{{Short description|Offering of loans exclusively from time deposits}} {{Globalize|date=June 2021}} {{Banking}}'''Full-reserve banking''' (also known as '''100% reserve banking''') is a system of banking where banks do not lend demand deposits and instead only lend from time deposits. It differs from fractional-reserve banking, in which banks may lend funds on deposit, while fully reserved banks would be required to keep the full amount of each customer's demand deposits in cash, available for immediate withdrawal.
Monetary reforms that included full-reserve banking have been proposed in the past, notably in 1935 by a group of economists, including Irving Fisher, under the so-called "Chicago plan" as a response to the Great Depression.<ref>[https://www.telegraph.co.uk/finance/comment/jeremy-warner/10107375/The-banking-revolution-that-would-wipe-out-Britains-debts.html A banking revolution] Jeremy Warner, UK Telegraph</ref><ref>{{Cite web|last=Weisenthal|first=Joe|title=BAN ALL THE BANKS: Here's The Wild Idea That People Are Starting To Take Seriously|url=https://www.businessinsider.com/banning-banks-2014-4|access-date=2020-11-30|website=Business Insider}}</ref> This proposal experienced a resurgence of interest among economists, central bankers, and citizen movements following the 2007-2008 global financial crisis.<ref>{{Cite journal |last=Ricks |first=Morgan |date=2016-06-01 |title=Safety First: The Deceptive Allure of Full Reserve Banking |url=https://chicagounbound.uchicago.edu/uclrev_online/vol83/iss1/11 |journal=University of Chicago Law Review Online |volume=83 |issue=1}}</ref>
== International developments == No country in the world requires full-reserve banking.<ref>{{Cite book |last=Fandl |first=Maximilian |url=https://www.google.com/books/edition/Monetary_and_Financial_Policy_in_the_Eur/dB9eDwAAQBAJ?hl=en&gbpv=1&dq=full-reserve+banking+country&pg=PA50&printsec=frontcover |title=Monetary and Financial Policy in the Euro Area: An Introduction |date=2018-05-31 |publisher=Springer |isbn=978-3-319-72643-4 |language=en}}</ref>
=== Europe === Iceland's legislature considered it in 2015 after the 2008–2011 Icelandic financial crisis.<ref name="IL_gov_rpt"> {{cite web | url=https://www.stjornarradid.is/media/forsaetisraduneyti-media/media/skyrslur/monetary-reform.pdf | title=Monetary Reform - A Better Monetary System For Iceland | last=Sigurjónsson | first=Frosti | author-link=Frosti Sigurjónsson | date=2015-03-01 }} </ref><ref> {{cite news | url=https://www.ft.com/content/6773cec8-deaf-11e4-8a01-00144feab7de | title=Iceland's daring raid on fractional reserve banks | newspaper=Financial Times | date=2015-04-09 }}</ref><ref name="Tele_2015-03-31">{{cite news | url=https://www.telegraph.co.uk/finance/economics/11507810/Iceland-looks-at-ending-boom-and-bust-with-radical-money-plan.html | title=Iceland looks at ending boom and bust with radical money plan | newspaper=The Daily Telegraph | date=2015-03-31 }}</ref>
In a 2018 Swiss ballot initiative, 75% of voters voted against the Sovereign Money Initiative which had full reserve banking as a prominent component of its proposed reform of the Swiss monetary system.<ref>[https://www.ft.com/content/7b225c88-51f1-11e8-b24e-cad6aa67e23e Switzerland's 'Vollgeld' banking overhaul: how reform would work]</ref><ref>{{Cite web|last=Atkins|first=Ralph|date=10 June 2018|title=Swiss voters reject 'sovereign money' initiative|url=https://www.ft.com/content/686e0342-6c97-11e8-852d-d8b934ff5ffa |archive-url=https://ghostarchive.org/archive/20221210/https://www.ft.com/content/686e0342-6c97-11e8-852d-d8b934ff5ffa |archive-date=2022-12-10 |url-access=subscription |url-status=live|access-date=2020-11-30|website=Financial Times}}</ref><ref>{{Cite web|last=swissinfo.ch/sb|title=Vote survey shows no generation gap but misunderstandings|url=https://www.swissinfo.ch/eng/sovereign-money-and-gambling-votes_vote-survey-shows-no-generation-gap-but-misunderstandings/44282652|access-date=2020-11-30|website=SWI swissinfo.ch|date=26 July 2018 |language=en}}</ref>
