Argumentation:Fractional reserve banking
The economic, environmental and social effects arising from money creation through fractional-reserve banking have been subject to much heated political debate for well over two centuries.[1][2][3][4][5][6][7]
Criticisms
There are ethical, legal and pragmatic economic arguments against the practice of fractional reserve banking.
Some economists and ethicists have concluded that the practice is fraudulent and therefore immoral, in that a bank promises to redeem deposits on demand when it is aware that, through this practice, it will never have sufficient funds to satisfy all depositors. Some critics consider this fundamentally unethical, akin to counterfeiting and/or embezzlement.[8][9][10] Murray Rothbard and others have concluded that fractional reserve banking is nothing but a monetary Ponzi-scheme, relying on new borrowers (or entrants to the scheme) to remain "solvent". Reformist economists such as Murray Rothbard support a "full reserve" banking system and criticize fractional reserve banking as inherently fraudulent.[11] Murray Rothbard held this view very strongly throughout his life.[9][12]
Leaving aside the ethical, moral and legal criticisms against fractional reserve banking, the primary practical economic criticisms relate to the potential fragility of bank liquidity in a fractional reserve banking environment, the financial risk of bank runs that depositors bear when depositing money with banks, and the impact that demand deposits have on the stock of money, and on inflation (that is, the implicit expansion of the money supply and its associated impact on prices and the exchange rate). An alternative to fractional reserve banking is full-reserve banking.[13] With full-reserve banking, some monetary reformers, such as Stephen Zarlenga of the American Monetary Institute, support the concurrent issuance of debt-free fiat currency from the Treasury, while others such as Congressman Ron Paul and some economists from the Austrian school, call for a commodity currency as existed under the gold standard.[14][15][16]
Some conservationists and environmentalists believe that fractional reserve banking creates the necessity for indefinite economic growth which leads to environmental destruction and depletion of natural resources especially when coupled with population growth.[17][18]
Exacerbation of the business cycle
Adherents of the 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.[19][20][21] 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.[22]
Effects of an increased money supply
Fractional reserve banking involves the creation of money by the commercial bank system, increasing the money supply. According to the quantity theory of money, this larger money supply leads to more money 'chasing' the same amount of goods, which leads to a higher price level.[23] Austrian economists state that this expansion of the broad money supply (demand deposits and notes) caused by fractional reserve banking is a cause of price inflation.[24]
Arguments for the practice
A few Austrian School economists, such as Pascal Salin suggest that a full-reserve banking system should not be enforced legally, and dispute Murray Rothbard's characterization of fractional-reserve banking as a simple form of recursive embezzlement, and rather advocate the abolition of central banking, and suggest that free banking replace the current system. Austrian monetary theorist George Selgin has also argued in favor of fractional reserve banking as the true free market position.[25]
F.A. 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."[26]
By increasing the capital available for investment, fractional reserve banking may speed economic development, allowing the economy to enjoy a higher level of investment than would exist in a full reserve environment.
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<ref>tag; no text was provided for refs namedtwilight - ↑ Antal E. Fekete, Fractional Reserve Banking Revisited
- ↑ China Inflation and Gold, Darryl Robert Schoon
- ↑ The Good, the Bad and the Ugly, James Quinn
- ↑ Ron Paul video - fractional reserve banking is fraudulent
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<ref>tag; no text was provided for refs namedPaul_End - ↑ The Faults of FRB, Thorsten Polleit
- ↑ The Need for 100% Reserves, Frank D. Graham
- ↑ The Faults of FRB, Thorsten Polleit
- ↑ Murray Rothbard, The Mystery of Banking
- ↑ Stephen A. Zarlenga, The Lost Science of Money AMI (2002)
- ↑ Paper Money and Tyranny, Ron Paul
- ↑ Fiat Paper Money, Ron Paul.
- ↑ Agenda for a New Economy: From Phantom Wealth to Real Wealth by David Korten 2009 ISBN 1605092894
- ↑ The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century by James Howard Kunstler 2006 ISBN 0802142494
- ↑ Sraffa P. (1932a), Dr. Hayek on Money and Capital, in "Economic Journal", n. 42, pp. 42-53
- ↑ Nicholas Kaldor (1939). "Capital Intensity and the Trade Cycle". Economica 6 (21): 40–66. doi:10.2307/2549077.
- ↑ Friedman, Milton. "The 'Plucking Model' of Business Fluctuations Revisited". Economic Inquiry: 171–177.
- ↑ The Prize in Economics 1974 - Press Release
- ↑ Charles T. Hatch, Inflationary Deception
- ↑ Ludwig von Mises, The Theory of Money and Credit, ISBN 0-913966-70-3 [1] See also: Jesus Huerta de Soto, Money, Bank Credit, and Economic Cycles, ISBN 0-945466-39-4 [2]
- ↑ Slivinski, Stephen. "Interview: George Selgin". The Federal Reserve Bank of Richmond. http://www.richmondfed.org/publications/research/region_focus/2009/winter/full_interview.cfm. Retrieved 2009-10-29.
- ↑ http://mises.org/journals/rae/pdf/RAE9_1_3.pdf Walter Block and Kenneth A. Garschina, "Hayek, Business Cycles and Fractional Reserve Banking: Continuing the De-Homogenization Process", Review of Austrian Economics, 1996.