Prominent Economists Call for End to Fractional Reserve Banking

Challenging a Sacred Cow of Banking Dogma

Excessive leverage by the banks was one of the main causes of the Great Depression and of the 2008 financial crisis.

As such, lower levels of “fractional reserve banking” – i.e. how many dollars a bank lends out compared to the amount of deposits it has on hand – the more stable the economy will be.

But economist Steve Keen notes (citing Table 10 in Yueh-Yun C. OBrien, 2007. “Reserve Requirement Systems in OECD Countries”, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board):

The US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.

So huge swaths of loans are not subject to any reserve requirements.

Indeed, Ben Bernanke proposed the elimination of all reserve requirements for banks:

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Economist Keen informs Washington’s Blog that about 6 OECD countries have already done away with reserve requirements altogether (Australia, Mexico,  Canada, New Zealand, Sweden and the UK).

But there is a growing recognition that this is going in the wrong direction, because fractional reserve banking can destabilize the economy (and credit can easily be created by the government itself.)

It was big news this week when one of the world’s most prominent economics writers – liberal economist Martin Wolf – advocated doing away with fractional reserve banking altogether… i.e. requiring that banks only loan out as much money as they actually have on hand in the form of customer deposits:

Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated.


What is to be done? A minimum response would leave this industry largely as it is but both tighten regulation and insist that a bigger proportion of the balance sheet be financed with equity or credibly loss-absorbing debt. I discussed this approach last week. Higher capital is the recommendation made by Anat Admati of Stanford and Martin Hellwig of the Max Planck Institute in The Bankers’ New Clothes.

A maximum response would be to give the state a monopoly on money creation. One of the most important such proposals was in the Chicago Plan, advanced in the 1930s by, among others, a great economist, Irving Fisher. Its core was the requirement for 100 per cent reserves against deposits. Fisher argued that this would greatly reduce business cycles, end bank runs and drastically reduce public debt. A 2012 study by International Monetary Fund staff suggests this plan could work well.

Similar ideas have come from Laurence Kotlikoff of Boston University in Jimmy Stewart is Dead, and Andrew Jackson and Ben Dyson in Modernising Money.


Opponents will argue that the economy would die for lack of credit. I was once sympathetic to that argument. But only about 10 per cent of UK bank lending has financed business investment in sectors other than commercial property. We could find other ways of funding this.

Our financial system is so unstable because the state first allowed it to create almost all the money in the economy and was then forced to insure it when performing that function. This is a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector.

(The IMF study is here.)

In fact, a lot of experts have backed this or similar proposals, including:

Interestingly, the Chicago Plan for full reserve banking came very close to passing in 1934. But the unfortunate death of one of its main Congressional sponsors – Senator Bronson M. Cutting  – in a plane crash reversed the momentum for the bill.

As Wikipedia notes:

Cutting played a key role in the political struggles over the reform of banking which Roosevelt undertook while dealing with the Great Depression, and which resulted in the Banking Reform Acts of 1933 and 1935. As a supporter of the Chicago Plan proposed by economist Irving Fisher and others at the University of Chicago, Cutting was among a handful of influential Senators who might have been able to remove from the private banks their ability to manipulate the money supply by enforcing a 100 percent reserve requirement for all credit creation, as stipulated in the Chicago Plan. His unfortunate death in an airliner crash cut short what may have been his most enduring legacy to the nation.

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  • Anders Aronsson

    You could add Austrian economist Murray Rothbard to the list above.

    • Fullblad

      he is on the list…

      • Anders Aronsson

        Thanks, I must be going blind 😉

  • Charlie Primero

    Banks only loaning out money they actually have? What a bizarre, novel idea! 🙂

  • Name

    Social Credit ( ) is another alternative.

    “many economists have rallied against the fractional reserve
    system of banking that prevails in the industrialized
    world (e.g., Irving Fisher, Lloyd Mints, Henry Simon,
    Murray Rothbard, Milton Friedman and most economists of
    the Austrian School of economics. But few, if any, other authors
    have explained that as productivity increases year after
    year, who benefits from that increased productivity is
    determined essentially by money and banking policy. Specifically,
    Douglas explains that, if the money supply is not increased,
    dollars/pounds become more valuable, such that prices
    drop. But, if the money supply is increased just enough,
    the value of each dollar/pound – hence prices – can be
    left unchanged. Finding it desirable to keep prices unchanged
    in this way, Douglas then explains that, essentially,
    a decision has to be made about who gets the additional
    dollars/pounds. Under our current fractional reserve system,
    the banks do, by creating and lending out extra credit.
    Under a “social credit” system, the extra dollars
    would be divided up and given to all citizens in equal
    portions as a “dividend”. His rationale: that
    increases in productivity – resulting as they do from
    innovation and technological advancement over time – are
    a “cultural heritage” that belongs not to banks
    but to all members of society. His message is clear: the
    citizenry are prevented from benefitting from their own
    cultural heritage, and this leaves them increasingly indebted
    to banks, and unable to reduce, over time, the portion
    of their lives that they spend working and simply trying
    to survive. Under social credit, Douglas foresees a decrease
    in work and an increase in leisure or, at least, the opportunity
    to work less if one so chooses.”

