Federal Reserve Abolition Act

[bascule]

That zany Ron Paul is at it again, introducing yet another in a series of acts intended to abolish the Federal Reserve:

 

http://www.house.gov/apps/list/speech/tx14_paul/AbolishtheFed.shtml

 

Some choice quotes from Dr. Paul and my responses to them:

 

Madame Speaker, I rise to introduce legislation to restore financial stability to America's economy by abolishing the Federal Reserve. Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy.

 

Seems like a bit of a post hoc ergo propter hoc fallacy. Dr. Paul's statement implies we did not see a boom-and-bust monetary policy prior to the creation of the Federal Reserve. I wonder what Ron Paul makes of this list, namely:

 

The Panic of 1797, the Depression of 1807, the Panic of 1819, the Panic of 1837, the Panic of 1857, the Panic of 1873, the Long Depression, the Panic of 1893, Panic of 1907.

 

If we were to partition the list of recessions which occurred in the 100 year spans before and after the creation of the Federal Reserve, we find there were the same number in the same period (unless we see ANOTHER recession between now and 2013)

 

Would an apologist for Dr. Paul care to interpret this statement for me so it makes sense?

 

From the Great Depression, to the stagflation of the seventies, to the current economic crisis caused by the housing bubble, every economic downturn suffered by this country over the past century can be traced to Federal Reserve policy.

 

I'm quite curious what Dr. Paul is implying here. Perhaps I'm reading too much into this statement, but Dr. Paul seems to be implying that if we got rid of the Federal Reserve, we wouldn't have economic downturns. After all, he's saying Federal Reserve Policy is the cause of all economic downturns, is he not?

 

My question is: why were there economic downturns before the Federal Reserve?

 

A followup question: How did the Federal Reserve cause the 1973 Oil Crisis?

 

--

 

I could go on, but for those of you who think that we should abolish the Federal Reserve: do you feel there's a need for a lender of last resort? Do you feel the problems that caused the Panic of 1907 are still applicable today, and if so, how would you address those problems without a central banking system?

 

I think Dr. Paul is myopic in that he does not seem to be considering the problems the Federal Reserve was created to address, problems which only seem to me to be exacerbated by the present day economy versus the economy of 100 years ago.

 

I don't think Americans are capable of dealing with both a fiat currency and a commodity currency, and I don't think any commodity can address the volume of currency needed by the American economy.

 

I think eliminating the Federal Reserve will cause at least as many problems as it solves.

 

Bottom line, I don't think Dr. Paul's suggestions are practical whatsoever.

Edited February 17, 2009 by bascule

[D H]

I am so embarrassed: My representative. At least I had the rare opportunity to vote against him three times last year, twice in the primaries (he ran as a congresscritter and for President) and once in the general election. I used all three opportunities.

[ecoli]

Good catch bascule! But don't worry, you're not the first person to notice this apparent contradiction.

 

Luckily, we have some published answers.

For the classic work, read this book: http://mises.org/books/historyofmoney.pdf (skip to page 98 for the banking panic of 1837) It's a extensive economic history book by Murray Rothbard, an economic historian in the Austrian tradition.

 

Here's another article on the 1837 panic only http://mises.org/journals/scholar/trask1.pdf

 

Hope this clears up some issues for you. If not, I'd be happy to talk about it after wednesday (cell bio exam!)

---

Merged post follows:

Consecutive posts merged

I am so embarrassed: My representative. At least I had the rare opportunity to vote against him three times last year, twice in the primaries (he ran as a congresscritter and for President) and once in the general election. I used all three opportunities.

 

sorry to hear that you voted against the only person in congress who's actually saying something different.

[bascule]

Luckily, we have some published answers.

For the classic work, read this book: http://mises.org/books/historyofmoney.pdf (skip to page 98 for the banking panic of 1837) It's a extensive economic history book by Murray Rothbard, an economic historian in the Austrian tradition.

 

Here's another article on the 1837 panic only http://mises.org/journals/scholar/trask1.pdf

 

Hope this clears up some issues for you. If not, I'd be happy to talk about it after wednesday (cell bio exam!)

 

Okay, I'll wait for your followup. I'm afraid a 400 page PDF and "go fish!" isn't going to help me find the answers I'm looking for.

 

Seriously though, do you believe abolishing our country's central banking system in the middle of a financial crisis is a good idea?

