As always, my views are just a layman's perspective with no claims to expertise.

@RedSky

You correctly point out the intent of the reform, to stop fractional banking which they diagnosed as a primary driver of volatility within the financial sector. They want to revert back to a system where the banks were intermediaries the way you described it: deposit leads to loan, in this case at a maximum ratio of 1:1, no leveraging.

Unlike the current system where bank deposits are mostly created by banks themselves -- the act of lending creates deposits. In fact, deposits are liabilities of the banks, not assets. Reserves are assets, but they are only traded between entities with accounts at the central bank. And, in normal times, are provided quite freely by the central bank in exchange for other assets.

Anyway, "Vollgeld" places the ability to create money exclusively in the hands of the central bank. Controlling the amount of money in circulation was a concept most central banks were eager to drop during the '90s, since it never worked. Demand for credit is volatile, central control is inflexible, even if they could somehow quanfity the need for it ex ante -- which they can't. Hell, they can't even do it ex post. You can't quantify the need for additional money beyond what's already in circulation if the central bank's action set the conditions for a dynamic development in the first place. You can't know in advance what increases in production need to be financed, you can't know how demand for liquidity evolves over time. The quantity theory of money was buried for a reason, it ignores reality.

Anyway, I applaud the proponents of Vollgeld for pointing out the dysfunctionalities of our fractional reserve system as well as how questionable it is, ethically, to hand over so much power to a small cabal of financial elites. In fact, I'm quite ecstatic to hear them point out that a nation with a sovereign, free-floating currency does not need to finance deficits through banks -- how very MMT of them. Go OMF!

But their proposed solutions are a fallback to "the market will stabilise itself if left alone, a completely independant central bank will keep the quantity of money in circulation at just the right amount". This hands-off approach resulted in absolute devastation whenever it was applied. They want to turn the state into a regular economic subject that has to adapt to the amount of money currently in circulation. It's (the illusion of) control by technocrats, where you get to disguise policies against the masses as "economic neccessities". Basically the German Eurozone on steroids.

As for the absolute independence of the central bank: you are right, that is not strictly part of the Swiss Vollgeld initiative. But it's what almost every proponent of Vollgeld within the German-speaking circles argues for, including major drivers behind the initiative. Can't let politicians have control over our central bank or else they'll abuse it for populist policies.

They are true believers in technocrat solutions, completely seperate from democratic control.

PS: I cut down my ranting to a minimum of MMT arguments, given that many people see it as just a different sort of voodoo economics.

Edit: Elizabeth Warren's 21st Century Glass Steagal Act strikes me as a rather promising way to solve a great number of problems with the financial industry without going back into the realm of monetarism.

She has about the level of understanding I would expect from a bright 12 year old. If her parents are feeding her this, they have a "bright 12 year old"'s understanding of the financial system. About the same as Ron Paul.

Canada has debt because it spends more than it takes in. Doing so in recent years has been mostly a good decision - and generally it's hard to argue with Canadian fiscal and bank-regulatory policy given its recent performance. We've weathered the recession better than most other places (partly this is due to the our natural resources and industry mix, but not completely).

Fractional reserve banking has a complicated effect on the economy. It's not easy to fit this into a 5 minute talk, but it allows for beneficial ways of managing and growing the economy.

If you think banks are just stealing money, go start a bank or invest in one. You'll find that they're businesses like any other, and that Canadian banks are mostly well regulated, and mostly make their money in responsible ways. Banks are not magic, and individuals can leverage money in many of the same ways they do.

On the flip side, there's been tremendous misbehavior by American financial companies (most of these aren't best described as banks) in the last decade, supported by bad laws. Some people got very rich while the economy got screwed to Hell. This had nothing to do with the basic ideas of fractional reserve banking, and everything to do with naked dishonesty, regulatory capture, and plain old corruption.

Okay, explain how this magical fixed money system works? What would be used to fix the money supply? How could we ensure that people don't decide to keep their money in banks, where the banks can issue "bank notes" which people then use as surrogates for your fixed money supply? When we had a specie backed currency, these problems still existed.

