will put the Fed in check" is ignoring Ford's statement that the "Federal" reserve is not federal, it is private, and this is fundamentally like a "Fox guarding the hen house". It is clear, but perhaps you wish it not to be clear, that Ford recognized that the name "Federal" is extraordinarily misleading because it is a private fractional reserve system operated by private bankers, profiteers who use the false label "Federal" to fundamentally make the public believe it is something for which it is not, it is a humbug private operation labelled something for which it is not. Please state the substantial objective grounds for removal. If it takes a million biased reasons to remove and no factual objective one, does this justify removal? Do you remove evidence simply because it offends you, or do you remove it because you have objective reasoning. I have yet to see substantial objective reasons for removal, please provide.AmourReflection (talk) 17:53, 7 June 2012 (UTC)

For starters, you're ignoring WP:CONSENSUS (Wikipedia's preferred convention for resolving content disputes like this one), and today, you've violated WP:3RR and are exhibiting a tendency to edit war to get your way with the article. You also keep misinterpreting me and even twisting my arguments to somehow support your position. You've not satisfactorily addressed my arguments and instead have simply repeated yours in painfully long-winded walls of text. You are assuming bad faith with your silly accusation that we are reverting the quote merely because we deem it unpopular or because we disagree with it or somehow dislike Ford (that is something you have imagined). Ford is criticizing the Federal Reserve, not fractional reserve banking, and I and others have explained this from various angles citing the very source you've referenced, with your responses amounting to one big "nuh uh" defense. When you selected the quote and inserted it into the article, did you honestly think that nobody would bother to download the source and read the chapter to see Ford's criticism in full context? Unfortunately for you, I did precisely that. No matter; you're quite obviously going to keep reinserting this into the article no matter what. Even more disingenuous is that below, you've accused us of arguing that 10% is not a fraction, and said that we basically don't understand or accept math? Of course the number 10% is a fraction, but you've willingly misunderstood what it represents. It is not the reserve ratio, it is a suggested percentage reduction in the reserve ratio. Ford is criticizing the 1900s-1920s monetary policy of the Fed, and it's as clear as day. John Shandy` • talk 23:57, 7 June 2012 (UTC)

Ford on Federal Reserve Idea

It's hard for a newcomer to follow what's happening above, so this section is specifically about this Henry Ford quote:

“

The Federal Reserve Idea was doubtless right; if it had not been, it could not have been established. But it has been manipulated. It has not been a 'federal' reserve; it has been a private reserve. It has been operated in the interest of bankers and not of everyone in general. Capable of being used to carry the country gradually back to a natural flow of business and to a natural level of prices, it was used to bludgeon business at a critical time and to bludgeon it in such a way that money-lenders profited when producers suffered.

If that is the fact, there is no American banker but will say that the method was wrong; economically wrong, logically wrong, commercially wrong, if not criminally wrong.

Today the Federal Reserve boasts of its own reserve as if that were a sign of national economic health. With the country struggling to live, the Federal Reserve ought to be low, not high. The height which the reserve has reached is a measure of the depth of the country's depression.

If the Federal Reserve would let out a part of that flood of money — a high financial authority suggests that less than 10 percent would do it — it would be like an infusion of blood into the nation's veins.

”

There are at least two reasons this quote is inappropriate:

The quote is very timely. It's about how Ford saw the Federal Reserve system at that point in time (1921, yes?), not arguing that the system was inherently wrong but that it was being misused, etc, even relating it to the particular economic cycle of the time. That's too timely, it doesn't carry over to a criticism now, nearly a century later.
It's about the Federal Reserve system, which is different than fractional reserve banking.

