01Aug 2018

Fractional Reserve Banking

Posted in Economics, Money


     As I understand it, in a pure capitalist economy there would be fractional reserve banking. A bank with 100% gold reserves would be virtually risk free. Depositors would receive a low interest rate on their savings, perhaps even charged for a chequing account. A bank that held say 40% in reserves would have to pay a higher interest rate to depositors in order to compensate for the added risk.

     If after a natural disaster there were a run on the banks in the area of the disaster, a national or international bank would have little problem handling it. Smaller banks in the region of the disaster with 100% reserves should have no problem. But smaller banks with 40% reserves may be in jeopardy. This can be mitigated by a clause that banks could put (and do) in their agreement with depositors – that depositors can only withdraw a certain percentage on demand and the remainder over a period of weeks or months, giving the banks time to resolve their problem. Of course a run on the banks will mean some of the low reserve banks might fail. But that is the risk that depositors take in their attempt to get a better return on their deposits.

     I see nothing here that violates any freedoms of the participants so long as all the particulars are known to the banks and the depositors and enforced by lawful contract.

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