Some criticisms of full reserve banking
William Hummel
Below are comments copied from the website of the Ludwig von Mises Institute at http://wiki.mises.org/wiki/Full_reserve_banking#The_case_for_full_reserve.
I copied only the negatives to give a sense of what some others think is wrong with full reserve banking. I don't necessarily agree with all the comments, but they certainly merit further study.
The most common criticism of full-reserve banking, and by contrast the principal argument for fractional reserve banking, is the need for capital formation. Hayek accepted that bank credit and fractional reserve banking — even if they contributed to business cycles — were necessary as "the price we pay for a speed of development exceeding" that which would otherwise be possible.
Austrian monetary theorist, Selgin, has argued: "Those who insist on fractional-reserve banking's fraudulent nature or inherent instability overlook overwhelming proof of the benefits that fractional reserve banking has brought in the way of economic development by fostering investment.
Under full-reserve banking, deposits available for immediate withdrawal would sit idle ready for depositors to claim their money, while entrepreneurs went without this potentially usable capital. This would be likely to significantly reduce the capital available to borrowers and therefore reduce total spending and aggregate demand in the economy.
Full-reserve banking would also lead to severe reductions in the growth of the money supply and liquidity. A full-reserve banking system would therefore be likely to cause significant economic dislocation and possibly a severe credit crunch.
William
John Hermann
Below are comments copied from the website of the Ludwig von Mises Institute at http://wiki.mises.org/wiki/Full_reserve_banking#The_case_for_full_reserve.
I copied only the negatives to give a sense of what some others think is wrong with full reserve banking. I don't necessarily agree with all the comments, but they certainly merit further study.
The most common criticism of full-reserve banking, and by contrast the principal argument for fractional reserve banking, is the need for capital formation. Hayek accepted that bank credit and fractional reserve banking — even if they contributed to business cycles
— were necessary as "the price we pay for a speed of development exceeding" that which would otherwise be possible.
Austrian monetary theorist, Selgin, has argued: "Those who insist on fractional-reserve banking's fraudulent nature or inherent instability overlook overwhelming proof of the benefits that fractional reserve banking has brought in the way of economic development by fostering investment.
Under full-reserve banking, deposits available for immediate withdrawal would sit idle ready for depositors to claim their money, while entrepreneurs went without this potentially usable capital. This would be likely to significantly reduce the capital available to borrowers and therefore reduce total spending and aggregate demand in the economy.
Full-reserve banking would also lead to severe reductions in the growth of the money supply and liquidity. A full-reserve banking system would therefore be likely to cause significant economic dislocation and possibly a severe credit crunch.
Take a look at the following reference: http://directeconomicdemocracy.wordpress.com/2013/04/09/what-full-reserve-banking-could-and-couldnt-achieve/
One point made here is that there already exist (non-bank) loan companies providing large loans like mortgages, and that even though their margins might be smaller than those of banks their very existence as viable entities demonstrates that capital formation in the absence of a high level of leveraging is not an intractable problem. Other thought-provoking discussions on this topic include:
http://www.positivemoney.org/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
http://andrewlainton.wordpress.com/2012/09/13/the-dubious-logic-of-the-case-for-full-reserve-banking/
John
Joe Leote
There would be no interest-margin profit on such lending. Most of the time the yield curve has low rates of interest for short term borrowing and lending (money market rates); it has higher rates of interest for the risk associated with long term borrowing and lending (capital market rates). Financial intermediaries make a profit on the carry by borrowing in money markets to finance loans in capital markets.
Sallie Mae (the government-sponsored student loan investor in the United States) had a line of credit to Treasury and invented a matched book strategy at some point in its history. However no private investor could run a matched book at a profit without shifting the risk to taxpayers or some sort of profit-subsidy. The credit-default swaps and other efforts to insure away risk tend to accumulate systemic risk at the macro level which private markets cannot insure.
Years ago, with respect to reading the Bible and contemplating human tendency to destroy nature for profit, I invented this phrase: society cannot insure against collective ignorance. The only insurance scheme that does not go broke in the long run is the Treasury debt. And even the long term solvency of Sovereign Treasury is debatable if the debts are extended to economic units which do not reduce to a "captive audience" in the fiat currency.
Joe
Mira Tekelova
Hello,
The alleged deflationary effect of full reserve banking
James E. Blair
My objection to this (and most other articles) that claim stimulus spending "pays for itself" is that they don't distinguish HOW the money is spent. I say that matters. If for infrastructure improvements or research, or if private spending via tax cuts, then the stimulus probably does.
But if government spending is on building pyramids, or if the private money goes to expanding "bubbles", then no, the stimulus will be inflationary.
Jim
helge nome
Perhaps you could advance some specific arguments, rather than simply referring to a website?
I agree with Jim. Pumping money into a system may yield very different outcomes, depending on the
state of the system at the time of money injection.
Helge
James E. Blair
While I claimed only that HOW stimulus money was spent would determine whether it would "pay for itself" or result in inflation, I agree with Helge that the timing of stimulus is also important. Stimulus during a time of "full employment" is more likely to cause inflation, than during a time of high unemployment, all else being equal.
I claim that the result of government stimulus depends on both WHAT and WHEN; considerations that so many of these articles ignore.