Talk:Full-reserve banking

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This article was nominated for deletion on September 29, 2006. The result of the discussion was keep.

The article states that a full-reserve banking system eliminates the incentive for banks to lend money. Doesn't it in fact make it impossible for a bank to lend money? If $100 in total are deposited to bank A, for instance, it cannot lend a single dollar without infringing on the full-reserve rule. The only exception to this would be term deposits, which could be lended because they are not counted when calculating the reserve ratio. — Preceding unsigned comment added by 70.48.38.86 (talk • contribs) 06:51, 28 October 2005 (UTC)

Correct, a bank would not be able to lend out demand deposits. Under a full-reserve system, however, there would be a far greater incentive for customers to make term deposits when possible. Term deposits would presumably pay interest, whereas demand deposits would probably pay negative interest (via safekeeping fees, as the poster below points out). So if the bank can attract a lot of term deposits onto its books, it will have no problem making loans as long as it simply matches the maturities of its loans to the maturities of its term deposits. This whole line of thought is surprisingly missing from the article. I'll consider taking it on. --Cdelite (talk) 18:41, 3 October 2008 (UTC)

The bank could only lend out of it's own profits, rather than lending their clients cash. Banks would have to charge customers for safe storage of their deposits. At least that's how I think it would work. --nirvana2013 14:14, 9 February 2006 (UTC)

Both wrong. The bank would be unable create new money in the form of credit. That is, it could lend part of the $100 (possibly with the agreement of the deposit owner) but not create an extra 900 (credit)dollars by simply recording it as book-keeping entry. This is what happens under the current franctional-reserve system. In this light, both "fractional-reserve" and "full-reserve" adjectives are possibly misnomers. Something is also wrong with the introductory paragraphy but I don't quite know how to rewrite it. -- Janosabel 16:24, 2 June 2007 (UTC)

It is you who are wrong - in current "fractional reserve" system, a bank coud not lend $900 for $100 of deposits. It can only lend $90 for $100 in deposits. —Preceding unsigned comment added by 85.139.171.190 (talk) 23:44, 2 October 2007 (UTC)

No, it is YOU who are wrong - a deposit of $100 WILL indeed create another $900 worth of credit in a fractional reserve system with reserve ratio 0.1. Please get your economics and mathematics right before you call others wrong. Thank you. —Preceding unsigned comment added by 220.238.251.161 (talk) 07:41, 10 October 2008 (UTC)

Correct as far as it goes, but if the $90 lent is deposited in a bank, that bank can lend out an additional $81. And if that $81 is re-deposited, its bank can lend out an additional $72.90. This is the well-known "money multiplier" at work. If you work it out ad infinitum, the banking system (as a whole) could in fact lend out a total of $900 on the original $100 deposit (based of course on a 10% reserve requirement). I think that's where poster Janosabel was coming from; his/her words just didn't come out quite right. --Cdelite (talk) 18:00, 3 October 2008 (UTC)

We made a compilation of FAQ with professor Joseph Huber:

FAQ

Paul Nollen 11 feb 2006

What is the direct source for this long Q&A? If there is a link we should simply provide that. If there is no source we shouldn't mention it at all. Either way, it doesn't belong here. -Will Beback 20:29, 11 February 2006 (UTC)

This FAQ is within the authorized limits and an answer to the question above. There is for the moment no direct link. The FAQ is compiled in cooperation with professor Huber. joseph.huber@soziologie.uni-halle.de

Paul Nollen 12 feb 2006

ok I made a link to the FAQ. Better so?

Paul Nollen 12 feb 2006

Yes, much beter thanks. -Will Beback 19:46, 12 February 2006 (UTC)

In response to --nirvana2013 14:14, 9 February 2006 (UTC)

That isn't quite correct. What it means is that commercial banks become analogous to "Mutual Funds" or other investment organizations. Banks would lose their money creation capability. Please see the wikipedia article on money creation.

Note that this does not mean that there is no incentive to lend money. The incentive is still there, and is the same as that under a fractional reserve system: to earn interest on the money lent.

