Fractional Reserves and Demand Deposits: Historical Evidence from an Unregulated Banking System
By Malavika Nair
This article appeared in the Summer 2013 issue of The Independent Review


Would banks operating under laissez faire adopt a 100 percent reserve ratio or a fractional-reserve rule that would allow them to affect the money supply? The Chettiar banking system in late-nineteenth-century India functioned without any government regulation, and there is strong evidence that its bankers kept fractional reserves on interest-bearing checking deposits (explicit debt contracts that were redeemable on demand), although their ability to affect the money supply was not very large.

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