 

sorry to hear that you voted against the only person in congress who's actually saying something different.

 

What about Kucinich?

Edited February 17, 2009 by bascule

[JohnB]

If we were to partition the list of recessions which occurred in the 100 year spans before and after the creation of the Federal Reserve, we find there were the same number in the same period (unless we see ANOTHER recession between now and 2013)

Wouldn't that indicate that having the Federal Reserve has made no difference?

 

If this is the case, why not remove the drain on your economy?

 

Don't forget that your system is very different from our "Reserve Bank" system, so I'm sort of asking from ignorance.

[ecoli]

Okay, I'll wait for your followup. I'm afraid a 400 page PDF and "go fish!" isn't going to help me find the answers I'm looking for.

fair enough

Seriously though, do you believe abolishing our country's central banking system in the middle of a financial crisis is a good idea?

briefly, no. But since Paul's no idiot and realizes the bill isn't going to pass anytime soon, he's doing this to get people to ask themselves the question "do we actually need a central bank?"

This thread is evidence that his bill is having the intended effect.

 

Obviously, massive change of how financial system works during an economic recession is not a great idea, no matter what the change is. So I agree with your point there.

 

I think Paul and other libertarian-minded politicians goal is to get people questioning the status quo, so we can debate real types of change (some of which relies on heavily debated theory in economic circles).

 

 

What about Kucinich?

 

touche... last I heard, he was critical of the Fed as well.

[iNow]

I think Paul and other libertarian-minded politicians goal is to get people questioning the status quo, so we can debate real types of change (some of which relies on heavily debated theory in economic circles).

 

I couldn't agree more, and I had hoped you'd include mention of that in your response. They help steer the dialog, and to generate new ones. I have opened a new thread to explore some of that so as not to take this one off topic.

 

http://www.scienceforums.net/forum/showthread.php?t=38647

 

 

Speaking of this thread topic, if we did get rid of the Fed, might we find a better way to accomplish similar things... to achieve the up-side without the down-side we find using the Fed?

[npts2020]

I think a better idea for now would be to just make the Fed operate in a responsible manner. How much money can you basically give away before there are serious consequences? The biggest problem with abolishing the Federal Reserve is that the only way the Federal government will guarantee your money afterwards is if you buy U.S. government bonds, and who knows what that guarantee will be worth on our current path?

[ParanoiA]

Seems like a bit of a post hoc ergo propter hoc fallacy. Dr. Paul's statement implies we did not see a boom-and-bust monetary policy prior to the creation of the Federal Reserve. I wonder what Ron Paul makes of this list' date=' namely:

 

The Panic of 1797, the Depression of 1807, the Panic of 1819, the Panic of 1837, the Panic of 1857, the Panic of 1873, the Long Depression, the Panic of 1893, Panic of 1907.

 

If we were to partition the list of recessions which occurred in the 100 year spans before and after the creation of the Federal Reserve, we find there were the same number in the same period (unless we see ANOTHER recession between now and 2013)[/quote']

 

Well then, likewise how do we benefit from the federal reserve if we suffer just as many economic downturns AFTER it's creation? It's feasible to fight the potential for bank runs without using legal tender laws to promote bad money and endless reserves. Now we have a currency so debased, I doubt Gresham could have predicted it.

 

I could go on, but for those of you who think that we should abolish the Federal Reserve: do you feel there's a need for a lender of last resort? Do you feel the problems that caused the Panic of 1907 are still applicable today, and if so, how would you address those problems without a central banking system?

 

I'm not convinced a central banking system is necessary. But more importantly, I'm not sure a lender of last resort is the only weapon against bank runs or the supposed need for elastic currency. A lender of last resort promotes bad behavior just like the implied, and later confirmed, federal backing of Fanny May and Freddie Mack and bailing out failing companies right now.

 

The safety net is best when no one knows it's there. I'm not sure how we achieve that. Could FDIC prevent bank runs from self fulfilling prophecies of insolvency? I'm not sure. It's another safety net, but geared more for depositors, so maybe it won't promote the same kind of irresponsible investment we see on the large scale?

 

Central planning, however, fails because we cannot predict every variable. So it will always fail. Free banking fits with our model for freedom and responsibility inherent in capitalistic consequences. Without legal tender laws, bad money won't force out good money either. This is far more natural, allows everyone to assess risk, both buying and selling, the quintessential nature of trade between humans. And perhaps more workable now with such an established currency. It would be interesting to see the dollar compete within the union.