Also, yes, the derivative securities market is the largest driver of inflation out there at the moment. Many estimates put the value of all these unregulated securities (that's right, poof, I have money, securities) at around $600 Trillion dollars. Makes our debt seem kinda trite doesn't it?

>> ^davidraine:

First, to my original point, a fixed money supply does not allow for fractional reserve banking -- By definition, fractional reserve banking varies the supply of money. Second, I don't remember massive inflation caused by the sale of unregulated securities, though I do remember a massive speculative bubble bursting and an economic crash.
>> ^bmacs27:

Fractional reserve banking has nothing to do with the medium of exchange. Banks have engaged in fractional reserve banking since long before the abolition of the gold standard. A better argument is that the securitization of debt (deregulation of finance) has caused massive inflation by encouraging the underwriting of bad debt by allowing the risk to be sold off.

First, I'm not proposing anything -- I was just pointing out that inflation and speculative bubbles could be largely mitigated making the supply of money fixed. Second, a fixed money supply does not presuppose (or require) price fixing, so you can still use various property as a value store.
>> ^bmacs27:
Further, the video doesn't seem to explain that in our current system I can use my wages to purchase gold at market, and can thus use it as a store of value (if I actually believed it to be fairly valued against e.g. wages or real estate). In the government price fixing system you are proposing that wouldn't be possible, and the value of my gold would be subject to systemic risk (bad policy) just like currency is today.
>> ^davidraine:
I don't think they're calling for anything -- Simply explaining. Also, the point is that everything they point out is not true for any medium of exchange. The hallmark of fiat currency that makes it true is banks' ability to conjure money out of nowhere, which starts the inflationary and speculative balls rolling. With a fixed money supply, this can't happen.

@mgittle I'm sorta at a loss of what more to say to you. I've linked you a few places where they do out the math of how fractional reserve banking works where they show the $100 deposit results in $90 in loans, not $900.

Nothing you've linked me has challenged that premise, they've just said that this ultimately means banks will wind up with $90 in loans with only $10 in reserve, but that means they're holding $100 in deposits, not $10.

Again if banks could create money, why bother with loans & interest? Why bother keeping track of reserves, or account balances?

And interest collected doesn't reduce the money supply. Banks don't destroy the dollars they collect in interest, they either use it to pay salaries, or the shareholders, or they loan it out to earn more interest. In all of those cases, the money goes right back into circulation, and doesn't affect the money supply.

@NetRunner

See, that is indeed where our understanding differs. Any bank may create money, not just the Federal Reserve. The Fed is the only agency that can literally create it from nothing. All other banks in the system create demand for it based on the fractional system. They may only loan money based on the reserve ratio.

So, yes, banks want depositors because the amount of loans they can issue (and therefore the amount of incoming interest they can collect, which further becomes more money they can lend) is partly based on deposits. But, as your Wikipedia link points out in #6 of the process, "when a loan is granted, the person is generally granted the money by adding the balance to their bank account." They don't mean "instead of giving them cash or gold". They literally mean "granted the money"...the money is created in their account. Money which did not exist prior to the loan agreement.

So the bank gives you $10,000 while holding $1000 in reserve (10% reserve requirement). The bank also creates a $10,000+interest hole for you to fill and generates a monthly payment bill. At no point did the bank have $10,000 to give to you...as in, if you marked every dollar in the economy with a serial number dependent on who created it, they would all say "i was created by the Fed at the request of bank XYZ to pay out loan money to someone because they don't have it on hand". When you pay back your loan, the bank destroys the "hole" it created for you, but keeps the interest on the bank's balance sheet.

When someone cashes your $10,000 check, the bank then transfers $10,000 to that person's account, but that $10,000 is available partially because of deposits and partially because of incoming interest payments from people with outstanding loans...or other bank profits from investment or whatever. If the bank has $1M on deposit, they can create $10M in loans TODAY, and if each of those people all request cash immediately, the bank will not have it on its balance sheets. But, the Fed is allowed to create cash from nothing to pass on to the bank for the purpose of fulfilling these withdrawal requests. Yes, it does seem incredible. Yes, this is why people don't like fractional reserve banking.

