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.

Fiat money: from the current Islamic finance scholars’ perspective

Humanomics ◽  
2017 ◽  
Vol 33 (3) ◽  
pp. 274-299 ◽  
Author(s):  
Syammon Jaffar ◽  
Adam Abdullah ◽  
Ahamed Kameel Mydin Meera
Keyword(s):  
Design Methodology ◽  
Banking System ◽  
Commercial Banking ◽  
Quantitative Investigation ◽  
Fractional Reserve Banking ◽  
Content Type ◽  
Fiat Money ◽  
Fractional Reserve ◽  
Level Of Knowledge ◽  
Reserve Banking

Purpose This paper aims to discuss the opinions of current Shariah scholars on the concept of debt money in the present-day fiat money system. Design/methodology/approach Research design of this paper is a quantitative investigation of Shariah experts by distributing a questionnaire to them. As majority of Shariah scholars are also Shariah advisory of the current banking system, it is important to find out their level of knowledge on the issue of debt money created by the commercial banking system through the fractional-reserve banking (FRB) system. Findings Based on this investigation, most Shariah scholars are unaware of and confused about the mechanics underpinning the creation of money, especially with respect to FRB as it is practiced by the conventional and Islamic banking systems. Originality/value Based on this research, it is recommended that these scholars should improve their understanding of the operation of the fiat money system and its consequences. It is recommended that, in future, Shariah scholars should think “outside of the box” by creating Islamic financial instruments that do not resemble those of the conventional system.

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.

Full reserve system and the Maqasid Shariah

2017 ◽  
Vol 5 (2) ◽  
pp. 58 ◽  
Author(s):  
Zuriyati Ahmad ◽  
Abdul Ghafar Ismail
Keyword(s):  
System Analysis ◽  
Banking System ◽  
Fractional Reserve Banking ◽  
Monetary System ◽  
Fractional Reserve ◽  
Reserve Banking ◽  
Reserve System ◽  
System Today

The essence of the monetary system today is in using the fractional reserve banking system. Nonetheless, this system is not free of critics such as the fraud of making loans and creating deposits out of nothing which are argued to create distortion to the economy. Since 1930s, many economic scholars have debated the use of full reserve system as an alternative tool of monetary system.Islamic scholars also argue and reject the working of fractional reserve banking system and propose the idea of full reserve system. From the view of Islamic scholars, the full reserve system should be applied to avoid the riba’ in the monetary system. Hence, this study tries to assess whether the use of full reserve system can attain the Maqasid Shariah to support the alternative banking system. Using the argument on fractional reserve system, discussion on the concept of full reserve system, analysis of the impacts of full reserve system and the support from Quran and Hadith, this study concludes that the injustice and riba’ can be avoided under thefull reserve system, hence,attaining the Maqasid Shariah.

scholarly journals ISLAMIC ENDOGENOUS MONEY: EVIDENCE FROM ISLAMIC BANKING SYSTEM IN INDONESIA AND MALAYSIA

2021 ◽  
Vol 7 (3) ◽  
Author(s):  
Khoirul Umam ◽  
Abdul Ghafar Ismail ◽  
Achmad Tohirin ◽  
Jaka Sriyana
Keyword(s):  
Empirical Studies ◽  
Banking System ◽  
Financial System ◽  
Empirical Method ◽  
Islamic Banking ◽  
Fractional Reserve Banking ◽  
Monetary System ◽  
Fractional Reserve ◽  
Endogenous Money ◽  
Reserve Banking

This research is conducted due to the un-ware contemporary Muslim economists on the feature of money whether exogenous or endogenous. Arguing that money in Islam should be endogenous, Choudhury (1997) asserts that fiat and fractional reserve systems makes money exogenous. If it is true, this condition leads to the un-oriented development of Islamic monetary and financial systems that are basically is fiat and fractional reserve systems. Accordingly, the empirical studies on Islamic monetary policy in Islamic financial system that is based on exogenous money concept cannot reveal the true money supply for the economy. This paper aims to propose the theoretical model of endogenous Islamic money and conduct an empirical study of the model on Islamic banking that is based on fiat and fractional reserve systems. The empirical method used is based on the ARDL and ECM. The result of the research gives evidence that the profit and loss sharing system is a core feature of the Islamic endogenous money system in the fractional reserve requirement system. Other evidence reveals that the development of the Islamic financial system can minimize the existence of exogenous money in a fiat monetary system. By these results, this study argues that Islamic endogenous money system can be developed in fiat and fractional reserve banking systems through the profit and loss sharing systems.