 

All that said, I'm still reading and trying to soak this stuff in. The banking panics do put quite a wrench in the gears and create a valid expectation of some kind of solution. I'm certainly not comfortable with the power of the federal reserve though.

[bascule]

Well then, likewise how do we benefit from the federal reserve if we suffer just as many economic downturns AFTER it's creation?

 

I don't know enough to answer that question. I can only point out that the scale and complexity of the economy has increased vastly since then, and can only in turn ask if an economy as large and complex as ours could safely operate entirely on emergent market forces.

 

It's really a question of whether an intelligent agent can do a better job than the emergent forces, and my personal feeling about that question is yes, I would pick an intelligent agent over the emergent forces.

 

People make mistakes and those mistakes will lead to economic downturns. With a purely emergent system I don't see how you prevent manipulations for personal gain which have an adverse effect on the entire system. Here you have intelligent agents acting in their own self-interest and only emergent forces to keep them in check.

 

Could FDIC prevent bank runs from self fulfilling prophecies of insolvency? I'm not sure. It's another safety net, but geared more for depositors, so maybe it won't promote the same kind of irresponsible investment we see on the large scale?

 

How does a "free market" prevent irresponsible investment?

 

Central planning, however, fails because we cannot predict every variable. So it will always fail.

 

Models inherently can't predict every variable. That's what makes them models. However, you don't need to predict every variable to have reliable predictions. You end up with estimates based on averages with certain windows of uncertainty.

 

Clearly we're encountering a case where the models failed miserably. However, Greenspan's take on the whole thing in 20/20 hindsight leaves me with a feeling that, if anything, he underregulated due largely in part to drinking Milton Friedman's free market kool aid.

 

In my undereducated layman's opinion, the solution is more regulation and greater control by our central banking system, and my guess is we'd be worse off abandoning a central banking system.

 

I think it'd be interesting to see a poll of economists and their views on eliminating the Federal Reserve.

[ecoli]

It's really a question of whether an intelligent agent can do a better job than the emergent forces, and my personal feeling about that question is yes, I would pick an intelligent agent over the emergent forces.

So you'd concentrate power into one "intelligent" person than millions of decentralized decisions? How do you know if that intelligent person isn't just acting in self interest?

 

People make mistakes and those mistakes will lead to economic downturns. With a purely emergent system I don't see how you prevent manipulations for personal gain which have an adverse effect on the entire system.

But this is a much bigger problem with central planning than it is with personal decision making

 

How does a "free market" prevent irresponsible investment?

By natural business cycles and recessions. We should start thinking of this recession as the cure for the disease which was investor mistakes.

 

How can we expect to learn from our mistakes (propping up an entire economy on debt) by adding to deficit spending? It makes no sense.

 

Models inherently can't predict every variable. That's what makes them models. However, you don't need to predict every variable to have reliable predictions. You end up with estimates based on averages with certain windows of uncertainty.

In this case, the uncertainty was huge. And, from what I've read, the people who were best able to predict this recession weren't bothering themselves with official keynesian-based economic models (look up Peter Schiff on youtube, for example).

 

Clearly we're encountering a case where the models failed miserably. However, Greenspan's take on the whole thing in 20/20 hindsight leaves me with a feeling that, if anything, he underregulated due largely in part to drinking Milton Friedman's free market kool aid.

You'd have a hard time proving that one to me, considering that our modern economy is hardly a true free market.

 

Perhaps things like derivative markets where under watched (if not under regulated) but Greenspan's monetary policy led to the bubble and crash in exactly the way the Austrian's predict... And you're claiming the free market types are drinking the cool aid??

 

In my undereducated layman's opinion, the solution is more regulation and greater control by our central banking system, and my guess is we'd be worse off abandoning a central banking system.

I've been studying this a lot lately, and I no longer consider myself an economic layman. What I do know, is that politicians know less about the economy than laypeople and that their policy decisions are rarely based on economic sense, but special interest desires.

 

With that in mind, increasing central planning and regulation (based on poor economic models) makes a lot less sense then letting people learn from their mistakes and let "natural recessions" take their course.

[iNow]

Do you not care about systemic risk? I appreciate your idealism, and have supported it myself for a long time, but I find it too far removed from reality and based on too narrow a view of how things work. Back to my question, though, you don't care about systemic risk, where people get punished even when they've done nothing wrong? Your position implicitly says this, btw, so I'm not really putting words in your mouth.