=== Islamic banking === For Islamic banking and finance, Mahmoud El-Gamal and Tarek El Diwany criticize conventional finance, with ideas echoing full-reserve banking.<ref>{{Cite book |last=Visser |first=Hans |url=https://www.google.com/books/edition/Islamic_Finance/KIXe3rY_OkgC?hl=en&gbpv=1&dq=full-reserve+banking+Mahmoud+El-Gamal&pg=PA145&printsec=frontcover |title=Islamic Finance: Principles and Practice |date=2009-01-01 |publisher=Edward Elgar Publishing |isbn=978-1-84844-947-3 |language=en}}</ref> Malaysia's Islamic Financial Services Board published research comparing Islamic banking's asset-backed requirements with conventional fractional-reserve systems.<ref>{{Cite book |last=Publishing |first=Bloomsbury |url=https://www.google.com/books/edition/Islamic_Finance_Instruments_and_Markets/YxPVBAAAQBAJ?hl=en&gbpv=1&dq=%22Islamic+Financial+Services+Board%22+compare+fractional&pg=PA101&printsec=frontcover |title=Islamic Finance: Instruments and Markets |date=2010-11-15 |publisher=Bloomsbury Publishing |isbn=978-1-84930-039-1 |language=en}}</ref>
=== Asia === In Bhutan, ORO Bank partnered with Finastra to launch what claims to be Asia's first full-reserve online bank.<ref>{{Cite web |title=Asia’s first full reserve digital bank, ORO Bank, launches in Bhutan powered by Finastra |url=https://www.fintechfutures.com/digital-banking/asia-s-first-full-reserve-digital-bank-oro-bank-launches-in-bhutan-powered-by-finastra |access-date=2025-08-26 |website=www.fintechfutures.com |language=en}}</ref>
== Concepts == Full-reserve banking requires banks to maintain 100% reserves against demand deposits. This is a significant change from fractional-reserve banking,<ref>{{Cite book |last1=Phillips |first1=Ronnie J. |url=https://books.google.com/books?id=14kYDQAAQBAJ |title=The Chicago Plan and New Deal Banking Reform |last2=Minsky |first2=Hyman P. |date=2016-09-16 |publisher=Routledge |isbn=978-1-315-28663-1 |pages=46 |language=en}}</ref> where only a small percentage of deposits must be on reserve.<ref>{{Cite book |last1=Goodwin |first1=Neva |url=https://books.google.com/books?id=u4kZEQAAQBAJ&dq=fractional-reserve+small+percentage+deposits&pg=PA344 |title=Essentials of Economics in Context |last2=Harris |first2=Jonathan M. |last3=Rajkarnikar |first3=Pratistha Joshi |last4=Roach |first4=Brian |last5=Thornton |first5=Tim B. |date=2024-09-25 |publisher=Taylor & Francis |isbn=978-1-040-11400-1 |language=en}}</ref> In sovereign money proposals, the state issues money rather than banks.<ref>{{Cite book |last=Mader |first=Philip |url=https://www.google.com/books/edition/The_Routledge_International_Handbook_of/SanODwAAQBAJ?hl=en&gbpv=1&dq=full-reserve+sovereign+money&pg=RA1-PA1966&printsec=frontcover |title=The Routledge International Handbook of Financialization |last2=Mertens |first2=Daniel |last3=Zwan |first3=Natascha van der |date=2020-02-05 |publisher=Routledge |isbn=978-1-351-39036-1 |language=en}}</ref>
=== Basic Principles === Full-reserve banking effectively splits banks into two distinct functions, described by Benes and Kumhof (2012) as the "separation of the monetary and credit functions of the banking system."<ref>{{Cite book |last1=Benes |first1=Mr Jaromir |url=https://books.google.com/books?id=eFUZEAAAQBAJ&dq=The+Chicago+Plan+Revisited.&pg=PA43 |title=The Chicago Plan Revisited |last2=Kumhof |first2=Mr Michael |date=2012-08-01 |publisher=International Monetary Fund |isbn=978-1-4755-0552-8 |pages=4 |language=en}}</ref>
