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Full-reserve banking, also known as 100% reserve banking, refers to an alternative to fractional reserve banking in which banks would be required to keep the full amount of each depositor's funds in cash, ready for immediate withdrawal on demand. Funds deposited by customers in demand deposit accounts (such as checking accounts) could not be loaned out by the bank because it would be legally required to retain the full deposit to ensure an adequate reserve for customer payments. Proposals for full reserve banking systems generally do not place such restrictions on deposits that are not payable on demand, for example time deposits or savings accounts.
Full-reserve system is not currently in practice anywhere in the world, however full-reserve banking was practiced by the Bank of Amsterdam in the 17th and 18th Century and by Hanseatic League banks until the Napoleonic Wars. In the 20th Century many Swiss Private banks operated with 100% reserves as required by their charters, but not by law. A system of full-reserve banking was discussed by economist Irving Fisher in 1935.
Proposals for full reserve banking systems
Proposals for reforming the banking system that incorporates some aspect of full reserve banking systems:
Views on full-reserve banking
In the post-World War II era, economists have shown little interest in 100%-reserve banking, although some have examined the issue and concluded that the costs and inconvenience of a full-reserve banking system would outweigh any benefits. However, economist Milton Friedman at one time advocated a 100% reserve requirement for checking accounts and economist Laurence Kotlikoff has also called for an end to fractional-reserve banking. Murray Rothbard stated that 100% reserve banking would eliminate the financial risks associated with bank runs.
Some economists have noted that because banks would not earn revenue from lending against demand deposits, depositors would have to pay fees for the services associated with checking accounts. This, it is felt, would likely be rejected by the public. Economists Diamond and Dybvig have warned that under full-reserve banking, since banks would not be permitted to lend out funds deposited in demand accounts, this function could be expected to be taken over by unregulated institutions. Unregulated institutions (such as high-yield debt issuers) would take over the economically necessary role of financial intermediation, possibly destabilizing the financial system, leading to more frequent financial crises.
There is currently no country in which the reserve requirement for banks is 100%, however there exist financial institutions that operate on this basis.
- "A Program for Monetary Reform, Douglas, Paul H.; Hamilton, Earl J.; Fisher, Irving; King, Willford I.; Graham, Frank D.; Whittlesey, Charles R. (July 1939)".
- Fisher, Irving (1935), 100% Money[page needed]
- Friedman, Milton (1960). A Program For Monetary Stability. Fordham University Press.
- Diamond, Douglas W; Philip H. Dybvig (Jan 1986), "Banking Theory, Deposit Insurance, and Bank Regulation", The Journal of Business 59 (1): 55–68, doi:10.1086/296314, JSTOR 2352687, "In conclusion, 100% reserve banking is a dangerous proposal that would do substantial damage to the economy by reducing the overall amount of liquidity. Furthermore, the proposal is likely to be ineffective in increasing stability since it will be impossible to control the institutions that will enter in the vacuum left when banks can no longer create liquidity. Fortunately, the political realities make it unlikely that this radical and imprudent proposal will be adopted."
- White, Lawrence H. (Winter 2003). "Accounting for Fractional-Reserve Banknotes and Deposits—or, What’s Twenty Quid to the Bloody Midland Bank?". The Independent Review 7 (3): 423–41. ISSN 1086-1653.
- Solow, Robert M. (March 28, 2002), "On the Lender of Last Resort", Financial crises, contagion, and the lender of last resort, Oxford University Press, p. 203, ISBN 978-0-19-924721-9
- Kotlikoff, Laurence J.; Leamer, Edward (April 23, 2009), "A Banking System We Can Trust", Forbes.com, retrieved September 14, 2010
- Rothbard, Murray N., The Mystery of Banking, Ludwig von Mises Institute, ISBN 978-1-933550-28-2, retrieved September 14, 2010
- The Case for a 100% Gold Dollar, Murray Rothbard
- Allen, William (October 1993). "Irving Fisher and the 100 Percent Reserve Proposal". Journal of Law and Economics 36 (2): 703–17. doi:10.1086/467295. JSTOR 725805.
- Diamond, Douglas; Philip Dybvig (Winter 2000). "Bank Runs, Deposit Insurance, and Liquidity". Federal Reserve Bank of Minneapolis Quarterly Review 24 (1): 14–23. Retrieved 29 August 2012.
- Alternatives to Conventional Banking Products By Maryam Ayaz
- In Defence of Fractional Reserve Banking (Pascal Salin)
- The Chicago Plan Revisited, IMF Working Paper, Jaromir Benes and Michael Kumhof, August 2012