Fractional reserve banking… and why it’s a disaster.

A collection of resources for anyone researching our widely misunderstood monetary system.

milton“It’s a process that, even today, few bankers understand”

Milton Friedman, Nobel Prize winner in economics, 1976.

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…

goodProfessor 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.