Lets suppose the government outlaws fractional reserve banking, but keeps our current fiat currency system the same. Can a Full Reserve Banking System co-exist with a fiat monetary system? What would be likely consequences of such changes?
In principle, we could freeze the monetary base and institute 100% reserve banking. The Federal Reserve would merely function as a clearinghouse and caretaker of the money supply (e.g. retiring old notes).
You could take it a step further, what about a fully privatized monetary system? Private banks issue their own competing currencies (CitiBank Dollars, HSBC Dollars, etc). This system could also become a fiat currency system with 100% Reserves.
The obvious problem would be incentives. Lacking a commodity base, both public and private fiat currencies would have the incentive to print more dollars than they have in the vault. Government central banks with fiat currency have every reason to violate any Full Reserve promise.
In theory, the answer is yes, since money is only what everyone agrees upon as a medium of exchange. This could be precious metal, paper, or cocoa beans, it doesn't matter. Commodity-based currencies, however, hold their value because they are limited in quantity at any given time and take blood and sweat to produce (or loot). Even if fiat money were issued debt-free, there is still the temptation for the issuer to print more. Nobody anywhere, especially not bureaucrats, can be trusted to resist that temptation.
You could take it a step further, what about a fully privatized monetary system? Private banks issue their own competing currencies (CitiBank Dollars, HSBC Dollars, etc). This system could also become a fiat currency system with 100% Reserves. The obvious problem would be incentives. Lacking a commodity base, both public and private fiat currencies would have the incentive to print more dollars than they have in the vault. Government central banks with fiat currency have every reason to violate any Full Reserve promise.
Well, they may have the incentive to do so, but there are certain mechanisms in competitive settings that prevent the over-issue of notes and over-extension of credit beyond the demand for money (in the broader sense). The government, like all of its competitors in such an environment, would not be in a position to overextend and print too much money, especially if a 100% RR naturally emerges (their notes would lose value relative to other notes, and it would eventually go bankrupt). If the government attempted to fix the value of their notes then Gresham's law would take hold. This is why we have a monopoly on money and legal tender laws in the first place; the government simply cannot compete, but wants to control the monetary system.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Underneath our current system this would prevent any new creation of money and as the exsisting loans were paid off the money supply would soon be completely extinguished. Unless the monetary system was replaced at the same time fractional banking was destroyed we would suffer a complete monetary collapse.
Theoretically yes, but what is the point? Central banks were created to protect the overexpansion of credit of fractional reserve banks. So if there is no fractional reserve why do you need a central bank? You dont even need a centralized clearing house, but even if you want to have a monopolistic clearing house, it is not like having a central bank.
It's important to understand that instituting 100% reserves would not prevent banks (or other firms) from creating money. All it would do is prevent banks from creating demand deposits in their present form. Money is that which is accepted as a medium of exchange, and it can emerge spontaneously through the interactions of market participants, i.e. the money supply can increase irrespective of whether the monetary base in fixed. I suspect, that were these type of reforms to be instituted, short term time deposits would be begin functioning as money alongside 100% reserve bailment notes. The consequences for the money supply would be little different than with fractional reserve banking, except that I suspect it would tend to create a surplus of loanable funds and frustrate economic growth.
Modus Tollens:except that I suspect it would tend to create a surplus of loanable funds and frustrate economic growth.
Right, because it is pieces of paper notes that constitute real available capital. A paper note trapped in a bank vault is a piece of wealth deprived from society.
Daniel,
While the present banking system tends to create an excess of loanable funds relative to real savings, I think a 100% reserve system (like the one described) would tend to create a deficiency of loanable funds relative to real savings. In both cases -- an excess or deficiency -- real economic growth will be frustrated or even retarded depending on the severity of the mismatch. I believe you disagree. We have went over those disagreements elsewhere to no avail, and I do not wish to rehash those arguments here.
Modus Tollens:Daniel,
My name is not Daniel.
Modus Tollens:I think a 100% reserve system (like the one described) would tend to create a deficiency of loanable funds relative to real savings.
And fortunately, only policy is shaped by opinion. Never a truth.
Modus Tollens:We have went over those disagreements elsewhere to no avail, and I do not wish to rehash those arguments here.,
Contrary to your belief, I am not debating you for your own sake. This is a forum for intellectual discussions and debate. It's not perfect, but it's probably the best on the Web on these matters. You do not come here, make speeches full of assertions based on nothing but your own authority, and have a right to enjoy some freedom not to be challenged or discredited.
DD5, Dan, or whatever,
I said I do not wish to rehash those arguments, not that I enjoy some kind of right not to be challenged or discredited (it's not something I even desire).
Modus Tollens:I said I do not wish to rehash those arguments
I did not ask you to and frankly I don't care if you do or don't. You just have to realize that since this is a public forum and not a personal chat, you do not ask me or somebody else not to discredit your preaching here, and I already said that I do not necessarily engage you for your sake.
Yes DD5, I know, this is a commons, and you are its tragedy.
The only tragedy here is for you apparently since you are unable to use this forum as a platform for your preachings. I may be the reason today, but somebody else will be the reason tomorrow.