While one might argue that commercial banks might then be inclined to charge their customers to hold money for them, this is already the case for many small accounts. Many banks charge monthly or yearly fees for the mere existance of a checking account, regardless of whether any checks are actually drawn on the account during the period. At least they do in the Southeastern United States of America.

Deposit multiplier equals zero or one? The linked page does not quite define the multiplier, but multiplication by zero seems to imply deposits disappear... Doktor 21:20, 13 March 2006 (UTC)

Misleading lead

I think the lead is technically correct, but it implies full-reserve banking is somehow related to commodity money. Which is not surprising since advocacy of the two concepts is correlated. But full-reserve banking is compatible with fiat money. Brock (talk) 23:25, 25 March 2008 (UTC)

The lead is not correct technically on top of being misleading. Please see www.monetary.org for a a good analysis of full reserve banking.01001 (talk) 18:20, 31 March 2008 (UTC)

Hypothetical?!

Full reserve banking has existed for centuries, it is obviously not he dominant system now, but you only have to look at the history of the Bank of Amsterdam for 200 years or the swiss banks just to mention two historical cases. So why does it say "A hypothetical practice"?? Also Venetian and Florentine banks in the Renaissance and some California banks in the 19th century.

• The article also indicates that Islamic banks follow this practise and so I agree that the term hypothetical is inappropriate. Colonel Warden (talk) 12:01, 11 September 2008 (UTC)

The sentence about Islamic banks says that "in theory" they are 100 per cent reserve, but in practice, this is not the case, and no examples of 100 per cent reserve banking are observed [1]. Similarly, in theory, they don't lend money at interest. But theory and practice are not the same - there are all sorts of methods for getting an interest-like return on money lent, and for lending against reserves that are supposedly intact. As for the historical examples, it's not clear that they correspond to the modern sense of the term "bank", as opposed to, for example, a safety deposit facility. JQ (talk) 12:23, 11 September 2008 (UTC)

• You seem to be begging the question. The Bank of Amsterdam was obviously a bank, as our article describes. Colonel Warden (talk) 12:33, 11 September 2008 (UTC)

A fair point. It would be useful to include a historical section covering the emergence and disappearance of full reserve banking. I've put in a stubby section to that effect.JQ (talk) 12:54, 11 September 2008 (UTC)

Another "fair point" would be to admit that BullionVault and other professional gold hoarding services are acting like full reserve banks and are (arguably) modern-day examples of full reserve banking.

On what basis? BullionVault doesn't claim to be a bank and doesn't appear to offer even basic banking services. They are, as they say, just a storage facility. You might have a better argument with e-gold, but there seem to be lots of problems there. JQ (talk) 07:50, 12 September 2008 (UTC)

I find the current wording overstates the history: the Smith text at the Bank of Amsterdam article compares it to banks elsewhere, which are "less sound" in this comparison than the other ones. This strongly implies that the BoA was an exception to the general rule. If so, saying "but was displaced by fractional reserve banking after 1800" implies that it was the main form of banking, and that there was a specific time frame. It seems from the text that full reserve banks were mostly always marginal. Comments from others?--Gregalton (talk) 15:45, 12 September 2008 (UTC)

Please

Please don't attack me again. You've just deleted refs. Come on, where's your humanity? - $laveryWorldwideInc (talk) 05:03, 7 September 2008 (UTC)

Lede

Moving on, we have a statement in the lede Proposals for the restoration of full reserve banking have been made, but are generally ignored or dismissed by mainstream economists.. This wording does not seem satisfactory. For one thing, the manner in which banking is practised as much a matter of politics and business as a matter of economic theory. And for another it is not clear that economics has a mainstream per the adage that there are as many opinions about economics as there are economists. It would be better to say that full-reserve banking is not normal nowadays except for the Islamic banks that aspire to it and avoid a judgemental opinion. Colonel Warden (talk) 14:20, 11 September 2008 (UTC)

The claims made to support the "restoration" (I question whether one can say this, but for the time being, whatever) are essentially economic and financial, so to say it is ignored by mainstream economists is entirely pertinent.

