Earlier quoted context omitted.
>What's that supposed to mean? The misconception is that if a bank has a capital X, the law gives them power to create loans up to 10X. What I'm saying is that without the law, the bank could create loans without a constraint, so say 20X, 100X 1000X. The fractional reserve policy is actually a limit, not the source of lending in excess of capital. Loans are money creation, and this creation is organic, it doesn't nee…
> What I'm saying is that without the law, the bank could create loans without a constraint, so say 20X, 100X 1000X. No, they couldn't, and they didn't when no such laws existed. Canada and Scotland had prominent episodes in their histories when banking was fairly lightly regulated and no such laws existed; and their banks did not create '1000X' loans from thin air. > Another misconception is that this money creation…
Regarding your theory of gold deposits being behind money creation is on Wikipedia as Metallism.
Regarding how banks worked before such laws existed, we could look at the period immediately before the creation of fractional reserve, I would predict that immediately before the rule was put in place, the banks were creating these 1000X (maybe 100X? I don't know) which caused a bank run. Without looking, the history of fiat money is quite recent, 1 century or maybe even less? So this shouldn't be too long ago. It is possible for banking working correctly for a long time without the rule, it might have been a short period, kind of like how soccer worked without offside rule for a long time, but it was put in place to stop some specific type of play anti-sportsmanlike play, not to enable another.
>I agree on the first and last part. I'm not what you mean by organic.
I think a more standard term is endogenous, as in an emergent behaviour of private individuals, rather than exogenous, as in set by a central bank. https://en.wikipedia.org/wiki/Endogenous_money
>What is that supposed to mean?
You are right these are not standard terms, I meant gross money creation as money that is created with a corresponding liability. For example a loan, or a loan with a mortgage on land. The money base increases, but so does the size of the economy represented by that currency in equal increments. Endogenous money seems to map quite cleanly to gross money. Although not all exogenous money is "net" (as in creating currency without an underlying asset).
>No, it would absolutely contribute to inflation. As a thought experiment: just imagine the government banned private money creation tomorrow. Inflation would totally crash and the economy would collapse from a lack of demand.
One of the examples of exogenous money that does create inflation and I would say it's net money creation (for lack of a standard term I don't know about), would be seignorage, a term that comes from metal economies, where they would reduce the amount of valuable metal in coins, and the value of the coins was maintained by the trust, power and guarantee of the imperial seals imprinted on them, this gradually lead to fiat valuable metal was completely removed.
Nowadays it seems the term seignorage is still used to refer to the revenue created by the state whenever it 'prints' money without a liability. It is important to distinguish this from endogenous money creation like loans and clarify that the latter doesn't cause inflation, and if it does its effect would be minimal when compared to seignorage.