In the US, we use a system of fractional-reserve banking. Fractional-reserve banking is allows banks to loan out more than they have assets to cover. Originally, it was developed to increase the money supply of nations beyond the limits of the commodity backing them (gold & silver), a necessity in order to avoid deflation.

However, in the ensuing years, we have moved away from a gold standard, to money based on government debt. As such, there is no benefit to the country or to the treasury, to have fractional-reserve banking. The 'backing' of Federal Reserve Notes (Those green paper things in your pocket) is US Gov't debt, Treasury Notes. This is called fiat money, and is used by every major nation. The actual money is created by the Federal Reserve and multiplied at other banks.

It is necessary to create more money every year, as population and productivity grow, to avoid deflation, as opposed to hard currency which does not grow, usually because it is linked to a commodity such as gold.

Basically, due to fractional-reserve banking, privately onwed banks get to create money, and collect interest on it.

The alternative, specified in this link, is for the US Government to create money, as specified in the constitution, and stop paying interest on it. Specifically, the government should require full-reserve banking, and loan banks the (new) currency to cover their reserves.



This largely eliminates the national debt, and allows the government (within established limits to avoid inflation) to print more money every year, and spend it into circulation. At 3% of the M3 money supply, this is around $275B a year, money that could be used to provide government services, reduce taxation, or even directly issued to each US citizen. It also frees up some $400B annually in debt service.

It seems like a bad idea for the government just to print money, but it's got to be better than allowing private banks to do it. My only problem with the idea is being able to establish and maintain hard and fast limits on the government's ability to create new money, in order to avoid inflation.

Question for debate: Full Reserve Banking, is it good for us?

If everyone wer to do this at the same time, no problem.

Where the problem arises, is that a good portion of our debt has been purchased by foreign banks and countries, as well as individuals, who purchase Bonds. They aren't buying actual money. I can guarantee you that they aren't going to look kindly upon the loss of interest they were promised when they purchased said bonds, if we just up and change the way we compute our debt.

Every one? I'm not sure what other countries do.

Bondholders would continue to receive interest until their bonds were paid back. The US would have an asset, the cash loans to banks, to counter the obligations they have, outstanding bonds. The cash loans would probably be very low interest, possibly even no interest for a few years, so the net difference in rates of the existing bonds and the new loans would still have to be paid for a while. All new money would be created without creating new debt.

I don't see the problem with paying off a debt early, it's not breaking a promise, it's filling an obligation.

Good idea SWM28WDC, but fractional reserve banking could be allowed through a special licence.



One thing you have to do when paying off national dept is to make sure that we don't get a depression or hyper-inflation.


This could be done by setting an albertrary value of the FRN's with an index of 100, and the board of directors are charged with the responsibility of keeping index between 97 and 103. (source)

Sometimes someone has to take a risk and be the first to implement new policies.

Another way of eliminating debt is to fully take over the Federal Reserve and place it under the control of the Treasury Department; compensating the stock holder with FRN's for a limited time. (source)

Ok, let's clear up some misperceptions here.

First of all, banks cannot lend more money than they have. They don't just print new money to create loans. They take deposits, keep some of it, and lend the rest out to make a profit. The part they hold back is the reserve. The part they lend is not "creating money", but lending money they have on hand.

When banks take deposits, they don't just keep those deposits in their own bank, they loan it out, spread it around to other banks, and invest it in securities... anything to make a buck on the money they're holding. The funds invested in other banks (as deposits) could be lent out by those banks and the process continues.

So... if you required all banks to keep 100% of their deposits on-hand, then they have to turn to that "free money" from the government to make their profit. And all that deposit money -- and all those interest-bearing bank accounts -- go away, since money deposited by the average individual is essentially dead money at the bank and the bank can't offer interest on it and has no real incentive to take that deposit money in the first place.

As for the government just distributing free money, that's just plain inflationary. Right now, banks can borrow money overnight at discounted rates from the Federal Reserve in order to meet their reserve requirements. But they can only borrow so much, since the Fed also uses that power to manage the amount of new cash going into the system. Too much new cash and you drive up inflation. Too little and you can go into a recession.

So... the "full reserve" plan is bogus. Just because a guy can get his book published about his bogus idea doesn't make it less bogus.

AMF, tell me how the banks don't create money with the deposit creation multiplier? A deposit of $10 allows them to loan into existince $100. Do you dispute this? That $100 then travels through the economy, to other banks, and creates even more money.

The idea that a deposit of $10 allows them to loan $9 is misinformed. Even full-reserve banking would allow them to loan $10 on a $10 deposit.

I agree that full-reserve banking would end interest on bank deposits (0.20%APR today), and free banking services: deposits, withdrawals, checking, etc. However, full-reserve banking wouldn't destroy the profitibility of lending money...do not forget that the plan elimates $500B a year in competition for credit from the US Government. It also has the opportunity to reduce taxation by 25% or so. I'd take 25% of my taxes back in exchange for the pittance I make in bank interest every year.

US money is based (fractionally) on US Government Debt, or promises to pay. I see no reason that basing US money (directly) on US Government Credit, or promises to accept, would negatively affect the value of US Dollars.

The value of US money is not based on a commodity, but is determined by the economy, by the price system. If demand for money exceeds its supply, the price of the dollar goes up, and we have disinflation or deflation. If the supply of dollars exceeds it demand, the price of the dollar goes down, and we have inflation. Hyperinflation occurs when an arbitrary rate of inflation has been passed. The most important control over inflation is the control of the money supply...how much money is in circulation.

The government printing debt-free money is not inflationary in and of itself. If the amount of money the government prints is carefully regulated, the price of the dollar can be controlled. With the idea that a small and stable rate of inflation of 1-2% is desireable, 3-5% of the money supply could be printed every year. If less inflation were desirable, less money could be printed. In times of war, if were desirable to risk some inflation, more money could be printed. Printing money only becomes inflationary or as you put it 'hyperinflationary' when there are no controls on government printing of money, or the government prints more money than the economy can handle through greater productivity and population.

The government can take money out of circulation as well, by paying debt, and by increasing the bank deposit requirement. If money is taken out of circulation through these methods at the same rate it is createded by the buearau of printing and engraving, there is no inflation.

A case in point: the US mint creates money in each coin it produces, about 22 cents with each quarter. Does US coinage exchange at less than face value?

It's pretty simple: banks don't create money. Banks take money from one place and redistribute some of it to another, hopefully turning a profit in the interim.

In response to banks failing in the '30's, the government set up a system whereby banks absolute MUST keep some of their deposits under their direct control for handling withdrawals in a timely manner. These are the reserve.

What is not required to be held in reserve is the bank's to invest in ways to make the bank a profit. If banks would have to hold 100% of their deposits in reserve, they would not be able to make loans, since they have no other cash to play with... unless someone like the government gave it to them, and then you're in the business of the government creating money so that banks can make a profit, which definitely isn't cool.

From Wiki Credit Money



Also from wiki Deposit creation multiplier:



wiki Fractional reserve banking



There is no doubt that fractional reserve banking increased the money supply by creating money. They make bank interest off of these loans. The US Gov't issues bills, bonds, and notes, which promise to repay the lender, to commercial banks, who then loan out ~10x as much money, and charge interest for this loaned money. Were the Treasury to stop issuing such bonds, etc, and start issuing US Treasury Dollars, and increase the fractional reserve requirement by an amount to keep the money supply stable, the US government would cease being in debt, and would not be charged interest. As long as the money supply is stable vs. money demand, inflation does not change.

Were the US government to cease being a borrower, it would be even more in it's best interest to keep inflation low.