So, even though the Fed is the one supplying the actual cash, it is the banks who are creating the demand for the newly created money. This is how banks loan more than they have...based on how much they have on depost with the local (or central, in the case of commercial banks) Federal Reserve branch.

We're saying a lot of the same things, but there is a difference.

EDIT: this is also the reason I belong to a credit union

@mgittle I think we agree in the broad strokes, and overall conclusion, but I think you have some of the minor details wrong.

You and others here have asserted that banks can "loan out more than they have". This is false, according to everything I've ever read or seen happen in my own work life (in financial services).

Here's my own version of a logical proof. If I want to take out a loan from the bank to buy something, the bank actually has to give real money to someone. But, the Federal Reserve is the only agency that can create dollars legally. Therefore, the bank must have enough dollars in some account in order to pay out the initial loan amount, or it can't issue the loan.

So where do banks get the money to lend out? Well, for a traditional bank, it comes from the checking and savings accounts of regular people, as well as out of capital accumulated from profits. This is that "some account" whose name is actually the bank's "reserve account" at...the Federal Reserve. To cover withdrawals from those savings accounts, banks are legally required to keep a fraction of their total capital in reserve -- hence the name "fractional reserve banking".

So, how does the Fed inject new money into the economy? It anonymously buys government bonds from banks, using freshly created money. What if the Fed wants to take money out of the economy? Well, it sells government bonds, and destroys the cash it gets in return for the sale. No physically currency really gets created or destroyed, of course, it's just adding and subtracting numbers from the relevant reserve accounts.

Here's wikipedia's explanation of the Fed's monetary policy process, which is more detailed and authoritative than mine.

You also make the case that paying off debt hurts the economy because it shrinks the money supply. That's true! Which is why right now the economy is seriously in need of the Fed expanding the monetary base. Right now everyone's trying to pay down their debts (deleverage, in the financial lingo), and it's sucking all the money out of the economy. The Fed needs to work overtime to pump more money into the economy to take up the slack. Unfortunately, the banks have been wanting to keep way more than their usual in reserves -- they aren't loaning out the money the Fed is creating, they're just piling it up in their account at the Fed.

Because of that, it's never leaving the building, much less entering into the economy where it might potentially cause inflation. That's why I've been trying to tell marbles that monetary base expansion != inflation...they're two different terms for a reason!

It's also why I think abolishing the Fed or returning to a gold standard just makes things worse for everyone. One can argue that the Fed is pursuing the wrong monetary policy (for exmaple most liberal economists say it's been too timid about expanding the money supply), but this whole attempt to make the whole seem like some sort of illegitimate scam grates on me.

Without the Fed trying to expand the monetary base, you'd get something like 20% unemployment, and outright deflation, rather than just a low and declining rate of inflation.

>> ^NetRunner:

>> ^mgittle:
The problem with fractional reserve systems using fiat currency is their reliance on growth.
I haven't watched the documentary you linked, but the only part of what you said I'd really contest is this part.
How is fiat currency reliant on growth?
Perhaps you meant it the other way around -- that fiat currency is just one more tool that's used to cajole the human race into participating in this "growth" whose value has become increasingly dubious?
That's how I see it, at least on the days when I see the face and not the vase. Most days I still see markets and capitalism as a positive net influence on the welfare of the human race, but their most fervent advocates sure do work hard at making me think otherwise.


Yeah, well put rearding the "fervent advocates". I did kind of mean it the other way around. Thank you for actually taking a second to understand my meaning rather than arguing literal points only (the literal-only thing being my definition for nerdiness).

It's not fiat currency alone that makes our economy reliant on growth. I should have been more specific, but such is life when you have to get to sleep...haha. Fiat currency just a part of the whole Fractional Reserve banking + legal tender law + fiat currency system. In my mind, the growth thing is probably tied most to the fractional reserve system. Hopefully none of this sounds condescending because I'm not sure how much of this you already know, but here's my understanding:

Because the money supply is variable and dependent on debt, an expanding economy is extremely good and a contracting one is extremely bad. Because banks are allowed to loan more money than they possess *and* charge interest, you run into a problem. Where do individuals get the money needed to pay the interest on their loan if it was created from nothing? You have to get it from the overall money supply, which is made up of money created by banks from other peoples' promises to pay.

