Note in particular this at the end of the section on fractional reserve money:
> Before leaving the subject of fractional reserve systems, I should mention one particularly bizarre variant -- a
fractional reserve system based on fiat money. I call it bizarre because the essential function of a fractional reserve
system is to reduce the resource cost of producing money, by allowing an ounce of reserves to replace, say, five
ounces of currency. The resource cost of producing fiat money is zero; more precisely, it costs no more to print a five-
dollar bill than a one-dollar bill, so the cost of having a larger number of dollars in circulation is zero. The cost of
having more bills in circulation is not zero but small. A fractional reserve system based on fiat money thus economizes
on the cost of producing something that costs nothing to produce; it adds the disadvantages of a fractional reserve
system to the disadvantages of a fiat system without adding any corresponding advantages. It makes sense only as a
discreet way of transferring some of the income that the government receives from producing money to the banking
system, and is worth mentioning at all only because it is the system presently in use in this country.
(By "this country" he means the US, although the US is not the only country with such a system.)
> Note in particular this at the end of the section on fractional reserve money:
> (By "this country" he means the US, although the US is not the only country with such a system.)
Actually the US is a country without such a system, i.e, the US (and most countries really) are not fractional reserve systems, and have not been in decades. James Tobin called this "The Old View" in 1963:
Fractional reserve banking is a nice 'Econ 101' way of thinking of the monetary system, but in no way does it match reality. It should really be stopped being taught because people hold onto the paradigm and it causes faulty analysis:
By the simple definition of "fractional reserve"--that a financial institution only needs to keep a fraction of its total liabilities as actual currency in its reserve pool, and must convert other assets into currency if withdrawals exceed that reserve amount--it most certainly is. That is how all financial institutions in the US work, just as in other countries.
It would be interesting to see a debate between Friedman and the other economists you reference, who obviously hold very different views. I don't think we're going to resolve any such differences here; I would simply note that there are such differences, and that the views of the economists you mention are not universal, nor are they necessarily correct.
https://www.cato.org/sites/cato.org/files/pubs/pdf/pa017.pdf
Note in particular this at the end of the section on fractional reserve money:
> Before leaving the subject of fractional reserve systems, I should mention one particularly bizarre variant -- a fractional reserve system based on fiat money. I call it bizarre because the essential function of a fractional reserve system is to reduce the resource cost of producing money, by allowing an ounce of reserves to replace, say, five ounces of currency. The resource cost of producing fiat money is zero; more precisely, it costs no more to print a five- dollar bill than a one-dollar bill, so the cost of having a larger number of dollars in circulation is zero. The cost of having more bills in circulation is not zero but small. A fractional reserve system based on fiat money thus economizes on the cost of producing something that costs nothing to produce; it adds the disadvantages of a fractional reserve system to the disadvantages of a fiat system without adding any corresponding advantages. It makes sense only as a discreet way of transferring some of the income that the government receives from producing money to the banking system, and is worth mentioning at all only because it is the system presently in use in this country.
(By "this country" he means the US, although the US is not the only country with such a system.)