Is fractional reserve banking inflationary?

It increases the money supply.

Let's say there are 10 units of currency in the world. They are yours. You deposit them in a bank. How many units of currency are there? 10.

Now, let's say that the bank gives a loan of 5 to Joe. They write Joe a check for 5.

Now how many units of currency are there. Your 10, plus the Joe's 5. That's 15. That's more than existed previously. The money supply has increased. Hence, inflation.

 

Yes, obviously. But the question is does increasing a money supply always cause inflation?
Despite what many people think, bank notes issued by a national central bank are not pure fiat money.
There is some relationship that exists between the Fed's reserve assets and the worth of the dollar.
Increasing the money supply doesn't automatically mean a corresponding proportional increase in inflation. Unless you count debt as a negetive component of the net money supply. And why should that be surprising? If someone else's debt functions as a positive component to increase the money supply.

If I hand out 10 axes to people in a small town, and then later hand out 10 more axes, that doesn't nessessarily decrease the value of 1 axe to them.

Now suppose I come back again to that town and tell people I'm going to take away their houses unless they give me back one of those axes.

People who think the dollar is a pure fiat currency are brain dead, stupid, AND ignorant. (sorry, a little bit of frustration coming out there)

I'm not in any way trying to minimize the danger of inflation from more money being issued. But people need to better understand it. Doubling the currency in circulation doesn't lead to a 100% inflation rate.

 

An increase in money supply IS inflation.

 

obviously not if prices go down due to increased production of goods or decreased velocity

 

Sustainable economic growth is achieved from the investment of capital created through production and savings.

 

growth comes from new inventions which in turn come from capitalist animal spirits. capital is adjunctivly related

 

That's completely irrelevant to this discussion.

That is not what this discussion is focusing on.

 

That would be where your mistake is.

You see the dollar as an intrinsically worthless piece of paper that people only use to trade amongst themselves.

But people who see things this way usually don't really understand what the dollar is.

Let me rephrase this in a different way. Don't you think personal debt would act as a negetive component towards the money supply?

Why can't an individual person loan money to themselves to increase the money supply?
Yet we think this works on the level of fractional reserve banking?

If it doesn't work for an individual, obviously it wouldn't work for a collective of people either, demonstrating the logical fallacy.

 

it was correct exact answer to question. Why not ask more accurate question then?

 

I thought inflation was when prices went up??

 

the affect of monetary inflation will always be manifested somewhere . Look at the massive asset inflation that happened over the past 10 years despite low velocity. Production inflation in the face of static demand is caused by monetary inflation, leading to price deflation. Malinvestment in practice

It is required to carry invention from drawing board to production line

 

There are some varying different definitions of inflation. I would define it as when a unit of currency loses some of its value.

Prices could of course go up for other reasons, having nothing to do with the money supply.

 

The record shows that for four decades the money supply has been expanding while inflation has been falling. Many people say that money supply growth always causes inflation, but when handling money we're better checking what is and not what people say.

Let's understand together with the fact that ten years ago began a massive deflation in market prices for land, equities, and currencies.

 

Actually, individuals can and do create money all the time, it's just so much work for small time cases that most folks leave it to the banks that are better at it.

If someone asks me to hold $1K in cash for them for a while they're out of pocket w/ the agreement that I have to return it upon demand, and someone else asks to borrow $1K from me and signs over title to easily sold assets (say, gold coins) worth a lot more, then the money supply has just increased by $1K to $2K (the first guy's demand deposit note plus the next guy's borrowed cash).

 

But that wouldn't really be any different from you deciding to borrow money out of your own retirement savings.

Do you think a society as a whole deciding they want to start saving money results in deflation?

 

That's the definition of inflation. Inflation of the money supply.

 

If you think that, please explain how prices would go up in a barter economy. I'm interested to hear your explanation of how inflation occurs in a non-monetary economy.

 

Inflation is an increase in the money supply. So an increase in the money supply IS inflation.

 

No, I don't. You attribute that to me.

I don't even understand what you're asking, so I can't answer your question.

What's the logical fallacy? I think I missed it.

 

When dollars used to be backed by gold, would it cause inflation when they increased the money supply? No, not really.

The issue is dollars are backed by dollars in a complicated circular arrangement within the Federal Reserve Bank system, so when the money supply changes, it's not just a simple effect.

 

Fractional reserve banking is, at its core, the same type phenomena as if everyone simply decided to dip into their savings to spend more money.
Or if I started buying things without money by promising to pay all those people 5 years from now.

To the extent that those things would create inflation (if they would) then fractional reserve banking would also create inflation.

I think it's easier to analyze the phenomena if we look at these simple examples I just outlined.

 

Dollars WERE gold. They weren't 'backed' by anything.

 

I don't really see how that's relevant to the point I was trying to make.

I could analagously say that dollars are taxes, dollars are people's houses.
Don't pay those dollars and the Fed will foreclose on your mortgage. (your local bank bundled up some of its mortgages and sold them to the Fed)

 

What if professional economists don't truly understand how the economy actually works?

They analyze a specific phenomena, but do they really know to what extent that phenomena contributes to the cause of something else?

For example, "money velocity" might actually be an intellectually bankrupt theory if fractional reserve banking does not actually contribute substantially to inflation. It could be flawed theory.

This of course has many political implications.

 

yes a necessary part but not the essential part