# '''Custody and Transaction Services''': Banks hold deposited currency as 100%-reserve deposits, transferable to third parties.<ref>{{Cite journal |last=Tobin |first=James |year=1985 |title=Financial Innovation and Deregulation in Perspective |url=https://www.imes.boj.or.jp/research/papers/english/me3-2-3.pdf |journal=Bank of Japan Monetary and Economic Studies 3 |pages=25}}</ref> # '''Investment Intermediation''': Banks would become true intermediaries, transferring from savers to borrowers. Jackson and Dyson (2012) argue this separates transaction accounts and investment accounts.<ref>{{Cite web |last1=Jackson |first1=A. |last2=Dyson |first2=B. |year=2012 |title=Modernising Money: Why Our Monetary System is Broken and How it Can be Fixed |url=https://modernisingmoney.org/ |access-date=2025-01-28 |website=Modernising Money |page=265 |language=en}}</ref>
===Money Creation=== In the current system of fractional reserve banking, banks only hold a fraction of their capital against deposits and loans.<ref>{{Cite book |last=Lauk |first=T. |url=https://www.google.com/books/edition/The_Triple_Crisis_of_Western_Capitalism/lyFHBQAAQBAJ?hl=en&gbpv=1&dq=%22fractional+reserve+banking%22+fraction&pg=RA1-PT10&printsec=frontcover |title=The Triple Crisis of Western Capitalism: Democracy, Banking, and Currency |date=2014-11-20 |publisher=Springer |isbn=978-1-137-43296-4 |language=en}}</ref> Banks loans create money from nothing by crediting deposits to customer accounts.<ref>{{Cite book |last=Martinez |first=Raoul |url=https://www.google.com/books/edition/Creating_Freedom/ia5QCwAAQBAJ?hl=en&gbpv=1&dq=create+credit+and+money+ex+nihilo+%E2%80%93+extending+a+loan+to+the+borrower+and+simultaneously+crediting+the+borrower's+money+account&pg=PT291&printsec=frontcover |title=Creating Freedom: The Lottery of Birth, the Illusion of Consent, and the Fight for Our Future |date=2017-01-31 |publisher=Knopf Doubleday Publishing Group |isbn=978-0-307-91165-0 |language=en}}</ref>
McLeay et al. note that in the current system, "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money."<ref>{{cite journal |last1=Michael |first1=McLeay |last2=Amar |first2=Radia |last3=Ryland |first3=Thomas |date=14 March 2014 |title=Money Creation in the Modern Economy |url=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2416234 |journal=Bank of England Quarterly Bulletin, Q1 |language=en |page=14|ssrn=2416234 }}</ref> In contrast, Sigurjonsson explains that full-reserve banking, "transfers the power to create money from commercial banks" to the central bank.<ref>{{Cite web |last=Sigurjonsson |first=Frosti |date=March 2015 |orig-date= |title=Monetary Reform: A Better Monetary System for Iceland |url=https://www.government.is/media/forsaetisraduneyti-media/media/Skyrslur/monetary-reform.pdf |archive-date= |page=83}}</ref>
This has several implications:
# '''Money Supply''': Dyson et al. argue that banks would no longer be money creators and so generate less financial instability.<ref>{{Cite book |last1=Dyson |first1=Ben |url=https://ideas-shared.com/wp-content/uploads/atbdp_temp/SovereignMoney-AnIntroduction-20161214.pdf |title=Sovereign Money: An Introduction |last2=Hodgson |first2=Graham |last3=van Lerven |first3=Frank |publisher=Positive Money |pages=13}}</ref> # '''Credit Creation''': Kay argues for managing maturity mismatch through markets not within financial institutions.<ref>{{cite journal |last1=Kay |first1=John |title=Should we have "narrow banking"? |journal=London School of Economics |pages=222 |url=https://harr123et.wordpress.com/wp-content/uploads/2010/07/futureoffinance5.pdf}}</ref>
=== Account Types === Full-reserve banking proposes two distinct types of accounts, analyzed by Pennacchi (2012).<ref>{{Cite journal |last=Pennacchi |first=George |date=2012-10-01 |title=Narrow Banking |url=https://www.annualreviews.org/content/journals/10.1146/annurev-financial-110311-101758 |journal=Annual Review of Financial Economics |language=en |volume=4 |issue=4 |pages=141–159 |doi=10.1146/annurev-financial-110311-101758 |issn=1941-1367|url-access=subscription }}</ref><ref>{{Cite book |last=Gürkaynak |first=Refet S. |url=https://www.google.com/books/edition/Research_Handbook_of_Financial_Markets/0ki-EAAAQBAJ?hl=en&gbpv=1&dq=Pennacchi+2012+distinct+accounts&pg=PA131&printsec=frontcover |title=Research Handbook of Financial Markets |last2=Wright |first2=Jonathan H. |date=2023-05-09 |publisher=Edward Elgar Publishing |isbn=978-1-80037-532-1 |language=en}}</ref>
