Munich Personal RePEc Archive

Our absurd fractional reserve bank system.

Musgrave, Ralph S. (2021): Our absurd fractional reserve bank system.

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Fractional reserve banking is inherently risky, which in large part explains the hundreds of bank failures throughout history and the 2007/8 bank crisis which lead to catastrophic economic and social damage. So fractional reserve must have some amazing benefits to make up for the latter shambles, or so you might think. In fact the alleged benefits of fractional reserve as compared to the alternative, namely 100% reserves are unimpressive to put it politely. Three of the main alleged benefits are examined below: first, the fact that fractional reserve banks create liquidity / money, second that it gives private / commercial banks more flexibility and third that it involves lower interest rates.

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