An excerpt from Herman Daly, steady-state economist, via:

“Why should money, a public utility (serving the public as medium of exchange, store of value, and unit of account), be largely the by-product of private lending and borrowing? Is that much of an improvement over being a by-product of private gold mining? Why should the public pay interest to the private banking sector to provide a medium of exchange that the government can provide at no cost? Why should not seigniorage, unavoidable in a fiat money system, go entirely to the government (the commonwealth) rather than in large part to the private sector?

Is there not a better away? Yes, there is. We need not go back to the gold standard. Keep fiat money, but move from fractional reserve banking to a system of 100% reserve requirements. The change need not be drastic–we could gradually raise the reserve requirement to 100%. This would put control of the money supply and all seigniorage in hands of the government rather than private banks, which would no longer be able to live the alchemist’s dream of creating money out of nothing and lending it at interest. All quasi-bank financial institutions should be brought under this rule, regulated as commercial banks subject to 100% reserve requirements. Credit cards would become debit cards. Banks would earn their profit by financial intermediation only — i.e. lending savers’ money for them (charging a loan rate higher than the rate paid to savings account depositors) and charging for checking, safekeeping, and other services. With 100% reserves every dollar loaned to a borrower would be a dollar previously saved by a depositor, re-establishing the classical balance between investment and abstinence. The government would pay some of its expenses by issuing more non interest-bearing fiat money in order to make up for the eliminated bank-created, interest-bearing money. However, it can only do this up to a strict limit imposed by inflation. If the government issues more money than the public voluntarily wants to hold, the public will trade it for goods, bidding the price level up. As soon as the price index begins to rise the government must print less, tax more, or withdraw some of the previously issued currency from circulation. Thus a policy of maintaining a constant price index would govern the internal value of the dollar (providing a trustworthy store of value and constant unit of account). In effect the fiat money would receive a real backing—not gold, but the basket of commodities in the price index. The external value of the dollar could be left to freely fluctuating exchange rates. These policies are not new—they go back to Frederick Soddy in1926, and to similar proposals by Frank Knight and Irving Fisher, the leading American economists of the 1920s. The fact that bankers and their friends in government and academia have willfully ignored these ideas for 90 years does not constitute a refutation of them, but rather is a tribute to the power of vested interests over the common good.

How would the 100% reserve system serve the steady state economy?

First, as just mentioned it would restrict borrowing for new investment to existing savings, greatly reducing speculative growth ventures—for example the leveraging of stock purchases with huge amounts of borrowed money would be severely limited.

Second, the fact that money no longer has to grow to pay back the principal plus the interest required by the loan responsible for the money’s very existence lowers the general pressure to grow. Money becomes neutral with respect to growth rather than biasing the system toward growth.

Third, the financial sector will no longer be able to capture such a large share of the nation’s wealth, leaving more available for meeting the needs of the poor. A steady state economy is not viable if it means a steady state of poverty for any significant proportion of the population.

Fourth, the money supply would no longer expand during a boom, when banks like to loan lots of money, and contract during a recession, when banks try to collect outstanding debts, thereby reinforcing the cyclical tendency of the economy. Reducing the risk of recession reduces the need to accumulate more to get us through the bad times.

Fifth, with 100% reserves there is no danger of a run on the bank leading to failure, and the FDIC could be abolished, along with its consequent moral hazard.

Sixth, the explicit policy of a constant price index would reduce fears of inflation and the resultant quest to accumulate more as a protection against inflation.

Seventh, a regime of fluctuating exchange rates automatically balances international trade accounts, eliminating big international surpluses and deficits. US consumption growth would be reduced without its deficit; Chinese production growth would be reduced without its surplus. By making balance-of-payments lending unnecessary, fluctuating exchange rates would greatly shrink the role of the IMF and its “conditionalities.” It also introduces more short-term risk and uncertainty into both international trade and investment. Many economists would see this as a disadvantage, but steady state economics favors a greater degree of national production for national consumption, and fluctuating rates would offer a bit of protection in the form of adding an extra element of cost (exchange rate risk) to international transactions. Like the Tobin tax it “throws a bit of sand into the gears” and reduces global commerce and interdependence to a more manageable level.

To dismiss such sound policies as “extreme” in the face of the demonstrated fraudulence of our current financial system is quite absurd. The idea is not to nationalize banks, but to nationalize money, which is a natural public utility in the first place. This monetary system makes sense independently of one’s views on the steady state economy. But it fits better in a steady state economy than in a growth economy.”