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 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.