CRETOG8(t/c) 19:32, 7 June 2012 (UTC)

Dear Cretog8,

The Federal Reserve Act enacted in 1913 established the fractional reserve system, did it not? Ford's quote is in 1921, after the Federal Reserve act enacted in 1913. The fractional reserve system we have today is fundamentally the same system we had that was acted in 1913. We have fundamentally the same system today in 2012 that we had in 1913, it has not fundamentally changed, and thus Ford's quote in 1921 is timely, and is still timely today. Please provide evidence that says the Federal Reserve Act of 1913 that established the fractional reserve system is substantially different, I would like to see this. Your argument of suggesting it is referencing a specific cycle lacks evidence, please provide a page number and reference that demonstrates this. Evidence suggests that Ford recognized there are business cycles, this is the nature of economic systems. No where have I seen evidence that suggests an explicit reference to a specific cycle in time. Henry Ford's quote is indeed about the Federal Reserve system in general, however, it is explicitly about fractions and fraction level setting, this article is about fractional reserve banking, is it not? Please explain to me how you believe that 10% is not a fraction, I wish to have an explanation for that. Your arguments lack credible rational objectiveness, for criticizing a critic, especially considering the basic mathematics of fractions and whether to set them high or low. Please provide some evidence other than your own futile opinion. I have yet to be convinced that the quote is irrelevant, and as more and more non-objective biased critics of Henry Ford try to remove it, the more and more convinced I become that the quote needs to remain. If editors who wish to remove the quote continue to deny a fraction is 10% and setting a fraction high or low, it's challenging to have credibility of argument, but that has been your argument, among many other non-objective arguments.AmourReflection (talk) 20:10, 7 June 2012 (UTC)

Dear AmourReflection: Without getting into the rest of the specifics of the argument about the Henry Ford material: No, the Federal Reserve Act in 1913 did not "establish" the fractional reserve system of banking. The concept of a fractional reserve banking system began before the establishment of the Federal Reserve System.

The Henry Ford material might be more appropriate, more "on point," in the article on critiques of the Federal Reserve System (if there is still such an article in Wikipedia -- I'll check later). Famspear (talk) 21:40, 7 June 2012 (UTC)

OK, here's a link to the article: Criticism of the Federal Reserve. The Henry Ford material seems to be a criticism of the Federal Reserve System, not just "fractional reserve banking." The two concepts, Federal Reserve System and fractional reserve banking, can be thought of as similar to two circles that partially overlap, like a Venn diagram. The Federal Reserve System involves fractional reserve banking, but not all banks that use fractional reserve banking are part of the Federal Reserve System. Further, the Federal Reserve System involves more concepts than just fractional reserve banking. So the two "subjects", if you will, are not exactly the same.

Think of it this way: An "automobile" is a means of transportation. But "transportation" involves more than just automobiles. A critique of "transportation" would not necessarily be directly on point in an article on "automobiles." Further, the "automobile" involves more than just the concept of transportation -- for example, some people collect automobiles and use them for "show", and not for "transportation.

The two topics -- automobiles and transportation -- are, in a sense, "related." But a critique of some aspect of automobiles would not necessarily go well in an article on "transportation", as the "transportation" article might relate to automobiles AND bicycles AND airplines AND trains, etc., etc. Saying that you want to put a critique of "automobiles" in an article on "transportation" because "automobiles" are related to "transportation" does not work well, in my view. Famspear (talk) 22:00, 7 June 2012 (UTC)

Dear Mr. Famspear, Agreed that part of the quote falls into a Venn diagram intersection, and fundamentally the quote of Henry Ford resides inside the intersection of Fractional Reserve Banking and Federal Reserve. I also agree that the Federal Reserve Act of 1913 was not the invention of fractional reserve banking, however, if you analyze the details of the Federal Reserve Act enabled in 1913, you will find detailed design of fractional reserve banking that is established by the U.S. Federal Reserve Act itself. For your statement that not all banks use the Federal Reserve system is not particularly, if at all, relevant, considering that Henry Ford was focused on international banking, not just the U.S. Federal Reserve even though stated in the quotation, especially if you are capable of reading the reference itself.

