The Solution is Full Reserve / 100% Reserve Banking

By Ralph S. Musgrave


The term full reserve (FR) refers here to the system advocated by the following, among others.
1. Laurence Kotlikoff, economics professor in Boston. See Kotlikoff (2012). However, for a quick introduction to Kotlikoff’s ideas see Klein (2013).
2. Richard Werner, economics professor in Southampton, UK. See Werner (2011).
3. Milton Friedman. See Friedman (1960, Ch3, starting at heading entitled “Banking Reform”).
4. James Tobin, economics Nobel Laureate. See Tobin (1985&1987).
5. Merton Miller, economics Nobel Laureate and co-author of the “Modigliani-Miller” theory.
6. Ben Dyson, founder of Positive Money. See Dyson (2012).
7. John Cochrane, economics professor in Chicago. See Cochrane (2013).
8. Irving Fisher, professor of political economy at Yale in the early 1900s. See Fisher (1936).
FR is sometimes called “100% reserve banking”, while German speakers use the word “Vollgeld”.The following few paragraphs are a brief summary of FR.
Commercial banks create money when they make loans, as explained by an article published by the Bank of England – McLeay (2014) And that freedom to create money is a subsidy of banks, for reasons given by for example Huber (2000, p.31, 2nd paragraph). As Huber says, if commercial banks can simply print the money they lend out, rather than obtain such money in the same way every non bank firm obtains money, i.e. earn it or borrow it, then commercial banks can lend at an artificially low rate of interest. Or to put it more strongly, as explained by the Nobel laureate economist, Maurice Allais, private money creation amounts to counterfeiting (See Phillips, 1992).
Another flaw in the existing bank system is that it breaks a widely accepted principle namely that it is not the job of taxpayers to rescue commercial ventures which go wrong. That is, while everyone has a right to a totally safe method of lodging and transferring money, and while that activity is not inherently commercial, anyone who wants their bank to lend on their money so as to earn interest is clearly into commerce, in exactly the same way as where they deposit money with a private pension scheme, stockbroker, mutual fund / unit trust, or buy corporate bonds. For governments to offer taxpayer backed deposit insurance for banks which invest or lend on money while not offering the same service for mutual funds etc which do the same is a glaring inconsistency.


1. Introduction
1.1. Full reserve banking in brief
1.2. More on the deposit guarantee
1.3. Defects in recent attempts at bank regulation
1.4. Doesn’t a 25% or so capital ratio bring near total safety?
1.5. The inherent defect in privately created money
1.6. Interest rate adjustment is a defective tool
1.7. It is not just FR advocates who want to vary the amount of base money created and spent
1.8. New base money should be spread widely
1.9. A bit less investment would not matter
1.10. FR is being imposed on MMFs in the US
1.11. Benes and Kumhof’s debt jubilee
1.12. FR forces banks to find savers before loans are made?
1.13. The basic flaws in Vickers
1.14. Kotlikoff versus Dyson and Werner


2. Flawed arguments against FR
2.1. FR limits the availability of credit?
2.2. Central bank money is not debt free?
2.3. Bank capital is expensive for tax reasons?
2.4. FR means the end of banks?
2.5. Central banks will still have to lend to commercial banks?
2.6. FR stops banks producing money from thin air which can fund investments?
2.7. Investments under FR might not be viable?
2.8. FR will not reduce pleas by failing industries to be rescued by government?
2.9. The cost of converting to FR will be high?
2.10. Central bank committees won’t be politically neutral?
2.11. Administration costs of FR would be high?
2.12. The cost of current accounts will rise under FR?
2.13. FR is dependent on demand injections?
2.14. The effect of FR on inflation and unemployment
is unclear?
2.15. FR would drive business to the unregulated sector?
2.16. The state cannot be trusted with peoples’ money?
2.17. Vested interests would oppose FR?
2.18. FR will reduce innovation by banks?
2.19. Deposit insurance and lender of last resort solves banking problems?
2.20. Lenders will try to turn their liabilities into
2.21. Anyone can create money, thus trying to limit money creation is futile?
2.22. Advocates of FR are concerned just with retail banking?
2.23. The government and/or central bank will not be better than the market at regulating the amount of money?
2.24. It wasn’t just banks that failed in 2008: also households became over-indebted?
2.25. Creation of liquidity / money is prevented?
2.26. Funding via commercial paper would be more difficult
under FR?
2.27. FR is nearly the same as monetarism?
2.28. No demand for safe or warehouse banks?
2.29. FR would cause a stampede to safe accounts?
2.30. FR would raise the cost of funding banks?
2.31. Fractional reserve is not fraudulent?
2.32. FR will not stop boom and bust?
2.33. Bank shareholders will demand a high return to reflect their uncertainty about what a bank actually does?
2.34. FR reduces commercial bank flexibility?
2.35. FR would not stop bank runs?
2.36. Vickers’s flawed criticisms of FR
2.37. Regulating loans is better than FR?
2.38. FR doesn’t insure against liquidity shocks?
2.39. Government couldn’t produce enough money under FR?
2.40. FR prevents all lending?
2.41. Banks will try to circumvent FR rules?
2.42. Converting to FR involves a huge bailout
of existing banks?
2.43. The Money Creation Committee would not regulate demand accurately?
2.44. Interest rate fluctuations would be larger under FR?
2.45. Safe banks under FR need subsidies?


3. Flawed arguments FOR full reserve
3.1. We pay interest on privately created money there for base money is better?
3.2. FR benefits the environment and equality
3.3. Without debt there would be no Money
3.4. Interest condemns borrowers to perpetual debt
3.5. Full reserve is a huge bonanza for everyone?
3.6. Fractional reserve banking boosts house prices?



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Date of Publication

December 15, 2018

File Size: 1191 KB
Length: ix + 72 pages

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