Credit creation or financial intermediation?: Fractional-reserve banking in a growing economy

1999 ◽  
Vol 2 (3) ◽  
pp. 53-64 ◽  
Author(s):  
John P. Cochran ◽  
Steven T. Call ◽  
Fred R. Glahe
Keyword(s):  
Financial Intermediation ◽  
Fractional Reserve Banking ◽  
Fractional Reserve ◽  
Credit Creation ◽  
Growing Economy ◽  
Reserve Banking

scholarly journals Promoting Islamic Private Equity Fund As An Ideal Financial Intermediary Institution

IKONOMIKA ◽  
2017 ◽  
Vol 2 (2) ◽  
pp. 112
Author(s):  
Nashr Akbar ◽  
Muhamad Haeikaly
Keyword(s):  
Private Equity ◽  
Financial Intermediation ◽  
Fractional Reserve Banking ◽  
Equity Fund ◽  
Financial Intermediary ◽  
Private Equity Fund ◽  
Fractional Reserve ◽  
Bank Institution ◽  
Reserve Banking ◽  
Risk Taker

The existence of financial intermediation institution is quite necessary to support the economic activity. It serves both surplus unit and deficit unit to meet their wants whereby the former wants to invest his money in the lack of skill, while the latter wants to develop their businesses but does not have adequate capital. Bank institution is the most common institution serving the people’s need of financial intermediation. However, bank has several weaknesses that may harm and hamper the economic development. This paper aims to explore the weaknesses of banks as financial intermediary institutions and then promote Islamic Private Equity Fund as alternative. The result showed that the weaknesses of banks are: 1) fractional reserve banking, 2) fiat money, 3) debt-based investment, 4) risk averse. Furthermore, the study also found that Islamic Private Equity Fund can serve as an ideal financial intermediary institution due to some strengths: 1) no fractional reserve banking, 2) equity-based investment and 3) risk taker

scholarly journals How to create a banking & monetary system for the 21st century: the Huerta de Soto and Chicago plans reworked

2021 ◽  
pp. 13-66
Author(s):  
Alok Basu
Keyword(s):  
Monetary Policy ◽  
Business Cycle ◽  
Economic Activity ◽  
Present System ◽  
Fractional Reserve Banking ◽  
Monetary System ◽  
Fractional Reserve ◽  
Credit Creation ◽  
The Business Cycle ◽  
Reserve Banking

Every economics textbook will tell you that banking is at its core a process of intermediation designed to facilitate the transfer of savings into investment. In some respects fractional reserve banking does this much too well. It is a system which takes deposits and lends them out. The problem is that this process is built on – for want of a better word – deceit. Borrowers are offered secure term contracts, while depositors are promised their money back whenever they want it. This deceit only works because most depositors are happy to keep their money in the banking system most of the time. Supporters of fractional reserve banking would say – so what. The fact that the system exploits this trait of depositors – to keep their money in banks rather than under their mattresses – is surely a good thing. Without such a system, lending would not happen to anywhere near the same degree, credit creation would be severely impeded and economic activity adversely affected. The problem with this system is that it has a tendency to max out on credit creation in the good times, but chronically undersupply credit in the bad times – thus greatly accentuating the natural ups and downs of the business cycle. And over a course of time, it results in an accumulation of debt in society that is not economically very healthy. Recent events underline these concerns. Any proposed reform of the banking and monetary system needs to be able to illustrate that such a system will be capable of delivering the «right amount» of credit in good times and bad – so as not to impede economic activity in downturns, but also not to act as an accelerator for the good times. We can refer to this as the «optimal» quantity of credit over the course of the business cycle. In this paper, I assess two models. One is a derivative of the so-called «Chicago Plan», and set out in the IMF Working Paper by Michael Kumhof and Jaromir Benes titled The Chicago Plan Revisited published in August 2012. The other is an equity-based proposal which I call the «Huerta de Soto Plan», and derived from proposals set out by Professor Jesus Huerta de Soto in his book Money, Bank Credit and Economic Cycles, published as far back as 1998. The Kumhof/Benes proposal puts monetary policy at the heart of the credit creation process in a way that is far more effective than under the current system. Governments end up achieving far greater control of the levers of monetary power than under today’s fractional reserve system. By contrast, the Huerta de Soto Plan opts for a free-market based approach to money resulting in a free and genuinely open market for credit that is driven entirely by the forces of competition and where governments and central banks have no role to play in monetary policy. This paper spells out the mechanics underlying both plans, and assesses their relative merits. Neither plan is perfect. Both propose extremely radical reform of the modern monetary system, and they can result in – I believe – some potentially very inflationary and damaging behavioral effects in the process of the transition from the present system to what is proposed. The Kumhof/Benes proposal is far and away the weaker of the two – not only would it be economically and politically unworkable – the behavioral consequences would be harder to control. By contrast, the Huerta de Soto Plan – although more radical in many respects – would also be more palatable, albeit it would need certain tweaks, and the adverse behavioral impacts arising from the implementation of this plan would be somewhat easier to offset. Key words: Huerta de Soto, Kumhof/Benes, Chicago Plan, Fractional Reser-ve, Mutuals, Quantitative Easing. JEL Classification: B31, B53, E42, E52.