[ParanoiA]

Back to my question, though, you don't care about systemic risk, where people get punished even when they've done nothing wrong?

 

People always get punished AND rewarded, through no fault of their own. Inflation hurts the poor, more than anyone else, instigated by the federal reserve most of the time and is generally a calculated economic decision (not a deliberate evil mind you, I'm sure it's with good intent).

 

All of us effect each other already, by market forces. We punish and we reward via supply and demand and how we participate in it. With or without the federal reserve, or central planning this will happen over and over again. Until of course, we gain knowledge from our investment failures and all make perfect decisions. I won't hold my breath...

[iNow]

Okay, but when I refer to "systemic risk," I'm hardly referring to inflation or deflation, or a poor investment choice.

 

 

http://en.wikipedia.org/wiki/Systemic_risk

Systemic risk is the risk of collapse of an entire system or entire market and not to any one individual entity or component of that system. It can be defined as "financial

system

instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries". It refers to the risks imposed by

interlinkages

and

interdependencies

in a system or market, which could potentially bankrupt or bring down the entire system or market if one player is eliminated, or a cluster of failures occurs at once.

 

<...>

 

The easiest way to understand systemic risk is to consider a bank run which has a cascading effect on other banks which are owed money by the first bank in trouble. As depositors sense the ripple effects of default, and liquidity concerns cascade through money markets, a panic can spread through a market, creating many sellers but few buyers. These interlinkages and the potential "clustering" of bank runs are the issues which policy makers consider when addressing the issue of protecting a system against systemic risk. Governments and market monitoring institutions (such as the SEC, and central banks) often try to put policies and rules in place to safeguard the interests of the market as a whole, as all the trading participants in financial markets are entangled in a web of dependencies arising from their interlinkages and often policy makers are concerned to protect the resiliency of the system, rather than any one individual in that system. Sometimes "picking winners" and protecting favored individual participants in a system can engender moral hazard in a system and weaken the resilience of the system as a whole.

 

Systemic risk should not be confused with market or price risk as the latter is specific to the item being bought or sold and the effects of market risk are isolated to the entities dealing in that specific item. This kind of risk can be mitigated by hedging an investment by entering into a mirror trade.

[ecoli]

iNow - I'm much more worried about breaking our currency through hyperinflation (and debt) than I am about bouncing back from a temporarily broken financial system.

 

Of course, I'm coming from the position that expansionist monetary and fiscal policies during the great depression extended it by years, so I'm sure you understand my concern about pursuing the same policies now.

 

You aren't wrong, of course. Our economy is based on a lot of these failed financial systems, but I don't see how propping up these financial systems is going to fix the problem. Its seems that a bottom up overhaul created by systematic failure makes more sense than propping them up and expecting the problem to just go away (by transferring individual and corporate debt to public debt, for example)

---

Merged post follows:

Consecutive posts merged

I want to aid though, since you bring up the notion of systematic risk, the only scholarly research done into "counterparty risk" in the financial system was done by Bernanke himself in the '80s.

 

It is in no way certain that, if Bear Stearns would have failed, it would have caused a collapse in the rest of the financial system.

[iNow]

Of course, I'm coming from the position that expansionist monetary and fiscal policies during the great depression extended it by years, so I'm sure you understand my concern about pursuing the same policies now.

Yes, absolutely. As I tried to allude to above, I tend to share much of this sentiment, I just don't take mine as far as you do. I do understand your point, though.

 

 

It is in no way certain that, if Bear Stearns would have failed, it would have caused a collapse in the rest of the financial system.

Interesting link. Thanks. I sense that counterparty risk is more applicable to single contracts. It also doesn't really speak to the issue of default by one of the parties of the contract causing the other party to collapse. That's why I don't really find your comment above very meaninful or useful to the conversation. It is like saying that pushing a domino is not certain to cause a cascade and knock down all of the other dominos stacked behind it. Sure, it's possible that the other dominos won't fall, but it's incredibly unlikely. All indicators suggest that the first one to tip will cause the others to do the same due to their closeness and mutual influence.

 

That's the thing I'm focussing on here. These are dominos, and the health of one greatly depends on the health of the other. I posit that the risk is, in fact, systemic, not simply counter-party.

