Full-reserve banking

Full-reserve banking (also known as 100% reserve banking) is a proposed alternative to fractional-reserve banking in which banks would be required to keep the full amount of each depositor's funds in cash, ready for immediate withdrawal on demand. Funds deposited by customers in demand deposit accounts (such as checking accounts) would not be loaned out by the bank because it would be legally required to retain the full deposit to satisfy potential demand for payments. Proposals for such systems generally do not place such restrictions on deposits that are not payable on demand, for example time deposits.[1]

Monetary reforms that included full-reserve banking have been proposed in the past, notably in 1935 by a group of economists, including Irving Fisher, as a response to the Great Depression.[2] More recently, there has been renewed interest following the Great Recession.[3]

Currently, no country in the world requires full-reserve banking. Banks operating under a full-reserve ratio generally do so by choice or by contract, although the governments in some countries such as Iceland and the US have considered implementing full reserve banking to avoid future financial crises.[4][5] In 2018, Switzerland voted on the Sovereign Money Initiative which has full reserve banking as a prominent component of its proposed reform of the Swiss monetary system.[6] The measure was overwhelmingly rejected.[7]


In favor

Economist Milton Friedman at one time advocated a 100% reserve requirement for checking accounts,[8] and economist Laurence Kotlikoff has also called for an end to fractional-reserve banking.[9] Austrian School economist Murray Rothbard has written that reserves of less than 100% constitute fraud on the part of banks and should be illegal, and that full-reserve banking would eliminate the risk of bank runs.[10][11] Jesús Huerta de Soto, another economist of the Austrian school, has also strongly argued in favor of full-reserve banking and the outlawing of fractional reserve banking.[12]

The financial crisis of 2007–2008 led to renewed interest in full reserve banking and sovereign money issued by a central bank. Monetary reformers point out that fractional reserve banking leads to unpayable debt, growing economic inequality, inevitable bankruptcy, and an imperative for perpetual and unsustainable economic growth.[13] Martin Wolf, chief economist at the Financial Times, endorsed full reserve banking, saying "it would bring huge advantages".[3]


Some economists have noted that under full-reserve banking, because banks would not earn revenue from lending against demand deposits, depositors would have to pay fees for the services associated with checking accounts. This, it is felt, would probably be rejected by the public[14][15] although with central bank zero and negative interest rate policies, some writers have noted depositors are already experiencing paying to put their savings even in fractional reserve banks.[16] In their influential paper on financial crises, economists Douglas W. Diamond and Philip H. Dybvig warned that under full-reserve banking, since banks would not be permitted to lend out funds deposited in demand accounts, this function would be taken over by unregulated institutions. Unregulated institutions (such as high-yield debt issuers) would take over the economically necessary role of financial intermediation and maturity transformation, therefore destabilizing the financial system and leading to more frequent financial crises.[17][18]

Writing in response to various writers' support for full reserve banking, Paul Krugman stated that the idea was "certainly worth talking about", but worries that it would drive financial activity outside the banking system, into the less regulated shadow banking system.[19]

See also


  1. A Program for Monetary Reform
  2. Fisher, Irving (1935), 100% Money
  3. Weisenthal, Joe. "BAN ALL THE BANKS: Here's The Wild Idea That People Are Starting To Take Seriously". Business Insider.
  4. Iceland's daring raid on fractional reserve banks, Financial Times
  5. A banking revolution Jeremy Warner, UK Telegraph
  6. Switzerland's ‘Vollgeld’ banking overhaul: how reform would work
  7. Solow, Robert M. (March 28, 2002), "On the Lender of Last Resort", Financial crises, contagion, and the lender of last resort, Oxford University Press, p. 203, ISBN 978-0-19-924721-9
  8. Kotlikoff, Laurence J.; Leamer, Edward (April 23, 2009), "A Banking System We Can Trust" (PDF), Forbes.com, archived from the original (PDF) on June 4, 2011, retrieved September 14, 2010
  9. Rothbard, Murray N., The Mystery of Banking (PDF), Ludwig von Mises Institute, ISBN 978-1-933550-28-2, retrieved September 14, 2010
  10. The Case for a 100% Gold Dollar, Murray Rothbard
  11. Jesús Huerta de Soto (2012). Money, Bank Credit, and Economic Cycles (3rd ed.). Ludwig von Mises Institute. ISBN 978-1-61016-388-0. Retrieved 4 August 2013.
  12. Jackson, Andrew; Dyson, Ben (2012). Modernizing Money. Why our Monetary System is Broken and how it can be Fixed. Positive Money. ISBN 978-0-9574448-0-5.
  13. White, Lawrence H. (Winter 2003). "Accounting for Fractional-Reserve Banknotes and Deposits—or, What's Twenty Quid to the Bloody Midland Bank?" (PDF). The Independent Review. 7 (3): 423–41. ISSN 1086-1653.
  14. Allen, William (October 1993). "Irving Fisher and the 100 Percent Reserve Proposal". Journal of Law and Economics. 36 (2): 703–17. doi:10.1086/467295. JSTOR 725805.
  15. Texan Gold Depository
  16. Diamond, Douglas W.; Philip H. Dybvig (Jan 1986), "Banking Theory, Deposit Insurance, and Bank Regulation", The Journal of Business, 59 (1): 55–68, doi:10.1086/296314, JSTOR 2352687, In conclusion, 100% reserve banking is a dangerous proposal that would do substantial damage to the economy by reducing the overall amount of liquidity. Furthermore, the proposal is likely to be ineffective in increasing stability since it will be impossible to control the institutions that will enter in the vacuum left when banks can no longer create liquidity. Fortunately, the political realities make it unlikely that this radical and imprudent proposal will be adopted.
  17. Diamond, Douglas; Philip Dybvig (Winter 2000). "Bank Runs, Deposit Insurance, and Liquidity" (PDF). Federal Reserve Bank of Minneapolis Quarterly Review. 24 (1): 14–23. Retrieved 29 August 2012.
  18. Krugman, Paul (April 26, 2014). "Is A Banking Ban The Answer?". New York Times. Retrieved September 18, 2015.
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