# Critique the reply my brother gave on this Economic question **URL:** \ **Category:** Great Debates\ **Created:** [July 11, 2016, 4:24pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665 "2016-07-11T16:24:24Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Ryan\_Liam](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ryan_liam/32/3965_2.png) [@Ryan\_Liam](https://boards.straightdope.com/u/Ryan_Liam)\ **Post date:** [July 11, 2016, 4:24pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/1 "2016-07-11T16:24:24Z")
I presented my brother with a link about how the Gold Standard was an irrelevant method of measuring the value of paper money. > **[The gold standard is a better monetary system.](http://www.huppi.com/kangaroo/L-gold.htm)** > > A liberal essay rebutting the myth > that the gold standard is a better monetary system. > [@](#): > > **Huppi** > Summary > > The far right advocates the gold standard because it gets government out of the business of controlling the money supply. They fear that printing money creates inflation, and retracting money causes recessions. But the opposite is also true: printing money cures recessions, and retracting it cures inflation. Governments in the last 60 years have used these policies with tremendous success. There has not been a single depression or bank panic in any nation anywhere in the world using Keynesian monetary policies. But during the Gilded Age of the late 19th and early 20th centuries, depressions and bank panics were common. The historical record is so strong that mainstream economists reject the gold standard almost universally. Here’s my brothers reply; > [@](#): > > Completely irrelevant, my argument has never been towards a gold standard, the economics of our money supply at this moment in time breeds inequality and let’s the banks set the lending rate which is the ultimate reasons for creating money, now don’t tell me we are going to argue over who creates money? > > It’s the banks not the government, my argument has always been that, like Keynes government should control money supply yes. But this isn’t what is happening, the banks should only be able to lend a specific amount into the economy and fractional reserve banking should be completely controlled from a central bank ruling not the individual banks appetite for lending which can actually increase volatility due to them hunting for returns on money they have created out of nothing so therefore take bigger lending risks, which we are actually seeing now and I come across everyday. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [July 11, 2016, 4:54pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/2 "2016-07-11T16:54:01Z")
What he is advocating is an end to fractional reserve banking. The problem with this is an end to the leverage gained by the fractional reserve banking would mean fewer loans and with it less investment and less growth. ---
**Author:** ![PatrickLondon](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/patricklondon/32/4422_2.png) [@PatrickLondon](https://boards.straightdope.com/u/PatrickLondon)\ **Post date:** [July 11, 2016, 5:06pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/3 "2016-07-11T17:06:12Z")
> [@puddleglum](#): > > What he is advocating is an end to fractional reserve banking. The problem with this is an end to the leverage gained by the fractional reserve banking would mean fewer loans and with it less investment and less growth. It comes down to the political question: who balances the overall advantages and disadvantages of either printing money or limiting banks’ ability to create credit? The gold standard was a rather crude one-size-fits-all/either-or control. But Keynesian policies also involved more or less fixed exchange rates, with an internationally-agreed system for some degree of flexibility for economies under stress. And one other point of critique - he’d help himself if he learnt punctuation. ---
**Author:** ![YogSothoth](https://avatars.discourse-cdn.com/v4/letter/y/8edcca/32.png) [@YogSothoth](https://boards.straightdope.com/u/YogSothoth)\ **Post date:** [July 11, 2016, 5:09pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/4 "2016-07-11T17:09:48Z")
So he’s for the gold standard, not for the gold standard? He barely mentioned it and didn’t say if his belief is that such a standard helps or hinders what he wants to happen. I give this paper a D- ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [July 11, 2016, 5:40pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/5 "2016-07-11T17:40:13Z")
> [@](#): > > the banks should only be able to lend a specific amount into the economy and fractional reserve banking should be completely controlled from a central bank ruling not the individual banks appetite for lending which can actually increase volatility _ **due to them hunting for returns on money** _ they have created out of nothing so therefore _ **take bigger lending risks** _, which we are actually seeing now and I come across everyday. This may come as a surprise to the government entity which does control private banking — The Fed has pumped trillions into the banking sector but rather than “taking bigger risks” the private banks are content to leave much of that money in excess-reserves accounts earning 0.25% interest. Your brother’s concern might have merit in other contexts (I advocate increasing broker’s margin requirements during stock market bubbles) but doesn’t seem to apply to today. The mention of money “created out of nothing”, even though it is tangential to the main point, suggests that there’s a perception that the bank-created money is somehow illicit. ---