[ecoli]

I should explain a little further... The point about counter-party risk was brought up by Jeffery Miron (a Harvard economist) at a lecture I went to back in November. I think his point is that we don't really know how the dominoes are stacked here, and went ahead without a whole lot of evidence that they would have been knocked down (lots of counter-party risk seems to be systematic risk?)

 

For example, if lots of the big financial groups disappear, there are still lots of small ones that can take their place (I saw some evidence a while ago that there were small banks that were doing quite well before the bailouts). And we're still nowhere near the level of bank failure we saw in 1929.

[iNow]

Thanks for the clarification. I'll need to think more on this, as the number layers in this onion and the complexity of each is something with which I have only a passing understanding.

[ecoli]

Thanks for the clarification. I'll need to think more on this, as the number layers in this onion and the complexity of each is something with which I have only a passing understanding.

 

 

Yes, that goes for all of us. Too many people think that they have the right answers and rush to give it... I think its partly we got into this mess in the first place.

[ParanoiA]

Ecoli - I'm curious about your thoughts on the potential for banking runs and panics in a free banking system, assuming that's the implied alternative to the federal reserve. Or do you have other ideas?

[ecoli]

Ecoli - I'm curious about your thoughts on the potential for banking runs and panics in a free banking system, assuming that's the implied alternative to the federal reserve. Or do you have other ideas?

I need to do a lot more reading to say something substantial about the matter, but from what I see the Austrians saying, is that government signals and insurances have allowed for the persistence of a fractional reserve banking system, which creates runs because banks are unable to cover their deposits.

 

I'm not sure how a banking system would work that isn't fractional reserve, however. I can imagine how being a full reserve bank would stifle loan, so while something like the FDIC exists, a full reserve bank would be at a competitive disadvantage.

[ParanoiA]

Full reserve banking certainly looks great on its face and seems the responsible method. But here, my lack of depth concerning the creation of money is subverting any attempts to grasp this concept:

 

Among criticisms of a full-reserve banking system is the argument that full-reserve banking implicitly means that there is no government-controlled "monetary policy" at all.

 

I don't really understand that. So, in trying to understand the mechanics of how money is created, or metaphorically "printed", it seems it is based on debt. This almost makes sense to me, but not really.

 

Here's the crux of my confusion:

 

The matter of money creation is poorly understood. There is a common misconception that banks or governments create money. Governments only borrow money into existence from the banks. Banks can and do manage and redistribute money and wealth. Only people and natural resources represent potential wealth. Only people can, by their labor, produce useful wealth, which can be traded, either 1) directly by barter, 2) thru the use of currency, or 3) thru the creation of money. Remember, all people who buy or sell, i.e. are producers or consumers, are traders.

 

Money is created when a trader makes a commitment, by buying goods or services from other traders, to place goods or services in the marketplace of equal value in the future.

 

In making purchases, traders borrow against their future production if they do not currently have a trading surplus. Money is created as evidence of that debt. Putting goods and services back on the market repays the debt, and extinguishes the money. In other words, money is borrowed into existence, and is extinguished as the loan is repaid. The effective lender, or guarantor of a loan is all the traders who trade with the borrower‑‑in short‑‑the community; the market.

 

That is just not intuitive to me at all. If I borrow money from the bank, then aren't they just handing me money - kind of like a really shrewd trade deal on my part? And when I pay it back, with some interest, then aren't they just getting the assets right back, with some profit, thereby profiting from the trade? Where's the "creation" happening?

 

Now, that would make sense if the bank didn't really let go of that money, rather just promised the money in the form of some receipt, thereby gaining the advantage of lending more money than they actually have, similar to guaranteeing all demand deposits while only keeping a fraction of those reserves available for demand.

 

Anyone have a grasp on this that wouldn't mind explaining what I'm missing here? We all go on and on about printing money and diluting the money supply, creating inflation - those are concepts we understand. But I have to admit, the mechanical particulars of how money is really created escapes me, and I'll wager some of the membership too. I think it would help to understand that before we can realistically analyze the federal reserve beyond the obvious issues with central planning.

