Reserve banking

Letter: It’s time to reconsider all bank reserves

Updates to the letter

Fractional reserve banking is a system in which only a fraction of bank deposits are backed by cash on hand and available for withdrawal. The system is risky (Opinion of July 23). For hundreds of years, this resulted in bank failures, with depositors losing their money. The advent of taxpayer-guaranteed deposit insurance in the 1930s and the multibillion-dollar bailout of banks was not much of an improvement as it meant that banks were receiving state support, while that other lenders who lend as much as banks do not.

In addition, depositing money in a bank for the purpose of earning the bank is the same as depositing money with a stockbroker for the same purpose in that both activities are of a commercial nature and that it is not for taxpayers to support trade, in the absence of very good social reasons to do so.

As for the purported merit of fractional reserve banks, namely that they create money and liquidity, they unfortunately do so in a pro-cyclical fashion, which means central banks and governments have to counter this. Add to this the fact that private banks are totally incapable of creating the huge additional sums of money needed in crises like the current Covid crisis.

Therefore, depriving private banks of their ability to create money would not hurt, as Martin Wolf, your chief economic commentator, argued.

So we want the alternative to fractional reserve, i.e. full bank reserve, to be taken much more seriously for a variety of reasons, including some or all of the above.

Jorg Guido Hulsmann
Professor of Economics, University of Angers, Angers, France

Patrizio Laina
Chief Economist, Confederation of Finnish Professionals (STTK), Helsinki, Finland

Joseph huber
Emeritus Chair in Economic and Environmental Sociology, Martin Luther University, Halle-Wittenberg, Germany

Ib Ravn
Senior Lecturer, Aarhus University, Copenhagen, Denmark

Bryan gould
Vice-Chancellor, Waikato University Hamilton, New Zealand

Letter in response to this letter:

Reflections on Bank Goal / Ron Iles, Lindfield, West Sussex, UK


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