**Author:** ![Ryan\_Liam](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ryan_liam/32/3965_2.png) [@Ryan\_Liam](https://boards.straightdope.com/u/Ryan_Liam)\ **Post date:** [July 11, 2016, 6:41pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/6 "2016-07-11T18:41:29Z")
> [@puddleglum](#): > > What he is advocating is an end to fractional reserve banking. The problem with this is an end to the leverage gained by the fractional reserve banking would mean fewer loans and with it less investment and less growth. I’ve presented the reply > [@](#): > > How does that mean less loans with less investment & less growth, if the government controlled money creation they could still do all those factors, the banks don’t lend to someone just because they have gone through a very long and drawn out application process, they lend People and businesses money because it’s there to be lent. > > If I buy £10 worth of bonds off the BOE, with that as leverage I can now lend £100 worth of loans credit cards etc, why would I only lend £8 when I can lend the extra £2 & get rid of what the banks like to term idle reserve, but when there isn’t demand for that extra £2, banks start loosening there lending criteria in order to garner interest on the £2 they created out of nothing. ---
**Author:** ![treis](https://avatars.discourse-cdn.com/v4/letter/t/bc79bd/32.png) [@treis](https://boards.straightdope.com/u/treis)\ **Post date:** [July 11, 2016, 7:54pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/7 "2016-07-11T19:54:59Z")
I think your brother is mistaken about the control the government has on bank lending. They have big levers like the reserve ratio, discount window, and currency trading to control how much lending banks do. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [July 11, 2016, 8:05pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/8 "2016-07-11T20:05:30Z")
What exactly is your brother proposing? Government already has authority over chartered banks, e.g. to audit and force bad loans to be accounted properly. IIRC, the Fed has left the reserve requirement at 10% for several decades; is the proposal to increase that to 20%? To 100%, thus eliminating fractional-reserve lending? In the latter case, where would businesses get credit? From the government? I agree with your brother that private banks have run roughshod over the economy in some ways, but ordinary fractional-reserve banking is _not_ the problem. ---
**Author:** ![kaylasdad99](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kaylasdad99/32/3398_2.png) [@kaylasdad99](https://boards.straightdope.com/u/kaylasdad99)\ **Post date:** [July 11, 2016, 8:38pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/9 "2016-07-11T20:38:53Z")
Here’s the part that piques my interest: > [@Ryan\_Liam](#): > > Here’s my brothers reply; > > > [@](#): > > > > It’s the banks not the government, my argument has always been that, like Keynes government should control money supply yes. But this isn’t what is happening, the banks should only be able to lend a specific amount into the economy and fractional reserve banking should be completely controlled from a central bank ruling not the individual banks appetite for lending which can actually increase volatility due to them hunting for returns on money they have created out of nothing **so therefore take bigger lending risks, which we are actually seeing now and I come across everyday.** (emphases mine) What line of work is your brother in (or what activities make up his daily routine), that he comes across the effect he mentions every day? ---
**Author:** ![Ryan\_Liam](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ryan_liam/32/3965_2.png) [@Ryan\_Liam](https://boards.straightdope.com/u/Ryan_Liam)\ **Post date:** [July 11, 2016, 9:45pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/10 "2016-07-11T21:45:34Z")
> [@kaylasdad99](#): > > Here’s the part that piques my interest: > > (emphases mine) > > What line of work is your brother in (or what activities make up his daily routine), that he comes across the effect he mentions every day? He runs a debt management company. ---
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [July 12, 2016, 4:14am UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/11 "2016-07-12T04:14:27Z")
[del]I kind of suspect OP’s brother is flailing for an workable reason to condemn banks. (I don’t want to defend the industry, but that was not an impressive argument.)[/del] Edit: Wait, on reread, this sounds familiar. Is the UK going through a period of suspiciously easy loans? I’m remembering stories of the S&L sector in the USA in the 1980’s. He may be onto something? ---
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [July 12, 2016, 5:09am UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/12 "2016-07-12T05:09:59Z")
