Our "fractional reserve" bank system is nonsense. We need full reserve.
The reason is simple.
Ralph Musgrave.
6. Even more hilarious is that when any other organisation makes that promise (e.g. stockbrokers, private pension schemes etc) they're prosecuted for fraud!!
7. The arrival of taxpayer backed deposit insurance in the mid 1900s and billion dollar bail outs for banks might seem to solve the problem. But if BANKS are protected by taxpayers, while other lenders are not, that equals preferential treatment for banks. (Other lenders include for example pension schemes which lend to corporations when they buy corporate bonds, and firms which allow customers an extended period before payment for goods is required).
8. Moreover, depositing money at a bank with a view to earning interest is no different to depositing money with a stock-broker with a view to earning interest or dividends in that both activities are a form of COMMERCE. And it is not the job of taxpayers to support commerce, absent very good social reasons for doing so.
9. In contrast, everyone has a right to a totally safe method of storing and transferring money, long as they aren’t into COMMERCE. That facility can be provided by central banks making accounts available to everyone, a facility which ALREADY pretty much exists in several countries in the form of state run savings banks, e.g. “National Savings and Investments” in the UK.
10. Another basic flaw in fractional reserve is that it enables private banks to create money out of thin air. Unfortunately they tend to create and lend out money like there's no tomorrow in a boom: which is exactly when extra stimulus is not needed. Then come a recession, they do the opposite: call in loans, which results in money being destroyed. Again, that's exactly what is not needed. (For verification of the fact that private banks create money out of thin air, see this Bank of England article.)
In contrast, under full reserve, where only the central bank creates money, it does so only when such extra money is needed, i.e. when stimulus is needed. Indeed it is not the least bit difficult to bring an economy up to capacity using central bank money alone: government and central bank simply need to create and spend the right amount of money into the economy.
11. Another nonsensical aspect of privately created money is that it is so unreliable that governments have to back it with taxpayer backed deposit insurance and multi billion dollar bank bail outs. But that being the case, is such money really "privately created" or is it publically created? To the extent that it is publically created, what's involved here is duplication of effort: that is two different forms of publically created money. First there is standard central bank money, and second there is the latter "private/public" money.
12. Ergo fractional reserve should be replaced with full reserve banking (aka “narrow banking”). Under full reserve, it’s impossible for banks to fail, and the above fraud and non-level playing field are disposed of.
13. If you're tempted to object to full reserve, I've probably already dealt with your objections: see section two of this book of mine which deals with about forty flawed objections to full reserve:
http://books.ksplibrary.org/978-605-2132-86-9/
14. And finally, if the advantages of full reserve are so obvious, why hasn't it been implemented? Well the answer is simple: as Milton Friedman explained, the present system suits what he called the "vested political interests" just fine. (See the end of the third last para of the preface of his book "A Program for Monetary Stability.")
Longer versions of the above article:
There's a longer version (about a thousand words) of that article. Article title: "Remove bank subsidies, and the existing fractional reserve system automatically becomes a full reserve bank system". See: https://ralphanomics.blogspot.com/2020/07/remove-bank-subsidies-and-existing_84.html Plus there's an even longer version (about three thousand words) in a journal. Article title: "Two Flaws in Fractional Reserve Banking". See: https://drive.google.com/file/d/1yuDcdiuaud8ionc6bWp5qzN7X7JjotCV/view |
|