Couldn't it be said that fractional reserve banks create the perception of there being more money?
Just look at how persistently people retain the belief that banks create money. Wouldn't those same people consider their lines of credit as being "good as cash", and react to them in the same way as they do to getting more money, i.e. by spending more, and thus driving up prices?
What I'm curious about is how would this change the big picture of our economic situation. And why do people perpetuate this myth of fractional reserve banking as a way to create new money?
I'm not sure why there is so much disinformation/propaganda related to the banking system (often coming form "official" sources). I don't have an answer for that yet, but I do consider it to be a very intriguing question.
As far as the big picture of our economic system, I'm just trying to understand it. I don't think the way most people currently understand it is very empirical. They get lost in a type of economic language that obscures what is literally happening.
If i deposit 10$ and the bank lends out $ and i still have an account that says 10$ then there is now 15$ demand deposits count twords the money supply! I dont see what the disconnect is.
The major difference is cash is legal tender, the demand deposit is not. You can only use the deposit *like* money when the person you trade with agrees to do so. This happens when you pay per cheque or credit/debit card.
"use the deposit like money" Money is anything that is used as a medum of exchange throught out an economy. It is money. Also, its infact defined as part of the money supply. ITs money in every way. That legal tender laws dont apply is not realivant to the fact that fractional reserve banking increases the money supply.
I would argue that a debt is FUTURE money (not money in the present). If you sell a debt, you are not creating money, any more than selling a hot dog creates money. What you are really doing is borrowing money (essentially). The money isn't created, it has to come from the person you are selling the debt to.
Insofar as what I have specifically quoted, there's nothing that Austrians would disagree with. I have heard many Austrian economists explain bank runs (how they happen and what the effects are). Austrians fully acknowledge what the effects of bank runs are. This is why I find it so strange that they (some of them) simultaneously think commercial banks can create money, or that banks are money warehouses. Those two ideas contradict each other.
Has money been created if people are given to believe that they have money in the banks, when it doesn't exist? If no, OK but this perception still affects prices.
For clarity, when I said "this perception" I didn't mean the perception that banks create money, or anything like that, I meant the perception that their bank account is meaningful. People don't differentiate (in value) between bank deposits and cash, when, if no more money could be printed, the latter should be many times more valuable.
How do you explain the loss in purchasing power of the dollar over the last century, is it to do with fractional-reserve banking, or something else?
I've always assumed the the loss in the dollar's purchasing power had to do with the Fed increasing the money supply. I'm not convinced that commercial banks have anything (at least directly) to do with it.
However, I'm not sure that price inflation is purely the result of an increase in the money supply. It may also be increased by the velocity of money.
Commercial banks DO increase the velocity of money (especially because the Fed system is monopolistic, and creates artificial demand).
There's a concept in economics called the "equilibrium price", from which prices can deviate in one of two directions. My suspicion is that the velocity of money effects this process. I'm not sure that's a bad thing though.
Anyways... I don't fully understand it yet myself. I just have a feeling that it's the next thing I need to look into.
Let's say you go into a bank for a loan, the bank agrees to credit your account with a couple of hundred thousand dollars and you agree to the repayments. Luckily for you, you are the 1000th customer that week and they decide to forgive the repayments so you have the money (the deposit account) free and clear.
Would this affect the price you would pay for any incremental dollar?
So the quantity of demand deposits in the system affects the price people are willing to pay, or can receive for cash, yes? And since it is the commercial banks which are responsible for the quantity of demand deposits in the system, it is they that are largely responsible for the loss in purchasing power of the dollar?
A demand deposit is basically just a loan. So... if more people are willing to lend out their money (by depositing it in a bank), then yes, there will be more money available for people to spend. However, this just increases the velocity of money. In other words, people are spending money instead of saving it.
I'm not sure (yet), if this causes price inflation. I think it gets kinda complicated.
I also suspect it's cyclical, so it may cause prices to rise at first, but then fall afterwards.
On top of that, there appears to be a lot of disinformation/propganda put out by the Fed iteslef. That certainly doesn't help, but again... just because the Fed claims the banking system works a certain way, doesn't mean it actually works that way. Pretty much everything the Fed (representative of the Fed, and the Fed's official literature) says is propaganda.
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theVAGINAntichrist 1 year ago
Couldn't it be said that fractional reserve banks create the perception of there being more money?
Just look at how persistently people retain the belief that banks create money. Wouldn't those same people consider their lines of credit as being "good as cash", and react to them in the same way as they do to getting more money, i.e. by spending more, and thus driving up prices?
PanzerDivisionBOM 2 years ago
I'm going to clarify all these issues soon in an essay. My position will become more clear. I just haven't gotten around to it yet.
D4Shawn 2 years ago
Alright, looking forward to it. : )
PanzerDivisionBOM 2 years ago
What I'm curious about is how would this change the big picture of our economic situation. And why do people perpetuate this myth of fractional reserve banking as a way to create new money?
Masturbating4America 2 years ago
Because it is. lol.
spawk1993 2 years ago
I'm not sure why there is so much disinformation/propaganda related to the banking system (often coming form "official" sources). I don't have an answer for that yet, but I do consider it to be a very intriguing question.
As far as the big picture of our economic system, I'm just trying to understand it. I don't think the way most people currently understand it is very empirical. They get lost in a type of economic language that obscures what is literally happening.
D4Shawn 2 years ago
The deposit is money !
