Safety First: The Deceptive Allure of Full Reserve Banking
In Safe Banking, Professor Adam Levitin joins a venerable tradition in the money and banking literature. That tradition, called full reserve banking, has claimed a number of illustrious supporters over the years, including Professors Irving Fisher, Henry Simons, and Milton Friedman. The basic idea of full reserve banking is seductive in its simplicity: "banks" should own nothing but physical cash. Because a full reserve bank has no investments, it can suffer no investment losses. A run on such a bank would be harmless, because the bank would never fail to meet redemptions (barring any loss or theft of cash). The process of bank money creation, familiar to any student of Economics 101, would go away. Money creation would be exclusively a government affair; "banks" would be pass-through vehicles, true depositories of currency. Our elaborate system of prudential bank regulation and supervision would be needless.