I’m not sure what you mean. There are a lot of consequences . . . what aspect are you interested in?
Well the first that pops into my head is the inflationary potential. My son has it in his head (from this on-line video) that it is much worse. That the fractional reserve system sets up a situation that mandates increasing debt which can only be managed if you have perpetual growth. If growth stalls then, this video claims, collapse of the system occurs.
I can’t get the video link to work–my computer is old–but I’d be skeptical of any source that works from a premise that “debt is bad”. Debt is good–it allows people who have more than they need to trade resources with people (and businesses and governments) who need more than they have.
Fractional reserve banking does allow more “debt” (a.k.a. “investment”) to be created, because it allows lenders to have the same cake that borrowers eat. Lenders make their loan in the form of demand deposits, which are still money, and borrowers take out their loan in the form of money. Then borrowers spend the money, and the cycle repeats. It’s an essential lubricant of commerce. It hasn’t been terribly controversial at least since the early Nineteenth Century.
People do have more trouble paying off debt when growth stalls, but there is no reason this should lead to systemic collapse, with or without fractional reserves.
As for inflation, if you moved from no fractional reserves to fractional reserves, you probably would have inflation. Once a fractional reserve system is up and running, inflation results only if the reserve requirement is loosened. This gives the “authorities” (which may be private central banks, or as in the US since 1913, a government-run central bank) another monetary policy tool. In general, however, at least in the American experience, when the Fed has mismanaged the currency and allowed rampant inflation, they have done so by open-market monetary creation rather than by manipulation of reserve requirements.
At least according to Wikipedia, there’s really not that much leeway to manipulate reserve requirements anymore: they only exist for demand deposits (which appear to be a small fraction of the overall money supply).
So the US owns all this gold in Fort Knox that just sits there. Why don’t they sell it off?
It’s not all the US’s gold…and what is the US’s gold is the Federal Reserve. They don’t sell it off because that would pretty much negate the reason to HAVE a reserve.
-XT
It’s a lot of gold but it’s pretty small compared to the national economy. The United States owns a little over 8000 tons of gold (261,500,000 Troy Ounces). The gold market closed today at US$783.10 per ounce. So all of the gold the country owns is worth $204,781,000,000 rounded off to the nearest million (and making the very unrealistic assumption that dumping that much gold into the market would have no effect on its price). Two hundred billion dollars sounds like a lot, but to put it in perspective, it’s about four months operating expenses just for the Department of Defense.
It’s kind of a mystery to me how trusting in the value of shiny rocks is preferable to trusting in a well-regulated banking system and the productivity of the nation. If one must have a commodity-based economy, it should be a commodity of some use in a survival situation, like oil or food or fresh water or bullets or something.