<blockquote>
  <p>Fractional banking acts as a multiplier on the money available for loan takers.</p>
</blockquote>

<p>Actually, this is subsequently to having <strong><em>taken</em></strong> loans that the money multiplier increases from 1. Fractional banking <em>potentially</em> increases the "money supply", it does not do so <em>performatively</em>. Incidentally this is even why, western economists are currently discussing the possibility of <a href="https://www.google.com/amp/s/www.thefiscaltimes.com/2019/08/19/We-May-Need-Helicopter-Money-Next-Downturn-Report%3famp" rel="nofollow noreferrer">fighting the next downturn with helicopter money</a>.</p>

<p>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.</p>

<blockquote>
  <p>What would happen to the economy if fractional banking was gradually abolished?</p>
</blockquote>

<p>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 <a href="https://en.m.wikipedia.org/wiki/Monetary_policy#Conventional_instrument" rel="nofollow noreferrer"><em>conventional</em></a> 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 <a href="https://en.m.wikipedia.org/wiki/Business_cycle" rel="nofollow noreferrer">longer business cycles</a>.</p>

CC BY-SA 4.0
2019-08-27T06:28:27.557Z
Would interest rates be normal again?
Rye bread
CC BY-SA 4.0
2019-08-27T06:58:18.180Z
@Rye Given that any [real interest rate](https://en.wikipedia.org/wiki/Nominal_interest_rate#Nominal_versus_real_interest_rate) can be decomposed as the sum of a [*risk-free rate*](https://en.wikipedia.org/wiki/Risk-free_interest_rate) and a [*borrower-dependent risk-premium*](https://en.wikipedia.org/wiki/Risk_premium), I see no theoretical reasons why they would be different from what they are currently. Their [volatility](https://en.wikipedia.org/wiki/Volatility_(finance)) would be lower though.
keepAlive
CC BY-SA 4.0
2021-09-08T15:22:58.013Z
The last paragraph is speculation at best.  For example, fractional reserve banking may impose a limit to overall lending, but the allocation of loans is driven by profit considerations of the banks. Also, there haven't been any reserve requirements in the UK since 1981, and it has been working just fine.
BrsG
CC BY-SA 4.0
2021-09-08T17:42:18.613Z
@BrsG you miss the point. The counterfactual notion here is not about imposing reserve requirements, but imposing [full money](https://monneta.org/en/full-money-positive-money-and-monetative/), which would change the *profit maximization program* of banks for sure strongly restricting it as least. Anyway, you are in revenge downvote. No time to loose with you and believe it or not, the downvote you receive was not from me. Cheers.
keepAlive
CC BY-SA 4.0
2021-09-09T08:46:57.837Z
@keepAlive: Maybe I miss the point. To me the question reads just as what would happen if we abandoned reserve requirements? Where is the imposition of full money implied? You also didn't state anywhere that your answer is based on that assumptions. Hence the downvote, not out of "revenge". If it was "revenge" I could have downvoted many of your actually quite good answers!
BrsG
CC BY-SA 4.0
2021-09-09T09:19:50.193Z
@BrsG Ok no reason not to believe you. True, this is not 100% explicite. But the sentence *"precluding someone else from borrowing the bike from me"* pictures a "full bike" system, assuming that I am the first (and only) borrower of the bike, which is an implicit -- but missing, you are right -- assumption...
keepAlive
CC BY-SA 4.0
2019-08-26T22:25:27.560Z
2019-08-26T22:42:53.247Z
2019-08-26T22:42:53.247Z
keepAlive
<p>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. </p>

<p>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. </p>

<p>What would happen to the economy if fractional banking was gradually abolished?</p>

<macroeconomics><interest-rate><banking>
What would happen if fractional banking was phased out?
Rye bread
# What would happen if fractional banking was phased out?

(Asked by: username_0 on 2019-08-24)

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?

**Tags:** macroeconomics, interest-rate, banking


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## 1 answers

### Answer by username_1 on 2019-08-26. Score: 2 | Accepted answer

> 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](https://www.google.com/amp/s/www.thefiscaltimes.com/2019/08/19/We-May-Need-Helicopter-Money-Next-Downturn-Report%3famp).

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*](https://en.m.wikipedia.org/wiki/Monetary_policy#Conventional_instrument) 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](https://en.m.wikipedia.org/wiki/Business_cycle).

> **Comments:**
> **username_0**: Would interest rates be normal again?  
> **username_1**: @Rye Given that any [real interest rate](https://en.wikipedia.org/wiki/Nominal_interest_rate#Nominal_versus_real_interest_rate) can be decomposed as the sum of a [*risk-free rate*](https://en.wikipedia.org/wiki/Risk-free_interest_rate) and a [*borrower-dependent risk-premium*](https://en.wikipedia.org/wiki/Risk_premium), I see no theoretical reasons why they would be different from what they are currently. Their [volatility](https://en.wikipedia.org/wiki/Volatility_(finance)) would be lower though.  
> **username_2**: The last paragraph is speculation at best.  For example, fractional reserve banking may impose a limit to overall lending, but the allocation of loans is driven by profit considerations of the banks. Also, there haven't been any reserve requirements in the UK since 1981, and it has been working just fine.  
> **username_1**: @username_2 you miss the point. The counterfactual notion here is not about imposing reserve requirements, but imposing [full money](https://monneta.org/en/full-money-positive-money-and-monetative/), which would change the *profit maximization program* of banks for sure strongly restricting it as least. Anyway, you are in revenge downvote. No time to loose with you and believe it or not, the downvote you receive was not from me. Cheers.  
> **username_2**: @username_1: Maybe I miss the point. To me the question reads just as what would happen if we abandoned reserve requirements? Where is the imposition of full money implied? You also didn't state anywhere that your answer is based on that assumptions. Hence the downvote, not out of "revenge". If it was "revenge" I could have downvoted many of your actually quite good answers!  
> **username_1**: @username_2 Ok no reason not to believe you. True, this is not 100% explicite. But the sentence *"precluding someone else from borrowing the bike from me"* pictures a "full bike" system, assuming that I am the first (and only) borrower of the bike, which is an implicit -- but missing, you are right -- assumption...  

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