[quote=jonnycsd]Fractional reserve banking is the ubiquitous practice where banks take in demand deposits and lend out a portion (or fraction) of those deposits to borrowers. The banks are counting on the fact that not everyone will want to withdraw their deposited funds at the same time. Of course this exposes the banks to some degree of risk in the form of a “run on the bank” if too many people want their money at once. Jimmy Stewart explains this scenario elequently in “Its a Wonderful Life”
Eliminating fractional reserve banking would require banks to have a one dollar of cash on hand (not necessarily paper cash) for each dollar deposited in a demand account (i.e. your typical checking or savings account). Loans would only be made based on longer term deposits into the bank (such as CDs).[/quote]
Those of us who oppose fractional reserve lending have no problem with banks keeping demand deposits on hand and lending out only that which is desired to be loaned out by the owner of that money (the depositor).
If we had full reserve banking, the bank could act as a middle-man between those who want to loan money and those who want to borrow it. The duration of the loans would have to be matched with the duration of the deposits (a 5-yr CD matched with a 5-yr loan, for example). Detractors say that this would cause interest rates to rise and restrain “growth,” and I would say that those are both perfectly acceptable and preferable to the boom/bust cycles (and inflation!) we so often have to endure with fractional reserve lending. If rates were high, and leverage were difficult to obtain, people would be much more careful with their money — a very positive outcome, IMHO.
