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100% Reserve Banking doesn't work

This has bothered me for weeks, but I now know how to fix the banking system. Enforcing 100% Reserve banking doesn't work because there is no incentive for the bank to keep any sort of savings accounts, in fact, for it to work, they would have to charge negative interest for the service of holding your money.

Of course the FDIC is a horrible idea because it incentivizes risky business on the parts of the banks. It's also clear that ultra-low fractions on reserve is dangerous. The formula to calculate the inflation as a result of fractional reserve is: MONEY/(100%-n%), so $1000 is inflated to $1000/(10%)=$10k in a 90% fractional reserve system. You can see the problem when the fractional reserve is at 100% (opposite of 100% reserve banking) because then you get $1000/(100%-100%) which approaches infinity!

http://en.wikipedia.org/wiki/Geometric_sum

Instead, banks should be allowed to float their Reserve percentage. However, they must inform their customers exactly what percentage reserve the account is being held at, how much reserve is a guaranteed withdrawal at any given time, and how long they have to wait to withdraw up to their reserve percentage. They must also allow the public to know exactly (say within +/- 2% on a unannounced spot check without penalty) how much money they have on reserve, how much they have loaned out, and how much is going in and going out, and what percentage of their holdings are in various financial mechanisms so the public can make an informed decision about whether or not the bank is on solid ground.

Of course these rules would only apply to interstate banks. Banks or credit unions operating in only one state would not be under any federal oversight, but most state would probably adopt similar rules.

Notice having a higher reserve percentage is naturally encouraged because those banks will be able to offer a competitively low interest rate in exchange for the added security of holding. Those banks could flip a higher profit on a competitive loan, but would need bigger volume in terms of savings in the reserve to flip the same amount of money. This is perfect; one of the problems in our current system is that bigger, national banks are easy to collapse, in this system bigger banks fundamentally have more stability because they will be biased towards having a higher percentage of their holdings on reserve.

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SteveMT's picture

HELLO OUT THERE...THE BAILOUT BILL CHANGED THE 10% RESERVE...

requirement. The reserve requirement NOW is ZERO%. This change was supposed to have taken effect in 2011, but was moved up and slid into the bailout package. So, banks can operate with no reserve if they so choose. The down side is that they may not give you all of your money that you wish to withdraw, especially if all of the money at that bank has been lent out. Already in effect then is what you have recommended, a floating reserve percentage, down to nothing/zero/nada % reserve! God help us all! See Bailout Bill Sections: 128 and 202-203. Don't expect this to be written clearly.

there is a book by Murray N.

there is a book by Murray N. Rothbard about 100% Reserve Banking and it is explained very well in there ...

my quick own personal view .. savings is not an investment it is savings

an investment is an investment ... if your lending money to an entrepreneur you do so examining him and his plan with the expectation of receiving a profit ( accumulating interest on your initial amount ).

There are two types of accounts or at least there should be ... savings (storing your money for example in a vault for a fee) and speculative ( loaning capital with the expectation of making a profit )

the whole thing about the 100% thing is about 100% gold dollar

the accounts people choose to have and that a business offers are subject to consumers freedom of choice

All paper money eventually returns to its real intrinsic value, zero. - Voltaire

Republicae's picture

First, it is vital that we

First, it is vital that we understand that under a commodity specie monetary system, using gold and silver, that the money in such a system is the private property of the person who not only earned it, but also deposits it in a banking institution. Therefore, the banks are merely warehouses, storage facilities that enter into contract under their fiduciary responsibility to their clients. Obviously, as such, within those responsibilities is that of providing a client with instant demand on his deposits. This does not preclude a contract that would allow the use of the depositor’s funds at a reasonable rate of interest, but to do otherwise without such a contract is, in the simplest form, fraud.

Today, the banks use the funds of a depositor in any way they deem profitable for the bank and since the money we use today is not actual real property of the depositor the banks assume a position that would not be possible under a gold monetary system since it is the government that assumes ultimate ownership under the current fiat system.

Under a gold monetary system, the banks would serve basically the same functions they do today with one vital exception and that it they hold the money property of their depositors in trust. A fractional reserve system does not provide for the same fiduciary trust, it can’t because at any given time is assumes complete control over the funds in deposit.

Now, for instance, how would you feel if you had $10,000.00 in a bank safe-deposit box and the bank entered your box, without your consent, used the money and then when you came to remove your $10,000.00 from your safe-deposit box it was not available to you at the moment of demand? In a similar fashion, your account is raided each and every month, without your direct consent or, in most cases, without your knowledge either.

http://www.1776solution.blogspot.com

http://militantjeffersonian.com

"We are not a nation, but a union, a confederacy of equal and sovereign States" John C. Calhoun

Fractional reserve banking

originated with "commodity specie money". It was not invented by the Fed, the Bank of England, or even the Bank of France.

Sorry, but the sad truth is that a simple return to gold wouldn't be good enough to prevent the problem.

