1
$\begingroup$

There are negative interest rates now and into the foreseeable future. This must mean there is too much money being offered compared to the demand for loans. Fractional banking acts as a multiplier on the money available for loan takers, so it drives up the supply.

In this extreme situation, perhaps it would be a good idea to gradually phase out fractional banking and return to a simpler and less risky economy.

What would happen to the economy if fractional banking was gradually abolished?

$\endgroup$

marked as duplicate by EnergyNumbers, Giskard, Art, dismalscience, jmbejara Aug 31 at 3:03

This question has been asked before and already has an answer. If those answers do not fully address your question, please ask a new question.

2
$\begingroup$

Fractional banking acts as a multiplier on the money available for loan takers.

Actually, this is subsequently to having taken loans that the money multiplier increases from 1. Fractional banking potentially increases the "money supply", it does not do so performatively. Incidentally this is even why, western economists are currently discussing the possibility of fighting the next downturn with helicopter money.

If I have borrowed, say, a bike, and that I do not plan to use it during the next week, why preclude someone else from borrowing it from me? And the risk that I change my mind and need my bike during the next week is not unmanageable. Especially that the new borrower may have good opportunities to increase to collective wealth.

What would happen to the economy if fractional banking was gradually abolished?

Resources would be suboptimally employed and we would probably enter a long period of recession. Especially that the world currently "needs" inflation and that credit is the main conventional inflation-engine. That being said, at some point, the entire economic system would likely synchronize with this new credit pace, finally leading the world into a new economic regime, slower, with less volatility and with longer business cycles.

$\endgroup$

Not the answer you're looking for? Browse other questions tagged or ask your own question.