Talk:Full-reserve banking

This article was nominated for deletion on September 29, 2006. The result of the discussion was keep.

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How does it actually work?

I don't understand the article at all; it certainly isn't written for laymen. How does a bank make money for itself or its clients if it is holding, rather than investing, its money? The article needs to explain how full reserve banking actually works; trying to guess how it works based on the critisim section is ridiculous. 184.77.159.253 (talk) 03:04, 21 February 2011 (UTC)

I'd like to change the intro as follows:

Full-reserve banking, also known as 100% reserve banking, is a banking system comprising two types of account. One for storage of money needed for day to day spending and the other for the storage of longer term savings. The former is known as a demand deposit account and under full reserve banking this money can not be lent out by the bank. The latter is known as a savings account where by the saver agrees not to take out the money without serving some minimum term or notification period. This money is allowed to be loaned out by the bank during the period agreed by the saver.

Would that have been clearer? Reissgo (talk) 00:03, 22 February 2011 (UTC)

If you look in any textbook, the standard definition for Full-reserve banking is that banks keep all moneys deposited as reserves. The mention of proposed 'investment accounts' in the lead is already overweight. LK (talk) 07:20, 22 February 2011 (UTC)

The idea that Fisher, Milton Friedman and others, proposed a system in which banks could not make any loans is utterly idiotic. Reissgo (talk) 10:32, 22 February 2011 (UTC)

Agree with LK. Deposits are held in full, by the very definition of full-reserve. Banks could theoretically still act as intermediaries, but those are investments akin to mutual funds, not deposits. BigK HeX (talk) 13:26, 22 February 2011 (UTC)

I was very careful not to use the word "deposit" (just for your sake) in my description. So you are arguing against something I didn't say. Reissgo (talk) 15:26, 22 February 2011 (UTC)

I noted my agreement with LK. You (wrongly) presume I was "arguing against" you. BigK HeX (talk) 16:49, 22 February 2011 (UTC)

Touché. But what I would like to stress is that everyone that proposes a system of 100% reserve banking, also proposes a mechanism for banks to make loans (I challenge LK to find a single instance of someone proposing 100% reserve banking without a mechanism for banks making loans). A system of 100% reserve banking without a mechanism for banks to make loans is plain stupid and AFAIK supported by no one. Given this fact, it seems obvious that the fact that there is a mechanism for banks to make loans, should be stated in the lead and is not the slightest bit "overweight". Reissgo (talk) 20:53, 22 February 2011 (UTC)

Your assertion may (or may not) be overstated. There are certainly proposals about full-reserve banking that don't touch on investing, as the issue of investing is secondary, perhaps merely tangential to full-reserve banking. Consumer deposit-taking institutions might forego investing and instead adopt a model of just charging customers for providing check-clearing services and safety-deposit services. It is helpful, but, strictly speaking, there is no need for full-reserve proposals to speculate on whether institutions would replace lending with mutual-fund type models of investing. BigK HeX (talk) 23:11, 22 February 2011 (UTC)

"There are certainly proposals about full-reserve banking that don't touch on investing" - name one. Reissgo (talk) 00:29, 23 February 2011 (UTC)

Digital gold currency. BigK HeX (talk) 00:41, 23 February 2011 (UTC)

Your link does not constitute a "proposal about full-reserve banking". Reissgo (talk) 12:13, 23 February 2011 (UTC)

It's not a proposal. If you take them at their word, it's an actual 'full-reserve' banking system. These digital gold companies promote themselves as 'full-reserve' institutions. LK (talk) 05:15, 24 February 2011 (UTC)

Exactly. Its a minor detail. A tiny part of our financial system. A proper "proposal for 100% reserve banking" would be a proposal for how the whole monetary system would work. Proposals for 100% reserve banking have been written by Fisher, Friedman, assorted Austrians, the American monetary institute, PositiveMoney.org and others. AFAIK they all include the ability for banks to make loans. This is why I think it is important that the Wiki page on 100% reserve banking makes it clear that loans can be made in a 100% reserve system. Implying otherwise would be misleading. Reissgo (talk) 11:01, 24 February 2011 (UTC)

This part of the introduction makes no sense to me.