Thus, with every new credit card swipe, mortgage signing, etc, more money is owed to banks than actually exists at any given time. It's only the time lag between borrowing and repayment that keeps the entire system from collapsing. This means that unless the total amount of debt continually increases at a sufficient rate, it's impossible for everyone to succeed in paying back their loans...there must be foreclosures. This is why people constantly get offers of new credit, *and* why recessions are such a bitch. It's very hard to get things growing again after the money supply decreases.

The system is also one in which individuals paying off debts have more money (less income goes to paying interest), but everyone paying off their debts leaves society with no money. Therefore, anyone who pays off their debt to increase their own personal financial security actually hurts the overall economy. It makes no sense for markets to rely on rational individuals' decisions if their individual decisions are bad for the economy in aggregate. For this reason alone, the system is extremely fragile.

Hope all that makes some sort of sense. Maybe I'm wrong in parts. I'm partially regurgitating the videos I linked earlier while adding in stuff I've learned from other sources. I've nor heard anyone refute the premise of the video, but I'm sure it's not infallible in its interpretation. I'd love to hear what other people think. It got sifted long ago but there was little discussion.

As for your comments about markets being a net positive, I don't disagree with you at all. It's when people rely on markets to solve every problem (including moral ones) and don't realize that there are some places markets ought not go that there becomes a problem. (Should courts enforce a custody contract between an infertile couple and a surrogate mother? ...and and endless list of other similar questions)

>> ^mgittle:

The problem with fractional reserve systems using fiat currency is their reliance on growth.

I haven't watched the documentary you linked, but the only part of what you said I'd really contest is this part.

How is fiat currency reliant on growth?

Perhaps you meant it the other way around -- that fiat currency is just one more tool that's used to cajole the human race into participating in this "growth" whose value has become increasingly dubious?

That's how I see it, at least on the days when I see the face and not the vase. Most days I still see markets and capitalism as a positive net influence on the welfare of the human race, but their most fervent advocates sure do work hard at making me think otherwise.

>> ^marbles:

And price changes from an increased "supply" of currency is called inflation.

Before I get into the rest of what you said, I want to just highlight this part because it's an example of the root problem with your entire reply.

You seem to have this habit of making tautological arguments that hinge on asserting that the premise you wish to prove is baked into the very definition of some word, and therefore you don't need to actually make an argument for said premise.

I've been here with you before, about a word whose definition is much fuzzier than inflation (liberty), but now you're doing it with a word whose definition is very specific, and clearly does not contain the premise you want it to contain.

This is also my answer to your disagreement about the meaning of fractional reserve banking.

This is also my answer to your disagreement about what modern-day Keynesian monetary theories say. I'll also add that your quote isn't a Keynes original, it's Keynes quoting Vladimir Lenin.

As to your very last bit, you have a funny idea of what "earned honestly" means. Supposedly you resent banks gambling with our savings. Did they honestly "earn" our savings?

>> ^NetRunner:
Well, prices are set by market forces. You know, supply and demand. It's not necessarily the case that the Fed expanding the monetary base will lead to inflation.

Again, look at the last few years. Bernanke expanded the monetary base radically, but inflation has stayed low, and is on a declining trend.

And price changes from an increased "supply" of currency is called inflation.

Bernanke expanded the monetary base of the US dollar (ie world reserve currency) and people all over the world are in the streets rioting over the increased cost of living. PPI in the US has gone up 7.2% the last 12 months. And if you're referring to QE, most of that money is either parked at a bank or was used to buy toxic debt (to counter deflation). But when those TRILLIONS do reach the marketplace, inflation will be realized. That's why precious metal prices have blown up. The US dollar has lost 98% of it's purchasing power against gold the last 40 years.
>> ^NetRunner:
Oy. Okay, so here's how a bank works. People like you and me have some money. The bank offers to "hold" that money for us in an account, and at least used to pay us some small amount of interest on that money as incentive for us to keep our money with them.

But the bank doesn't just take our money and stick it in some vault for safekeeping, they lend that money out to other people, at a higher rate of interest than they offered us.

