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This is literally the inevitable conclusion of any economic system based on fractional reserve banking where chartered banks are able to produce new currency fr

This is literally the inevitable conclusion of any economic system based on fractional reserve banking where chartered banks are able to produce new currency from nothing on their balance sheets as debt. There will never be enough money supply (M0) to pay off debt. And unlike more civilized cultures like the ancient Babylonians we don't have periodic jubilees for debt forgiveness for human people.

karpierz 3y ago
Given that society has relied on fractional reserve banking since the 1600s, what is the alternative banking process you had in mind?
- jesusofnazarath 3y ago
  [dead]
- creatonez 3y ago
  You don't necessarily need to switch off of such a system. But you do need to properly characterize it, rather than having nobel prize winning economists (and crappy news articles like this) get twisted into a pretzel trying to maintain incorrect dogmas about how it works.
- dragontamer 3y ago
  Ehhh... I don't like either of your characterizations. USA started on... very chaotic period. Continental Dollar was a failure in 1780s and the citizenry largely used the Spanish Peso, at least until the next Dollar came out IIRC. Eventually US Banking solidified upon the dual-standard of silver and gold. But... not really? A lot of those banks didn't actually hold that physical silver or gold, it was all virtual notes and paper pretending to be silver or gold. (Is this fractional reserve banking but on the silver standard? Depends on who you ask) In the 1880s (if I got that right), the Silver standard was eradicated and the USA was largely on the gold standard. We were in a pretty turbulent time regardless, until the big-whammy hit in 1930s. While "technically" on the Gold standard, FDR then issued Executive Order 6102 making gold illegal. Simultaneously, from the 1910s in this period, the US banking system was transitioning to the modern Federal Reserve system. I'm not sure exactly when fractional reserve banking hit in the Federal Reserve system, but I remember some important laws passing in the 1930s as well. Its all a moving target and difficult to say "X happened" at a particular point of history. It was all happening at the same time. Different banks, different parts of the country, different states were in a complex web of Silver, Gold, dollars, independent notes, and so forth. I'd personally say by the 1930s, with Gold becoming literally illegal, was when the USA fully transitioned into fractional reserve banking for the masses. Gold remained illegal until Nixon re-legalized it in the 1970s, but also finally removed gold from officially backing our currency (granted: with Gold being illegal, it didn't practically back our currency anymore for decades, so Nixon just made Gold float to the market rate and match reality, as opposed to pretending that we had a gold-backed system). But that's just my opinion on the matter. Others can draw lines in the sand and almost arbitrarily argue any of these points we were "doing fractional reserve banking", or "on the gold standard", or whatever.
- superkuh 3y ago
  Because fractional reserve banking is the least worst way and it's very unlikely to change we have to acknowledge this power bias and mitigate it. If chartered consumer bank is creating new M0 money supply as debt through loans or other processes it should not be legally allowed to be involved in stock and other market investments. Deposit and investment banks should not legally be allowed to mix. The immense profits and power to create new currency as debt should not have all it's incentives and value siphoned off into non-productive market manipulations and vehicles. In the USA this is one first step, one we've taken before in recent history, that needs to be taken again to mitigate the centralized (~4k chartered banks in the USA) money supply creation issue of fractional reserve banking.
  - ethbr0 3y ago
    "stock and market investments" vs other uses of money (e.g. loans) is a difficult distinction Presumably this would just look like deposit banks only ever... what? Buying US government debt?
- NoMoreNicksLeft 3y ago
