A banking system known as full-reserve banking, also known as 100% reserve banking, forbids banks from lending out funds that they receive from clients in the form of demand deposits. Under this system, banks only lend term deposits rather than demand deposits. It is used popularly and, due to its widespread use of full reserve banking, is known as 100% reserve banking or the sovereign money system. Only funds received as time deposits from consumers can be lent by banks.
Therefore, banks in this situation only operate as custodians over depositors’ funds and may charge depositors a fee for the service of safeguarding that they provide to the depositors. Contrastingly, in many current banking systems, banks pay consumers interest on their demand deposit balances. This is done to make sure banks can honor depositor redemption requests and prevent a bank run even if all depositors decide to request their money at once at some point in the future. In this scenario, banks just serve as the custodians of depositors’ funds and may charge a fee for this service.
Although the complete reserve banking system won’t stop the impending collapse, once it does occur, it might be a preferable strategy for moving ahead. This system allows banks to lend these deposits to borrowers at a specific interest rate, collect repayments from the borrowers, and then finally reimburse depositors their money together with a particular amount of interest.
Advantages
There are many advantages to full reserve banking. Here are a few of the main benefits:
- The entire reserve banking system encourages banks to increase lending at an unsustainable rate when the economy enters a growth phase, and consumer and corporate confidence rise. A more considerable multiple funds deposited in current accounts is loaned out to support this lending.
- Lowered GDP results from the misallocation of resources caused by artificially low-interest rates and credit expansion.
- The total reserve minimize the possibility of a bank run by ensuring banks can satisfy depositor demands even if every client requests a withdrawal at the same time.
- A massive reduction in the national debt, as a large portion of the interest-bearing assets that banks currently hold are government/treasury bonds or the national debt. Therefore, acquiring these assets with the freshly generated money described above would substantially lower the national debt.
- An economy that controls inflation also avoids the inequitable redistribution of wealth that results from the inflation tax, which results in a more equitable distribution of income and wealth. A fairer distribution of income and wealth can be achieved and maintained by avoiding periods of high inflation because the wealthy are well-equipped to profit from them. At the same time, the general public is far more susceptible to their effects.
Full-reserve banking’s proponents contend that it is more logical, reduces bank robberies, and places restrictions on banks’ money-creation power, all of which could help to reduce economic instability. Full reserve banking is a fair system with such advantages.