Problem is, we're allowed to withdraw our money from the bank whenever we want, so the bank has to keep some cash on hand (aka in reserve). However it will only keep a fraction of the total deposits in reserve, because otherwise it wouldn't be able to loan out money. That's what fractional reserve banking means.

That's what one would presume fractional reserve banking means, but it's not.




>> ^NetRunner:
I agree. Provided by "our system" you mean laissez-faire capitalism.

The banks take our savings and gamble them on risky, potentially profitable investments. That's sorta key to the functioning of capitalism though. Without that, the whole system crashes almost instantly.
LOL. The state stepping in to reward and cover up fraud is not laissez-faire capitalism. I don't get it. You defend the system, then you try to shift blame on free market capitalism?

>> ^NetRunner:
Artificially. You keep using that word. I don't think it means what you think it means.

Prices are set by market forces, and according to free market advocates this is perfect/moral/only way they can or could ever be set, or else we'll go to hell be socialists.

There are plenty of unnatural "market forces" in our current system. Even inflation itself. Hence, prices are artificially set.


>> ^NetRunner:
Different economic models hypothesize different answers. I tend to think the Keynesian story is right -- it's aggregate supply and aggregate demand. When you have a shift in either one that would lead to a higher equilibrium price, then you see "aggregate price" (aka the CPI) rise.
Which is to say, you can get both inflation and deflation without the Fed doing anything. To stabilize inflation, you actually need the Fed constantly adjusting the monetary base so neither inflation or deflation get out of kilter. Look at pre-1913 interest rates if you don't believe me.

John Maynard Keynes on inflation: "By this means government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft."

What you're talking about makes no sense. Prices in a market with sound money still go up and down. That's the way a market works. Calling it inflation and deflation doesn't make it so.

>> ^NetRunner:
I agree, if by "the ones that...extract value from that actually worked and earned their wealth" you mean any and all business owners, investors, and so on who have done nothing but collect interest on wealth they already own.

Maybe before you start going after people who are collecting interest on the wealth they presumably earned honestly, you will stop defending those who collect interest on money they created from nothing. Deal?

>> ^mgittle:
The problem with fractional reserve systems using fiat currency is their reliance on growth. It should be obvious even to children that "growth" cannot be sustained indefinitely in a closed system (the planet Earth). You can argue technology will fix our problems before nature fixes them for us, but that's gambling, IMO.
The biggest problem with growth, IMO, is a moral and philosophical one reflected by its influence on our culture. People talk about growth and progress as being some sort of universally good thing. cough AynRandobjectivism cough Growth needs to be a means to an end, not an end in itself. The problem with growth and progress being an end in itself is that we cannot have a conversation about what we're growing into or why we're even bothering to grow in the first place.


You're talking about economic growth. I don't see the planet Earth being a limit like you're describing. That's more of a close-minded assumption. We've always been able to invent and innovate with the opportunity. Putting a limit on that, is denying ourselves that opportunity. Surely a 100 years ago, people never envisioned our present world. And a 100 years from now, I hope people can say the same about us.

The problem with fractional reserve systems using fiat currency is that it's fiat. Even if you could match inflation with economic growth (which you can't), you would still have an elite class collecting interest from loans of magically created cash.

@davidraine @NetRunner @marbles

I think these videos explains it better:
http://www.youtube.com/watch?v=Dc3sKwwAaCU
http://www.youtube.com/watch?v=rCu3fpg83TY&feature=related

They're much longer and the animation is terrible, but they have better content, IMO.

As for banking without a fractional reserve system...you could have a system that utilized self-issued credit traded on an exchange. Money and credit could be based on the amount of valuable goods and services you (or a company) can provide rather than based on promises to pay back debt.

Yeah, it's the same guy's video, but you can learn about the idea here:
http://www.digitalcoin.info/

The problem with fractional reserve systems using fiat currency is their reliance on growth. It should be obvious even to children that "growth" cannot be sustained indefinitely in a closed system (the planet Earth). You can argue technology will fix our problems before nature fixes them for us, but that's gambling, IMO.

The biggest problem with growth, IMO, is a moral and philosophical one reflected by its influence on our culture. People talk about growth and progress as being some sort of universally good thing. *cough*AynRandobjectivism*cough* Growth needs to be a means to an end, not an end in itself. The problem with growth and progress being an end in itself is that we cannot have a conversation about what we're growing into or why we're even bothering to grow in the first place.

