I have been having a very long running battle on Wikipedia about fractional reserve banking. The wiki page currently insists that the mainstream view is that the money supply is constrained by the reserve requirement. I have been campaigning to get this changed. I have cited several papers and quoted the work of Steve Keen too. The defenders of the status quo have pointed out that the money-multiplier-constraint story is in all the major textbooks (Mankiw etc.) and therefore that defines the status quo. I pointed out that my evidence against this idea comes from peer reviewed journal papers which IMHO should trump textbooks. This argument seems to have fallen on deaf ears and they are not budging. I then pointed out that if I was wrong, and the money-multiplier-constraint story is indeed still the accepted view then there should exist some peer reviewed papers somewhere which refute the papers that criticize it. The status quo defenders have then said words to the effect of “oh yes, there will be many such papers, but we can’t be bothered to look them up”. This made me so angry that I then said that I would pay $250 from my own pocket to anyone that could find such a paper… and now of course their response is to claim that I wouldn’t pay up when I (inevitably) lost the challenge. The argument is still going on - but I am posting here to offer the money to anyone that can find such a paper - and yes I will pay - I can afford it and I am a man of my word. I would rather pay the money to someone from this forum than either of the guys from Wikipedia.
Please follow this link for a few extra details of the challenge:
I don’t know where to find a paper for Keen’s work. I merely know of Keen’s thoughts from blog entries and lectures I’ve seen on youtube etc. I’m sure he has said these things in a paper too - I just don’t know where.
Here’s one of his blog entries where he talks about the money multiplier.
I don’t know where to find a paper for Keen’s work
But I guess you need one, as Wikipedia policy of “no original research” strongly prefers peer-reviewed journals over self-published articles. Until you have an article in a peer-reviewed journal, there is no sense looking for its refutation.
I skimmed it… as someone who has read it more thoroughly can you tell me whether he totally denies the multiplicative effect of money injection into a FRB system governed by a central bank, or rather does he have quibles about the ‘necessary’ status of the strict ordering of events in the orthodox model, i.e. saying that in advance of an expectation of a money injection, managers of loanable funds might extend loans and then worry about meeting their reserve requirements in short order?
Re “papers” - in my wikipedia battle the work of Keen was just one additional piece of evidence - the main evidence was two other peer reviewed journal papers:
“Understanding the Remarkable Survival of Multiplier Models of Money Stock Determination” by Seth B. Carpenter and Selva Demiralp and “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?” by Raymond E. Lombra.
Well the money supply could be constrained by the reserve requirement, but its also constrained by a lot of other stuff… CARs come to mind. Profitability of loans. Even the cost of expanding the money supply (printing paper) might limit it under some regimes.
“… and now of course their response is to claim that I wouldn’t pay up when I (inevitably) lost the challenge.”
Note: you can use The Point (as the Murphy-Krugman debate challenge does) and make your pledge. Your offer will seem more trustworthy to them - and others from our side may even chime in to raise the stakes.
(For the record, The Point charges some 5% fee, so you have to consider whether to do it this way - but it’s something that may raise your prestige. Sadly, they accept donations from only a few countries besides the US. )
I went through a similar ordeal with the WP “Inflation” article. It’s quite remarkable the sheer amount of, what Judge Bork called, “resistence…to what are fairly basic and simple ideas of economics.” It blew me away. It was the first real experience I had with the animosity and total opposition toward Austrian ideas. It’s almost not worth fighting in that realm.
This is exactly why LvMI decided to create its own Wiki.
@John James: Well I have had some progress on wikipedia. For example the old full reserve banking page gave the impression that loans can not be made in a full reserve system. After a huge battle, this has now been corrected.
Also, on the fractional reserve page there is at least some acknowledgement that there is some disagreement about the money multiplier story (this also required a huge battle).
I’m now aiming to get it accepted that idea that the reserve ratio doesn’t constrain the money supply in is fact the mainstream view - at least with regard peer reviewed papers even if the textbooks still have it wrong.
This has been talked about before on this forum before, but LK is very much a devout neoclassical economist. You can disprove the notion that reserve requirements put an upper limit on the money supply (they don’t, the very nature of the money multiplier effect in fractional reserve banking prevents this) until you’re blue in the face, but I highly doubt he’ll budge.
