Apologies if this is the wrong forum but I'm getting to the end of my tether with unwanted phone calls we're receiving on our landline. We moved in around 6 months ago, got a new number and I keep getting calls throughout the day. I'm paying Virgin Media for anonymous caller rejection (which I don't think I should have to pay for!) but keep getting calls with no number stored. A lot of the time the caller doesn't say anything (as though it's one of those automated diallers that's not connected) which is worrying for my wife when she answers. Other times debt collectors are asking for people we don't know with foreign sounding names, or it's somebody like the Halifax. For example, I told the Halifax yesterday I didn't know the woman they wanted and not to contact me again. Then this morning another guy from Halifax called, said his notes said I'd knew the woman and to cal back !!!!! I asked for his department, or his manager, or for an address to complain to but he wouldn't give them to me. Then he wanted MY personal details, asking repeatedly, which I wouldn't give. I'm really really fedup with this daily problem and wondered if anyone can please, please help?

I'd like to go back to post #22 to try to clarify things further. Let's take out all notions of borrowing from the commercial markets or elsewhere for now and just concentrate on FRB. The source of the funds is important to me to work out costs, but I agree that it is more important now to nail down the FRB process, and borrowing the money is a red herring here. I've taken the 'Wonderful Life' example, upon which I think we're agreed, and tabulated/graphed it on Excel. http://www.dynamicdevices.co.uk/downloads/Fractional Reserve Lending (System).png This just shows the process by which a percentage of a deposit in bank A is lent out, and passes through banks B, C, D ... etc. increasing the money supply as it goes. (No surprises here - I _think_ we agree on this ?) I've tabled 50 iterations but the limiting case is 1/R where R is the ratio. As the ratio I have used is 20% the multiplier m = 5 and so my initial £100 increases to £500 in the economy. Next, and here's where I have been having some trouble, I've been trying to relate that iterative loaning of 80% of the deposit to the commentary I'm reading that a bank can loan £500 for a deposit of, say £100, which is counter-intuitive. I think I understand the basis for this viewpoint now. Banks are continually taking deposits and making loans. In the first example we iterate through a number of banks but we might equally well look at the whole banking sector within the economy and average out those deposits and loans. If we make an assumption that all (or most) of the commercial money loaned from bank A will eventually be deposited with another bank, rather than hidden under the bed, and this other bank is also making loans on the same basis as bank A, then on average we can perform our analysis as if these loans and deposits refer to a single bank. Here's that analysis http://www.dynamicdevices.co.uk/downloads/Fractional Reserve Lending (Bank).png So given the assumptions are reasonable then it follows that for a deposit of £100 a bank can loan £400 at reserve ratio R=20%, or £900 at reserve ratio=10%.

This might also help you. There's a page here on the money supply, and specifically M0 and M4 measures: From the page: (my emphasis) There's a graph here showing how M4 has grown in UK, US and elsewhere over the years:

I'm glad that's settled then... When you write that the effect is 'transitory' you are agreeing that the effect occurs. Yes, the 'commercial bank money' which is created when the loan is made will be destroyed when the loan is repaid. Your argument does not refute the point that the 'commercial bank money' is created when loans are made. It's a multiplier effect so in this context you have to have some 'money' from some source to make loans. You either have to get more people to deposit or you have to be able to refinance your existing loans or take out new ones at a rate that works for you. As I understand it the problem with the banks was/is was that they either couldn't refinance existing loans or get the rates anticipated on new loans.

I can't agree. I believe the quotes speak for themselves which is that As you'll now understand, I was responding in my own words as you were writing this. It boils down to the multiplier. With a 10% asset ratio we agree banks can lend £90 for every £100 deposited. There is also a view (rightly or wrongly) that with a 10% asset ratio banks can lend £100 for every £10 of assets. Would you agree or disagree with this quote from Wikipedia?