Economics certainly does have a mainstream - that's not a real argument.--Gregalton (talk) 17:39, 11 September 2008 (UTC)

• Be that as it may, a contentious statement of this sort requires a source. Contemplation of the sources may help advance the argument. Colonel Warden (talk) 18:11, 11 September 2008 (UTC)

Then flag it with the appropriate citation request.--Gregalton (talk) 21:36, 11 September 2008 (UTC)

Article mixes full-reserve banking with "full-reserve currency"

By "full-reserve currency" I mean (central) banknotes that are 100% backed by warehoused commodities (representative money, like people think History of money#Gold-backed banknotes works). In the case of currency boards the "commodity" is foreign currency.

A full-reserve banking article should contrast to the fractional-reserve banking. I suggest deleting everything that has got to do with "full-reserve currency". Najro (talk) 18:02, 12 September 2008 (UTC)

Clear as mud

The explanation of how a bank can maintain its 100% reserve by lending against a commodity or "debt free" government currency needs explication. Please. Sounds something like William Jennings Bryan's advocacy (if memory serves) of a monetary base whose elasticity would be tied to bankers acceptances. But I'm no economist. Can someone flesh out the details? Captqrunch (talk) 15:32, 5 October 2008 (UTC)

This page gives too much credibility to an impossible or near-impossible economic theory

It is unbelievable that such a topic can be given such weight on Wikipedia. The description on Full-Reserve Banking is good, and the page itself isn't too shabby. However, any mainstream economist will no doubt tell you that Full-Reserve Banking simply doesn't work. Not only because Monetary Policy is negated, but also because Banks would lose most of their profit.

The page is written as though a debate still exists on the issue - not even Islamic Banks do this in practice. The article should be more factual and realistic - a Macroeconomics textbook (such as Introduction to Macroeconomics, Bernanke, for example) easily refutes this theory. A quick discussion on the importance of the Money Multiplier here would be very helpful as well. Seriously, how can economics students or anyone else who is new to the subject understand predominant trends in the world today if all they get is this confusing whiff about the supposed "advantages" of Full-Reserve Banking?

This article needs to be explicit and explain - exactly why the Banks of today's world adopts the Fractional-Reserve Banking System. 220.238.251.161 (talk) 07:53, 10 October 2008 (UTC)

"Such weight"??? It's one article on the topic! What else do you want? Where else would you put it? If you want to read an article on modern banking practice, there's fractional reserve banking, banks, finance, central banking, IMF, Federal Reserve as well as a whole host of others. No one has said that this practice exists or predominates. The arguments are real and referenced. Your apparent desire to gut an article that simply describes the practice objectively and clearly, with references, is nothing but a crude attempt at censorship of the issue. Censorship is evil. Full reserve banking is not. —Preceding unsigned comment added by 60.242.186.198 (talk) 05:36, 12 October 2008 (UTC)

Maturity-matched banking

Reply to Cdelite (talk) 18:41, 3 October 2008 (UTC):

I'm not sure the proposal fits best into this particular article. It is because when the bank lend the money of a term deposit, there is the chance that the borrower will not pay back. So the banks ability to pay back the money to the lender depends not on the bank itself, it depends on the borrower. It is not the bank that keeps reserves, it has "outsourced" the keeping to the borrower. But maybe the matching of maturities can be expressed in terms of "full-reserves" in some way...

Maturity matching cannot be inflationary (compare to Real bills doctrine). This is because the money can only be at one place at a time. But at a bank run the money will end up in two places at the same time, both at the borrower, who has not yet paid back, and at the lender, which has withdrawn his money from the bank, clearly inflationary. (Assuming that the bank has been able to lend money to survive the bank run from a lender of last resort, that is just printing new money).

More info at Talk:Bank_run#Bank_run_prevention and Talk:Bank regulation#Asset-liability maturity match requirement?. Najro (talk) 17:52, 10 October 2008 (UTC)