Policy Article

A Full Reserve System as a Promising Concept for a Monetary Reform? (publication in German)

Kieler Beiträge zur Wirtschaftspolitik

In a full reserve system, commercial banks would lose the ability to create money out of thin air and to use sight deposits as a source of funding. The monetary reform would certainly have advantages and disadvantages. On the positive side, financial stability would increase and the government sector would generate higher revenues from money creation. Moreover, the central bank could better exercise control over monetary aggregates, but at the cost of losing short-term interest rates as a policy instrument. Additional regulation would be required to avoid the full reserve system to be undermined, and increasing costs for financial services can be expected. A severe adjustment crisis of the banking sector would probably weigh on economic activity in the short run. The Swiss referendum in June 2018 focuses on “Vollgeld” as proposed by Huber where central bank money is placed in and withdrawn from circulation almost entirely via the government sector. Overall, full reserve money is regarded as a promising concept but a predictable, gradual convergence to a full reserve system appears preferable compared to a sudden system change.