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30 Jul 2012: This FAQ is under construction...
FAQ
What is full reserve banking?
See the definition page on this site.
What is fractional reserve banking?
See here.
Is the money supply constant under full reserve banking?
Yes, so long as the time deposits are strictly enforced, i.e. the depositor is not
allowed to take their money out early under any circumstances.
I don't believe the money supply is constant because time deposits are included in official measures of the money supply.
There is little consensus amongst economists about the definition of "the money supply". Governments
around the world include different things in their definitions. The reason that some measures of the
money supply currently include time deposits is because time deposits are generally ill-enforced.
If the depositor wants to take their money out early, their is usually little in the way of penalty.
This results in a situation where the money stored in time deposits can be spent almost as freely
as money stored in demand deposits. If time deposits were strictly enforced, no government anywhere
would include it in their money supply measures.
For more about the relation between time deposits and the money supply, see pages 238–41 of The Mystery of Banking by Murray Rothbard.
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