First, to my original point, a fixed money supply does not allow for fractional reserve banking -- By definition, fractional reserve banking varies the supply of money. Second, I don't remember massive inflation caused by the sale of unregulated securities, though I do remember a massive speculative bubble bursting and an economic crash.
>> ^bmacs27:


Fractional reserve banking has nothing to do with the medium of exchange. Banks have engaged in fractional reserve banking since long before the abolition of the gold standard. A better argument is that the securitization of debt (deregulation of finance) has caused massive inflation by encouraging the underwriting of bad debt by allowing the risk to be sold off.

First, I'm not proposing anything -- I was just pointing out that inflation and speculative bubbles could be largely mitigated making the supply of money fixed. Second, a fixed money supply does not presuppose (or require) price fixing, so you can still use various property as a value store.
>> ^bmacs27:

Further, the video doesn't seem to explain that in our current system I can use my wages to purchase gold at market, and can thus use it as a store of value (if I actually believed it to be fairly valued against e.g. wages or real estate). In the government price fixing system you are proposing that wouldn't be possible, and the value of my gold would be subject to systemic risk (bad policy) just like currency is today.
>> ^davidraine:
I don't think they're calling for anything -- Simply explaining. Also, the point is that everything they point out is not true for any medium of exchange. The hallmark of fiat currency that makes it true is banks' ability to conjure money out of nowhere, which starts the inflationary and speculative balls rolling. With a fixed money supply, this can't happen.

>> ^marbles:

So... where does this increase in price level (i.e. inflation) come from...? Oh yeah, from expanding (or inflating) the fiat monetary base!

Well, prices are set by market forces. You know, supply and demand. It's not necessarily the case that the Fed expanding the monetary base will lead to inflation.

Again, look at the last few years. Bernanke expanded the monetary base radically, but inflation has stayed low, and is on a declining trend.

>> ^marbles:
>> ^NetRunner:
Also, "Without a system built on fractional reserve" means a world without banks.

LOL Says who? It may be a world without corrupt banks. If you or I can't loan money we don't have, why should a bank be able to?

Oy. Okay, so here's how a bank works. People like you and me have some money. The bank offers to "hold" that money for us in an account, and at least used to pay us some small amount of interest on that money as incentive for us to keep our money with them.

But the bank doesn't just take our money and stick it in some vault for safekeeping, they lend that money out to other people, at a higher rate of interest than they offered us.

Problem is, we're allowed to withdraw our money from the bank whenever we want, so the bank has to keep some cash on hand (aka in reserve). However it will only keep a fraction of the total deposits in reserve, because otherwise it wouldn't be able to loan out money. That's what fractional reserve banking means.

>> ^marbles:
Meanwhile, our system uses the power of the state to reward fraud and gambling of the largest banks and biggest corporations while extracting wealth from the poor and middle-class.


I agree. Provided by "our system" you mean laissez-faire capitalism.

The banks take our savings and gamble them on risky, potentially profitable investments. That's sorta key to the functioning of capitalism though. Without that, the whole system crashes almost instantly.

>> ^NetRunner:

Inflation is an increase in the price level, not expansion of the monetary base. That's why we have separate terms for them.


Thanks Peabody, but I'm pretty sure everyone knows that inflation is the increase in prices. (We have separate terms for that too, you know) So... where does this increase in price level (i.e. inflation) come from...? Oh yeah, from expanding (or inflating) the fiat monetary base!

Inflation: a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency

>> ^NetRunner:
Also, "Without a system built on fractional reserve" means a world without banks.

LOL Says who? It may be a world without corrupt banks. If you or I can't loan money we don't have, why should a bank be able to?

>> ^NetRunner:
Speculation has nothing to do with debt, or even banking. It's gonna exist as long as we have markets and contracts. Fraud will also exist as long as there is property.
And all debt is artificial, as is all money.


Meanwhile, our system uses the power of the state to reward fraud and gambling of the largest banks and biggest corporations while extracting wealth from the poor and middle-class.