Monday, 29 July 2013

Full reserve, Positive Money style, would have ameliorated the Euro shambles.

To a large extent, the Euro shambles was caused by silly loans made by Euro banks as Mark Blyth points out. Where a bank makes silly loans under fractional reserve, a bank run tends to ensue. In contrast, under full reserve, there is not much point in bank creditors running.
To be exact, full reserve necessarily involves forcing depositors to choose between having their money lodged in a near 100% safe fashion, and in contrast, having their money loaned on by their bank, in which case the depositor carries the risk (or much of the risk), rather than taxpayers carrying the risk. That “forced choice” is explicitly advocated by Positive Money and others.
The latter “forced choice” can actually be imposed on banks without necessarily adopting full reserve lock stock and barrel. For example John Cochrane advocated “forced choice” in the Wall Street Journal recently without mentioning full reserve.
Thus it’s the forced choice that would actually have ameliorated the Euro shambles rather than full reserve as such. As to exactly why full reserve (which involves “forced choice”) would have ameliorated the Euro shambles, reasons are set out in an article by me on the Positive Money site.


  1. Having a credit risk free deposit system is not possible. Every deposit in the system is a claim on a loan in the system. Having banks not "loan on" deposits , as you say, doesn't change that.

  2. Ah yes, you are refering to Central Bank reserves. Those reserves also require loans to give them value. For example the Central Bank aquires a Bond and pays for it with reserves, which results in an asset and liabilaty pair the same way as commercial bank lending does.
    It depends on what you mean by full reserve and the purpose of it. I was looking at the system as a whole.

  3. Dinero,

    This blog system is behaving strangely. Your comments are being duplicated 5 to 10 times. Any problems your end?

    In the process of trying to rectify things, I’ve managed to delete about four comments. I might try to replace them later. Anyway, to answer your latest point:

    The idea that central bank issued money requires deposits of private bank money in order to give central bank money its value is a new one on me. Chartalists claim CB money derives its value from the fact that government accepts CB money in payments in taxes, and/or insists that tax can only by paid in CB money. That’s quite an incentive to get hold of CB money.

    Another factor given CB money its value is the declaration by government that only CB money is legal tender. Strikes me that those are both good points.

    I agree that in practice, CB money under current arrangements gets into the economy when the CB prints money and buys government debt. But that’s only because of the arrangement we have that is supposed to keep politicians away from the printing press.

    There are plenty of people and groups who think that arrangement is defective. I’m one. Milton Friedman and Warren Mosler advocated a system where there are no government bonds or debt. So in that scenario it would be impossible by definition for CB money to enter the economy via bond purchases by the CB. Also Positive Money, Prof. Richard Werner and the New Economics Foundation in their submission to Vickers advocated a system where CB and government simply create new money and spend it straight into the economy. See:

  4. Yes it is very difficult to put comments on your blog. I don't know why. I get no confirmation that he comment has been sent. I will see if this one comes up and if so I will not re send and look for the confimation in future.

  5. Yes blogger comment seem to be accepted erratically , Don’t know why.

    The reserves don't require deposits for their value they require assets, such a government bonds. The value in that case coming from the goods and services created by the tax payer.
    On the subject of the government having a special status and a source of debt free money. - If the government was free from the imperative to raise taxes in order repay its bonds and simply spent money without incurring debt, then there would be no measure of the consequences of that spending , good or bad. The fact that a tax base is required, and not harmed, is the objective yardstick by which Government activity is ultimately measured.


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