  I've tried very hard these past few decades to understand what fractional reserve banking is without spiraling into becoming some whackjob conspiracy theorist. Can someone tell me if this is substantially wrong? Through some combination of poorly chosen policies in centuries past, social inertia, and perhaps even a little ignorance even on the part of the experts, we now have a society that has normalized the idea that banks get to authorize people (and companies) to receive resources they don't currently have enough cash to purchase outright. When they authorize this, they pay the seller with imaginary money that they say they have (but don't really have). Thus the seller is (most of the time) made whole. In return for this authorization, the borrowers pay the bank that principal back, along with interest. In some more conservative ways of thinking, interest is the idea that when a lender risks his or her money loaning it to you, they should receive compensation for that risk. But the bank didn't have the money to loan to them either. Whether this means the bank is taking less risk, or more risk, I can't even properly process at this point... but regardless of any hypothetical risk that it might be taking, what the interest really is for is nothing more than the fee for them authorizing that the person/company receive those resources. On that point I'm quite certain, the interest pays that "fee". I do not believe this is a particularly biased take on the matter. I don't believe I've injected much politics into it. I think this system (such as it is) has arisen organically, and without much in the way of design or any group steering it to this. It seems quite insane to me. Beyond the bounds of mere lunacy. Lovecraft never spoke of eldritch abominations so horrifying that they might cause a madness as profound as this. Why are we allowing banks to do this? I get it that society needs someone to do this function. But... 1. Why are banks and their staff the most qualified to undertake the function? 2. How did legislatures and even monarchs ever allow this particular power to slip away from them, without even so much as a debate about why they couldn't be trusted to do it? 3. Even if we need this functionality, how do we know how often it should happen (and for whom), and why would this system both keep it from happening not enough and from happening too much? Especially since banks are incentivized to lend as much as possible in many (maybe even all) circumstances? Isn't this sort of like putting the crackhead in charge of the medicine locker key? 4. Why is no one talking about it in this way? Maybe I'm just fucked in the head, but I've never heard it explained like this, and it makes me wonder if I've got it all wrong. But none of the extant explanations are less crazy-sounding, not that I've ever found.
sebzim4500 3y ago
>we don't have periodic jubilees for debt forgiveness for human people. How would that even work? Why would you ever repay debt if you could just wait for it to be forgiven?
- quickthrower2 3y ago
  Also you would need to technically zero out all positive bank accounts, since they are debt owed to people by the bank.
  - detourdog 3y ago
    This might not be a banking system. This might be part of a social system. A civil society used to have more value than a functioning banking system. There were also ideas that the corner of the ones crop fields couldn't be harvested. These corners should be for people with nothing and the bests of the land.
    - quickthrower2 3y ago
      Yes. I think before modern money, cancelling out debts would be simpler (just throw some runes in the sea, or whatever), and they didn't even have mortgages. But now everything is debt and everything is financialized, including the debt itself. I reckon cancelling debt would be great for the rich who are probably leveraged to the hilt to avoid selling anything, to avoid taxes. It would be decent for the middle class who keep their houses debt free. And bad for poor people, who just get this months payday loan wiped out, so they can afford that car repair, and still need to pay rent. House prices would double, due to serviceability increases, so they have less chance of owning!
- BitwiseFool 3y ago
  And on the flip side, why would you ever loan money to someone if you knew you would be forced to forgive some portion of it?
- detourdog 3y ago
  It's a really old idea that if you haven't gotten your value back by x period of years give up the value is gone. It could be that it's older cultures that operated this way. The idea is that a loan turns into slavery at some point and that is unacceptable. There is also the aspect that if you could go this long without the loan being repaid you have enough already.
nine_zeros 3y ago
This. If the only way for more money (credit) to come into existence is debt, then someone will have to keep taking debt. For past debts to be paid off, more debt needs to be created. How exactly is this a stable system? Who the fuck thought this would last?
- DirkH 3y ago
  I mean, it will last long enough for the generation who started it to get rich off of it? Right?

