Inflation, the Gold Standard, and Fractional Reserve Banking

May 28, 2008 by  

Interested in learning (or about learning more) about money and banking? Interested in the law as it pertains to money and banking? I have just released part/episode 5 of my “Understanding Money & Banking” video series. Titled “Inflation, the Gold Standard, and Fractional Reserve Banking“, part 5 challenges the view of some that inflation is simply the result of government expansion of the currency supply, and the view that “if we just returned to a gold standard, we would not have inflation”. Topics include: the nature of “gold standard”; useful vs. useless gold standards; hyper-inflation in history; fractional reserve banking; 100% reserve requirements.

I strongly recommend to everyone – including economics majors – that they watch the series in order, starting with episode 1, rather than just jump directly into episode 5 (see episode descriptions below). The reason: my conceptions, descriptions and terminology may differ considerably from that which you have read in economics texts. This is not to suggest that the economic texts “have it wrong”, per se. However, it has been my observation that many works of economics betray an ignorance of the nature of money, of banking, and of the mechanics of basic financial transactions such as the making of a deposit, the borrowing of money, etc. Hopefully, these videos will provide some useful insights to non-economists and economists alike, whether amateur or professional.

For those who have already watched episodes 1 through 4, jump right in (note: the video will be available world-wide within a day or two, if you cannot access it yet in your area…youtube videos take a while to propagate around the globe):

Paul McKeever’s “Understanding Money and Banking”, Episode 5:
Inflation, the Gold Standard, and Fractional Reserve Banking


The Understanding Money & Banking series explains money and banking from the perspective of a lawyer with knowledge of economics, rather than from the perspective of an economist. The result is a rare, if not unique, opportunity to learn – in more precise terms – about the nature of money and of banking.

Episode 1, titled “What is Money?“, started with the basics that you will rarely, if ever, read in any book on economics. Topics covered include: the definition of “money”; the essential difference between money and that which is not money; key differences between “currency”, “debt”/”credit”, and “money”; the relationship between money and the use of force by government; the nature of cheques and of debit card transactions; the mechanics of how dollars/pounds really “change hands”.

Episode 2, titled “Anatomy of a Bank Loan“, gives you a rare insight into what is actually happening, mechanically and legally, when someone borrows money. Also discussed: the nature of credibility, and what one is actually buying with interest payments.

Episode 3, titled “Counterfeiting and the Quantity of Money“, discussed the relationship between prices and the number of dollars of which ones country’s money supply is comprised. Also covered: the relationship of productivity to the value of a dollar; the effects of increasing the total number of dollars; the essential reason that counterfeiting is a crime; who are the victims of counterfeiting?

Episode 4, titled “The Crafty Counterfeiter’s Motto“, this episode addresses the nature of current practice of increasing the supply of dollars as the economy grows (a practice that, during a period of economic growth, fights price deflation, even while falsely portraying the effort as one aimed to control price inflation). The central issue: is it wrong to take that which a person never knew they had coming to them in the first place?


8 Responses to “Inflation, the Gold Standard, and Fractional Reserve Banking”

  1. Glenn on May 28th, 2008 8:10 pm

    Excellent! I’ve been waiting a long time for that 5th part. Thanks.

  2. Paul McKeever on May 28th, 2008 9:02 pm

    Yes, sorry to have kept you (and everyone else) waiting so long. So many projects/responsibilities, so little time. Hopefully, people won’t have to wait another 9 months for the next one…which, IF things continue to brew the way they’re brewing, will be about the morality of inflation and credit expansion.

  3. Paul McKeever on May 29th, 2008 7:33 am

    ERRATA – Apparently, I accidentally gave Ron Paul a raise in this video: from Congressman to Senator. Must have been the presidential nomination run that got me confused. Thanks to EdgeMugga for pointing it out.

  4. Paul McKeever on money, banking, and the Federal Reserve | Nathan Baker on October 12th, 2008 5:26 pm

    […] Here are some insightful videos by Paul McKeever in an article entitled “Inflation, the Gold Standard, and Fractional Reserve Banking.” […]

  5. Banking and Morality: 100% Reserve versus “Fractional” Reserves : Paul McKeever on October 20th, 2008 7:33 am

    […] written pieces (see here, here, and here, for examples) and in videos, I have advocated a 100% reserve requirement for […]

  6. Charles on October 24th, 2008 7:31 am

    Your video series is just what I had been looking for: a logical, lucid explanation of the subject, which I had been having trouble understanding; it is invaluable. And you patiently answer questions, too. Thank you so much. Do you get any compensation besides satisfaction? Why not charge for your videos?

    Question #1: If the currency supply is fixed, and the reserve ratio is also fixed, then it seems to me that the total money supply remains constant, so how does inflation occur?

    Question #2: In Canada, you have informed us, there is no reserve requirement; that must mean that banks set their own. Do any banks choose zero? If governments allow less than 100% reserve banking, why do they insist on a reserve at all? Why not let me open a bank without taking deposits, and just issue my bank notes ad libidum? I’d sign up for that. Isn’t that what the central bank does?

  7. Charles on January 18th, 2009 4:15 am

    You write that you believe it would be impossible to use gold as standard money owing to limitations on immigration/emigration and trade. Could you explain this, please?

    If standard money were indeed gold, no bank could devalue it. Notes issued by that bank would not be able to claim they are redeemable for gold when they are not. So that would preclude both types of inflation at once. Am I right, or is there something I have overlooked? Thank you very much.

  8. Paul McKeever on January 18th, 2009 1:14 pm

    Charles: Do a search on “playing card money” to see the sort of problem that develops. In effect, gold would physically move to places on earth where the economy is robust, and would flee areas that produced little of value. That would not be a problem provided (a) people could move to where the economy is robust, and (b) there were free trade, such that electronically-verified ownership of any amount of gold (i.e., no matter how much or how little) could be traded internationally without legal or military impediment. The problem – without free trade and immigration/emmigration – is for areas where things ARE being produced, but few/nobody outside of that geographic region are purchasing the things: the little, economically isolated communities would have no gold with which to trade.

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