The fractional reserve Banking diagram

2021 ◽  
pp. 81-104
Author(s):  
Edward W. Fuller
Keyword(s):  
Default Risk ◽  
Liquidity Risk ◽  
Central Banking ◽  
Free Banking ◽  
Fractional Reserve Banking ◽  
Banking Systems ◽  
Fractional Reserve ◽  
Rate Risk ◽  
El Sistema ◽  
Reserve Banking

Fractional reserve banking systems are inherently unstable. Fractional reserve banks create three types of risks when they make loans: liquidity risk, interest rate risk, and default risk. These risks interact to make fractional reserve banking systems unstable and prone to failure. This paper derives the Fraction­ al Reserve Banking Diagram. The diagram is used to illustrate liquidity risk, in­ terest rate risk, and default risk. Finally, the diagram is used to compare central banking, free banking, and 100 percent reserve banking. Keywords: Fractional Reserve Banking, Central Banking, Free Banking, 100% Reserve Banking, Banking Panics JEL Codes: E32, E43, E50, E52, E58, G21 Resumen: El sistema bancario de reserva fraccionaria es inherentemente ines­ table. Los bancos de reserva fraccionaria crean tres tipos de riesgos cuando conceden préstamos: riesgo de liquidez, riesgo de tipo de interés y riesgo de impago. Estos riesgos interactúan para hacer de la banca de reserva fraccio­ naria inestable y propensa a la quiebra. Este trabajo deriva el Diagrama de Banca de Reserva Fracciona. Este diagrama se utiliza para ilustrar el riesgo de liquidez, el riesgo de tipo de interés y riesgo de impago. Finalmente, se utiliza para comparar la banca central, el sistema de banca libre y la banca con co­ eficiente de reserva del 100%. Palabras clave: Banca de reserva fraccionaria, Banca Central, banca libre, banca con coeficiente de reserva del 100%, pánicos bancarios. Clasificación JEL: E32, E43, E50, E52, E58, G21

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.

scholarly journals Unanswered quibbles: George Selgin still gets it wrong with fractional reserve free banking

2021 ◽  
Author(s):  
Philipp Bagus ◽  
David Howden
Keyword(s):  
Banking System ◽  
Real Income ◽  
Jel Classification ◽  
Free Banking ◽  
Fractional Reserve Banking ◽  
Credit Expansion ◽  
Investment Projects ◽  
Fractional Reserve ◽  
Monetary Equilibrium ◽  
El Sistema

In this article we reply to George Selgin’s counterarguments to our article «Fractional Reserve Free Banking: Some Quibbles». Selgin regards holding cash as saving while we focus on the real savings necessary to maintain investment projects. Real savings are unconsumed real income. Variations in real savings are not necessarily equal to variations in cash holdings. We show that a coordinated credit expansion in a fractional reserve free banking (FRFB) system is possible and that precautionary reserves consequently do not pose a necessary limit. We discuss various instances in which a FRFB system may expand credit without a prior increase in real savings. These facets all demonstrate why a fractional reserve banking system —even a free banking one— is inherently unstable, and incentivized to impose a stabilizing central bank. We find that at the root of our disagreements with Selgin lies a different approach to monetary theory. Selgin subscribes to the aggregative equation of exchange, which impedes him from seeing the microeconomic problems that the stabilization of «MV» by a FRFB system causes. Key words: Free banking, fractional reserve, monetary equilibrium, credit expansion, economic cycle. JEL Classification: B53, E32, E42, E5, G18, H11, K39, P3, P34. Resumen: En este artículo respondemos a George Selgin, que a su vez respondió a nuestro artículo «Fractional Reserve Free Banking: Some Quibbles». Selgin considera que los saldos de tesorería son ahorros, mientras nosotros nos fijamos en los ahorros reales necesarios para mantener proyectos de inversion. Ahorros reales son ingresos reales no consumidos. Variaciones en los ahorros reales no necesariamente coinciden con las variaciones en los saldos de tesoreria. Mostramos que una expansión crediticia coordinada es posible en un sistema bancario de reserva fraccionaria (FRFB) y que las reservas prudenciales no constituyen necesariamente un limite a la expansión co - ordinada. Discutimos varios escenarios en los que el sistema FRFB puede expandir los créditos sin un aumento previo en los ahorros reales. Todas estas facetas muestran que un sistema bancario de reservas fraccionarias —incluso uno de banca libre— es inherentemente inestable y produce incentivos para imponer un banco central estabilizador. Mostramos que el origen de nuestras diferencias con Selgin está en un enfoque diferente a la teoría monetaria. Selgin es partidario de la ecuación de intercambio que es muy agregada y que le impide ver los problemas microeconomicas que la estabilización de «MV» por parte del sistema FRFB produce. Palabras clave: Banca libre, reserva fraccionaria, equilibrio monetario, expansión crediticia, ciclo económico. Clasificación JEL: B53, E32, E42, E5, G18, H11, K39, P3, P34.

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