karpierz 3y ago

Given that society has relied on fractional reserve banking since the 1600s, what is the alternative banking process you had in mind?

jesusofnazarath 3y ago
[dead]
creatonez 3y ago
You don't necessarily need to switch off of such a system. But you do need to properly characterize it, rather than having nobel prize winning economists (and crappy news articles like this) get twisted into a pretzel trying to maintain incorrect dogmas about how it works.
dragontamer 3y ago
Ehhh... I don't like either of your characterizations. USA started on... very chaotic period. Continental Dollar was a failure in 1780s and the citizenry largely used the Spanish Peso, at least until the next Dollar came out IIRC. Eventually US Banking solidified upon the dual-standard of silver and gold. But... not really? A lot of those banks didn't actually hold that physical silver or gold, it was all virtual notes and paper pretending to be silver or gold. (Is this fractional reserve banking but on the silver standard? Depends on who you ask) In the 1880s (if I got that right), the Silver standard was eradicated and the USA was largely on the gold standard. We were in a pretty turbulent time regardless, until the big-whammy hit in 1930s. While "technically" on the Gold standard, FDR then issued Executive Order 6102 making gold illegal. Simultaneously, from the 1910s in this period, the US banking system was transitioning to the modern Federal Reserve system. I'm not sure exactly when fractional reserve banking hit in the Federal Reserve system, but I remember some important laws passing in the 1930s as well. Its all a moving target and difficult to say "X happened" at a particular point of history. It was all happening at the same time. Different banks, different parts of the country, different states were in a complex web of Silver, Gold, dollars, independent notes, and so forth. I'd personally say by the 1930s, with Gold becoming literally illegal, was when the USA fully transitioned into fractional reserve banking for the masses. Gold remained illegal until Nixon re-legalized it in the 1970s, but also finally removed gold from officially backing our currency (granted: with Gold being illegal, it didn't practically back our currency anymore for decades, so Nixon just made Gold float to the market rate and match reality, as opposed to pretending that we had a gold-backed system). But that's just my opinion on the matter. Others can draw lines in the sand and almost arbitrarily argue any of these points we were "doing fractional reserve banking", or "on the gold standard", or whatever.
superkuh 3y ago
Because fractional reserve banking is the least worst way and it's very unlikely to change we have to acknowledge this power bias and mitigate it. If chartered consumer bank is creating new M0 money supply as debt through loans or other processes it should not be legally allowed to be involved in stock and other market investments. Deposit and investment banks should not legally be allowed to mix. The immense profits and power to create new currency as debt should not have all it's incentives and value siphoned off into non-productive market manipulations and vehicles. In the USA this is one first step, one we've taken before in recent history, that needs to be taken again to mitigate the centralized (~4k chartered banks in the USA) money supply creation issue of fractional reserve banking.
- ethbr0 3y ago
  "stock and market investments" vs other uses of money (e.g. loans) is a difficult distinction Presumably this would just look like deposit banks only ever... what? Buying US government debt?
NoMoreNicksLeft 3y ago
I've tried very hard these past few decades to understand what fractional reserve banking is without spiraling into becoming some whackjob conspiracy theorist. Can someone tell me if this is substantially wrong? Through some combination of poorly chosen policies in centuries past, social inertia, and perhaps even a little ignorance even on the part of the experts, we now have a society that has normalized the idea that banks get to authorize people (and companies) to receive resources they don't currently have enough cash to purchase outright. When they authorize this, they pay the seller with imaginary money that they say they have (but don't really have). Thus the seller is (most of the time) made whole. In return for this authorization, the borrowers pay the bank that principal back, along with interest. In some more conservative ways of thinking, interest is the idea that when a lender risks his or her money loaning it to you, they should receive compensation for that risk. But the bank didn't have the money to loan to them either. Whether this means the bank is taking less risk, or more risk, I can't even properly process at this point... but regardless of any hypothetical risk that it might be taking, what the interest really is for is nothing more than the fee for them authorizing that the person/company receive those resources. On that point I'm quite certain, the interest pays that "fee". I do not believe this is a particularly biased take on the matter. I don't believe I've injected much politics into it. I think this system (such as it is) has arisen organically, and without much in the way of design or any group steering it to this. It seems quite insane to me. Beyond the bounds of mere lunacy. Lovecraft never spoke of eldritch abominations so horrifying that they might cause a madness as profound as this. Why are we allowing banks to do this? I get it that society needs someone to do this function. But... 1. Why are banks and their staff the most qualified to undertake the function? 2. How did legislatures and even monarchs ever allow this particular power to slip away from them, without even so much as a debate about why they couldn't be trusted to do it? 3. Even if we need this functionality, how do we know how often it should happen (and for whom), and why would this system both keep it from happening not enough and from happening too much? Especially since banks are incentivized to lend as much as possible in many (maybe even all) circumstances? Isn't this sort of like putting the crackhead in charge of the medicine locker key? 4. Why is no one talking about it in this way? Maybe I'm just fucked in the head, but I've never heard it explained like this, and it makes me wonder if I've got it all wrong. But none of the extant explanations are less crazy-sounding, not that I've ever found.

sebzim4500 3y ago

>we don't have periodic jubilees for debt forgiveness for human people. How would that even work? Why would you ever repay debt if you could just wait for it to be forgiven?

quickthrower2 3y ago
Also you would need to technically zero out all positive bank accounts, since they are debt owed to people by the bank.
- detourdog 3y ago
  This might not be a banking system. This might be part of a social system. A civil society used to have more value than a functioning banking system. There were also ideas that the corner of the ones crop fields couldn't be harvested. These corners should be for people with nothing and the bests of the land.
  - quickthrower2 3y ago
    Yes. I think before modern money, cancelling out debts would be simpler (just throw some runes in the sea, or whatever), and they didn't even have mortgages. But now everything is debt and everything is financialized, including the debt itself. I reckon cancelling debt would be great for the rich who are probably leveraged to the hilt to avoid selling anything, to avoid taxes. It would be decent for the middle class who keep their houses debt free. And bad for poor people, who just get this months payday loan wiped out, so they can afford that car repair, and still need to pay rent. House prices would double, due to serviceability increases, so they have less chance of owning!
BitwiseFool 3y ago
And on the flip side, why would you ever loan money to someone if you knew you would be forced to forgive some portion of it?
detourdog 3y ago
It's a really old idea that if you haven't gotten your value back by x period of years give up the value is gone. It could be that it's older cultures that operated this way. The idea is that a loan turns into slavery at some point and that is unacceptable. There is also the aspect that if you could go this long without the loan being repaid you have enough already.

nine_zeros 3y ago

This. If the only way for more money (credit) to come into existence is debt, then someone will have to keep taking debt. For past debts to be paid off, more debt needs to be created. How exactly is this a stable system? Who the fuck thought this would last?

DirkH 3y ago
I mean, it will last long enough for the generation who started it to get rich off of it? Right?