Your analogy on types of transportation actually reinforces the relevancy of having Henry Ford's quote inside the Fractional Reserve Banking article, as you are illustrating going from abstract to more and more specific within the intersection of the Venn diagram. The article is about fractional reserve banking, a specific aspect of banking, and Henry Ford is discussing reserve fractions, the same specific aspect of banking. Tell me how that is outside of fractional reserve banking? Your argument that federal reserve is broader than fractional reserve is inaccurate in that there are few, if any, counter examples that illustrate a banking system that does not use fractional reserves. The broader term is fractional reserve banking, and federal reserve is a kind of fractional reserve banking. Find me one major bank in the world that does not use a fractional banking reserve system, and then you might make sense, but I have yet to encounter one. Henry Ford is making a point about the control mechanism of fractional reserve banking, namely setting the fractional banking reserve requirement. Your argument about 'automobile' is a form of 'transportation' is disingenuous. A more realistic and relevant analogy is 'transportation' requires 'motion control', and Henry Ford's quote discusses setting of the 'motion control' mechanism, fundamentally, the control of the fractional reserve setting, and this fractional reserve setting is the mechanism that controls most, if not all major fractional reserve banks throughout the world individually. Since Henry Ford explicitly states a fractional reserve ratio, as well as if it needs to be high or low, undeniably places it dead center in the fractional reserve banking diagram of the Venn diagram you are referring to, unless you wish to argue pointlessly that a fraction is not a fraction. How is the statement that reserve fraction of 10% can not be more explicit and plain as a reserve fraction setting, and thus relevant and valid criticism of the fractional reserve system? Are you trying to argue that this is not about fractional reserve banking? If so, then what is this article really about? If you look at the vast majority of the article it is dependent on the reserve fraction, look at the charts and tables, most all of them are dependent on the reserve fraction setting, and Henry Ford is explicitly discussing the reserve fraction (not even implicitly), what else do you think he is talking about? It is pointless to argue that because the reserve fraction being discussed by Henry Ford happens to be a specific government and is thus, not related to fractional reserve banking is complete nonsense. If you actually read the reference, you will discover Henry Ford is not focused exclusively on the United States Federal Reserve, so your point on arguing that because he mentions "Federal Reserve" that it falls outside of fractional reserve banking when he is explicitly talking about the fractional reserve aspect of one particular federal fractional reserve bank of many, your argument carries no weight. Your argument would only carry weight if the U.S. Federal Reserve banking system was not a fractional reserve banking system, but because it is a fractional reserve banking system, sadly, your argument carries no weight. Its like saying because someone argues about a car and mentions "blue car" instead of "red car" or just "car" that "cars" are not "cars". Literally, the same goes with Henry Ford's quote, you are arguing that because he mentions "Federal reserve" 'fraction' instead of just 'fraction' that 'fractions' are not 'fractions', this is the valiant irrational logic you are using. I suspect it is much more likely you and other critics have an incredible, and perhaps justifiable, disdain for the context of the reference over the content of Henry Ford's quote, and thus choose to bias on removal instead of providing objective reasoning and objective arguments, and perhaps even more so, taking into consideration why people recognize certain things, and why people become motivated to go against things unjustly and in group form, without fully understanding the contextual nature of people. Perhaps if you can objectively clarify how you believe Henry Ford is not talking about fractional reserve banking then I will understand, but I have still yet to see convincing arguments to the contrary. I suspect criticism of the criticism, is likely emotionally and unadmittedly based on because Henry Ford associated with the Christian Adolf Hitler and had a disdain for Jews is not an objective reason to remove his quotation. In a sense, it is probably a greater reason to keep the quotation, as it illustrates the atrocities that can occur due to a system that is manipulated and builds up to instability, especially when valid criticism of a skewed system is removed or censored without objective reasoning and objective arguments, independent of religious or group association.AmourReflection (talk) 23:18, 7 June 2012 (UTC)

Dear AmourReflection: I don't need to "analyze the details of the Federal Reserve Act enabled in 1913," or to "find detailed design of fractional reserve banking that is established by the U.S. Federal Reserve Act itself." We already know all that. And I did not say that "not all banks use the Federal Reserve system". I said that "not all banks that use fractional reserve banking are part of the Federal Reserve System." Regarding the remainder of your long post: You seem to have been straining over this Henry Ford text off and on for a few months now, but you have not convinced me, and you apparently have not convinced any other editors, that the material you are advocating really goes in this article in this form. I appreciate what appears to be your strong interest in this, but I don't see that you have come up with persuasive arguments on this particular issue. Yours, Famspear (talk) 00:32, 8 June 2012 (UTC)

Dear Famspear (& et. al. editors who wish to remove the criticisms of Henry Ford), You, have yet to convince me that 10% is not a fraction, setting this fraction high or low is not interpretation of fractional reserve banking, that text explicitly in the quote itself contains anti-semitism, that the fractional reserve banking aspect of the Federal Reserve Act enacted in 1913 is any different than the fractional reserve banking aspect of the Federal Reserve of today (2012), these are all the critics arguments that I am aware of. If any of these are objective reasons for removing the quote, please state from the start how you objectively argue that fractions are not fractions that the reserve act is different now, that their is religion explicitly stated in the quote.

