While reading the answer to Implications of abolishing Fractional Reserve Banking on mortgages and interest rates, I started to wonder if there wasn't a simple solution to the problems that would arise with the introduction of a constant money supply.

Right now, banks create the illusion of more money existing by accepting deposits and holding onto only a fraction of them while lending out the rest. Alternatively, could they not just package up loans into investments and essentially sell shares in the investments to average people. This would essentially have the same effect, your cash would be tied up in the bank and you would receive some amount of interest on it. The investments could even be structured and insured in a similar way to the current system in order to maintain some amount of liquidity. The only big change is that people would be very much aware of where there money is when they put it in the bank, which to me would only increase the robustness of the system and reduce the possibility of bank runs, as there would be a general understanding that some of your money is loaned out at any given time.

Has this idea been studied, and are there any known or obvious flaws that I am not seeing?

  • $\begingroup$ When you say "solution to the problems described with a constant money supply", are you describing constant money supply as the solution, or as the problem? If it is the former, I don't think your proposal accomplishes a constant money supply xd $\endgroup$
    – Kitsune Cavalry
    Aug 15, 2017 at 16:06
  • $\begingroup$ @KitsuneCavalry What I'm proposing would be an approach to solving problems that would arise after the introduction of a constant money supply. $\endgroup$ Aug 15, 2017 at 16:12
  • $\begingroup$ "package up loans into investments". Ah, well, we did try collateralised debt obligations for mortgages. That really didn't go so well ... $\endgroup$
    – 410 gone
    Aug 15, 2017 at 17:41
  • $\begingroup$ @EnergyNumbers But that was because banks were giving out bad loans, not because the concept of packaging loans as investments is fundamentally flawed. $\endgroup$ Aug 15, 2017 at 18:33
  • 2
    $\begingroup$ Your proposal sounds similar to various proposals for "full reserve banking" or "positive money." One good source of information would be positivemoney.org, which has literature explaining the concept (and its history). One standard proposal is to break up bank deposit taking into two components. 1. Safe deposits covered 100% by reserves (Treasury bills), and so are safe. 2. Lending to "banks" in a mutual fund style structure where the depositor can experience losses. The second aspect is pretty much what you describe in the question. $\endgroup$ Aug 17, 2017 at 11:09

1 Answer 1


How, in practise, would that be different from what is happening now? ..or what you, as an "investor" could already do?

No one is forcing you to deposit all your liquid assets into a bank account - most banks offer some sort of investment-opportunities, where you can buy into different funds with different risk-profiles.

Next thing; suppose banks take all deposits and lend out to different customers for various purposes and they receive interest on those lendings - some of those interest are transfered back to you for allowing the bank to use your money. This would actually be the same, as putting your money into a fund. The bank "invests" your money with other customers and recieve some sort of yield on that investment (interest). Difference will be the risk-profile. By "investing" in the bank you recieve an extremely diversified portfolio, funding everything from consumer goods, cars, houses to actually backing large corporations. Most of your investment is being placed high up in the hierarchy of priotization if the lenders go into default, which makes your investment "safer" than if you go and buy bonds in that same company (but obviously also recieves a lower yield).

Your proposal will put peoples money in a different place in the hierarchy of debt if customer/lenders go bankrupt, actually increasing the general risk-profile of the bank.

In all everything comes down to your risk profile - which exposure do you want your investment to have. The risk of a AAA rated sovereign bond yielding -0.5%, receive 0% on your deposits in a government backed bank, 5% on a BB- mutual fund or 25% on an emerging markets bonds?


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