  • “As such, lower levels of “fractional reserve banking” – i.e. how many dollars a bank lends out…” ~ WashingtonsBlog

    From your words, it is clear that you do not understand at all commercial banking.

    Bankers do not lend dollars.

    A bank is a firm that seeks profit through the business of selling its own credit. Through banking, bankers exchange their credit for the credit of others. Thus, a banker is a trader who buys cash and debt by selling bank credits.

    To disabuse yourself and to rescue your readers from likely many fallacies albeit spread with good intention, at least read FALLACY FRAUGHT FORBES TRIES TO STOKE FEARS OF HYPERINFLATION

    As to reserve requirements, in the days of money — coined metal by weight and fineness — bankers kept in reserve physical coins in case customers would seek to exercise their rights of action to a sum of money equivalent to their deposit record.

    “…requiring that banks only loan out as much money.” ~ WashingtonsBlog

    From your words, it is clear that you do not understand the monetary system in the USA.

    Today, no one has money. Money doesn’t exist and hasn’t for many decades.

    Money is coined metal by weight and fineness. The Romans said so. It’s their word.

    Rather, Americans have cash. Cash is centralized bank notes circulating in perpetuity.

    Specifically, Americans have legal tender cash. So too do Canadians have legal tender cash, the Brits, all those of the Eurozone, the Japanese, and so on. Seemingly, legal tender cash does the work of money, but never is cash actual money.

    How can anyone be sure of this truth? Always, money can exist without banking and government. Cash only can exist with banking and banks. Never can cash exist without banking and banks. Not only does legal tender cash need banking, but also legal tender cash needs government.

    Without commercial banking, you would live as a bare subsistence savage. The problem isn’t with commercial banking. The problem is the FOMC setting the interbank lending rate (FFR).



    With the exception of Friedman, your list of economists reads like a who’s who of confused people. Besides, economists believe in academia economics, which is based on the false premises of utility and scarcity. Economics is false belief faux knowledge.


  • Bev

    As American Monetary Institute Chapter Leader, Dick Distelhorst, says:
    “We don’t want to put the government into the banking business – we want to get the banks out of the money creation business!” – Dick Distelhorst

    Historical experience has taught us what we need to do:

    1. Put the Federal Reserve System into the U.S. Treasury.
    2. Stop the banking system creating any part of the money supply.
    3. Create new money as needed by spending it on public infrastructure, including human infrastructure, e.g. education and health care.

    These 3 elements must all be done together, and are all in draft legislative form as the proposed American Monetary Act…

    Congressman Dennis Kucinich introduced an employment bill reforming our money system: The NEED Act proposes a historic money reform, containing all the monetary provisions of the American Monetary Act including ending “fractional reserve” banking.

    Professor Kaoru Yamaguchi’s Model of HR 2990

    Professor Yamaguchi (Berkeley, Doshisha Universities) shows that Kucinich’s HR 2990 NEED Act:
    (1) Provides the funding for infrastructure repair (which solves the unemployment crisis)
    (2) Pays off the national debt as it comes due
    (3) Does this without inflation! Click here ( ) to watch a video of Professor Yamaguchi’s presentation to the 2010 AMI Conference. Wow!

  • mirageseekr

    “But the unfortunate death of one of its main Congressional sponsors – Senator Bronson M. Cutting – in a plane crash reversed the momentum for the bill.”

    As with many things the CIA probably had a hand in this. Many reformists including JFK and MLK have been silenced permanently for bucking the system. Until we clean up congress and the alphabet soup agencies don’t hold your breath for any banking reform.

  • Fullblad

    It’s a sad point in history that the bankers got Roosevelt to champion Glass-Steagall instead of the Chicago Plan, both proposals being simultaneous, as the world would be in a very different place today. Better late than never. Let’s all support this plan or the one proposed by Dennis Kucincih and the American Monetary Institute (HR2990) as both are so similar in nature we could live with either one.

  • Instead why not require banks to lend only in the communities in proportion to their deposits held in those communities.

  • Dennis Richardson

    Amen. I am no educated economist I only have a BS degree in Mech Eng but everything that I have ever read confirms that this is the con game. The would be world government of the British Empire in London has been pushing this since the Venetian bankers got to London in 1510. End this evil money manipulation that the Rothschild’s took over in June 1815 on the London stock market. Debt based currency the cause of slavery.

  • iakovos
  • Joe

    Don’t forget Andrew Jackson, the president not the author. Come to think of it, an assassination attempt was made against him too.