I concur that the context of the quote can be interpreted as antisemitism, but the quote by and of itself does not. So if you want to continue to argue that fractions are not fractions and that the quote itself contains antisemitism, I would need to be enlightened as to this extraordinary odd (other than emotional) logic. So if you are not arguing about fractional reserve banking, then what is it really you, and all of other critics of Henry Ford's criticism, are you all truly arguing about? Is it because you are all emotionally biased that because Henry Ford was against Jews and associated himself with a Christian Adolf Hitler, are these your real reasons? Many who have removed the quote have argued this, but they have not been able to point out to me where in the quote itself is a religious remark, can you? If so, then perhaps I can understand you, but arguments like 10% is not a fraction, and that the Federal Reserve Act enacted in 1913 has some how changed fractional reserve banking that somehow it is different now, truly amaze me, unless this is purely emotional logic, of which I can understand the complete lack of reason, of which there is no shortage of in this world. I undeniably concur that Henry Ford was not justified in being antisemtic or associating with the Christian Adolf Hitler, but just because he was evidently antisemtic does not mean you can excuse his criticism of the fractional reserve setting of a banking system, just as I will not let arguments that fractions are not fractions stop me from addressing reasons for quote removal, or arguments that the U.S. Federal Reserve Act of 1913 is different today in 2012, that somehow fractional reserve banking has changed since then. Your arguments are not particularly persuasive either, other than antisemitism, of which is not contained in the quote itself by Henry Ford.

People can find out themselves, by reading the reference that Henry Ford loses credibility by being antisemitic, however, does this mean he loses credibility of being a genius at car manufacturing, automotive financing, business banking, and paying his workers enough so they can afford the cars his company made, to a company that still exists today, namely the Ford Motor Company?

Frankly, it is very challenging and wasteful to argue with people who believe fractions are not fractions, that a fractional reserve banking system established in the U.S. in 1913 was somehow changed in 2012, and that just because Henry Ford is anti-semetic he therefore has no credibility, is very disheartening, other than realizing that humans (critics of critics) are emotional beings of which rationalizes the irrational-ism and bias.

I will consider appealing to have this quote remain, if the appeal does not succeed, I will begin to lose substantial respect for the objective nature of Wikipedia and will not consider editing text here or elsewhere due to recognition of allowed bias of other editors just because someone like Henry Ford is likely emotionally unpopular due to his antisemitism, where text is removed for biased reasons (such as claims that fractions aren't fractions, antisemitism when there is no religious text in the quote itself, and that the Federal Reserve Act of 1913 that established fractional reserve settings is somehow any different in 2012) instead of objective reasons. It's this very kind of group think that causes genocide and war, people sometimes are unable to accept the evident truth, so what do they do? They delete any evident truth they refuse to believe. If people who click on fractional reserve banking they click on the article to learn about fractional reserve banking. They will also learn about the critic of fractional reserve banking, Henry Ford, and if they want to find out more about the criticism they can follow the reference and read the reference. And when they read the reference they will learn about Henry Ford's anti-semitism, and when they learn about the anti-semitism, they will also learn why wars start, and why genocide takes place, as they may discover it has a lot to do with religion and economics, namely international fractional reserve banking, but just because they hate this fact, does not mean they can chose to 'burn the book' (or remove it from U.S. High School history books) so to speak that Henry Ford was antisemitic. It's the same reason that people remove this quote is the same reason that people burn books, when they hate something, they wish to cover it up, instead of disclose the nature of the world. Those who are fearful chose to be blind, those who love, choose to know, regardless of the emotional magnitude of the light, whether it be good or bad, one must be willing to accept the brutal facts, and have the hope that knowing these facts, that history is not doomed to be repeated by people who remain fearful, greedy, and angry, or who are in total denial.

