can you offer an explanation why the money multiplier is sometimes in effect, and other times is not?
The ONLY time the multiplier is not in effect is when all banks are not centrally linked, and any time they use fractional reserve banking there is ALWAYS a multiplier, in the case that I am familiar with, the United States, we have the Federal Reserve Bank that guarantees a money multiplier, as all banks in the US are a member of the FRS…
In the United States, and I can be wrong as this is second hand information, I have not read the physical policy myself…
Real monetary input in a bank allows the bank (through FRB) to lend 9 times (900%) the amount as credit, and when credit is put in the bank it is then allowed to lend 90% of that as more credit, when you do this magic accounting… you end up with every $1 of physical money supporting $99 in credit as well as the $1 itself…
If you have two competing banks without a central membership, this encourages the bank to not engage in fractional reserve banking as the potential for a run could cause many customers to not be able to retrieve their input and make the bank proprieter potentially liable for misuse (debasing the value) of the medium of exchange…
yes, but selgin’s pushing competing banks that are allowed to engage in fraction reserve banking, so of course the multiplier would apply as ever…
I agree. But selgin is saying that in a free banking system, you can have banks practicing FRB but somehow avoid the multiplyer. I fail to see how this can occur in practice. It seems to me that in free banking, banks can be allowed to practice it, but they would have to almost always avoid it in order to stay in business. Perhaps I am missing something here. I’m going to check out some of his references he pointed to.
i searched C A Phillips PDF for the word 'inflation to see what would come up and I found
so, he’s a fan of centralised fractional reserve banking…
weird?
Yes, it is a fallacy that FRB does not produce a multiplier, and yes they would have to avoid it to remain in business…
I never suggested that there was no “multiplier” under free banking: that would be an absurd claim, as the multiplier under free banking is the reciprocal of the reserve ratio, 1/r, which (with fractional reserves) is necessarily greater than one.
What I did say is that no individual free bank has the power to increase its own balance sheet by a value in excess of its deposit receipts. I also denied that the system could do so unless there was an increaser in system reserves–as might occur as the result of a gold discovery. In contrast, if a central bank expands its liabilities, then that expansion results in a multiple expansion of systemwide assets and liabilities, even though system gold reserves haven’t changed.
All of this is consitent with received theory, and is discussed at length in my Theory of Free Banking.
yeah, so when the reserve rate is 10%, an initial seed of 100$ into 1 of the banks that practice frb whilst concurrently some other number of banks which happen to use the same reserve rate (10%) exist, then “the 90 can be/is deposited back at various banks and so again 10% can be kept and 90% loaned out.” so we are back at where i started when you told me I was wrong, and then you tell me im right, but then im wrong. i see how this works.
Oops. This is a forum, not a blog.
Professor Selgin, this is a forum with students and laymen.
While we acknowledge your intellectual superiority over us, participating and then inferring people are fools for discussing with you seems disingenuous at best.
The malevolent universe premise! The transvaluation of all values!
Interesting appeal to authority.
Well, Ryan, do you blame me for being impatient with Juan’s snide dismissal of my appeal to the distinction between competitive and monopolistic banking, to which I was responding? I am not one to think authority trumps rational argument. But the flippant dismissal of received theories will try any economist’s patience. It may be that Juan has found an error in the received theory. But in that case he owes it to everyone to explain where the rest of us went wrong, instead of merely sneering.
George, I apologize if I was too dismissive.
The thing is, I’ve never come across a clear and concise explanation of the workings of (hypothetically) free FRB based on first principles. Such an explanation might be helpful.
In a previous thread I suggested that you provide an explanation as basic as possible - I said imagine that your audience is mildly retarded - but didn’t get one. Instead you linked a couple of articles.
It seems to me that the majority if not all economic phenomena could be explained by describing how a small town would work.
You on the other hand say things like
“In a system of many banks…”
which begs the question : how many is ‘many’ banks ? - IMO the method of the discussion is flawed.
You seem to believe that the issue is completely settled and that only ‘fools’ don’t get it…But it seems to me that banking was never really free and that critics of FRB have not been just a handful of fools.
Sure? I was taught that they do in my economics class in high school and agricultural economics class in college. Plz forgive me for not having an in-depth understanding like some folks. I just like learning about economics in my spare time and came across some names and eventually vids, articles, some books(still gotta read some Austrian economics books though. Right now I’m just reading Economics in One Lesson.
Anyways, I thought banks lent deposits…or rather that they lent reserves. Reserves come from deposits and also from when the central bank increases the money supply by increasing bank reserves, don’t they?