"Alternatively, a saver could entrust their money with a bank for investment in the full-reserve equivalent of time deposits or savings accounts, which in a full reserve system would represent loans made to the bank rather than deposits.[1]"

A deposit in a bank is by definition a loan to the bank, even though most people do not realise they are investors in a banks profit making operations.

Also the article is getting mixed up by the true nature of a fractional reserve bank. A fractional reserve bank does not have sufficient on hand liquid assets to enable customers who have lent money to the bank to be paid out in a timely manner unless a buyer can be found for the illiquid loan book or loans can be secured against the loan book.

The bank of amsterdam was a warehouse bank. You paid money to have your money stored at the bank. the warehouse bank that lends customers savings money on term deposit still has the same problems if the loans go bad because it is in fact operating with fractional reserve. The loans mean either deposits are created at the same bank or term savers money is no longer at the bank. Either way you get two claims on the same money. 1. by the saver and 2 by the money user. If the bank fails then somebody ends up with less money.

Andrewedwardjudd (talk) 19:11, 28 April 2011 (UTC)andrewedwardjudd

"If the bank fails then somebody ends up with less money."

Precisely. The person who agreed that her/his deposits be lent on by the bank in return for a share of the interest the borrower is charged.

The depositor who does not want the bank to take any risks with the money, would have to pay a storage charge. In case of failure of the banks lending operations, this money would still be there intact.

In fact, this is what the Independent Commission on Banking actually proposed: the separation of retail (high street) banking from from the riskier investment/speculative banking.

What needs to be emphasized for the sake of clarity is that the "risk bearing" depositor accounts would be reduced by the amount lent on to borrowers; thus no increase in the money supply. This is the meaning of the phrase "full reserve"---it applies to the aggregate money supply that does not change; and you do not "get two claims on the same money".

Janosabel (talk) 16:02, 29 June 2012 (UTC)

Recent reverted addition to lead

About this edit[1]. It is inappropriate to add it to the lead for several reasons:

1. The lead summarizes the body, any issue that is not significantly discussed in the body shouldn't be in the lead.
2. Even taken at face value, the claims do not refute the statement "full-reserve banking have received little mainstream attention or support." Being the subject of one paper by some people visiting at the IMF and the subject of one speech by a central bank chair is essentially "a little mainstream attention or support".
3. The sources are not RS for the statements made. 1st source is a blog. 2nd source is a working paper by two people visiting the IMF and not reflecting the views of the IMF. It does not support "the IMF have indicated that it warrants serious consideration".
4. Mainstream views on full reserve banking have remained essentially unchanged through the Global Financial Crisis. Essentially the Diamond–Dybvig view dominates. Any bank-like institution (takes deposits, makes loans) is open to bank runs. Diamond–Dybvig argued that full-reserve banking will prevent banks from acting like banks and, will drive banking activity into less well-regulated institutions, further endangering the financial system and the larger economy.

--LK (talk) 14:44, 12 August 2012 (UTC)

Ok, lets consider your points in turn.

1. The exceptions to the "nobody pays attention to frb" are discussed in the body just as much as "nobody pays attention to frb".

2. You are refuting something I am not claiming. I am merely claiming that there are notable recent exceptions to the rule.

3. Both are RS. The first is actually the *letter* contained within the blog - not the blog itself. The letter is from Mervyn King himself. The *contents* of the second may not represent the views of the IMF, but the very fact that the IMF are funding this research is evidence that they are paying it attention. This is all I am claiming.

4. This has no bearing on the validity of my edit.

Conclusion - All your arguments are invalid. Please now allow my edit.

Reissgo (talk) 12:41, 13 August 2012 (UTC)

You can't use a working paper by two people visiting an organization to argue that the organization is serious considering something. This violates OR and SYN. You need to have a source that says the same thing, LK (talk) 02:18, 15 August 2012 (UTC)

Also, this[2] is WP:SYN. You need a RS that argues that mainstream objections to FRB don't apply because FRB banks can use time deposits. LK (talk) 02:50, 15 August 2012 (UTC)

Criticisms of full-reserve banking combined with a gold standard

I do not think this section is justified unless it specifies what "full-reserve banking combined with a gold standard" actually means and states who is proposing it. I made a list of all the proposals I could find for full reserve banking here and none of them involve gold. Reissgo (talk) 10:17, 14 August 2012 (UTC)

