Full-reserve banking

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Full-reserve banking is a theoretically conceivable banking practice in which all deposits, banknotes and notes in a financial system would be backed up by assets with a store of value. This implies the existence of a government body (such as a central bank) that would convert currency to a more stable type of asset if requested to do so. It also implies that the resources available to the central bank (and commercial banks) would be sufficient to convert all currency if so required.

The reserve ratio of all banks operating in such a system would be 100%, making the deposit multiplier equal to zero. In such a system, commercial banks would have no obvious incentive to extend loans. The opposite of this system is fractional-reserve banking, in which the bank would hold only a fraction of all client deposits as reserves.

A system in which all currency is backed by another asset and commercial banks are required to maintain a 100% cash reserve ratio has never been implemented in any actual economy. The closest system is that of a currency board, in which commercial banks are not required to maintain a 100% cash reserve, but all of the money in circulation is backed by another asset held by the central bank. This system is in use in Hong Kong where the Hong Kong dollar is backed by United States dollars deposited in the Exchange Fund of the currency board.

In theory, Islamic banking should be synonymous with full-reserve banking, with banks achieving a 100% reserve ratio [1]. However in practice this is rarely the case.

Since 1996, a form of private currency called digital gold currency has been in circulation. Many of these currencies act like full-reserve "banks" with a one to one ratio of the currency they issue and the hard asset, usually gold or silver, that they store as reserves. The most prominent examples are e-gold and GoldMoney. Also available are physical gold exchangers and storage providers, such as BullionVault.

A monetary reform for the information age on a full-reserve base is proposed by Joseph Huber and James Robertson in "Creating New Money". The fruit of collaboration between a German academic and a British economic writer, they argue for one reform: the reappropriation by governments of the right of seigniorage now possessed by private banks. About 95% of new money currently issued takes the form of loans made by private banks to their customers. Huber and Robertson want to make this illegal. The creation of new money, both cash and non-cash, should be the exclusive prerogative of the central bank. The latter should determine how much it creates in the light of the objectives chosen for the country's monetary policy, and credit the new money to the government, who will then put it into circulation by spending it.

See also

• Digital gold currency
• Fractional-reserve banking
• Gold standard
• Islamic banking
• Plain Money
• Reserve requirement
• Seignorage
• Silver standard

External links

• Full-reserve banking: Theory, fact and policy - A monetary system with 100 per cent reserve requirement and the gold standard
• Creating New Money