If i deposit 10$ and the bank lends out $ and i still have an account that says 10$ then there is now 15$ demand deposits count twords the money supply! I dont see what the disconnect is.
spawktalk 2 years ago
The major difference is cash is legal tender, the demand deposit is not. You can only use the deposit *like* money when the person you trade with agrees to do so. This happens when you pay per cheque or credit/debit card.
Kratzbyrste 2 years ago
"use the deposit like money" Money is anything that is used as a medum of exchange throught out an economy. It is money. Also, its infact defined as part of the money supply. ITs money in every way. That legal tender laws dont apply is not realivant to the fact that fractional reserve banking increases the money supply.
spawk1993 2 years ago
OK, but where is the problem?
Kratzbyrste 2 years ago
I would argue that a debt is FUTURE money (not money in the present). If you sell a debt, you are not creating money, any more than selling a hot dog creates money. What you are really doing is borrowing money (essentially). The money isn't created, it has to come from the person you are selling the debt to.
D4Shawn 2 years ago
the wikipedia article is written by socialist Krugmanites, not austrians.
YoAnarchy 2 years ago
Insofar as what I have specifically quoted, there's nothing that Austrians would disagree with. I have heard many Austrian economists explain bank runs (how they happen and what the effects are). Austrians fully acknowledge what the effects of bank runs are. This is why I find it so strange that they (some of them) simultaneously think commercial banks can create money, or that banks are money warehouses. Those two ideas contradict each other.
D4Shawn 2 years ago
Has money been created if people are given to believe that they have money in the banks, when it doesn't exist? If no, OK but this perception still affects prices.
YoAnarchy 2 years ago
a) Most people don't give a crap about economics.
b) Most people don't give a crap about how the banking system works.
c) Most people don't like to read fine print.
d) When people sign up for a bank account, they don't want to sit through a lecture on how the banking system works.
The fact that people don't give a hoot about how the banking system works, doesn't change the way the banking system works.
I'm trying to explain how it actually works (not how people think it works).
SHAWNONOMICS 2 years ago
For clarity, when I said "this perception" I didn't mean the perception that banks create money, or anything like that, I meant the perception that their bank account is meaningful. People don't differentiate (in value) between bank deposits and cash, when, if no more money could be printed, the latter should be many times more valuable.
How do you explain the loss in purchasing power of the dollar over the last century, is it to do with fractional-reserve banking, or something else?
YoAnarchy 2 years ago
I've always assumed the the loss in the dollar's purchasing power had to do with the Fed increasing the money supply. I'm not convinced that commercial banks have anything (at least directly) to do with it.
However, I'm not sure that price inflation is purely the result of an increase in the money supply. It may also be increased by the velocity of money.
Commercial banks DO increase the velocity of money (especially because the Fed system is monopolistic, and creates artificial demand).
D4Shawn 2 years ago
Why would velocity affect price? Is it like the mark-down on a 2nd hand car?
YoAnarchy 2 years ago
I'm not sure. I'm going to research that next.
There's a concept in economics called the "equilibrium price", from which prices can deviate in one of two directions. My suspicion is that the velocity of money effects this process. I'm not sure that's a bad thing though.
Anyways... I don't fully understand it yet myself. I just have a feeling that it's the next thing I need to look into.
Is there such a thing as TOO MUCH spending?
I'm not sure.
D4Shawn 2 years ago
Let's say you go into a bank for a loan, the bank agrees to credit your account with a couple of hundred thousand dollars and you agree to the repayments. Luckily for you, you are the 1000th customer that week and they decide to forgive the repayments so you have the money (the deposit account) free and clear.
Would this affect the price you would pay for any incremental dollar?
YoAnarchy 2 years ago
Most likely.
If I got a bunch of free money, I would no longer be in need of money. Thus, I would be more likely to put my money towards other things.
The more scarce a good becomes, the higher price people will pay. In your example, we have the opposite effect increased supply).
D4Shawn 2 years ago
So the quantity of demand deposits in the system affects the price people are willing to pay, or can receive for cash, yes? And since it is the commercial banks which are responsible for the quantity of demand deposits in the system, it is they that are largely responsible for the loss in purchasing power of the dollar?
YoAnarchy 2 years ago
A demand deposit is basically just a loan. So... if more people are willing to lend out their money (by depositing it in a bank), then yes, there will be more money available for people to spend. However, this just increases the velocity of money. In other words, people are spending money instead of saving it.
I'm not sure (yet), if this causes price inflation. I think it gets kinda complicated.
I also suspect it's cyclical, so it may cause prices to rise at first, but then fall afterwards.
D4Shawn 2 years ago
So it is because of an increase in velocity that extra demand deposits affect the price of cash?
YoAnarchy 2 years ago
I don't have a definite answer for you though. There are some things I need to look into.
Essentially, what we are asking is: Is there such a thing as too much spending. Does spending cause inflation?
D4Shawn 2 years ago
Would money suddenly appearing in your account at the bank increase the velocity of money in the economy?
YoAnarchy 2 years ago
On top of that, there appears to be a lot of disinformation/propganda put out by the Fed iteslef. That certainly doesn't help, but again... just because the Fed claims the banking system works a certain way, doesn't mean it actually works that way. Pretty much everything the Fed (representative of the Fed, and the Fed's official literature) says is propaganda.
SHAWNONOMICS 2 years ago
Is the price of cash affected by the quantity of demand deposits circulating in the system?
YoAnarchy 2 years ago
Seems like I should get my money out of the bank and keep it in a lock box at the house. Might be better.
UcanbeGOD 2 years ago
lolcat!
dmp1ce 2 years ago 2