~jaq

~jaq

Republicae's picture

I never said it

I never said it did.......

http://www.1776solution.blogspot.com

http://militantjeffersonian.com

"We are not a nation, but a union, a confederacy of equal and sovereign States" John C. Calhoun

Actually

you did, indirectly. You built a logical case, starting with the premise of commodity specie money. Just add caveat, and it will make its own sauce.

I'm not being harsh here. Just trying to keep people logically precise.

~jaq

~jaq

Republicae's picture

Actually, no, I wasn't. I

Actually, no, I wasn't. I was making the point that a 100% reserve system under gold specie was possible. The fact that a fractional reserve system was first formed and used under a gold specie system does not preclude a 100% reserve under a gold specie. If I wanted to talk about the history of fractional reserve banking I would have, believe me.

Read De Soto, he gives full treatment to the idea of a 100% gold standard -- with no fractional reserve banking and no central bank: "A Proposal for Banking Reform: The Theory of a 100 % Reserve Requirement". You can find that chapter in his extraordinary work entitled " Money, Bank Credit, and Economic Cycles".

http://www.1776solution.blogspot.com

I would remind you that extremism in the defense of liberty is no vice! And let me remind you also that moderation in the pursuit of justice is no virtue. Barry Goldwater

http://militantjeffersonian.com

"We are not a nation, but a union, a confederacy of equal and sovereign States" John C. Calhoun

Of course 100% Reserve

Of course 100% Reserve Banking doesn't work, that's why it has NEVER been seen in this country.

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"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

actually, it was seen during

actually, it was seen during Colonial Times and also during the Civil War

wolfe's picture

yes...

back when banks charged a small fee for holding your money for you.

Which is a far more legitimate use of a bank when it comes to checking. Oh wait, they have went back to charging us fees AND have fractional reserve banking.

I know a guy who didn't pay attention to his savings account. Come to find out, the monthly maintenance fee was causing the account to go down monthly... lol... He closed it when he realized.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

wolfe's picture

Silly.

Finance companies are not fractional (hence the larger interest), www.prosper.com is not fractional, VC's aren't fractional, I of course was not fractional when lending to a business associate.

The idea that someone has to create money in order to loan it is just silly. In fact, this cheap money approach breeds wasteful spending and of course is the primary reason for inflation more than anything the Fed does directly.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

I wasn't saying that banks needed to create money to lend it

I was asking how they could lend money if all the deposits are held in the bank and can't be touched.

wolfe's picture

The same way everyone else does...

They either setup specific funds which people can deposit their savings into that is used for investment purposes. (i.e. CD type of instrument)

That is not fractional, that is an investment, and the contract between the depositor and the bank, as well as the bank and the debtor are 100% valid.

The bank can use their profits to invest directly as well.

Exactly the same as all of those entities that I mentioned.

Just to be clear, as far as I know, checking deposits are NOT allowed to be used for reserve calculations and therefore isn't even what we are talking about anyway.

The Philosophy Of Liberty -
http://www.thephilosophyofliberty.com/

What I was never sure about

was how a bank is supposed to lend money to entrepreneurs if it has to maintain 100% reserves. Where is the money for loans going to come from?

If anyone has a quick answer to this, help me out ; )

From people

I wish I could find the really good article I read once about full reserve banking but... can't find it.

In full reserve banking, the funding for things runs on savings instead of debt--everyone's savings. Entrepreneurs get their money from the savings of persons willing to lend it to them.

This is a very good thing. Much of the reason the dot bomb happened was because there was way too much money, so investors did very foolish things with their money because... well, they had so much they could. So... some "bad" businesses were started and funded when in a properly capitalistic solid economy, they never would have--they wouldn't have survived. In a solid economy (hard money, etc.), "bad" businesses quickly fail and go away allowing the best to continue.

Similar to the housing boom... without all the crazy artificial money, the construction and such would have happened at an appropriate rate. Housing prices would not have skyrocketed because investors/flippers/and such would not have had access to virtually "free" money to do foolish things.

there is a book by Murray N.

there is a book by Murray N. Rothbard about 100% Reserve Banking and it is explained very well in there ...

my quick own personal view .. savings is not an investment it is savings

an investment is an investment ... if your lending money to an entrepreneur you do so examining him and his plan with the expectation of receiving a profit ( accumulating interest on your initial amount ).

There are two types of accounts or at least there should be ... savings (storing your money for example in a vault for a fee) and speculative ( loaning capital with the expectation of making a profit )

the whole thing about the 100% thing is about 100% gold dollar

the accounts people choose to have and that a business offers are subject to consumers freedom of choice

All paper money eventually returns to its real intrinsic value, zero. - Voltaire

There are several

"The Case Against The Fed"

"What Has Government Done To Our Money?"

~jaq

~jaq

If a bank loans out its

If a bank loans out its clients savings, then it does not have 100% backing.

