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Uploaded on Thursday 18 June, 2020 to the illusion of money |
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The system that preceded fractional reserve banking |
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The tried and tested alternative to fractional reserve banking is a defunct full reserve banking model. A full reserve banking system guarantees that the depositor's money will be available on demand, thus eliminating any prospects of money drying up with bank runs. Under this model, a bank may suggest a two-tier deposit account consisting of both on demand deposits (money available at any time for withdrawal for which the bank charges a fee for its safekeeping) and time deposits (money that accrues interest for depositors providing banks with monies to lend). A time deposit is an interest-bearing bank account that has a pre-set date of maturity. The money must remain in the account for the fixed term in order to earn the stated interest rate. A certificate of deposit (CD) is the best known example of such a scheme. Drawbacks to full reserve banking are that account holders are charged extra fees that they otherwise would not have to pay under fractional reserve banking and such a system does not increase the money supply, which typically augments sovereign debt as it necessitates a central bank to step in and inject liquidity, though personal debt may drop if overdrafts and credit loans are made scarce.
This video is courtesy of the Khan Academy whose YouTube channel is available here. |
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