Bedlington83, Apologies, I linked to criticism of fractional reserve banking, rather than the main fractional reserve banking page. The page, and specifically the discussion of the page holds more relevant information I believe. However, and in light of the previous email, here's my understanding of the methods (no doubt to be revised as my understanding improves): a) The "It's a Wonderful Life" scenario George runs a bank, which I envision as having a big safe out the back. Bob brings him a deposit of £100 which George puts in the safe. Bob has now effectively lent George some money, for which George has agreed to pay him interest on top of the original deposit, over time, and return the original deposit upon demand. Tom does the same, depositing £800, and then Fred also deposits £100. This means that George now has £1000 in the safe. Next, Jim comes in and asks for a loan to fund the purchase of a car. George knows Jim will be good for it and so lends him 90% of the money in his safe (£900). George does this because he's operating on a 10% reserve ratio which means he must keep 10% of the amount deposited with the bank, in relation to his lending. Jim, having signed the paperwork agreeing to a monthly repayment consisting of both a proportion of the principal sum, and also a related amount in interest, heads off to buy the car. George now has £100 left in the safe and can't make any more loans until he has more deposits. Jim goes to Phil's Used Car Emporium and pays for a new car. Phil goes to his bank and deposits the £900 with George. George now has an additional £900 deposited with him and so can make another loan of up to £810. It should be noted here that George is still keeping the original £1000 on his books as a deposit, although he doesn't actually have the money deposited any more. The cycle can, of course, repeat with George making new loans, and so there is an increase in the 'money supply'. George has been creating new 'commercial bank money' with his loans. For a 10% reserve ratio there will be a corresponding increase in the money supply of up to x10 (i.e. The original £1000 has now become £10,000. George is now left with the problem that if his depositors wish to withdraw more than the original £1000 he hasn't enough money in the safe to pay them and so his bank may become bankrupt. I think this example is essentially the same as the one you use and is referred to as funding through 'retail deposits' in the previous post. Obviously this example doesn't adequately discuss the systemic nature of money creation, as deposits will be made into and loans received from other banks, not just George's. We also don't go on to discuss the effects on the economy (if any) of an increase of this magnitude of the money supply - privately created 'money'. Lastly we don't discuss whether this is indeed 'money' as we would commonly use the term as previously pointed out by My Real Name. b) Big Money, High Risk Lending George sets up a bank. He's an extreme case so he doesn't invest any of his own money in starting up the bank, or worry too much about attracting depositors, which means his bank has £0 on its balance sheet to start. The bank is in the business of lending money, so George has some friends run a mixed media advertising campaign which leads to lots of people seeing offers for his loans on television and in the local newspaper. Jim sees the adverts and decides that he's going to take out a loan to buy a car. He goes to meet with George and thinks that the interest rate offered on the loan seems reasonable enough to borrow £900 of the deposits he thinks George has in the safe. Jim signs a promissory note which guarantees to George that Jim will labour over the next few years to ensure that he can make payments on the principal borrowed plus the interest repayments he has agreed. George tells Jim the money will be available to him in the next few days and Jim goes home. George now phones up Nathan who's a rich landowner. George tells Nathan that he has a promissory note from Jim, and that a guy he met in the pub, Charlie, has assessed Jim as a good risk. George says he needs to borrow £90 from Nathan to ensure he meets his reserve asset ratio of 10%. For this he will pay Nathan a fee and an interest repayment on the money borrowed, which he'll repay at a set date in the future. Nathan is more than happy to loan the money to George, as he's heard Charlie is good at weighing people up and he's getting a good rate of interest on his money. George has now got £90 on his balance sheet and so can lend the £900 to Jim by writing him a cheque. Now we leave out the issue of how long the £90 has been borrowed for, as if the loan of the £90 needs to be refinanced in the short term, and the lenders don't want to lend, then George would have a problem. There are a number questions in my mind. e.g. - the valuation on the promissory note (if this is indeed used) - how valuations are made on negotiable instruments such as this - how Charlie's credit rating system is validated by the FSA, - and whether in George can put the borrowing from Nathan directly on his balance sheet or needs to leverage the borrowing through the creation of some kind of structured investment vehicle. Alex/

Bedlington83 This seems not to be the case. I've had a very helpful response from a chap at Nationwide who makes things clearer: I suggested to him that a solvency ratio of around 11% seemed strong in comparison to other organisations and he concurs, saying: He also seems to concur with my understanding of the two ways that lending can occur, saying: I have to say I really do appreciate the time and trouble to which he went in answering my queries and will be considering Nationwide when my mortgage comes up for renewal