If I lose my appeal, I will accept this experience that Wikipedia favors bias over objective editing, and I will cease going to and referring to this cite, as many of you who have removed Henry Ford's quote of the criticism probably wish my objective views to be removed. Just because someone is anti-semetic, or biased in one area, does not mean they have no credibility in another area, such as business or banking.

I let people who argue that fractions are not fractions have credibility, why are none of you able to let Henry Ford have credibility? Is the fact that he established Ford Motor Company is just not good enough for you, or is it because you just can not, or are unable to withstand his antisemitic flaw? If I can accept people who argue fractions are not fractions, or that the Federal Reserve Act of 1913 has somehow had fractional reserve banking modified in 2012 today, then why can't any of you critics out there who keep removing Henry Ford's quote tell me you are unable to accept Henry Ford's anti-semitism? Or how about considering accepting Adolf Hitler's Christianity (that is a whole other topic)? People have flaws, some major, some minor, but they also have ideas and insight, and they provide significant historical hindsight that needs to be considered for better or worse, but those who fail to look at evident history directly in the eye because they are fearful (or angry) are doomed to repeat it. If you wish to repeat history, then ignore it and continue to delete the quote, continue to delete the evidence, and you will find yourself repeating it.AmourReflection (talk) 18:42, 9 June 2012 (UTC)

Dear Editors, please only consider removing Henry Ford's quote only if you are willing to discuss why before doing so. Is it not Wikipedia's policy to have a neutral objective rational logical discussion about the substantial reasons for removal, or you just remove it because you are offended and are sensitive to Ford's antisemitism? Is it Wikipedia's policy to favor irrational bias editing over objective editing? This article needs to be tagged as unbalanced and biased, as I have yet to see a counter rational argument other than antisemitism of the source. It appears editors of this article greatly disdain criticism of fractional reserve banking. I prefer to be banned from a biased editorial website, as I use to have some respect for Wikipedia's lack of bias, but here, there is incredible bias, bias based on the reference, of which is credible, the Dearborn Independent had wide circulation.....AmourReflection (talk) 01:57, 10 June 2012 (UTC)

^ "Charles Goodhart, 2007.02.28, Whatever became of the monetary aggregates?" (PDF). Bank of England.
^ "Paul Tucker, 2007.12.13, Money and credit: Banking and the Macroeconomy" (PDF). Bank of England.
^ "The economics of money, banking and finance: a European text. Fourth edition. P. G. A. Howells,Keith Bain Page 241". FT Prentice Hall.
^ The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors by Jonathan Golin. Publisher: John Wiley & Sons (August 10, 2001). ISBN 0471842176 ISBN 978-0471842170
^ Bankintroductions.com - Economic Definitions
^ Investopedia economic definitions
^ investorwords economic definitions
^ The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors by Jonathan Golin. Publisher: John Wiley & Sons (August 10, 2001). ISBN 0471842176 ISBN 978-0471842170
^ Bankintroductions.com - Economic Definitions
^ Investopedia economic definitions
^ investorwords economic definitions

[1] "Charles Goodhart, 2007.02.28, Whatever became of the monetary aggregates?" (PDF). Bank of England.

[2] "Paul Tucker, 2007.12.13, Money and credit: Banking and the Macroeconomy" (PDF). Bank of England.

[3] "The economics of money, banking and finance: a European text. Fourth edition. P. G. A. Howells,Keith Bain Page 241". FT Prentice Hall.

[4] The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors by Jonathan Golin. Publisher: John Wiley & Sons (August 10, 2001). ISBN 0471842176 ISBN 978-0471842170

[5] Bankintroductions.com - Economic Definitions

[6] Investopedia economic definitions

[7] vestorwords economic definitions

[8] The Bank Credit Analysis Handbook: A Guide for Analysts, Bankers and Investors by Jonathan Golin. Publisher: John Wiley & Sons (August 10, 2001). ISBN 0471842176 ISBN 978-0471842170

[9] Bankintroductions.com - Economic Definitions

[10] Investopedia economic definitions

[11] vestorwords economic definitions

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