Diamond-Dybvig

My problem with this paper is not necessarily the main bulk of it but rather the specific claim "This would displace lending activity into unregulated institutions". Proposals for full reserve banking do not just say "lets ban making loans from demand deposits, leave the rest of the system unchanged, and see what happens". Instead they are proposals for an entire monetary and banking system. So the idea that the only people making loans in such a new system would be unregulated is nonsense. This is why I am requesting further evidence that this particular aspect of the paper is widely accepted. Reissgo (talk) 08:36, 29 August 2012 (UTC)

Wikipedia is supposed to report what the standard academic journals say on a subject, regardless of what we may think is true. In this case, the standard model is the Diamond Dybvig model, and Diamond Dybvig pretty clearly opposes imposing full-reserve banking as they argue this will displace banking activity into less well-regulated institutions. Even if you disagree with their view, you must realise why Wikipedia must report this view that is expresses in a widely influential paper on the topic. If there is widespread disagreement with this view (and I haven't seen any), you are welcome to cite such disagreement, and accord it appropriate weight.. LK (talk) 09:41, 29 August 2012 (UTC)

Links to article by Rothbard on FRB

Please look at these articles from Rothbard.

• What Has Government Done to Our Money?
• The Case for the 100% Gold Dollar
• Taking Money Back

It's clear that he considers it 'fraud' when banks lend out monies entrusted to them. His problem is with the extension of credit by banks (bank lending), not with whether or not deposits are available on demand. He does not state in any of these screeds against fractional reserve banking the idea that "Oh, it's OK to have fractional reserve banking as long as the accounts are time deposits and not 'on-demand' accounts."
--LK (talk) 11:06, 30 August 2012 (UTC)

Which of those is a proposal for full reserve banking? And does that proposal put a restriction of lending money stored in time deposits? Reissgo (talk) 12:39, 30 August 2012 (UTC)

Financial intermediation vs Maturity transformation

Financial intermediation is not maturity transformation. Financial intermediation can still occur with Full RB. References to the benefit of financial intermediation are like reference to the benefits of drinking milk. Irrelevant to this page. If people can find cites for the benefits of maturity transformation that would relevant. If no one does, I will.FRB123 (talk) 11:40, 12 October 2012 (UTC)

I dispute that full reserve banking prevents maturity transformation. If no reference can be found to support the claim, I will remove that section. Reissgo (talk) 13:13, 14 October 2012 (UTC)

Well, it depends. If term deposits were lent out for longer periods than they were deposited, that would be MT. But then the question is whether Full RB would allow that. Austrians would (probably) say no, as it would still increase fiduciary media (circulation credit). But it's an interesting question. This is a subtle nuance on Full RB I certainly hadn't thought about. Anyone else have any ideas on term (or time) deposits? Under a Rothbardian Full RB system would there (should there) be MT? Leaving the time deposit issue to one side, there is no question FullRB would limit MT so it definitely should be listed in the "case against" because it's the only real cost to FullRB. And there have to be costs because it doesn't exist. If there were no costs, FRB wouldn't have overtaken FullRB. - FRB123 (talk) 23:38, 14 October 2012 (UTC)

lending for longer terms than the time deposits will only increase the money supply if the bank fails to find new time deposits to replace the expiring ones. Reissgo (talk) 11:45, 15 October 2012 (UTC)

I thought we already had this discussion. How about using one-week time deposits to finance 30-years mortgages? What about time deposits that last 2 days. What if a 'full-reserve system' forbids lending from 'demand deposits', but banks started offering 1-day time deposits? How is that any different from a savings account? LK (talk) 07:39, 16 October 2012 (UTC)

I don't know the point you're making. Full RB either limits or eliminates MT. Not FI. FRB utilizes MT and FI. FRB is the business of MT. So at the very least it is undisputed that the key difference between Full and FRB is MT not FI. That's all we are discussing. Whether Full RB would allow some MT (7 day deposits lent out for 30 year mortgages) is a completely different hypothetical and given the world we're in is so off the planet of hypotheticals it's not worth discussing. The chances of a Full RB system being implemented today is precisely zero.FRB123 (talk) 23:41, 17 October 2012 (UTC)

Current examples

• Peter Schiff's Euro Pacific Bank claims to practice full reserve banking (http://europacbank.com/company/security/)
• James Turk's GoldMoney claims to practice full reserve banking