If the money supply was constrained by the reserve requirement, then what about countries that use Fractional Reserve Banking, but have a reserve requirement of zero, such as Canada, Australia and New Zealand? Does that mean they don’t have any constraints on money supply? Obviously not.
Is that really true about the central banks of Canada, Australia, and New Zealand? Reserve requirements of 0% seem like a license for inflation on a massive scale. If that was true, how would one go about even withdrawing savings from a bank in those countries, or do chartered banks keep on-hand reserves out of their own volition?
That’s awesome if you’ve been able to have that much progress. More power to you. Keep it up. I’m quite glad that there are those of us out there willing to go through all that just to make Wikipedia more correct. And that’s no small thing, by any means…so many people get their info from that source first (if not completely)…so any ground that can be gained there is possibly much more impactful than many might realize.
I realize it’s kind of what you’re doing here, but if you ever need any support or additional input to help make the case on a talk page or something like that, send me a private message on here and I’ll see what I can do to help.
The point of the OPs request isn’t to help him argue for or against the merits of whether or not money supply is constrained by reserve requirements. The point is to help him with the problem of Wikipedia editors providing unreliable sources in the face of reliable sources on Wikipedia.
The primary thing that you have going against you seems to be that they feel their current sources are more valid than the sources you have provided. The answer as to whose sources are more reliable rests entirely on the policy of Wikipedia which is fairly clear on the matter:
It very clearly states, “Where available, academic and peer-reviewed publications are usually the most reliable sources, such as in history, medicine, and science.” and “Other reliable sources include university-level textbooks, books published by respected publishing houses, magazines, journals, and mainstream newspapers.”
It seems a fairly clear cut case that academic and peer reviewed publications trump university-level textbooks. Because of this, if they can’t supply a better source then your sources trump their sources and the edit should go through. If they still try to stop you then appeal to the wikipedia people on the issue since you are the one obeying the rules and they are not.
Yes, it’s true. Look in Wikipedia under “Reserve requirement” for details.
I live in NZ, so I don’t know the details about how it works in the other countries, but here, banks do not have deposit insurance; there is no equivalent to the FDIC. As a result, banks keep reserves on their own because without a safety net, it’s in their best interest to do so.
As far as what the OP is looking for, I understand. The point I’m trying to raise is that a simple counterargument, not relying on an appeal to authority (which can be easily dismissed or refuted by other authorities), is likely to be a more effective polemic.
Another counterargument: in the US, banks use “sweeps” to move demand funds into non-demand accounts overnight. The result is a substantial increase in their ability to create money, with no change in the reserve requirement. In fact, it’s obvious now that the reserve requirement is largely immaterial – which probably also explains why it hasn’t been significantly changed in so long.
That’s very interesting. Deposit insurance programs are one of the greatest contributors to lazyness and malinvestment on the part of banks in the United States. Naturally, without such a program banks would be more careful in making loans and investments. However, while I’m unfortunately unfamiliar with the practices of the Reserve Bank of New Zealand, I imagine that in a crisis it would bail out its “client” banks; indeed, the very idea of a central bank, besides putting control of the money supply in the hands of the government, is to be the lender of last resort should a banking run ever ocur. Is my assessment correct in regards to your country’s central bank, or does it operate differently?
And going back to the OP, I haven’t found any academic articles which would validate the statement that reserve requirements put a ceiling on the money supply. I’ll keep looking when I have time, though.
(Even though I currently live in NZ, I’m a US citizen, so “my country” is somewhat misleading)
After the financial crash in NZ in the late 1970s / early 1980s, the Reserve Bank of NZ had its charter re-written. It’s main purpose now is to manage inflation (money growth), according to a set target (typically around 2 to 3%). It does not have the dual mandate of the Federal Reserve to also support maximum employment.
During the global financial crisis, RBNZ did in fact announce that it would temporarily insure NZ banks against any associated losses. Fortunately, losses were very limited, since NZ banks did not invest much in US mortgage backed securities. After the immediate crisis passed, the deposit insurance was withdrawn. For the future, I suspect that if a single bank failed, they would stick to the no-insurance policy. However, if a systemic problem of some kind developed, they might very well step in as they did before.
The key point from a banker’s perspective is that they can’t be sure they will be bailed out if they screw up.
Getting back to the OP, here’s a link to an article written by the Fed itself that says changes to the reserve rate are not an effective way to control the money supply:
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