 

 

Edit: Apparently I'm just hard headed. This explanation at mises.org clears it up:

 

http://www.mises.org/article.aspx?Id=1118

 

For instance, let us say that a depositor—John—deposits $100 in cash at a bank (Bank A) and this constitutes the bank's current total cash deposits. The bank then lends $50 to Mike. By lending Mike $50, the bank creates a deposit for $50 that Mike can now use. This in turn means that John will continue to have a claim against $100 while Mike will have a claim against $50. This type of lending is what fractional reserve banking is all about. The bank has $100 in cash against claims of $150. The bank therefore holds 66.7% reserves against demand deposits. In short, the bank has created $50 out of "thin air" since these $50 are not supported by any genuine money.

Edited February 20, 2009 by ParanoiA

[tomgwyther]

Abolish the fed; use PayPal instead!

 

This is a little quip I came up with while reading this post. Originally meant as a bit of a joke, but it actually turns out to be quite enlightening.

 

I personally think fractional reserve banking is a bad thing and that making money from simply having money is the act of a parasite.

The real purpose of money should be to fascillitate the transaction of goods and services; an alternative to walking into Wal-Mart and exchanging two chickens and a goat in order to purchase your weekly groceries.

You simply trade a piece of paper which represents the chickens and the goat (or any other commodity for that matter.) for the groceries.

 

With regards to the federal reserve system, it's almost stomach churning to know that the issuance and control of a nations money supply is so heavily influenced by unelected private banks.

As Rockerfeller said "Give me control over a nations money supply and I care not who makes its laws."

Now that America has no money, now would be a good time to make some radical changes to the federal reserve system, if not outlaw the practice all together.

 

Using Paypal merely as an example

The Paypal VS Fractional reserve federal banking system goes something like this.

PayPal (Or other similar system) is rather like a global L.E.T.S system whereby all money in that system has its roots in actual goods and services.

The gross amount of money is potentially unlimited but it's creation is dependant on real wealth. paypal money is merely the the medium by which goods and services are traded.

Money becomes the servant of the people, and not people the servant of money.

If a government were to adopt such a scheme, it would no longer be subservient to a money supply outside of it's control. The government and only the government would have exclusive power to create money within the system which it could then spend into the economy on bridges, schools, hospitals, welfare etc, this government created money could then be collected back in the form of tax, to restore the financial balance, and no interest would have to be paid to anyone.

Under the current system, nearly all money in existence is created by private banks as debt. Here in Britain for example, for every pound I have in my pocket, 97pence of it is someones debt (%97 fractional reserve) and this figure is increasing exponentially.

When the government wants to spend money, it has to be borrowed - at interest - from a bank, this loan must be re-paid at interest, thus most of the income tax which I pay is actually the interest repayment on loans the government took out years ago. The government recently borrowed several billion, the interest alone on this is about £1,000,000 per day.

 

A governments ability to issue and control it's own money supply is vital to the prosperity of it's people, people like George Washington, John Adams and Thomas Payne were all to aware of this, hence it was the main reason for the war of independence; Independence from European banks who were against the American colonies issuing there own money.

 

That's why the Federal reserve system should go.

 

p.s this is just a brief overview of two economic systems an current economic states.

[ParanoiA]

Well, if I understand correctly, one of the arguments for fractional reserve banking is elastic money supply; seasonal spikes in demand for credit. But it would seem a weak argument considering the systemic consequence of inflating and deflating the money supply.

 

The whole practice is just so disturbing when you consider how injection by the feds amplifies the potential money supply by 10 - 1 billion dollars creates 10 billion dollars of new debt, or money. By only being required to keep a 10% fraction of demand deposit value in reserves, in theory each bank simply loans up to the max. Bank A loans 900 million to bank B, which loans 810 million to bank C, which loands 729 million to bank D and so forth until you end up with a total of 10 billion dollars floating around out there among the various banks. Again, this is potential, not necessarily reality, and there are valid arguments that counter the notion that banks respond directly to injected money.

 

Full reserve banking would eliminate bank runs and panics, but I suppose create a hazard for responding to crises where a huge sudden demand for credit cannot be answered. Or can it?

 

And what about full reserve banking for demand deposits only? That would seem to address the fear of bank runs since all of that money is there, yet still retain a smaller (and arguably more manageable) pool of money that can be used to answer spikes in demand for credit.

[bascule]

Full reserve banking would eliminate bank runs and panics, but I suppose create a hazard for responding to crises where a huge sudden demand for credit cannot be answered. Or can it?

 

I think the first thing you should be asking is if it can come anywhere close to satisfying existing demand for credit, and if it can't, what would the impact of that be upon the economy?

 

My guess: not good.