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LIMITED RESOURCES: Finite quantities of labor, capital, land, and entrepreneurship available to an economy for the production of goods and services. This is one half of the fundamental problem of scarcity that has plagued humanity since the beginning of time. The other half of the scarcity problem is unlimited wants and needs.
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                           FULL-RESERVE BANKING: A (hypothetical) method of banking in which banks keep 100 percent of their deposits in the form of bank reserves, meaning there are no deposits available for interest-paying loans. Full-reserve banking is one of two theoretical alternatives designed to help illustrate a contrast to the fractional-reserve banking actually practiced by modern banks. The other alternative is no-reserve banking. With full-reserve a bank essentially operates as a storage business, merely storing customer deposits until they are withdrawn. Full-reserve banking occurs if banks keep all deposits in reserve. Customers make deposits, which banks then place under the watchful eyes of security guards in their vaults. The money rests peacefully in the vaults until the customers make withdrawals. Every deposit is matched one-for-one by reserves.Full-reserve banking means that banks have no excess reserves that can be used to make loans. As such banks do not function as financial intermediaries. They do nothing but store deposits. The Fractional AlternativeFull-reserve banking is a theoretical alternative to fractional-reserve banking. Fractional-reserve banking is a method of banking activity in which banks keep less than 100 percent of their deposits in the form of bank reserves and use the rest for interest-paying loans.Fractional-reserve banking makes it possible for banks to function as profit-seeking financial intermediaries (matching up lenders and borrowers) while ensuring the safety and liquidity of deposits, especially checkable deposits that are part of the economy's money supply. Two GoalsConsider how full-reserve banking would work toward the two goals of the modern banking system--profitability as a financial intermediary and safekeeping of deposits.- First, the safekeeping goal IS well served with full-reserve banking. Customers are always able to retrieve their deposits. In effect, banks are storage businesses. If bank security is sound, the security guards are alert, and the vault is well-constructed, then deposits should be safely protected.
- Second, banks would NOT be able to function as financial intermediaries. Banks could make no loans. They would have no excess reserves that could be used for lending. If all banks in the economy practiced full-reserve banking, then some other type of business would have to perform the financial-intermediary function of bringing borrowers and lenders together.
- Third, banks would not be able to generate profit from interest-paying loans. Profit would have to come exclusively from the storage function. That is, customers would have to pay banks to safely store their money.
- Fourth, the temptation to use the stockpiles of cash locked away in bank vaults would be enormous. Businesses, consumers, government agencies, and even the bank itself would undoubtedly want to borrow this wealth for capital investment, home construction, car purchases, or government spending. But if banks gave in to this temptation, then they would be back into the financial intermediary business, and doing fractional-reserve banking.
Fred the GoldsmithA hypothetical example of full-reserve banking is provided by Fred the Goldsmith. Fred is a hypothetical goldsmith who applied his goldsmithing talents (crafting jewelry and other items from gold) during a period in which gold was also used as the medium of exchange. The key is that Fred naturally acted to keep his own gold, the gold he used as an input in this goldsmithing business, safe and secure in a sturdy vault. The safety offered by Fred's gold-storing vault was not lost on others, such as Bill the Knight, who needed a place to safely store a satchel of gold while he journeyed off to faraway lands doing knightly deeds (dragon fighting, damsel rescuing, etc.). If Bill the Knight leaves (deposits) 10 pounds of gold with Fred for safekeeping, the retrieves this satchel of gold upon his return, then Fred is practicing full-reserve banking. The No-Reserve AlternativeTo polar opposite to full-reserve banking is no-reserve banking. With this alternative, banks keep 0 percent of deposits in reserve. Every dollar of deposits received by banks is used for loans. In effect, banks are nothing more than a broker or agent that matches up borrowers and lenders. In fact, they probably have no need for a vault.With no-reserve banking, the profit goal is well served as a financial intermediary, as long as customers continue to make deposits. However, the deposit safekeeping goal is NOT well served. Banks are NOT able to satisfy withdrawal requests from customers, at least not in a timely fashion. With NO reserves, banks cannot "cash" checks. And if customers cannot withdraw funds they are not as likely to deposit funds. If banks have NO deposits then they can make NO loans or function as financial intermediaries.
Recommended Citation:FULL-RESERVE BANKING, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: May 18, 2024].
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Today, you are likely to spend a great deal of time searching the newspaper want ads seeking to buy either a 50 foot extension cord or a combination CD player, clock radio, and telephone (with answering machine). Be on the lookout for empty parking spaces that appear to be near the entrance to a store.
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The word "fiscal" is derived from a Latin word meaning "moneybag."
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"Perhaps the most valuable result of all education is the ability to make yourself do the thing you have to do, when it ought to be done, whether you like it or not; it is the first lesson that ought to be learned; and however early a man's training begins, it is probably the last lesson that he learns thoroughly. " -- Thomas H. Huxley, Scientist
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