Summary. Assume a pure fractional reserve banking system [assumes less than 100% financing of loans with deposits]. Also assume the simplest and most extreme case of banking collapse: all banks go bust. In this scenario the money supply vanishes: not too clever.Read it at Ralphonomics
In contrast, under FULL RESERVE [assumes 100% financing of loans with deposits], where deposits are taxpayer guaranteed that encourages the misuse of depositors’ money. Plus when all banks go bust, and assuming government reimburses all depositors, the money supply initially doubles which is liable to be inflationary, until that supply is withdrawn via tax. Also not too clever.
The best system is full reserve plus the “Kotlikoff / Werner” condition that where depositors let their bank use their money in a commercial fashion, and it all goes belly up, depositors lose their money. [How clever is this?]
Full reserve and the Kotlikoff / Werner system
by Ralph Musgrave