Removing the basic flaw in deposit insurance leads automatically to full reserve banking.

Musgrave, Ralph S. (2021): Removing the basic flaw in deposit insurance leads automatically to full reserve banking.

Abstract

Deposit insurance is beneficial in that it ensures everyone has a safe method of storing and transferring money. That is a basic human right. Unfortunately deposit insurance also supports a commercial activity, namely depositing money at a bank with a view to the bank earning interest for the depositor, which a bank can only do by in effect lending out depositors’ money. That is just as commercial as depositing money with a stockbroker, mutual fund or unit trust with a view to interest or some other form of return being earned. And it is not the job of government to support commercial activities. As for the idea that banks create the money they lend out, rather than intermediate, that is dealt with in the opening paragraphs below. Preventing deposit insurance assisting the above commercial activity while retaining a form of totally safe deposits is easily done by splitting deposits into two types: first, those where the depositor simply wants money stored safely, with that money being lodged at the central bank where it earns no interest, and second, those where the depositor wants to be into commerce. Interest is earned on the latter deposits, but depositors carry the risk involved which essentially turns those deposits into equity. And that is precisely what full reserve banking consists of.

• Item Type: MPRA Paper
• Language: English
• Keywords: deposit insurance; full reserve; narrow banking; 100% reserves
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G2 - Financial Institutions and Services

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