One hundred percent reserves would put our money supply back under the control of the government rather than the private banking sector.
Money would be a true public utility, rather than the by-product of commercial lending and borrowing in pursuit of growth.
Under the existing fractional reserve system the money supply expands during a boom, and contracts during a slump, reinforcing the cyclical tendency of the economy.
The profit (seigniorage) from creating (at negligible cost) and being the first to spend new money and receive its full exchange value, would accrue to the public rather than the private sector.
The reserve requirement, something the Central Bank manipulates anyway, could be raised from current very low levels gradually to 100%.
Commercial banks would make their income by financial intermediation (lending savers’ money for them) as well as by service charges on checking accounts, rather than by lending at interest money they create out of nothing. Lending only money that has actually been saved by someone reestablishes the classical balance between abstinence and investment.
This extra discipline in lending and borrowing likely would prevent such debacles as the current “sub-prime mortgage” crisis. 100% reserves would both stabilize the economy and slow down the Ponzi-like credit leveraging.
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