# '''Transaction Accounts''' #* 100% backed by reserves #* Available for immediate withdrawal #* May charge service fees #* Cannot be lent #* Legally separated from other bank activities<ref>{{Cite book |last=Ricks |first=Morgan |url=https://www.bibliovault.org/BV.landing.epl?ISBN=9780226330464 |title=The Money Problem: Rethinking Financial Regulation |date=2016 |publisher=University of Chicago Press |isbn=978-0-226-52812-0 |language=en |doi=10.7208/chicago/9780226330464.001.0001}}</ref> # '''Investment Accounts''' #* Fixed terms for withdrawal #* Can be used for lending #* May offer different risk-return profiles #* Risk explicitly borne by depositor #* Returns based on investment performance<ref>{{Cite report |url=https://www.econstor.eu/handle/10419/146979 |title=Money creation under full-reserve banking: A stock-flow consistent model |last=Lainà |first=Patrizio |date=2015 |publisher=Working Paper |issue=851}} p11</ref>
== History == In the 1840s, British Currency School theorists argued for 100% reserves.<ref>{{cite book |last1=Mises |first1=Ludwig Von |title=Money, Method, and the Market Process |date=1990 |publisher=Ludwig von Mises Institute |isbn=978-1-61016-387-3 |url=https://www.google.com/books/edition/Money_Method_and_the_Market_Process/9vFhOVbumSMC?hl=en&gbpv=1&dq=British+Currency+School+100%25&pg=PT120&printsec=frontcover |language=en}}</ref>
In the early 20th century, classical economics was widely accepted. In the 1930s, Keynesianism gained prominence as policymakers sought solutions for the Great Depression.<ref>{{cite book |last1=Wapshott |first1=Nicholas |title=Keynes Hayek: The Clash that Defined Modern Economics |date=11 October 2011 |publisher=W. W. Norton & Company |isbn=978-0-393-08311-8 |url=https://books.google.com/books?id=su1OvQrGVAAC&q=resurgent%20Keynesian%20tide |language=en}}</ref> thumb|Irving Fisher Economists proposed various strategies to address financial stability, including the Chicago Plan's full-reserve banking.<ref>{{Cite book |last=Phillips |first=Ronnie J. |url=https://books.google.com/books?id=GuLRy4aZ4mIC&q=long%20term%20reform |title=The Chicago Plan & New Deal Banking Reform |date=1994-12-15 |publisher=M.E. Sharpe |isbn=978-0-7656-3267-8 |pages=3 |language=en}}</ref> Irving Fisher's "The Debt-Deflation Theory of Great Depressions" (1933)<ref>{{Cite journal |last=Fisher |first=Irving |date=1933 |title=The Debt-Deflation Theory of Great Depressions |url=https://www.jstor.org/stable/1907327 |journal=Econometrica |volume=1 |issue=4 |pages=337–357 |doi=10.2307/1907327 |jstor=1907327 |issn=0012-9682|url-access=subscription }}</ref> analyzed how debt cycles contributed to economic instability.<ref>{{Cite book |last=Dimand |first=Robert W. |url=https://books.google.com/books?id=ua6PDwAAQBAJ&q=The%20Debt-Deflation%20Theory%20of%20Great%20Depressions |title=Irving Fisher |date=2019-03-29 |publisher=Springer |isbn=978-3-030-05177-8 |pages=177 |language=en}}</ref> Fisher proposed in his 1935 "100% Money"<ref>{{Cite journal |last=H. |first=R. G. |date=1936 |title=Review of 100 Per Cent. Money |url=https://www.jstor.org/stable/2980591 |journal=Journal of the Royal Statistical Society |volume=99 |issue=2 |pages=388–390 |doi=10.2307/2980591 |jstor=2980591 |issn=0952-8385|url-access=subscription }}</ref> disconnecting money and credit.<ref>{{Cite book |last=Lagoarde-Segot |first=Thomas |url=https://books.google.com/books?id=xaG5EAAAQBAJ&dq=Fisher+%22100%25+Money%22+complete+separation+of+monetary+and+credit+banking+functions&pg=PA94 |title=Ecological Money and Finance: Exploring Sustainable Monetary and Financial Systems |date=2023-04-13 |publisher=Springer Nature |isbn=978-3-031-14232-1 |language=en}}</ref>
