Lecture 2a

Emergent Results of Artificial Economics, 2011

Banking systems based on the fractional reserve banking process have been in use for several hundred years. However textbook models of these systems do not include either loan repayments or loan defaults, and predict the evolution over time of a stable, asymptotically converging process governing credit and money supplies to the general economy for which there is no empirical evidence in long run monetary time series. In this paper we describe a computer simulation of a simplified model of a fractional reserve banking system that includes loan repayment. We show that this demonstrates several issues in the accepted model including instabilities arising from flows of money and credit between different banks, a discrepancy with the accepted value of the money multiplier within the system, and the appearance of a cyclic governing function over time.

Proceedings of the 33rd International Academic Conference, Vienna, 2017

This paper presents a critical analysis of whether banks can multiply their available existing deposits of money, that is their liability, and or whether banks can create new money and thereby increase money supply. Economists held different views. Some argue that individual bank cannot multiply credit. Some view individual bank can multiply credit if the borrowers purchase with the borrowed money and, then, the sellers deposit successively the same money in the same bank, the money can be multiplied to the extent of credit divided by reserve ratio times. Some others argue that banks don't need deposit at all; it can create money when it gives loan and deposit it in the borrower's account. They are of the view that "The money supply is created as 'fairy dust' produced by the banks individually, "out of thin air". (Werner 2014, P1). From the critical review of these theories, some important issues come to the surface. First, Money cannot be multiplied, second, money cannot be created out of thin air, third, what is increased is only the IOUs from the banks to their customers and from the customers to their banks, fourth, as banks are bound to keep certain percent of their reserve (deposit) in the custody of the central bank, in every successive deposit the quantity of money reduces and after the final deposit and lending all money will be placed at the custody of the central bank. No money will be there in the economy to repay the loan and its interest. Repeated depositing and lending of same money, thus, reduces the money available for economic activities.

necsi.edu

The Fractional Reserve Banking system has been used for several centuries by western banking systems to regulate the supply of loans against their deposits. It appears to be widely misunderstood, both within current economic theory and outside it. Modern economic textbooks base their explanation on a description that appears to have originated from a British parliamentary report authored in large part by John Maynard Keynes in 1931. This correctly describes how the system creates money through the re-deposit of loans made by banks, but predicts an evolution from initial conditions to a stable supply of money and credit for which there is no empirical evidence in the historical record. It notably fails to include the effects of either loan repayment and loan default, and consequently appears to incorrectly predict the long term behaviour of the process.

The view is often held that central banks have little or no connection to the society within which they exist, although their policy decisions impact directly on people, institutions and society. While this view has gained much attention in the media and in some academic circles, this article uses evidence from South Africa to show the fallacy of the view that 'money is created out of nothing' and that central banks are owned by and secretly controlled for the benefit of particular interest groups. Instead, it draws on insights in post-Keynesianism to demonstrate that the ownership of the South African Reserve Bank rests in the hands of private shareholders, but in an open and transparent manner, and that the Reserve Bank succeeds in ensuring that the system is supervised and sufficiently regulated in the public interest.

2011

Fractional Reserve Banking has played an integral role in regulating the supply of money and debt from the commercial banking system for several centuries. However its mechanical behaviour, and the consequent quantitative behaviour of bank deposits and loans over time as a result, appears to be a source of considerable confusion both within current economic theory and outside of it. The description currently provided by most economic textbooks is inadequate, since it only explains the expansion of deposits from initial conditions due to the re-deposit of loan capital, and fails to include either loan repayments, loan defaults, capital holdings or the consequences of inter-bank lending. It also predicts the convergence of the bank deposit and loan supply to an asymptotically stable level over time, in contradiction to empirical statistics from banking systems over the last 200 years which show continuous expansion of the total amount of bank deposits, and bank originated loans, punctuated by occasional rapid contractions.

Bio-sketch: Jacky Mallett is a Senior Research Scientist at the Icelandic Institute of Intelligent Machines, Reykjavik University. Her research revolves around the design and analysis of high performance, distributed computer systems, complex systems, simulation and modeling. Recently she has turned her attention to economics, and is the author of Threadneedle, a banking and economic system simulation framework, based on double entry book keeping, which allows the behaviour of Basel Regulated Banking Systems to be experimentally explored. Abstract: Banking systems based on ledger entries, held against fractional reserves of physical currency, using double-entry book-keeping have played a key role in Western monetary systems for several centuries. Over this period economic analysis has wrestled with both the esoteric treatment of the daily and familiar form of money within the banking system, and with understanding the economic role of the monetary system itself. A complex emergent system based on statistical multiplex-ing techniques introduced many centuries before they were developed in other fields, the banking system has consequently both influenced economic analysis, and been subject to it, as repeated attempts have been made to regulate its behaviour. Unfortunately, a long history of thought stretching from Hume to the current day repeatedly demonstrates that no economic theory of money has ever survived contact with the indignities that the daily operation of the banking system inflicts on the unit of economic measurement. We will argue that by introducing perturbations into the monetary system over time scales that were effectively invisible in day-today economic activity, the banking system has been a major obstacle preventing the development of a complete and causally based understanding of the monetary and financial framework underlying modern economies.

Procesos de Mercado Revista Europea de Economía Política, 2006

Abstract: Since a few decades several sub-disciplines within economics have witnessed a reorientation towards institutional analysis. This development has in particular also affected the fields of macroeconomics and monetary theory where it has led to several proposals for far-reaching financial and monetary reform. One of the more successful of these proposals advocates a fractional-reserve free banking system, that is, a system with no central bank, but with permission for the banks to operate with a fractional reserve. This article exposes ...

The Review of Austrian Economics, 2012

Anthony Evans and Steven Horwitz readily admit that their own understanding of monetary theory is imperfect, and do not even “attempt a rebuttal of [our] claims.” George Selgin accepts that some of the arguments we put forward in Bagus and Howden (2010) make for “interesting theory”. He fails to rebuff our claim that precautionary reserves are unable to constrain credit creation in a fractional reserve free banking system. While calling for us to provide historical evidence to validate the quibbles we put forward, Selgin himself overstates the evidence. He also claims that we have distorted what he has written, and that we use incorrect monetary theory. These allegations are false.

Jadaliyya, 2024

Jadaliyya New Texts Out Now (NEWTON) interview about Zainab's Traffic: Moving Saints, Selves, and Others across Borders (California, 2024). https://www.jadaliyya.com/Details/46271