Federal Reserve
Full-Reserve Banking
While the
Federal Reserve System tends to operate on fractional reserve banking,
which is where banks only maintain a portion of all deposits in their
reserve accounts, there is also a banking practice known as full-reserve
banking. In fractional reserve banking the surplus of deposits not
placed in reserve accounts is used to create loans. In full reserve
banking assets containing a store of value back up all deposits,
banknotes, and notes. This system will allow for any currency to be
changed into a stable asset by a government agency like the central
bank. Full reserve banking allows for all the resources to be
changed over into currency if the need arose.
In other words, the reserve ratio for these
banks would be 100 percent, creating a scenario where banks would not
really want to offer checking and savings accounts, because they posed no
profit to the bank. With the deposit multiplier at zero, banks would
have to charge fees for those checking and savings accounts. This is
why full-reserve banking tends to be more theoretical than practical, as
it has never been put into practice in any economy.
There are some countries that have
implemented a currency board, which is fairly close to the full reserve
banking system in that the money that circulates is backed by central bank
assets, though the banks are not required to have 100 percent
reserves. In Hong Kong they use a currency board. The currency
is backed by the U.S. dollar, which the Exchange Fund places in a deposit
account. Argentina uses a currency board linked to the U.S. dollar, as are
many Caribbean states. Lithuania, Estonia, and Bosnia are
currency-board based, though they link their currency to the
Euro.
The only system that seems to use full
reserve banking is digital gold currency. In circulation since 1996,
this private currency is issued by providers that have full-reserve
private banks that offer the currency in a one to one ratio to gold or
silver. BullionVault, a gold exchanger and storage provider, as well
as e-gold and GoldMoney are examples of this system.
There is currently a debate ensuing about
creating reform for full reserve banking as proposed by Joseph Huber and
James Robertson. The two men believe that seigniorage, or revenue
from the minting of coins, is a right that needs to be re-evaluated and
appropriated differently. Right now, seigniorage is only offered to
private banks. Huber and Robertson believe that the central bank
should control the creation of new money, not private banks, which
currently create 95 percent of new money through consumer loans.
They believe that this new money should be created along the lines of the
country's monetary policy, offering the money to the government. The
government then would spend the money, placing it into circulation.