> [@foolsguinea](#): > > [del]I kind of suspect OP’s brother is flailing for an workable reason to condemn banks. > > (I don’t want to defend the industry, but that was not an impressive argument.)[/del] > > Edit: Wait, on reread, this sounds familiar. Is the UK going through a period of suspiciously easy loans? I’m remembering stories of the S&L sector in the USA in the 1980’s. He may be onto something? I think that the UK is recovering from a period of bad loans. Wikipedia says of the Clydesdale Bank: “In September 2013 the bank was fined £8.9m after miscalculating the mortgage repayments of more than 42,000 customers.[5] In March 2015 the House of Commons Treasury Select committee said in a conduct report that they had evidence that the Clydesdale Bank had mis-sold unregulated Tailored Business Loans and that the bank’s own internal review of the mis-selling had serious shortcomings and lacked transparency.[6] In April 2015 the Clydesdale was fined £20.7m the largest of its type imposed by the Financial Conduct Authority for the mis-selling of PPI insurance”. They didn’t all get into trouble like that, but “mis-sold unregulated Business Loans” doesn’t happen without a context. So the opinion htat there should be more regulation and less freedom is an opinion some people have. And it sounds like your brother may be in good place to argue his opinon from his personal experience. You should encourage him to do that, because his idea that banks are “free” to create money isn’t true. It’s like saying he is free to earn money because he gets paid for going to work: yes, he does get paid, no he really doesn’t have much “freedom” where that is concerned. Similarly, the banking system creates money, but it’s controlled by the government and central bank. Maybe the government has done a bad job, but the banks aren’t any more “free” than he is. ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [July 12, 2016, 3:28pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/13 "2016-07-12T15:28:52Z")
Poor government regulation exacerbates financial crises and consumer debt crises. The “moral hazard” of bailing banks out (e.g. buying their troubled assets as in TARP), and writing bankruptcy laws to favor banks rather than consumers have each led to excessive bad loans. But fractional-reserve banking is not the problem. And don’t forget that a bank can loan in total only 90% of its deposits; the way some explain fractional reserve you might think it was 900%. :smack: ---
**Author:** ![WillFarnaby](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/willfarnaby/32/514_2.png) [@WillFarnaby](https://boards.straightdope.com/u/WillFarnaby)\ **Post date:** [July 12, 2016, 3:39pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/14 "2016-07-12T15:39:14Z")
Sounds a bit like Greenbackerism with a twist. He wants the govt to control lending and printing directly, but under a gold standard. This would never last. ---
**Author:** ![Ryan\_Liam](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ryan_liam/32/3965_2.png) [@Ryan\_Liam](https://boards.straightdope.com/u/Ryan_Liam)\ **Post date:** [July 12, 2016, 4:56pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/15 "2016-07-12T16:56:40Z")
> [@Melbourne](#): > > I think that the UK is recovering from a period of bad loans. Wikipedia says of the Clydesdale Bank: > > “In September 2013 the bank was fined £8.9m after miscalculating the mortgage repayments of more than 42,000 customers.[5] In March 2015 the House of Commons Treasury Select committee said in a conduct report that they had evidence that the Clydesdale Bank had mis-sold unregulated Tailored Business Loans and that the bank’s own internal review of the mis-selling had serious shortcomings and lacked transparency.[6] In April 2015 the Clydesdale was fined £20.7m the largest of its type imposed by the Financial Conduct Authority for the mis-selling of PPI insurance”. > > They didn’t all get into trouble like that, but “mis-sold unregulated Business Loans” doesn’t happen without a context. > > So the opinion htat there should be more regulation and less freedom is an opinion some people have. > > And it sounds like your brother may be in good place to argue his opinon from his personal experience. You should encourage him to do that, because his idea that banks are “free” to create money isn’t true. > > It’s like saying he is free to earn money because he gets paid for going to work: yes, he does get paid, no he really doesn’t have much “freedom” where that is concerned. Similarly, the banking system creates money, but it’s controlled by the government and central bank. Maybe the government has done a bad job, but the banks aren’t any more “free” than he is. He has replied; > [@](#): > > If I buy £10 worth of bonds off the BOE, with that as leverage I can now lend £100 worth of loans credit cards etc, why would I only lend £8 when I can lend the extra £2 & get rid of what the banks like to term idle reserve, but when there isn’t demand for that extra £2, banks start loosening there lending criteria in order to garner interest on the £2 they created out of nothing. ---
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [July 12, 2016, 6:44pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/16 "2016-07-12T18:44:51Z")
I can’t make heads nor tails of that, sorry. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [July 12, 2016, 7:53pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/17 "2016-07-12T19:53:41Z")
