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Reserve Banking System Essay

1678 Words7 Pages

Move on to the debates of 100% RBS, this system is actually an alternative of the negative impact of Fractional Reserve Banking System . The proponents of Full Reserve Banking System are led by the Austrian School of Economics as well as Noble Prize Laureate named Friedrich A Hayek, Milton Friedman, James Tobin, Maurice Allais, and the Chicago School of Economics who are fed up by the negative impact of Fractional Reserve Banking System. The founder of Austrian School of Economics2, Ludwig von Mises stressed the importance of Full Reserve Banking System due to the role of the bank as the issuer of fiduciary media (issuer of fiat money) in form of bank deposit. He stated that the banks should back the fiat money with metallic commodity or it might use gold as the backing of fiat money. Should it implemented in the banking industry, it might help to control inflation (De Soto, 2006, p. 718). Mises idea was scrutinized by his brilliant follower named FA. Hayek. Hayek wrote an article of Full Reserve Banking System and asserted that the banking system had to combine the fiat money and gold and keep a Full Reserve Banking System against all their demand deposit obligations (De Soto, 2006, p. 725). Another Austrian School …show more content…

Henry Simmons as the leader of this school of thought pointed out that Full Reserve Banking System was not only a macroeconomic policy but also as the tools for government in controlling the quantity of money. He added that the deposit that is submitted to banks is a mere of warehouse deposit only for purpose of fiduciary that implies bank to keep the money away to be exploited in form of credit. This proposal, later on, were taken up by Irving Fisher and Milton Friedman. As Freidman idea of Full Reserve Banking System, he added up some interest that should be paid to the depositor (De Soto, 2006, pp.

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