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It's time to reconsider full reserve banking

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  • Jorg Guido Hulsmann
  • ,
  • Patrizio Laina
  • ,
  • Joseph Huber
  • ,
  • Ib Ravn
  • Bryan Gould
Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. The system is risky (Opinion, July 23). For hundreds of years it has resulted in bank failures with depositors losing their money. The arrival of taxpayer-backed deposit insurance in the 1930s and multi-billion-dollar bailouts of banks was not a big improvement because it meant banks received state support, while other lenders who lend about as much as banks do not.

Moreover, depositing money at a bank with a view to the bank earning a return for you is the same as depositing money with a stockbroker for the same purpose in that both activities are commercial in nature, and it is not the job of taxpayers to support commerce, absent very good social reasons for doing so.

As for the alleged merit of fractional reserve banks, namely that they create money and liquidity, unfortunately they do so in a procyclical manner, which means central banks and governments have to counteract that. Add to that the fact that private banks are totally incapable of creating the huge amounts of extra money needed in crises like the present Covid crisis.

Hence stripping private banks of their ability to create money would do no harm, as Martin Wolf, your chief economics commentator has argued.

We therefore wish to see the alternative to fractional reserve, that is, full reserve banking, given much more serious consideration for various reasons, including some or all of the above.
Original languageEnglish
JournalFinancial Times (London, 1888)
ISSN0307-1766
Publication statusPublished - 31 Aug 2020

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