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Describe a full-reserve banking system

      

Describe a full-reserve banking system.

  

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Zainabu
This as well is termed as 100% reserve banking, it is a banking practice in which the full amount of funds of each depositor are kept in reserve, as cash or other highly liquid assets. In other words, funds deposited are not lent out by commercial banks as long as the depositor retains the legal right to withdraw the funds on demand.

A few proposals have been made where 100% reserve could be combined with investment accounts, where savers could entrust their money with a bank for investment in the full-reserve equivalent of time deposits or savings accounts, which in a full reserve system would represent loans made to the bank rather than deposits. This would allow banks to continue to act as intermediaries between investors and borrowers.

Full-reserve banking was practiced historically by the Bank of Amsterdam and some other early banks but was displaced by fractional reserve banking after 1800. Proposals for full-reserve banking have been made by various economists, including Irving Fisher and Milton Friedman. Nevertheless, proposals for full-reserve banking have received little mainstream support.



Zainabdawa answered the question on July 27, 2018 at 14:35


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