 Hello, I'm Mark Thornton. Welcome to another episode of the Minor Issues podcast. The Fed has now increased its interest rate to above five percent, but that also means that the Fed is paying banks five percent on its three trillion dollars of reserves or about a hundred and fifty billion dollars in interest and and despite the regional bank debacle and all the problems in the economy, very little discussion has been on this minor issue of the Fed paying interest on bank reserves. It's become and it really always has been a big issue of monetary policy. Reserves are funds held against contingencies and banks naturally hold a lot of money against bad loans and against people coming in and withdrawing their deposits. Of course, what we've seen lately is runs on banks. Banks not having enough reserves to meet withdrawals and of course a lot of that has to do with the fact that they lent money during the Fed's more than decade-long policy of zero interest rates so that all rates in the economy including mortgage rates, bond rates, etc. were very low. But now that they've raised rates, that puts banks in quite a bind. Today, banks are not required to hold any reserves. So while historically reserve requirements might have been 10 percent or 5 percent of deposits mandated to be held on reserves, today there's zero required reserves. So all reserves today are paid about 5 percent so that that three trillion dollars of reserves earned banks about $150 billion in interest. Now of course as we discuss the Fed monetary policy and the internal structures of the Fed, it all seems like a lot of unnecessary complications, a kind of gigantic Rube Goldberg machine of unnecessary complications to achieve a very simple result. But in this case, it's a system, it's a Rube Goldberg machine system that doesn't work, that doesn't get the job done. Most Austrians agree with the idea that banks should hold 100 percent of all of their demand deposits or checkable deposits on reserve in the bank. Some Austrians believe that the legal system should enforce this requirement just as it does on warehouses of goods. Other Austrians believe that market competition in banking or free banking would lead to this result of 100 percent of all deposits being held in reserve and available for withdrawal. Now the great benefit of this policy, whether by law or through market competition, is that it would virtually eliminate bank runs of the type we're seeing today. Bank runs would be isolated only to criminal or fraudulent banks and would be few and far between. A second problem that this would eliminate is the basic banking problem of borrowing short-term in the form of demand deposits and lending long-term in the form of things like mortgages. A third thing that it would at least improve is that depositors who wish to have access to their funds but also wanted to earn an interest rate would be forced to basically put their money in money market mutual funds or something like that so that losses would be borne directly by the depositors themselves. So this system would require no regulation whatsoever. It would not require a federal reserve or any of the other federal financial regulators. Indeed, with this system combined with a gold standard, there would be no need for monetary policy by the government at all. So this would solve a lot of problems and it would take the decision making from a few government bureaucrats at the Fed and the federal government and sweep their powers away and rest that same power and authority in the individual decision making of 200 million Americans on a daily basis deciding what bank to put their funds into and whether to put them in demand deposits or possibly long-term certificates of deposit, bonds or money market mutual funds. Whether or not to have access to their funds directly and maybe pay some small fees or put their funds at risk longer term.