OpenAI’s ChatGPT usage has seen tremendous and almost uncontested growth since their official release in November 2022. But now, Google has officially unveiled Bard, their response to ChatGPT. How do they fare in a head-to-head? Let’s find out.
I will provide both AI platforms the exact same prompt, and will share their responses here, for everyone to judge which platforms provides a better response toward different types of queries.
AI explaining concepts (fractional reserve banking)
First off, let’s see how good they are at explaining concepts to us. I have picked a topic that is current in a lot of people’s minds, as we see domestic banks in the US failing one after the other, toppling even Credit Suisse along the way.
The prompt
Can you explain what fractional reserve banking means, and any implications it has, in under 500 words?
ChatGPT’s response
(note: the response was actually 519 words long)
Fractional reserve banking is a system used by most modern banking institutions that allows them to lend out a portion of the deposits they receive, while keeping only a fraction of those deposits as reserves. In this system, banks are required to hold a certain percentage of customer deposits as reserves, which are typically held in the form of cash or deposits with the central bank. The rest of the deposits can be used for lending and other activities.
The key implication of fractional reserve banking is the creation of money. When a bank receives a deposit, it keeps a fraction of that deposit as reserves and lends out the remaining amount. The borrower then uses the loaned amount to make payments or purchases, which ultimately end up as deposits in other banks. These banks can also lend out a fraction of the new deposits they receive, and the process continues, creating a cycle of lending and deposit creation.
This process effectively multiplies the money supply in the economy. For example, if the reserve requirement is 10%, a bank can lend out 90% of the deposits it receives, creating new loans and deposits. This means that a single deposit of $1,000 can result in $900 of new loans, and subsequently $900 of new deposits in other banks. As a result, the initial deposit of $1,000 effectively leads to an increase in the money supply by $900. This expansion of the money supply through lending is known as the money multiplier effect.
Fractional reserve banking enables banks to earn interest on loans and other investments, which is a primary source of revenue for banks. It also allows for the efficient allocation of capital in the economy by providing funds for businesses, individuals, and other entities to invest and spend.
However, fractional reserve banking also poses certain risks. Since banks only hold a fraction of the total deposits as reserves, there is a potential for a bank run or a panic where depositors rush to withdraw their funds simultaneously. If a large number of depositors demand their funds at the same time, a bank may not have enough reserves to meet all the withdrawal requests, potentially leading to a liquidity crisis and the collapse of the bank. To mitigate this risk, central banks often act as lenders of last resort, providing emergency liquidity to banks facing such situations.
Moreover, the expansion of the money supply through fractional reserve banking can contribute to inflationary pressures in the economy. When the money supply grows rapidly, it can lead to an increase in prices as there is more money chasing the same amount of goods and services. Central banks play a crucial role in managing these inflationary pressures by adjusting interest rates and implementing other monetary policy measures.
In summary, fractional reserve banking is a system where banks hold only a fraction of customer deposits as reserves and lend out the rest. It enables the creation of money and facilitates lending and investment. However, it also poses risks related to liquidity and inflation, which need to be carefully managed by banks and central banks.
Bard’s response (345 words)
Fractional reserve banking is a system in which banks are only required to hold a fraction of their deposits in reserve. The rest of the deposits can be lent out to borrowers. This system allows banks to create money, which can help to stimulate economic growth.
Here’s how fractional reserve banking works:
- A person deposits $100 in a bank.
- The bank is required to keep $10 in reserve and can lend out the remaining $90.
- The borrower takes the $90 and uses it to buy a car.
- The car dealer deposits the $90 in another bank.
- The second bank is required to keep $9 in reserve and can lend out the remaining $81.
- The process continues, with each bank lending out a fraction of its deposits.
As you can see, fractional reserve banking can lead to a rapid increase in the amount of money in circulation. This can be a good thing, as it can help to stimulate economic growth. However, it can also be a bad thing, as it can lead to inflation and financial instability.
One of the main implications of fractional reserve banking is that it can lead to bank runs. A bank run is a situation where a large number of depositors try to withdraw their money from a bank at the same time. This can happen if people lose confidence in the bank’s ability to repay its debts. If a bank run is successful, it can force the bank to close its doors.
Another implication of fractional reserve banking is that it can lead to inflation. Inflation is a general increase in prices. It can happen when there is too much money in circulation. When banks create money by lending out deposits, they are adding to the money supply. This can lead to inflation, as the prices of goods and services rise in response to the increased money supply.
Fractional reserve banking is a complex system with both positive and negative implications. It is important to understand how it works so that we can make informed decisions about its use
Bard did a more concise job overall, explaining a tough concept, and managing it in fewer words. The numbered points also help illustrate the ‘how’ in a clearer fashion.
ChatGPT on the other hand, gave a much more comprehensive answer, providing a good structure in its answer, and even ending with a nice summary paragraph to take away.
I guess the version you prefer will depend on the how you take in information.
In the next challenge, the 2 generative AI will fight to the death in a creative challenge, a novel outline exercise!