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It's hard to have a debate when people take a purely ideological stand and have little understanding of the mechanics of the problem. The immediate effect of 1

It's hard to have a debate when people take a purely ideological stand and have little understanding of the mechanics of the problem. The immediate effect of 100% reserve is that commercial banks cease offering credit and instead start behaving like safe deposit boxes for people's money, offering negative interest. They effectively stop transforming savings in productive investments, saved money is simply extracted from circulation. If it wants to prevent a major liquidity crunch, the central bank will flood the market with newly created money and keep the economy going. Just what we want, right ? But in doing so, it will effective take on the role of the commercial banks in deciding which areas of the economy are worthy of investment. So instead of voting with your money and choosing a bank that is safe and makes prudent investments, everybody is forced to "save" at zero interest and empower the Central Bank (effectively, the state) to make investments on their behalf and decide the economic future. Worse still, any failure or bad investment is socialized through inflation and high interest to the whole of the population, since there is no longer any competition that prunes imprudent banks. We are in fact moving away from market solutions and into a central planing utopia. Instead of punishing and bankrupting the speculators, we are putting them in charge.

makomk 11y ago
I don't think you are quite understanding the mechanics of the problem yourself. Banks don't transform savings into productive investments, they print money. When they give (say) a $1 million loan to a business they're writing $1 million of new money into existence in their account, money which is just as good as printed cash. Their ability to do so is not much affected by whether people save money or splurge it all on expensive cars and goods, because either way the money remains in the banking system and the banks can make loans using it. Also, it's not realistic to expect people to vote with their money and choose a bank that is safe and makes prudent investments. Teams of experts with specialised knowledge who do this as their full-time job can't figure that out; how is your average Joe with a full-time job of his own and no industry experience meant to? Worse still, with fractional-reserve banking if enough people believe that a bank will fail then the resulting run on the bank will cause it to fail, at which point you'd best hope you got your money out in time. If people don't trust the banking system as a whole, it doesn't force banks to make prudent investments, it causes bank failures and people keep their money under the mattress because even if they could figure out which banks are investing well those banks are still likely to fail due to bank runs.
- cornholio 11y ago
  > When they give (say) a $1 million loan to a business they're writing $1 million of new money into existence in their account, money which is just as good as printed cash. Actually, it's exactly the cash from the depositor, loaned out. What the depositor gets in return for his cash is a "bank account": a freshly printed promise from the bank that, at a later date, he will be able to extract his cash. So the depositor takes a risk and makes an investment, and is rewarded with an interest. When you are insisting on 100% reserve banking, you are denying the bank the option to lend out your money. I assure you institutional investors, like large corporations, pension and investment funds and which provide the bulk of the funds, very much vote with their wallet. They are not protected against bank failures and it's not like they can cash out billions and keep then under mattresses. The mere threat of a liquidity problem will make the bank very risk averse and focus on improving it's position at the expense of it's market share. So banks don't need to fail for the banking market to work, the diligent bankers will be those providing liquidity.
  - makomk 11y ago
    > a freshly printed promise from the bank that, at a later date, he will be able to extract his cash That's not really what they're offering. Physical money is incredibly inconvenient compared to bank accounts, so much so that the only reason to use it for large amounts is if you or the other party don't trust the banking system. The banks rely on this because they can't actually handle more than a tiny amount of people withdrawing their money. In effect what they're doing is offering to exchange your physical cash for bank-account cash that's more convenient and is treated by everyone as having the same value as the physical cash, plus a promise that so long as everyone continues to treat it that way you'll be able to convert it back to physical cash. The promise is essentially worthless because it's conditional on something that means you'd be able to do so anyway. (It's only worth something in full-reserve banking which we don't do anymore.)
  - stefantalpalaru 11y ago
    > Actually, it's exactly the cash from the depositor, loaned out. It's not, because it doesn't show on the depositor's ledger. The bank will not tell you that you have $10,000 left in your checking account because the remaining $90,000 have been loaned. It will tell you that you have the full $100,000 available to you at any time, relying on the fact that on average more than 90% of their depositors' money is extremely likely to remain unsolicited by them.

makomk 11y ago

I don't think you are quite understanding the mechanics of the problem yourself. Banks don't transform savings into productive investments, they print money. When they give (say) a $1 million loan to a business they're writing $1 million of new money into existence in their account, money which is just as good as printed cash. Their ability to do so is not much affected by whether people save money or splurge it all on expensive cars and goods, because either way the money remains in the banking system and the banks can make loans using it. Also, it's not realistic to expect people to vote with their money and choose a bank that is safe and makes prudent investments. Teams of experts with specialised knowledge who do this as their full-time job can't figure that out; how is your average Joe with a full-time job of his own and no industry experience meant to? Worse still, with fractional-reserve banking if enough people believe that a bank will fail then the resulting run on the bank will cause it to fail, at which point you'd best hope you got your money out in time. If people don't trust the banking system as a whole, it doesn't force banks to make prudent investments, it causes bank failures and people keep their money under the mattress because even if they could figure out which banks are investing well those banks are still likely to fail due to bank runs.

cornholio 11y ago
> When they give (say) a $1 million loan to a business they're writing $1 million of new money into existence in their account, money which is just as good as printed cash. Actually, it's exactly the cash from the depositor, loaned out. What the depositor gets in return for his cash is a "bank account": a freshly printed promise from the bank that, at a later date, he will be able to extract his cash. So the depositor takes a risk and makes an investment, and is rewarded with an interest. When you are insisting on 100% reserve banking, you are denying the bank the option to lend out your money. I assure you institutional investors, like large corporations, pension and investment funds and which provide the bulk of the funds, very much vote with their wallet. They are not protected against bank failures and it's not like they can cash out billions and keep then under mattresses. The mere threat of a liquidity problem will make the bank very risk averse and focus on improving it's position at the expense of it's market share. So banks don't need to fail for the banking market to work, the diligent bankers will be those providing liquidity.
- makomk 11y ago
  > a freshly printed promise from the bank that, at a later date, he will be able to extract his cash That's not really what they're offering. Physical money is incredibly inconvenient compared to bank accounts, so much so that the only reason to use it for large amounts is if you or the other party don't trust the banking system. The banks rely on this because they can't actually handle more than a tiny amount of people withdrawing their money. In effect what they're doing is offering to exchange your physical cash for bank-account cash that's more convenient and is treated by everyone as having the same value as the physical cash, plus a promise that so long as everyone continues to treat it that way you'll be able to convert it back to physical cash. The promise is essentially worthless because it's conditional on something that means you'd be able to do so anyway. (It's only worth something in full-reserve banking which we don't do anymore.)
- stefantalpalaru 11y ago
  > Actually, it's exactly the cash from the depositor, loaned out. It's not, because it doesn't show on the depositor's ledger. The bank will not tell you that you have $10,000 left in your checking account because the remaining $90,000 have been loaned. It will tell you that you have the full $100,000 available to you at any time, relying on the fact that on average more than 90% of their depositors' money is extremely likely to remain unsolicited by them.