Credit did exist to a much lower extent in the era following World War II but it didn’t seem to hurt economic growth that much. So the question may really need to be “does it need to be a CORE basis.” For centuries prior to Law coming up with fractional reserve banking, the world ran without much credit. And even when he created fractional reserves, he pegged them at no more than 25 percent. One could argue that it may be a smart move to go down that route as a 25 percent hit, while it may hurt, would not necessarily create a deathly blow on a company, organization, or governement.

Thanks for that. This article really does look interesting.

I agree that the consequences of a run at the bank might be reduced. One of the things many people on main street don’t seem to get is that FDIC and SPIC cover the consumer oriented financial institutions.

However, another issue could be against a run on the investment banks, which seems to be what’s happening right now and appears to represent the root of the crisis. But that’s in the unregulated and generally not consumer focused space. So it brings the interesting question of whether the “crisis” phase will impact main street or be limited to wall street.

Where an issue could arise is in the collateral damage: if banks are focused on solving some of the problems they created by using all their available cash to shore up bad assets, they may become more hesitant in making loans. I think that’s what we’re witnessing right now and the pendulum seems to have swung from “loans for anyone who asks, regardless of whether they are qualified or not” to “loans to no one, regardless of whether they are qualified or not”. So it’s a kneejerk reaction. However, I would argue that the best way to handle things would be for banks to actually do research into whether people are really qualified to hold a loan or not and base their decision on that data. It sounds revolutionary but I’d argue that this was the way the US financial system worked up until the 1960s.

It’s unfortunate that not everyone can own a house RIGHT NOW but I’d say it’s healthy to force people to save up to make such buys and to have people curtail how big a loan they can get.

A very interesting article on credit and crisis is ‘ECONOMIC CRISES’ by Charles Coquelin – 1864. He discusses the importance of credit, and its role in economic crisis.

The consequences of a run at the banks, even if this would occur, are much smaller today than they used to be, as a result of direct transactions between banks. Today, it is much more likely that people transfer their deposits to other banks, than that they withdraw those deposits. A transfer of deposits does not change the total amount of credit in the system, while withdrawing deposits does.