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The purpose of central banking is to protect private banks from bank runs. Free banking operated prior to the introduction of central banking and it was less st

The purpose of central banking is to protect private banks from bank runs. Free banking operated prior to the introduction of central banking and it was less stable. In free banking a bank either had the capital to pay its depositors or it didn't, and if it didn't it failed. Although this was a less stable situation it meant that credit couldn't expand indefinitely because each time one of the periodic bank failures occurred it would would reduce the money supply. Another way to prevent credit expanding indefinitely would be to eliminate fractional reserve lending. But that wouldn't work out well for governments who often borrowed from banks to finance wars and other actions that were not supported by their citizens.

beefield 8y ago
It is difficult for me to see how fractional reserve lending could be eliminated given the current level of technology and economical incentives there are for fractional reserve lending. I mean, of course, you could say that regulated financial institutions are not allowed to do fractional reserve banking, but only result of that would be unregulated shadow banking institutions doing the same. (Which, as a side note, is something I would be more than curious to know from cryptocoiners, how they are going to stop fractional reserve banking to flood crypto currency supply, as for sure there is no regulator that is going to stop that.)
- brian_cloutier 8y ago
  > (Which, as a side note, is something I would be more than curious to know from cryptocoiners, how they are going to stop fractional reserve banking to flood crypto currency supply, as for sure there is no regulator that is going to stop that.) There will for sure be a regulator to stop that. In fact, there are already numerous regulators to stop it. If you want to hold deposits for your customers who happen to be California residents, then you are a bank and will need a banking license from the California Department of Business Oversight. California does not care what currency those deposits are denominated in. I expect this to be true everywhere else in the world, cryptocurrency is not some alternative universe where the old rules won't apply.
  - beefield 8y ago
    Financial engineers are quite talented in figuring out ways to create things that look like a duck, swim like a duck, and quack like a duck, but definitely are not ducks in a regulatory sense. And I am not familiar with Californian regulations, but I think there may be some challenges in trying to enforce the regulations if a californian makes a bitcoin deposit to a remote chinese "bank"?
- soVeryTired 8y ago
  Fractional reserve banking doesn't exist anymore. Banks lend against their loss-absorbing capital, not their reserves. Reserves are just used for inter-bank settlement. Frances Coppola [0] has written fairly extensively on this topic, as has the Bank of England [1] [0] http://www.coppolacomment.com/2017/10/money-creation-in-post-crisis-world.html http://www.coppolacomment.com/2017/10/money-creation-in-post... [1] https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
  - beefield 8y ago
    Coppola (and most other people claiming to "reveal" something profound of financial system when they tell that banks do technically not lend deposits forward) is confused in my humble opinion. There is no need for double entry accounting trickery nor loans to create money. All bank needs to do is to say that they owe me money and they have created money at that very moment.[1] Simple as that. And they do create money without lending all the time! It is nothing special. When a bank "pays interest" to your account, do you think there exist some new loan that is needed for that money to exist? Nope. Bank just decides that now it is time to add some more money to your account. That's it. Or when bank pays salaries to the personnel or dividends to the shareholders? Nope. No lending associated whatsoever. Just money added to their bank accounts. (for simplicity's sake, I assume that the stakeholders have their bank accounts in the same bank) [1] Which to me implies that there is not that much interesting happening at that point. I mean, a bank could enter a few centillion dollars to my account, and technically the money would be created. But in practice that is laughable. Nobody in their right mind would imagine a second that the bank would be solvent and actually be able to pay me the money, so in reality that money does not exists (no credit...). So even if the traditional model of banks lending deposits forward is technically even more wrong than the banks create money from double entry accounting trickery, in reality that describes much better what actually economically is happening in the financial industry. But that is just my opinion...
    - soVeryTired 8y ago
      Where are you getting this information from? Surely interest on deposits is accounted for as a funding cost and is paid out of the bank's revenues (same for staff costs). I don't know why you're calling double accounting "trickery". It's literally the way a bank operates. I mean, it's enshrined in law for god's sake. A public company has to publish accounts every year, and the double-entry analysis you see in most discussions of money creation shows where assets are entered on the balance sheet.
rufusroflpunch 8y ago
Banks runs may be part of the origin story of central Banks, but it's definitely not the only or main reason they exist. That's what deposit insurance is for, and in the case of the U.S., bank runs continiued for decades after the Federal Reserve was created. Central Banks exist to be a monopoly creator of money and credit for the purposes of manipulating the market. They exist to execute macroeconomic policy.
chiaro 8y ago
Central banking evolved as a series of hotfixes for various macroeconomic edge-cases. Bank runs is one. Wildly varying inflation rates is another.