Albert G. Hart detailed in 1935<ref>{{Cite journal |last=Hart |first=Albert G. |date=1935-02-01 |title=The "Chicago Plan" of Banking Reform: I A Proposal for Making Monetary Management Effective in the United States |url=https://academic.oup.com/restud/article-abstract/2/2/104/1527634 |journal=The Review of Economic Studies |volume=2 |issue=2 |pages=104–116 |doi=10.2307/2967557 |jstor=2967557 |issn=0034-6527|url-access=subscription }}</ref> how to maintain economic stability during the transition to 100% reserves.<ref>{{Cite book |last=Phillips |first=Ronnie J. |url=https://books.google.com/books?id=GuLRy4aZ4mIC&q=Hart |title=The Chicago Plan & New Deal Banking Reform |date=1994-12-15 |publisher=M.E. Sharpe |isbn=978-0-7656-3267-8 |pages=147 |language=en}}</ref> William R. Allen recounted in 1993 how Fisher's proposals influenced banking reform discussions.<ref>{{Cite journal |last=Allen |first=William R. |date=Oct 1993 |title=Irving Fisher and the 100 Percent Reserve Proposal |url=https://www.journals.uchicago.edu/doi/abs/10.1086/467295?journalCode=jle |journal=The Journal of Law and Economics |volume=36 |issue=2 |pages=703–717 |doi=10.1086/467295 |issn=0022-2186|url-access=subscription }}</ref> Full-reserve banking did not become law.
Maurice Allais presented a 100% reserve proposal in a 1948 book.<ref>{{cite book |last1=Phillips |first1=Ronnie J. |last2=Minsky |first2=Hyman P. |title=The Chicago Plan and New Deal Banking Reform |date=16 September 2016 |publisher=Routledge |isbn=978-1-315-28663-1 |pages=164 |url=https://www.google.com/books/edition/The_Chicago_Plan_and_New_Deal_Banking_Re/14kYDQAAQBAJ?hl=en&gbpv=1&dq=Maurice+Allais+100%25+reserve&pg=PT160&printsec=frontcover |language=en}}</ref> Milton Friedman advocated for 100% reserves in 1960 with A Program for Monetary Stability.<ref>{{Cite book |last=Forder |first=James |url=https://www.google.com/books/edition/Milton_Friedman/LOCgDwAAQBAJ?hl=en&gbpv=1&dq=Milton+Friedman+100%25+reserves&pg=PA262&printsec=frontcover |title=Milton Friedman |date=2019-07-05 |publisher=Springer |isbn=978-1-137-38784-4 |language=en}}</ref>
James Tobin proposed a deposit currency system in 1985 with aspects of 100% reserves.<ref>{{cite book |last1=Soto |first1=Jesús Huerta de |title=Money, Bank Credit, and Economic Cycles |date=2006 |publisher=Ludwig von Mises Institute |isbn=978-1-61016-388-0 |url=https://www.google.com/books/edition/Money_Bank_Credit_and_Economic_Cycles/AJLGKdOZneMC?hl=en&gbpv=1&dq=James+Tobin+deposited+currency&pg=PA735&printsec=frontcover |language=en}}</ref> Laurence Kotlikoff called for 100% reserve banking in his 2010 book Jimmy Stewart Is Dead.<ref>{{cite book |last1=Ahiakpor |first1=James C. W. |title=Macroeconomic Analysis in the Classical Tradition: The Impediments Of Keynes’s Influence |date=22 March 2021 |publisher=Routledge |isbn=978-1-000-36041-7 |url=https://www.google.com/books/edition/Macroeconomic_Analysis_in_the_Classical/8KoXEAAAQBAJ?hl=en&gbpv=1&dq=Laurence+Kotlikoff+100%25&pg=PT100&printsec=frontcover |language=en}}</ref>
In the 2014 Money Creation and Society debate in the UK Parliament, Zac Goldsmith called for a monetary commission on full reserve banking.<ref>{{cite web |title=Money Creation and Society - Hansard - UK Parliament |url=https://hansard.parliament.uk/Commons/2014-11-20/debates/14112048000001/MoneyCreationAndSociety |website=hansard.parliament.uk |language=en |date=27 February 2025}}</ref>
In December 2025, N3XT inc launched the first full-reserve narrow bank in the U.S.A. after receiving its Special Purpose Depository Institution charter from the State of Wyoming.<ref name="h724">{{cite web | last=Ayan | first=Amin | title=Former Signature Bank Executives Launch N3XT, a Blockchain-Based 24/7 Payments Bank | website=Yahoo Finance | date=2025-12-05 | url=https://finance.yahoo.com/news/former-signature-bank-executives-launch-063531940.html | access-date=2026-02-10}}</ref>
==Views==
