View Full Version : Fractional Reserve Banking as Economic Parasitism

10-16-08, 10:28 PM
Fractional Reserve Banking as Economic Parasitism
A Scientific, Mathematical, & Historical Expose, Critique, and Manifesto (


This paper looks at the history of money and its modern form from a scientific and mathematical point of view. The approach here is to emphasize simplicity. A straightforward model and algebraic formula for a large economy analogous to the ideal gas law of thermodynamics is proposed. It may be something like a new F = ma rule of the emerging econophysics field. Some implications of the equation are outlined, derived, and proved. The phenomena of counterfeiting, inflation and deflation are analyzed for interrelations. Analogies of the economy to an ecosystem or energy system are advanced. The fundamental legitimacy of "expansion of the money supply" in particular is re-examined and challenged. From the hypotheses a major (admittedly radical) conclusion is that the modern international "fractional reserve banking system" is actually equivalent to legalized economic parasitism by private bankers. This is the case because, contrary to conventional wisdom, the proceeds of inflation are not actually spendable by the state. Also possible are forms of "economic warfare" based on the principles. Alternative systems are proposed to remediate this catastrophic flaw.

10-20-08, 04:01 PM
Very, very interesting paper. Quite a long read. It is laudable that the author provides workable, testable model. Indeed he shows it's not really that hard.

I have just finished reading the excellent 'More Heat than Light' by Mirowski. He trashes the neoclassical model for its internal inconsistencies and inconsistencies with observed data. He also berates economists for what appears to be a wilful refusal to entertain alternatives. Whilst I hope the current crisis will discredit the neoclassical model and spur research into alternatives I am not too hopeful. Too many monied interests are invested in the status quo.

Meaningful change will have to come from outside economics, perhaps from physics.

10-20-08, 08:20 PM
Excellent paper, Rajiv! Shukria! :)

10-21-08, 05:14 AM
Fractional Reserve Banking as Economic Parasitism
A Scientific, Mathematical, & Historical Expose, Critique, and Manifesto (

Excellent paper Rajiv. Thanks. This is a must read. Those less familiar with calculus and equations should skip the math part and read the most important stuff which is in plain language.

07-17-12, 07:43 PM
I disagree with this. I believe Fractional Reserve Banking is vital to the proper functioning of a modern, industrial, economy in which goods are produced in numerous stages with fine-grain division of labor and high productivity. Please see this blog post for any explanation: http://teconomist.blogspot.co.uk/2012/07/why-austrian-economists-are-wrong-about.html