Yabby "what banks do is in fact circulate the same money over and over." Where did you conjure that gem up from?
In 1970 the price of a schooner of beer in a pub was 25c and a labourer earned $20.00 per day.Now the price of a schooner today is $5.00 and a labourer earns $250.00 per day.Your money back then could buy 30 beers more than today if you were a labourer.

Where did all this inflationary money come from Yabby?In almost 40 yrs we have seen and increase in money supply above GDP and pop increase of at least 1200%.You and I are not allowed to counterfeit money and the RBA heaven forbid has an acceptable inflation rate of only 3.5% pa.The average inflation rate over 40 yrs according to the RBA is 4%.Using the compound interest formula there should only be 5 times the amount of inflation since 1970 compared to the present.Instead houses in Sydney are at least 36 times more expensive and food is at least 22 times more expensive with wages being 12.5 times higher than the present.Petrol in 1970 was 8c a litre.Today it is 16 times more expensive.A day's wages could buy 250 litres and today a day's wages buys 192 litres of fuel with much higher taxes and expenses we now endure.

Something is seriously amiss in the ABS statistics on inflation.The average inflation rate over 40 yrs is more like 8% pa.Who created all this extra inflationary money if it wasn't the banks?

Arjay, there are many things which affect inflation. For one if
workers want pay rises above their increase in productivity and can
enforce them. Some workers have more pricing power then others.

A bank, by giving you a loan to buy your house, increases the money
supply by that very fact. But its the same money that they got
from somebody else, to lend to you. Its the same money circulating
again and again.

Go back to the original goldsmiths. They would take your gold as
a deposit, charge you to hold it for you, when you wanted some,
you could go and get it. Eventually they realised that not all customers needed their money at once, they could lend out some of
it in the form of IOUs.

Now lets say in today's world, that the RBA decided that banks needed
100% reserves, to give you back your money when you as a depositor
requests it. Banks could lend you nothing, your money would sit there, until you spend it. No loans means no increased money supply.

If the RBA decides that 10% should be held as reserves, banks can
lend out 90%, keep 10% as reserves, but that money is deposited once
again by somebody else. Once again it is lent to another home
buyer, only this time less 10%, for again, 10% have to be kept
as reserves. But its the same money circulating. In other words,
banks cannot create money from nothing, pay no interest and charge
you 7% interest or whatever. Only the RBA can do that.

That it seems to me, is where fractional reserve banking is
misunderstood by many.

All good points, Yabby.

The other little problem would be, if there is no money to lend (as in your 1:1 capital adequacy scenario), where would the money come from to grow the economy? Arjay's "GDP increases say of 3.5%" become null and void.

The "growth is bad" mantra needs to be examined in the light of the alternative. Which isn't "no growth", it is the inevitable destruction of our way of life.

No jobs. No salaries. Farmers would close their gates, and build fences to keep out the food-hunters from the towns and cities. Then they'd have to build bigger and bigger walls, until... Well, we'va all seen the movies.

Arjay's "beer model" is actually quite instructive, too, if we think about it.

To get an accurate picture of inflation, a "basket" of products and services is used. And the prices of these - as you point out - will move at different rates.

So he's perfectly right, the worker on $250/day today is worse off than the worker in 1970, if he spends it all on beer. If he spent it all on cigarettes, or whisky, I have a strong suspicion he'd be even worse off.

Which of course is also where tax comes into play, but that's an entirely new calculation...

What also needs to be considered is that there's a ton of stuff that we put in that basket apart from just beer, cigs and scotch. I seem to remember that TV sets were quite expensive for someone on $100/week in 1970...

All part of the learning curve, Arjay.

I hope you are appropriately grateful for all this new stuff you are learning.

Pericles and Yabby,what a dishonest way to wage an argument.Both of your are playing game if intellectual thrust and parry with intent of deflecting attention from the real issue of the bank's ability to steal weatlth from the rest of society by virtue of counterfeiting,which is illegal for the rest of society.

A National Monetary Fund will see a more equitable society whereby the burdens of new inflationary money are shared by all,instead of an elite group of snotty nosed wannabies,who think that their genes give them the right to rule the planet!

This is not socialism but a re-defining of the rules of fair play.

Pericles and Yabby,what a dishonest way to wage an argument.Both of you are playing game if intellectual thrust and parry with intent of deflecting attention from the real issue of the bank's ability to steal weatlth from the rest of society by virtue of counterfeiting,which is illegal for the rest of society.

A National Monetary Fund will see a more equitable society whereby the burdens of new inflationary money are shared by all,instead of an elite group of snotty nosed wannabies,who think that their genes give them the right to rule the planet!

This is not socialism but a re-defining of the rules of fair play.

Arjay, I'm really not sure what your point is. The RBA is in control
of the money supply in Australia. It has the power to change
commercial banks reserve ratios, so can create a credit squeeze if it
wishes. It can determine interest rates. Any profits made by
the RBA are paid to the federal treasury. It is the job of the
RBA to be at arms length from politics or from short term politically
expediant decisions. It is their job to make decisions which are
best for the Australian economy as a whole.

If an economy is to function and grow, there needs to be credit
available. Only the RBA can issue currency, nobody else.

If there is some inflation, it is in the hands of the reserve bank
to weigh that up with economic growth and credit availability.

I just can't see your issue.