----------------------------------------------------------
"Ehhh, What's ups Doc?" B.Bunny "Scwewy Wabbit!"E. Fudd
People's Awareness Coalition: Deprogramming Sequence

The loan has 100% backing

because the money is only loaned out once. The bank would keep a portion of it's deposits on hand to satisfy at-once needs of it's depositors, just as they do now (I believe there is a clause in your savings account that allows them to delay payment for 30 days, giving them time to come up with the dough). The main difference between 100% backing and fractional reserve banking is that in the fractional system, the same money is loaned out 9 or 10 times and only about 10% of the total loan amount is actually in the bank. The banks are always balanced on the fine edge of making lots of money (from the interest on the multiple loans) and bankrupcy (from multiple possible parties who can potentially demand their money all at once).

Slower Growth

We would have slow, steady real wealth creation (savings) as opposed to boom/bust credit expansion and contraction.

Slow and steady gets the job done...

_______________________________________________________
"Let the good heart speak words of true peace, not inciting others to further war." -- B.I.S.

Thanks to both of you for explaining that to me

So what I gather is that 100% backing isn't necessarily the way we have to go. We just need more transparency on behalf of the banks on how much they're lending out, and their customers would have to explicitly agree to allow their money to loaned out, or else they could go to another bank.

That seems perfectly reasonable to me.

From Their Own Profits (fees charged for service)

The bank should only be able to lend their own money. If they want to lend customer's money - the individual customer should be fully informed. Perhaps with a prospectus of investment opportunities from which the customer selects. That way the customer would know what their "individual reserve" is at any given time.

This would also reduce the possibility of bank runs - as each customer would be aware of how much of their money was "invested" and how much was available for withdrawal.

Banking would become a paid security/storage/brokerage service (as it was originally).

_______________________________________________________
"Let the good heart speak words of true peace, not inciting others to further war." -- B.I.S.

This is right on

A bank would be no different from any other warehousing service. They store your item (money) and provide security and maybe transfer services and they could also make profit from lending from their profits through interest. The structure in place right now is criminal and in essence is fraud.

"It is the responsibility of the patriot to protect his country from its government."

— Thomas Paine

"Endless money forms the sinews of war." - Cicero, www.freedomshift.blogspot.com

By the way, I'm pretty sure

By the way, I'm pretty sure that your math should show that 100% reserve does not approach an infinite amount of inflation. Clearly, there is no inflation at all. $1000 = $1000 no?

"My theories explain, but cannot slow the decline of a great civilization. I set out to be a reformer, but only became the historian of decline."
- Ludwig Von Mises

"My theories explain, but cannot slow the decline of a great civilization. I set out to be a reformer, but only became the historian of decline."
- Ludwig Von Mises

Yeah, I messed up describing it a little bit.

I used "100% reserve banking" to mean "full reserve banking" and "100% fractional reserve banking" to mean the opposite, which is confusing.

Still..

100% reserve banking would mean no inflation. If our money was back by gold or silver than the only way to increase the money supply would be to mine more. Population increase would counteract the effects of the increased supply by mining.

Why should the banks be able to lend out more than they have? Anyone else doing this would be jailed. As far as I know credit unions do not participate in fractional reserve lending. They are non-profit groups. Why can't we just use this model for all of our banking needs?

My view is...

While I agree we should have free banking(no laws restricting the practices of banking) I will under such a system avoid like the plague any bank that isn't 100% reserve.
Having non-!00% reserve with money that is backed by specie is inflationary as there will exist more money in paper than there is in commodity backing it. With freely competing currencies that will be fine because it will feasible to avoid such inflation prone currencies. My view of what banking should be is like what Rothbard suggested, a warehouse that stores gold. Through all the fees and the interest it charges on loans, it saves money to loan out and it can only loan what it saves. Then banks will be on par with all other industries. Can you think of another industry that can loan something it doesn't have?

"My theories explain, but cannot slow the decline of a great civilization. I set out to be a reformer, but only became the historian of decline."
- Ludwig Von Mises

"My theories explain, but cannot slow the decline of a great civilization. I set out to be a reformer, but only became the historian of decline."
- Ludwig Von Mises

Another Solution

Would be to have a 100% gold standard - no paper receipts at all. This would be the biggest form of transparency. And if they coin-cut like the Romans did then inflation would be very obvious.

"Greater than the force of mighty armies is the power of an idea whose time has come"
- Victor Hugo

"Greater than the force of mighty armies is the power of an idea whose time has come"
- Victor Hugo

ex..

actly

Free unregulated banking

Free unregulated banking doesn't mean fraud is legal. We have to have laws allowing banks to commit fraud without being prosecuted. So yes lets deregulate banks but also lets repeal laws that protect them against prosecution for fraud. If you or I claim we have something for sale or loan and we really don't but charge someone for it we would be arrested. Banks should have to abide the same laws.

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Get Prepared!

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