beefield 8y ago

It is difficult for me to see how fractional reserve lending could be eliminated given the current level of technology and economical incentives there are for fractional reserve lending. I mean, of course, you could say that regulated financial institutions are not allowed to do fractional reserve banking, but only result of that would be unregulated shadow banking institutions doing the same. (Which, as a side note, is something I would be more than curious to know from cryptocoiners, how they are going to stop fractional reserve banking to flood crypto currency supply, as for sure there is no regulator that is going to stop that.)

brian_cloutier 8y ago
> (Which, as a side note, is something I would be more than curious to know from cryptocoiners, how they are going to stop fractional reserve banking to flood crypto currency supply, as for sure there is no regulator that is going to stop that.) There will for sure be a regulator to stop that. In fact, there are already numerous regulators to stop it. If you want to hold deposits for your customers who happen to be California residents, then you are a bank and will need a banking license from the California Department of Business Oversight. California does not care what currency those deposits are denominated in. I expect this to be true everywhere else in the world, cryptocurrency is not some alternative universe where the old rules won't apply.
- beefield 8y ago
  Financial engineers are quite talented in figuring out ways to create things that look like a duck, swim like a duck, and quack like a duck, but definitely are not ducks in a regulatory sense. And I am not familiar with Californian regulations, but I think there may be some challenges in trying to enforce the regulations if a californian makes a bitcoin deposit to a remote chinese "bank"?
soVeryTired 8y ago
Fractional reserve banking doesn't exist anymore. Banks lend against their loss-absorbing capital, not their reserves. Reserves are just used for inter-bank settlement. Frances Coppola [0] has written fairly extensively on this topic, as has the Bank of England [1] [0] http://www.coppolacomment.com/2017/10/money-creation-in-post-crisis-world.html http://www.coppolacomment.com/2017/10/money-creation-in-post... [1] https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
- beefield 8y ago
  Coppola (and most other people claiming to "reveal" something profound of financial system when they tell that banks do technically not lend deposits forward) is confused in my humble opinion. There is no need for double entry accounting trickery nor loans to create money. All bank needs to do is to say that they owe me money and they have created money at that very moment.[1] Simple as that. And they do create money without lending all the time! It is nothing special. When a bank "pays interest" to your account, do you think there exist some new loan that is needed for that money to exist? Nope. Bank just decides that now it is time to add some more money to your account. That's it. Or when bank pays salaries to the personnel or dividends to the shareholders? Nope. No lending associated whatsoever. Just money added to their bank accounts. (for simplicity's sake, I assume that the stakeholders have their bank accounts in the same bank) [1] Which to me implies that there is not that much interesting happening at that point. I mean, a bank could enter a few centillion dollars to my account, and technically the money would be created. But in practice that is laughable. Nobody in their right mind would imagine a second that the bank would be solvent and actually be able to pay me the money, so in reality that money does not exists (no credit...). So even if the traditional model of banks lending deposits forward is technically even more wrong than the banks create money from double entry accounting trickery, in reality that describes much better what actually economically is happening in the financial industry. But that is just my opinion...
  - soVeryTired 8y ago
    Where are you getting this information from? Surely interest on deposits is accounted for as a funding cost and is paid out of the bank's revenues (same for staff costs). I don't know why you're calling double accounting "trickery". It's literally the way a bank operates. I mean, it's enshrined in law for god's sake. A public company has to publish accounts every year, and the double-entry analysis you see in most discussions of money creation shows where assets are entered on the balance sheet.

rufusroflpunch 8y ago

Banks runs may be part of the origin story of central Banks, but it's definitely not the only or main reason they exist. That's what deposit insurance is for, and in the case of the U.S., bank runs continiued for decades after the Federal Reserve was created. Central Banks exist to be a monopoly creator of money and credit for the purposes of manipulating the market. They exist to execute macroeconomic policy.

chiaro 8y ago

Central banking evolved as a series of hotfixes for various macroeconomic edge-cases. Bank runs is one. Wildly varying inflation rates is another.