Fractional-reserve banking: Difference between revisions
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Indeed, in view of the all important role of money in the modern world, lack of discussion about where money comes from in the first place and how it gets into circulation seems a curious omission. | Indeed, in view of the all important role of money in the modern world, lack of discussion about where money comes from in the first place and how it gets into circulation seems a curious omission. | ||
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[[Category:Economics Workgroup]] | [[Category:Economics Workgroup]] | ||
Revision as of 13:00, 8 May 2007
Fractional-reserve banking is the modern practice of lending multiples of deposits held by banks. For example, a deposit of ten pounds enables the bank to lend ninety pounds to a new borrower (i.e. £100, less £10 kept as reserve), thereby increasing the amount "money" in circulation. The reserve ratio varies from time to time as determined by the central bank and is one of the means of controlling the money supply.[1]
Critics of fractional-reserve banking argue that banks have an unfair advantage over other businesses in being able to "transform a dollar of reserves into many dollars of money".[2]
Indeed, in view of the all important role of money in the modern world, lack of discussion about where money comes from in the first place and how it gets into circulation seems a curious omission.