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Fractional reserve banking, and why it's a disaster.

A collection of resources for anyone researching our widely misunderstood monetary system.
"It's a process that, even today, few bankers understand"
Milton Friedman, Nobel Prize winner in economics, 1976.
"Fractional reserve banking" is the label used to describe our current monetary system. Confusingly the system has changed so much in recent decades that this label is now rather misleading.

The first thing you need to know about fractional reserve banking is that it's taught incorrectly at university. And don't just take our word for it...

Professor Charles Goodhart CBE FBA
Member of the Bank of England's Monetary Policy Committee (1997-2000).
Emeritus professor at the London School of Economics.

Professor Goodhart described standard university teaching of our monetary system as "...such an incomplete way of describing the process of the determination of the stock of money that it amounts to misinstruction".

The reason the workings of our monetary system are taught incorrectly is that the details of how it operates in practice are too complex for students to study in a reasonable period as part of an undergraduate course. Instead they learn an oversimplified cartoon version of reality. Teaching simplified models is not necessarily a bad thing so long as the choice of simplifications are well made. It is done all the time in physics and chemistry without problem. Unfortunately the choice of simplifications made in the teaching of our monetary system have led a great many economists to some disastrously wrong conclusions about the behaviour of money.

New! Its official! Bank of England slams textbook descriptions of fractional reserve banking!

New! Top 10 documents showing that the description of the monetary system found in most textbooks is wrong.

Read "What Went Wrong with Economics" for a more detailed examination of
how fractional reserve banking leads to economic instability →

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