=== In favor === {{main|Monetary reform}} Economist Milton Friedman at one time advocated a 100% reserve requirement for checking accounts,<ref>{{Citation | last=Solow| first = Robert M.| title=Financial crises, contagion, and the lender of last resort| publisher=Oxford University Press| date = March 28, 2002| chapter = On the Lender of Last Resort| page = 203 |chapter-url = https://books.google.com/books?id=2486Jp8TjEcC&q=financial+crises,+contagion,+and+the+lender+of+last+resort&pg=PA201 | isbn = 978-0-19-924721-9}}</ref> and economist Laurence Kotlikoff has also called for an end to fractional-reserve banking.<ref name=":3">{{cite magazine |last1= Kotlikoff |first1=Laurence J. |last2=Leamer |first2=Edward |title=A Banking System We Can Trust |magazine=Forbes |via=Boston University |date=April 23, 2009 |url=http://people.bu.edu/kotlikoff/newweb/Abankingsystemwecantrust_4_2009.pdf |access-date= September 14, 2010 |archive-url=https://web.archive.org/web/20110604020252/http://people.bu.edu/kotlikoff/newweb/Abankingsystemwecantrust_4_2009.pdf |archive-date = June 4, 2011}}</ref> Austrian School economist Murray Rothbard has written that reserves of less than 100% constitute fraud on the part of banks and should be illegal, and that full-reserve banking would eliminate the risk of bank runs.<ref>{{Citation | last = Rothbard | first = Murray N. | title = The Mystery of Banking | year = 2008 | publisher = Ludwig von Mises Institute | url = https://www.mises.org/Books/mysteryofbanking.pdf | access-date =September 14, 2010 | isbn = 978-1-933550-28-2}}</ref><ref name="The Case for a 100% Gold Dollar">[https://mises.org/story/1829 The Case for a 100% Gold Dollar], Murray Rothbard</ref> Jesús Huerta de Soto, another economist of the Austrian school, has also strongly argued in favor of full-reserve banking and the outlawing of fractional reserve banking.<ref name="Soto">{{cite book|author=Jesús Huerta de Soto|title=Money, Bank Credit, and Economic Cycles|url=https://archive.org/details/bub_gb_AJLGKdOZneMC|access-date=4 August 2013|edition=3rd|year=2012|publisher=Ludwig von Mises Institute|isbn=978-1-61016-388-0}}</ref>
The 2008 financial crisis led to renewed interest in full reserve banking and sovereign money issued by a central bank. Monetary reformers point out that fractional reserve banking leads to unpayable debt, growing economic inequality, inevitable bankruptcy, and an imperative for perpetual and unsustainable economic growth.<ref>{{cite book |last1=Jackson |first1=Andrew |last2=Dyson |first2=Ben |title=Modernizing Money. Why our Monetary System is Broken and how it can be Fixed |date=2012 |publisher=Positive Money |isbn=978-0-9574448-0-5}}</ref> Martin Wolf, chief economist at the ''Financial Times'', endorsed full reserve banking, saying "it would bring huge advantages".<ref name="Weisenthal">{{cite web|last1=Weisenthal|first1=Joe|title=BAN ALL THE BANKS: Here's The Wild Idea That People Are Starting To Take Seriously|url=http://www.businessinsider.com/banning-banks-2014-4|publisher=Business Insider}}</ref>
Martin Wolf, Chief Economics Commentator at the ''Financial Times'', argues that many people have a fundamentally flawed and oversimplified conception of what it is that banks do. Laurence Kotlikoff and Edward Leamer agree, in a paper entitled "A Banking System We Can Trust", arguing that the current financial system did not produce the benefits that have been attributed to it.<ref name=":3" /> Rather than simply borrowing money from savers to make loans towards investment and production, and holding "money" as a stable liability, banks in reality create credit increasingly for the purpose of acquiring existing assets.<ref name=":1">{{Cite web|url=https://www.core-econ.org/martin-wolf-banking-credit-and-money/|title=Martin Wolf: Banking, credit and money|date=2013-11-11|website=CORE|language=en|access-date=2020-03-11}}</ref> Rather than financing real productivity and investment, and generating fair asset prices, Wall Street has come to resemble a casino, in which trade volume of securities skyrockets without having positive impacts on the investment rate or economic growth.<ref name=":3" /> The credits and debt banks create play a role in determining how delicate the economy is in the face of crisis.<ref name=":1" /> For example, Wall Street caused the housing bubble by financing millions of mortgages that were outside budget constraints, which in turn decreased output by 10 percent.<ref name=":3" />
