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Fractional reserve banking has a limit, because the bank always need to keep said fraction. So that creates inflation up to a point - then it stops. The governm

Fractional reserve banking has a limit, because the bank always need to keep said fraction. So that creates inflation up to a point - then it stops. The government can print infinite money without end, creating consistent, never-ending debasement. That's the difference. The banking system on its own could not account for consistently rising prices for the past hundred (or however many) years.

nhaehnle 13y ago
Fractional reserve banking has a limit, because the bank always need to keep said fraction. The thing is, though, that banks hand out loans independently of how much reserves they have. Only afterwards do they check whether they need more reserves, and obtain them if necessary. This is even reflected in the internal organization of banks: Loans and reserves are in different departments. The central bank creates new reserves as a reaction to increased demand by banks as part of its normal operation. It is not a political decision to do so. The political decision is to set the target interest rate (Fed funds rate). The money supply fluctuates to accommodate the demand of borrowers given that interest rate. Because of that, private banks can and do account for the monetary expansion that goes hand in hand with rising prices. However, it is probably more accurate to say that banks accommodate rising prices, i.e. the causality goes from rising prices to an increase of money (that is, causality goes from right to left in MV = PQ). Most importantly, firms use more credit to cover their operating expenses as prices rise, and home owners take out larger mortgages as house prices rise, etc. This increase in the loan volume as a reaction to price increases is what drives the growth in the money supply. All this about reserves is of course very far away from the fairy-tale stories of banks taking in deposits and loaning them out. Unfortunately, banking tends to be pretty opaque, and you really need to dig into this stuff to understand it. People like the MMT bloggers have popularized a proper understanding though, so it's not as difficult as it used to be (the MMT bloggers like Bill Mitchell and Randall Wray tend to have blind spots in other areas, but they have studied the monetary system pretty thoroughly and know what they're writing about in that regard).

nhaehnle 13y ago

Fractional reserve banking has a limit, because the bank always need to keep said fraction. The thing is, though, that banks hand out loans independently of how much reserves they have. Only afterwards do they check whether they need more reserves, and obtain them if necessary. This is even reflected in the internal organization of banks: Loans and reserves are in different departments. The central bank creates new reserves as a reaction to increased demand by banks as part of its normal operation. It is not a political decision to do so. The political decision is to set the target interest rate (Fed funds rate). The money supply fluctuates to accommodate the demand of borrowers given that interest rate. Because of that, private banks can and do account for the monetary expansion that goes hand in hand with rising prices. However, it is probably more accurate to say that banks accommodate rising prices, i.e. the causality goes from rising prices to an increase of money (that is, causality goes from right to left in MV = PQ). Most importantly, firms use more credit to cover their operating expenses as prices rise, and home owners take out larger mortgages as house prices rise, etc. This increase in the loan volume as a reaction to price increases is what drives the growth in the money supply. All this about reserves is of course very far away from the fairy-tale stories of banks taking in deposits and loaning them out. Unfortunately, banking tends to be pretty opaque, and you really need to dig into this stuff to understand it. People like the MMT bloggers have popularized a proper understanding though, so it's not as difficult as it used to be (the MMT bloggers like Bill Mitchell and Randall Wray tend to have blind spots in other areas, but they have studied the monetary system pretty thoroughly and know what they're writing about in that regard).