The brakes have to match the accelerator on the car, or you're going to be in for a hard time -- even if that means the car will go slower. You have to figure it out differently. Things will go fine (really well, in fact) during expansion, but come contraction, all hell breaks loose.
And what's coming isn't just an indictment of all of that. We're about to find out what happens when you go Full Monty off of commodity-based currency such as the US with the Nixon Shock in 1971. It's a multi-generational event, so most of us alive don't know. But we all will soon.
> The brakes have to match the accelerator on the car, or you're going to be in for a hard time -- even if that means the car will go slower. You have to figure it out differently
There's so many problems with this analogy you should just state what you're trying to go for.
You tell me - what do you think would happen to the economy if lending ground to a stand-still (Which is exactly what would happen, with a double whammy of the money supply massively contracting[1] as loans are paid off, but not rolled over)?
Like, sure, I'm willing to entertain the idea that its possible to come up with some kind of planned steady-state economy that does not require speculative allocation of capital to drive production. But you're going to have to present a much more compelling vision of that future than 'Just get rid of lending.'
(Also, housing prices would collapse overnight[2], boomers and other retirees will lynch anyone responsible for something like that.)
For another argument, note that the health of the economy is a function of how quickly money moves through it. Fractional reserve banking is the engine that moves that money. Stop the movement of money, and you'll stop the economy.
All in all, I think we're better off with having the occasional bank go bust, and its customer funds getting frozen for a few weeks while the FDIC unfucks the bank's balance sheets, pays dollar-for-dollar cash for its illiquid, currently underwater long-term bonds, holds them until maturity for a profit, and then destroys the money they made in that profit. It's an infrequent failure case, it doesn't result in money getting lost, and the bank gets punished enough that most of its compatriots think twice before YOLOing the farm on long-term treasuries.
[1] This is called deflation, and if you think inflation is bad, imagine living in a world where nobody spends or invests money on anything, because you can become richer by doing nothing, and just sitting like a dragon on a hoard of gold.
[2] Heaven knows, I rail against housing price inflation all the time, but you are going to have a bad political time if you just pull the rug out from under homeowners.
The rate of lending will drop by an order of magnitude without fractional reserve banking. As will the money supply (hence, defulation), because most of the world's money is created by fractional-reserve lending.
> Have banks offer either interest via full reserve banking where your deposit is locked or storage for a fee.
Why would you need a bank to do that, you can go buy treasuries on any brokerage that have that property right now.
The problem wouldn't be on the deposit side, it would be on the lending side.
No bank would offer a prime + 3% mortgage without fractional reserve lending. Housing prices would immediately collapse.
No bank would offer anyone a low-APR loan - you'd only get utterly usurious terms. How well do you think the economy would react to the cost of borrowing money going up by 5, or 10%?
> So is the issue that we are so deep in a fractional reserve system that any change would cause a blow up?
For half of those things, yes, the issue is that it would be a dramatic change that leaves a lot of people holding the bag. But, you are correct, it doesn't have to be this way.
> In other words could an economy started from scratch function with a fully backed reserve system?
Unfortunately, you'll still have problems with the other half of those issues.
Low velocity of money depresses the economy. This wasn't a concern back when most people were subsistence peasants, and were just toiling to physically grow and put food on the table. All very inelastic demand sort of stuff.
This is a pretty big concern when the way most people put food on the table is a 'job', most of which are heavily affected by elastic demand for various goods and services. A peasant doesn't care much about the health of the 'economy', a worker does.
For another problem, high cost of borrowing significantly advantages the wealthy, and incumbents. Higher spreads between prime and actual interest rates will siphon more money into the pockets of lenders. This significantly amplifies the rich-get-richer winners-win-more problem.
Like, sure, you could build a society like that. Historically, a lot of societies looked like this. They were not very productive, prosperous, and all of their wealth was consolidated in the hands of a few oligarchs.
I don’t see how it can make things worse in the long run