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That is one of the methods by which FRB could operate, yes. As I wrote, I can now see there are at least two schools of thought on this. This page covers the discussion more fully than my comments would: If you have sources showing that the 'debt based' analysis of FRB is incorrect I'd be grateful for the links. Thanks, Alex

Thanks Bedlington83 - I'll follow it up. As an aside, looking further into 'fractional reserve banking' following My Real Name's comments this does seem to be very contentious, with overtones of 'conspiracy theory', which is surprising. There appears to be a consensus that FRB is a system where banks hold a reserve much less than the deposits they've taken (as the deposits have been lent out). However there are two incompatible mechanisms by which this could work and there appears to be much dispute about which mechanism is actually practised by banks. Surprising given this should be a straightforward question. Regarding FRB vs full reserve lending, I'll come back on that when I have something confirming either way from Nationwide

Hi Bedlington83 Could you give me the source for this please? There's a thread on HousePriceCrash regarding mortgages and fractional reserve lending: ref: House Price Crash forum > Uk Building Societies - Fractional Reserve Banking? The responder indicates that Nationwide's annual report (2007) gives a solvency ratio of 11% which apparently indicates they hold reserves equivalent to 11% of loans, and thus do practise fractional reserve lending. Further posts seem to indicate they would have to simply to operate within the market. The report itself is here: ref: http://www.nationwide.co.uk/pdf/about_nationwide/FinalAnnualReport2007.pdf

My Real Name - I'm not an economist, as no doubt is obvious! I'm also not interested in flights of fantasy (if quotes above are such). I do want to get to a point where I have a reasonably correct layman's understanding of the rough cost to a bank of lending me money (or providing credit to me in the form of a mortgage if that is more correct?). Stepping back from the quotes, a quick look at Wikipedia shows material which seems helpful to us: As you'll see on the Wikipedia page that section references material from the Bank for International Settlements, the European Central Bank and the Chicago Fed. In terms of bank lending, you seem to concur that banks lend multiples of deposits, although whilst Wikipedia refers to this as 'commercial bank money' you refer to it as 'credit' ? (or do I misunderstand?) Getting back to the original question, essentially if I take out that example mortgage of 95K, there is no requirement for the bank to have deposits of 95K to lend to me. Presumably the constraint is that they must maintain adequate reserves to comply with the required "capital adequacy ratios" you mention. Can you give me an idea of what this would be? e.g. Perhaps a rough figure would be 10% in the US? So then is it fair to estimate that they require to have 9K5 held as a deposit in order to 'create commercial bank money' to lend me the 95K? Thanks

My Real Name - many thanks for your statements. Perhaps you could direct me to the sources (robust, academic and so forth) which inform you? I would be grateful if you would also enlighten me as to the contradictions in the quotes I included above. Many thanks

I can see your point of view, but the links I reference state categorically that in fact the banks do create money (or 'credit' which has come to mean the same thing). If you Google there is much much more out there that confirms this: And lastly - They take Mrs A's deposit. Then they lend to Mr B, C and D, and this lending can be and is a larger amount than that of Mrs. A's deposit. As you say, a reserve is kept on the basis that Mrs. A or her cohorts might want some of their money back and a run on the bank would bankrupt it. I can only go on what I am reading. I appreciate your skepticism but given the amount of information out there which seems to confirm my understanding, have you any alternative sources I can go to which would refute the argument that banks do in fact create and destroy money? Thanks, Alex/

Bedlington83 - thanks again for your comments. Are you saying you know that this does not happen, and therefore I am mistaken, or are you saying you find it impossible to believe this can happen? I agree these statements seem dubious but I have been reading a fair few sources prior to posting and they all seem to concur that this is exactly what does happen (excepting that the banks have to have some money to cover day to day transactions, a part of 'M1' I think) In the US the government cannot 'create money' (coins yes, notes no). Only the, privately owned, Federal Reserve can do that, which it does and then lends the money to the US goverment charging interest in the process (which is a story in itself). In the UK the government can create notes, since it nationalised the central bank in 1945, I read, but the banks can still make credit available as _multiples_ of deposits they hold, which I understand is how 'private money', i.e. non-Government money, is created and enters the economy when a borrower takes out a loan. If this is rubbish (and perhaps it is!) can you point me to an explanation of why this is wrong, and perhaps how it does actually work? Thanks, Alex/