One interesting position taken by many of the Austrian economists is that either a 100% reserve requirement ought to be held by banks, or banks ought to be considered insolvent by definition.
Now, I thought about the former idea, and certainly it would tend to prevent monetary inflation--meaning both increase of the money supply and also increasing prices. This would be a good thing.
On the other hand, I appreciate the convenience of putting my money in a bank, as well as the interest I get on my accounts. If the bank required 100% reserves, could it loan out any money?
Think about it; if it hands out gold, it no longer has 100% reserves. If it hands out notes--my passbook and the debtor's bank notes--it also no longer has 100% reserves. I fail to see how loans would be possible in such a scenario, unless banks were eliminated. Am I missing something here?
If I understand this properly, I think the Founding Fathers got it right when they allowed fractional reserve banking. Yes, let's have a reserve requirement (and make it known) to avoid devastating losses with runs on a bank, but let's not throw the baby out with the bathwater, either.
Also, a thought on what commodity/real money does; since gold has other uses besides money, holders of gold can take it elsewhere if its value as money isn't high enough. However, with fiat money, we have a more or less fixed supply at any given time, no matter what it buys.
This will tend to exacerbate volatility in prices, as the supply cannot adjust to a shifting demand curve to provide more or less.
Happy birthday, Dad - My dad would have celebrated his 80th birthday today. I wrote a version of the following a few years back and I'm reposting it here today, with just a few ...
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