ABSTRACT

When commercial bank liabilities have less than 100 percent reserve backing, solvency relies upon a facility to refinance loans. Without central bank refinancing, a bank may need to ‘liquidate’ rapidly such assets as it currently holds. A requirement to hold 100 percent reserves would force banks to revert to their earlier function – i.e., the safe-care of clients’ deposits with fees charged for their services. The circulation of money then varies primarily by the issue of central bank base money. Variations in the velocity of circulation and payments effected by transfers of private third-party debt would be the remaining points of slippage. The latter is a chink in the armour of central bank monetary control. With the unprecedented level of bank failures after the Crash of 1929, proposals for ‘emergency relief’ and ‘permanent banking reform’ were widely discussed. Across multiple structures of banking and finance, recurring disappointments and failures continue to motivate insurance, counter-strategies, regulation, gaming and moral hazard.