I think it’s just 1). Without 1) there is no purpose to the Fed really, since all their tools amount to manipulating interest rates and spending (printing) mone

I think it’s just 1). Without 1) there is no purpose to the Fed really, since all their tools amount to manipulating interest rates and spending (printing) money unauthorized by the legislature. If there’s no fractional reserve, new money is only created by government spending via spending bills passed by congress. People can hold deposit accounts with the government directly (via the treasury) so there’s no possibility of losing deposits. Investments can be left to the market. Interest rates for loans can better reflect real risk, instead of an imaginary number backed by inflation. When a bank that has made loans fails, the people who took the loan keep the money and collateral. There would be no risk to deposits or housing by bank failure. And the market selects for banks that are actually better at managing risk (imagine that!) A similar system was proposed as far back as the 1930s and was known as the “Chicago Plan”.