If banks would not be allowed to lend out more than what they have in terms of deposits, or if they would only be allowed to lend out twice that amount, what would be the most significant difference with the current fractional reserve system (in which the cash-reserve ratio can be as high as 1:9)?
I’m reading that the current system increases the availability of credit, which in turn helps the economy to grow. But if banks would only be allowed to lend out half of what they are currently lending out, wouldn’t the supply of money simply go down, and thus the value of money up, effectively leaving banks with the same lending power?
Current system:
- Total amount of money in circulation: central bank money x money multiplier. Most money is created by commercial banks.
Alternative system:
- Total amount of money in circulation: central bank money. All money is created by central banks.
I’m not asking what would happen if this would change over night (e.g. sudden decrease of money, monster deflation etc.). I’m asking what is the benefit (and to whom) of doing it the way it is currently done.
Most “money” exists as credit. It allows the central bank to control the growth of the money supply. The higher leverage allows more loans, that go into making things. It ultimately allows our economy to grow faster.
Yeah, but how would banks have less lending power if they would only be allowed to lend out half. Wouldn’t that simply reduce the amount of money in circulation and thus increase the value of money?