scholarly journals A Digital Currency Architecture for Privacy and Owner-Custodianship

2021 ◽  
Vol 13 (5) ◽  
pp. 130
Author(s):  
Geoffrey Goodell ◽  
Hazem Danny Al-Nakib ◽  
Paolo Tasca
Keyword(s):  
Systemic Risk ◽  
Banking System ◽  
Developed Countries ◽  
Fractional Reserve Banking ◽  
Point Of Sale ◽  
Digital Currency ◽  
Fractional Reserve ◽  
Banking Relationships ◽  
Reserve Banking ◽  
Payment Mechanisms

In recent years, electronic retail payment mechanisms, especially e-commerce and card payments at the point of sale, have increasingly replaced cash in many developed countries. As a result, societies are losing a critical public retail payment option, and retail consumers are losing important rights associated with using cash. To address this concern, we propose an approach to digital currency that would allow people without banking relationships to transact electronically and privately, including both e-commerce purchases and point-of-sale purchases that are required to be cashless. Our proposal introduces a government-backed, privately-operated digital currency infrastructure to ensure that every transaction is registered by a bank or money services business, and it relies upon non-custodial wallets backed by privacy-enhancing technology, such as blind signatures or zero-knowledge proofs, to ensure that transaction counterparties are not revealed. Our approach to digital currency can also facilitate more efficient and transparent clearing, settlement, and management of systemic risk. We argue that our system can restore and preserve the salient features of cash, including privacy, owner-custodianship, fungibility, and accessibility, while also preserving fractional reserve banking and the existing two-tiered banking system. We also show that it is possible to introduce regulation of digital currency transactions involving non-custodial wallets that unconditionally protect the privacy of end-users.

Rozeff on free banking: a critique

2018 ◽  
Vol 34 (2) ◽  
pp. 123-136
Author(s):  
Laura Davidson ◽  
Walter E. Block
Keyword(s):  
Design Methodology ◽  
Free Banking ◽  
Fractional Reserve Banking ◽  
Content Type ◽  
Monetary System ◽  
Fractional Reserve ◽  
Reserve Banking

Purpose The purpose of this paper is to correct Rozeff (2010). He contends that fractional-reserve banking is legitimate and efficacious. The authors demonstrate that it is not. Design/methodology/approach The design of this paper is to quote widely from Rozeff (2010) and then to expose his errors of analysis. Findings The authors demonstrate that fractional-reserve banking is neither legitimate nor efficacious. Originality/value Money is the lifeblood of the economy. If so, then banking is the marrow of the economy, since it is from that sector that money arises in the first place. It is crucially important, then, that the monetary system be based on sound principles. Fractional-reserve banking is a violation of these sound principles. Therefore, it is valuable to demonstrate that this is indeed the case.

Banks, private money creation, and regulatory reform

2018 ◽  
Vol 26 (1) ◽  
pp. 20-34
Author(s):  
Gerry Cross
Keyword(s):  
Regulatory Reform ◽  
Recent Criticism ◽  
Multiple Use ◽  
Fractional Reserve Banking ◽  
Content Type ◽  
Fractional Reserve ◽  
Private Money ◽  
Money Creation ◽  
Reserve Banking ◽  
New Framework

Purpose This paper aims to consider recent arguments that post-crisis regulatory reform has misunderstood the nature of banks’ activities. These arguments suggest that a bank’s role is not that of intermediation between savers and borrowers but the systemically riskier one of private money creation. Design/methodology/approach The paper assesses whether banks’ activities are best understood as private money creation rather than intermediation. It considers the argument that regulatory reform has not gone far enough to prevent a recurrence of future credit spirals ending in financial crises. Findings This paper analyses banks’ activities and finds that it is incorrect to consider that they engage in relatively unfettered money creation. While fractional reserve banking does create flows of money through the economy, these flows are tethered to banks’ funding requirements. Multiple use of that money, rather than representing an ill-understood risk, simply reflects the nature of maturity transformation. This has not been missed in designing the post-crisis regulatory framework. The revised framework contains many features that are not fully recognised by proponents of the money creation critique and goes significantly further than they allow. Once completed, it will address many of the concerns they raise. They are right to call for further consideration of whether the countercyclical features of the new framework are sufficiently developed. Originality/value The paper provides an early detailed response to recent criticism of the post-crisis regulatory reform programme coming from a money creation perspective of banks’ role in the economy.

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