==== Money supply problems ==== In ''The Mystery of Banking'', Murray Rothbard argues that legalized fractional-reserve banking gave banks "carte blanche" to create money out of thin air.<ref name=":4">{{Cite book|last=Rothbard, Murray N. |title=The mystery of banking|date=2008|publisher=Ludwig von Mises Institute|isbn=978-1-933550-28-2|edition=2nd|location=Auburn, Ala.|oclc=275097518}}</ref> Economists that formulated the Chicago Plan following the Great Depression argue that allowing banks to have fractional reserves puts too much power in the hands of banks by allowing them to determine the amount of money in circulation by changing the amount of loans they give out.<ref>{{Cite web|url=https://houseofdebt.org/100-reserve-banking-the-history|title=100% Reserve Banking — The History|date=2014-04-26|website=House of Debt|language=en-US|access-date=2020-03-17}}</ref>
==== Fractional-reserve banking fraud issues ==== Deposit bankers become loan bankers when they issue fake warehouse receipts that are not backed by the assets actually held, thus constituting fraud.<ref name=":4" /><sup>:97</sup> Rothbard likens this practice to counterfeiting, with the loan banker extracting resources from the public.<ref name=":4" /> However, Bryan Caplan argues that fractional-reserve banking does not constitute fraud, as by Rothbard's own admission an advertised product must simply meet the "common definition" of that product believed by consumers. Caplan contends that it is part of the common definition of a modern bank to make loans against demand deposits, thus not constituting fraud.<ref>{{Cite web |title=The Morality of Fractional Reserve Banking|last=Caplan|first=Bryan|date=2011-05-12|website=Econlib|language=en-US |url=<!-- https://www.e c o n l i b.org/archives/2011/05/the_morality_of_1.html -->}}{{rs|reason=source is blacklisted;|date=May 2023}}</ref>
==== Balance sheet fundamentals ==== Furthermore, Rothbard argues that fractional reserve banking is fundamentally unsound because of the timescale of a bank's balance sheet.<ref name=":42">{{Cite book|last=Rothbard, Murray N. |title=The mystery of banking|date=2008|publisher=Ludwig von Mises Institute|isbn=978-1-933550-28-2|edition=2nd|location=Auburn, Ala.|oclc=275097518}}</ref> While a typical firm should have its assets be due prior to the payment date of its liabilities, so that the liabilities can be paid, the fractional reserve deposit bank has its demand deposit liabilities due at any point the depositor chooses, and its assets, being the loans it has made with someone else's deposits, due at some later date.<ref name=":42" />
=== Against ===
==== New fees ==== Some economists have noted that under full-reserve banking, 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 probably be rejected by the public.<ref name="White2003">{{cite journal |url=http://sensiblemoney.ie/data/documents/tir_07_3_white.pdf |first=Lawrence H. |last=White |title=Accounting for Fractional-Reserve Banknotes and Deposits—or, What's Twenty Quid to the Bloody Midland Bank? |journal=The Independent Review |volume=7 |issue=3 |date=Winter 2003 |issn=1086-1653 |pages=423–41 |access-date=2012-11-30 |archive-url=https://web.archive.org/web/20150429081711/http://sensiblemoney.ie/data/documents/tir_07_3_white.pdf |archive-date=2015-04-29 }}</ref><ref name="Allen 1993 703–717">{{cite journal |jstor=725805 |title=Irving Fisher and the 100 Percent Reserve Proposal |first=William |last=Allen |journal=Journal of Law and Economics |date=October 1993 |volume=36 |pages=703–17 |issue=2 |doi=10.1086/467295|s2cid=153974326 }}</ref> However, in economies where central banks enact zero and negative interest rate policies, some writers have noted depositors are already paying to put their savings in fractional reserve banks.<ref>[https://mises.org/blog/texan-plans-build-gold-depository Texan Gold Depository]</ref><ref>{{Cite journal |last=Fontana |first=Giuseppe |last2=Sawyer |first2=Malcolm |date=2016-06-02 |title=Full Reserve Banking: More ‘Cranks’ Than ‘Brave Heretics’ |url=https://academic.oup.com/cje/article-abstract/40/5/1333/1987666 |journal=Cambridge Journal of Economics |language=en |volume=40 |issue=5 |pages=1333–1350 |doi=10.1093/cje/bew016 |issn=0309-166X |archive-url=https://web.archive.org/web/20210609130647/https://academic.oup.com/cje/article-abstract/40/5/1333/1987666 |archive-date=2021-06-09|url-access=subscription }}</ref>
