Debate Over Full-reserve Banking
During the Great Depression, economist Frank Knight and others suggested various monetary reforms, including a call to end fractional-reserve banking, in a 1933 memorandum that came to be known as the "Chicago plan". After an apparent recovery in the mid-1930s, America experienced the Recession of 1937-1938 and in 1939 a different group of economists circulated a new draft proposal, entitled A Program for Monetary Reform, which also advocated a system of 100%-reserve banking.
In the post-World War II era, economists have shown little interest in 100%-reserve banking, although some have examined the issue and concluded that the costs and inconvenience of a full-reserve banking system would outweigh any benefits. However, economist Milton Friedman at one time advocated a 100% reserve requirement for checking accounts and economist Laurence Kotlikoff has also called for an end to fractional-reserve banking. Some Austrian economists, such as Murray Rothbard have supported full-reserve banking and Rothbard went so far as to say that fractional-reserve banking is fraudulent and inflationary. Following the recent financial crisis, some economists have suggested that full reserve banking should be again considered as a serious option.
Economists generally believe that the costs of full-reserve banking would outweigh any benefits. 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 likely be rejected by the public. Because banks would not be permitted to lend out funds deposited in demand accounts, lending could be expected to be done instead by unregulated institutions, possibly destabilizing the financial system. Unregulated institutions (such as high-yield debt issuers) would take over the economically necessary role of financial intermediation.
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