During the last crisis, we saw the real importance of banks in the economy. when the bank goes down the complete economy will go down. So regulation was imposed. Regulation to make the next crisis not going to happen. But this regulation simply failed to deliver. At the moment the financial system is in worse shape than before the last collapse. So would it not be better to have crises proof banking?
When we look at the banking business model the revenue comes from deposit-taking and issuing loans. You put money on the bank, they borrow it from someone. This model is introduced before the year 0. But it was not money, it was graines.
The deposit-taking and borrowing business is a relatively low-risk business. It is hard to get banks bankrupted. Only a bank run or a complete economic collapse would cause this.
The deposit-taking of soft commodities was highly popular. The deposit-taking moved on and in the old Greece, we saw the first form of private banks seeing the daylight.
There is a big difference between the deposit and borrowing business. When banks take deposits they need to guard your money. They need to protect it and keep it safe. While when they are in the borrowing businesses they are in it for their interest. Nothing wrong with this. But the business is completely different.
With the collapse of the Roman Empire, the banking business went down. This was changed when the Templer developed a robust and solid banking business. The business didn’t fail and they didn’t enter the business of fractional reserve business. The robust Templar banking model went down due to the actions of Tyrannic Philip IV of France. He was on a tragic bank robbery with an effort to get hands-on the vast precious metals resources.
The fractional reserve banking business came in Europe of the ground in the period 1300-1600. The average deposit held on was 30%. Making the banks vulnerable for a bank run.
The effect of this destructive business model was that bank panics happened every few years. Banks went bust. People lost their life savings.
Around 1200 Europe saw an industrialized version of 100% reserve banking. The 100% reserve banking model was the answer to the panic and anger from the failed alternative banking models. It should be stressed out that those institutions never failed.
One of the most well known 100% reserve banks was the Bank of Amsterdam. The bank held a 100% reserve in the period 1600 to 1710. This highly successful bank opened branches in Middelburg, Rotterdam and across Europe.
One of the best benefits of a 100% reserve bank is that it is the perfect answer to the boom-bust cycle. To have a 100% reserve bank the destruction associated with this model could be abolished.
During the great depression in the USA, the Chicago plan was announced. The plan was a 100% reserve bank demand for all deposit-taking banks.
The plan for a 100% reserve bank is dismissed as a too radical one. But as we could see above. It is a working plan. At least if we wish to abolish the boom-bust cycles. If we wish to have sustainable banking it is the way forward!