The Case For Full Reserve
Were the United States to adopt full-reserve, all currency would be created by the federal government, and as a result all seigniorage revenue would also accrue to the federal government. This is in contrast to the current US system, where a large proportion of the currency supply is in the form of demand deposits created by private banks. When the Federal Reserve creates currency and uses it to buy treasury bills, it collects seigniorage revenue in the form of interest payments which it then returns to the United States (for example, in 2002 the United States earned $24.495 billion in this manner). When a private bank creates currency, the government cannot collect any seigniorage from it. Since the Federal Reserve has a target for the size of the currency stock, any currency created by private banks is currency that is not created by the Fed and thus constitutes lost seigniorage.
According to Murray Rothbard, full-reserve banking would eliminate (or at least greatly reduce) the financial risks associated with bank runs, as the bank would have all the money in reserve needed to pay depositors, regardless whether depositors actually claimed their money.
Some economists of the Austrian School believe that fractional-reserve banking, because it permits expansion of the money supply in response to the demand for credit, contributes to exaggerated swings in the business cycle. These economists state that, in contrast to fractional-reserve banking, full-reserve banking would guarantee a stable means of exchange that could not debased over long periods of time. This would ensure the integrity of the price mechanism, promote saving and the deferral of consumption, and encourage sustained, productive investment.
Read more about this topic: Full-reserve Banking
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