==== Shadow banking and unregulated institutions ==== In their influential paper on financial crises, economists Douglas W. Diamond and Philip H. Dybvig warned that under full-reserve banking, since banks would only be permitted to lend out funds where depositors agreed to time-lock their deposits, need for extra credit would drive some borrowers to use unregulated institutions. Unregulated institutions (such as high-yield debt issuers) would take over the economically necessary role of financial intermediation and maturity transformation, therefore destabilizing the financial system and leading to more frequent financial crises.<ref name="Diamond-Dybvig">{{Citation |last1=Diamond |first1=Douglas W. |author2=Philip H. Dybvig |title=Banking Theory, Deposit Insurance, and Bank Regulation |journal=The Journal of Business |date= Jan 1986 |volume=59 |issue=1 |pages=55–68 |jstor=2352687|quote=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. |doi=10.1086/296314 |postscript=.}}</ref><ref>{{cite journal |last=Diamond |first=Douglas |author2=Philip Dybvig |title=Bank Runs, Deposit Insurance, and Liquidity |journal=Federal Reserve Bank of Minneapolis Quarterly Review |date=Winter 2000 |volume=24 |issue=1 |pages=14–23 |url=http://minneapolisfed.org/research/qr/qr2412.pdf|access-date=29 August 2012}}</ref>
Writing in response to various writers' support for full reserve banking, Paul Krugman stated that the idea was "certainly worth talking about", but worries that it would drive financial activity outside the banking system, into the less regulated shadow banking system.<ref>{{cite news |last=Krugman|first=Paul|date=April 26, 2014 |title=Is A Banking Ban The Answer? |url=https://krugman.blogs.nytimes.com/2014/04/26/is-a-banking-ban-the-answer/?_php=true&_type=blogs&_r=0 |newspaper=New York Times |access-date = September 18, 2015 }}</ref>
==== Misses the problem ==== Krugman argues that the 2008 financial crisis was not largely a result of depositors attempting to withdraw deposits from commercial banks, but a large-scale run on shadow banking, especially repo — overnight lending.<ref name=":2">{{Cite web|url=https://krugman.blogs.nytimes.com/2014/04/26/is-a-banking-ban-the-answer/|title=Is A Banking Ban The Answer?|date=2014-04-26|website=Paul Krugman Blog|language=en-US|access-date=2020-03-11}}</ref> As financial markets seemed to have recovered more quickly than the 'real economy', Krugman sees the recession more as a result of excess leverage and household balance-sheet issues.<ref name=":2" /> Neither of these issues would be addressed by a full-reserve regulation on commercial banks, he claims.<ref name=":2" />
== See also == {{cols|colwidth=20em}} * Austrian business cycle theory * Chicago plan / The Chicago Plan Revisited * Committee on Monetary and Economic Reform (Canada) * Fiat money * Fractional-reserve banking * Monetary reform * List of monetary reformers * Money creation * Narrow banking * Positive Money * Reserve requirement * Hard currency * Seigniorage * Swiss sovereign money referendum, 2018 * Broad money {{colend}}
==References== {{Reflist|colwidth=30em}}
== External links == *[http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf The Chicago Plan Revisited], IMF Working Paper, Jaromir Benes and Michael Kumhof, August 2012 *[https://www.mises.org/journals/scholar/salin.pdf In Defence of Fractional Monetary Reserves] (Pascal Salin)
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