> [@Ryan\_Liam](#): > > I’ve presented the reply I’m not a banking expert but my reading suggests that the problem is how the government would know how much money to supply. Banks don’t just lend out all the money they can, they only lend when they think they will be paid out. So in times of growth demand for money goes up and the banks respond by creating more. Government could do this if it knew all the information banks do about who wants loans and how risky the loans are but they currently don’t. The reason the bank would not loan out the other 2 quid is they might not get repaid and would not get the interest. However, monetary policy is already currently completely controlled by the government. If a recession starts and banks stop making as much money as the economy needs then the government can create more base money or announce a new inflation target or do quantitative easing. I know of no instance in history where a government with a fiat money system failed to create enough money because it was unable to do so. If an economy does not have enough money it is not because the government is unable to do so; it is because they do not want to. So banning fractional reserve banking would create alot of turmoil in the banking industry in order to give the government a power it already has and is not using in many cases. ---
**Author:** ![Ryan\_Liam](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ryan_liam/32/3965_2.png) [@Ryan\_Liam](https://boards.straightdope.com/u/Ryan_Liam)\ **Post date:** [July 12, 2016, 9:02pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/18 "2016-07-12T21:02:52Z")
Brothers reply to Puddleglum > [@](#): > > Stretching that £2 out to a riskier borrower has little risk to the banks in actual fact because it’s fiat currency as long as the default rate stays below a certain amount the banks will always make money, I would even go as far as saying even if those buffers are breached they would still make money. > > The core problem is the symbiotic relationship or mutual assured destruction agreement they have with each other which ultimately is balanced in there favour because the boards of the banks we have no veto over but the government we do. > > Quantitative easing doesn’t work, it would have worked better if you just gave each individual £5k and told them to spend it. > > What will they do in the next financial crisis, which will come sooner rather than later…reduce interest rates…no… set an inflation target there already not achieving…no…reduce the money supply…which they haven’t…no. > > The counter arguments your fellow is stating are the the text book arguments which help nobody and keep the status quo. > > My whole basis is that we can have a Fiat currency all day long but with a further control over it not using tried and tested methods of old, because they don’t work, we just end up back at square one with the same old boring problems. ---
**Author:** ![dracoi](https://avatars.discourse-cdn.com/v4/letter/d/90db22/32.png) [@dracoi](https://boards.straightdope.com/u/dracoi)\ **Post date:** [July 12, 2016, 9:25pm UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/19 "2016-07-12T21:25:35Z")
At this point, I’m totally unclear about what he is proposing. Is it really as simple as “Instead of giving people the ability to borrow money, we should just hand it out directly from the government” or “National monetary policy should be determined by a public vote instead of educated professionals”? The problem is that you’re juggling so many factors at the same time. When banks lend money, people buy things with that money, which keeps the sales of everything from houses and cars to clothes and food going. Reduce consumption and you enter a recession. The government can stimulate spending in a number of ways, but cutting everyone a check creates greater debt, and that debt has to be purchased by someone. ---
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [July 13, 2016, 3:56am UTC](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665/20 "2016-07-13T03:56:09Z")
> [@Ryan\_Liam](#): > > He has replied; I think that perhaps what he means is: Quote: If **the Bank** buys £10 worth of bonds off the BOE, with that as leverage **and with £100 of deposits, the Bank** can now lend £100 worth of loans credit cards etc, why would **it** only lend **£80** when\*\* It\*\* can lend the extra **£20** & get rid of what the banks like to term idle reserve, but when there isn’t demand for that extra **£20** , banks start loosening there lending criteria in order to garner interest on the **£20 their customers created out of loans credit cards etc**. So it appears that he’s missed the technical point that the money is lent out of deposits. In terms of his conclusion, this is just a technical point, but it indicates that ☹ he doesn’t know what he is talking about, ☹ which is why he should stick to the part he does understand: when there is too much supply, the banks start loosening their lending criteria. As a suggested before, his opinion, that money supply should be more tightly regulated, can be decoupled from his understanding of the banking system. With Monopoly money I can demonstrate to a class of students how the banks, and the banking system, and the regulaters, create and control money, but I don’t think I could convince members of my own family. “A prophet is not without honor except in his own town and in his own home.” [Next page](https://boards.straightdope.com/t/critique-the-reply-my-brother-gave-on-this-economic-question/759665.md?page=2)