Re: A 100 Percent Reserve Banking System

From: William F Hummel (wfhummel_at_comcast.net)
Date: 06/07/04 

Date: Mon, 07 Jun 2004 05:03:16 GMT

On 07 Jun 2004 02:23:09 GMT, aft627@aol.com (Andy F) wrote:

>William F Hummel wrote:
>
>>On 4 Jun 2004 18:41:24 -0700, atki4564@iwon.com (Eric Atkinson) wrote:
>>
>>>This sounds sensible enough; why do you suppose it wasn't done this
>>>way from the beginning?
>>
>>What I have described in the lead article of this thread applies only
>>to a fiat money system, as distinct from the precious metal-backed
>>money system we once had. The fractional reserve banking system
>>existed long before we adopted the fiat money system in the mid-20th
>>century. Banks have a lot of political muscle and would now fiercely
>>oppose the required legislation, which would put them out of business
>>as we know them today. They would end up as ordinary intermediaries
>>without the power to control liquidity within the private sector.
>>
>>>Is their any downside?
>>
>>I don't see any serious downside. The Fed's control of the money
>>market interest rate would probably not be as tight. But that's not
>>all bad. In any case, the transition to such a system would take time
>>and be a bumpy ride.
>>
>Could the banks provide free banking with a 100% reserve system?

Quoting the article: "In a 100 percent reserve system, except for the
depository role, the distinction between banks and non-banks
disappears. Neither can create credit money, and they can only lend
what they have on deposit at the CB. Since the depository role offers
only modest income in the form of fees for service, we will assume
that role of banks evolves into branches of the CB, where the deposits
actually exist. We will use the term banks to refer to the depository
branches of the CB, and financial institutions (FIs) to refer to the
various forms of profit-seeking intermediaries in the private sector."

I assume you are referring to the depository role of private banks as
distinct from the lending role. In a 100 percent reserve system, it
would make sense for the Fed to perform that function. The cost could
easily be absorbed by the Fed and thus "free" to the depositors.

>Under the current system, if you put money in a bank account, the bank uses
>this money as a reserve so they can lend money to other people. The interest on
>these loans enables the bank to pay the cost of maintaining the account and
>make a profit.

Correct.

>However, with a 100% reserve , for every dollar you put in the account, the
>bank would have to keep it as a reserve to cover the liability, and they
>couldn't use it to make loans.this means they wouild have to charge people for
>storing their money. Or am I getting this wrong?
>
Again quoting the article: "In a 100 percent reserve system, banks
cannot create credit money. The entire money supply consists of base
money. Thus the concept of reserves as the backing for credit money
loses its meaning. Deposits and transactions involve only base money.
In practice the bulk of the money supply will exist as deposits at the
CB. Currency, used mainly in retail transactions, can be acquired on
demand in exchange for CB deposits."

In the 100% reserve system as proposed, I use the term "banks" to
refer to depository branches of the Fed whose only function is to
accept deposits and handle payments via check or wire order. In other
words, checking accounts would exist only with the Fed and not with
private banks.

However if private banks were allowed to retain the depository role,
they would have to own deposits of base money at the Fed equal to the
liabilities they assume when they accept customer deposits. Private
banks would then hold two types of accounts at the Fed, one to fully
back the deposits they hold, and another representing their own money
which could be loaned at interest to whomever they choose. Note that
such lending does not change the amount of base money because it
simply transfers ownership of the money at the Fed to the borrower's
account.

Since the bank deposit of the first type at the Fed could be used only
as a part of the payment system, banks would likely charge their own
depositors a fee for service. Of course it is possible that the banks
would use those checking deposits as a loss-leader to attract
customers to their lending activities. In that case the depositors
might get a checking account for free.

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