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Concept
Full-reserve banking
Summary
Full-reserve banking (also known as 100% reserve banking, or sovereign money system) 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.
Currently, no country in the world requires full-reserve banking across primary credit institutions, although Iceland has considered it. In a 2018 ballot referendum, 75% of Swiss 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.
Monetary reform
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. 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. 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.
The financial crisis of 2007–2008 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. Martin Wolf, chief economist at the Financial Times, endorsed full reserve banking, saying "it would bring huge advantages".
Official source
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