Summary:
Banks charge for the ADMINISTRATION COSTS involved in the various services they
perform. When they charge interest, that simply reflects the fact that they
have to pay interest to their creditors (e.g. depositors).
_______
Let’s
assume a private bank sets up in a barter economy, and offers some wondrous new
stuff called “money” which disposes of the inefficiencies of barter.
Citizens
crowd into the bank, open accounts and offer collateral so as to enable their
accounts to be credited. And let’s assume initially that citizens only want
enough money for day to day transactions: i.e. no long term loans are involved.
Now
clearly the bank will charge for administration costs (e.g. checking up on the
value of collateral). But there is no reason for the bank to charge interest.
Interest
is a charge made by a lender for the pain or inconvenience of foregoing
consumption (i.e. saving) so that the borrower CAN CONSUME, or “spend”. And in
creating money out of thin air in our hypothetical economy, the bank has not
foregone consumption, so there is no reason to charge interest.
But
of course that’s not to say that if you get a loan just to give you enough for
day to day transactions from a bank in the UK in 2013 that you won’t be charged
what the bank CALLS interest. The point is that if the bank does its costings
properly (i.e. does not subsidise one type of customer paid for by excess
charges on other customers) then the bank won’t charge you REAL INTEREST.
Long
term loans.
Where
money is created just for day to day spending, no long term loan is involved:
the amount in each citizen’s bank account would bob up and down from one week
to the next, but that’s it.
In
contrast, there are long term loans. People don’t get loans just to sit a home
admiring their newly acquired pile of money: they get loans in order to spend,
i.e. consume the fruits of other peoples’ labour.
Now
the only way to induce anyone to abstain from consumption is for the bank to
offer interest to depositors. If interest is offered, then some people will
leave more in their bank accounts than they otherwise would. And clearly the
bank will have to pass that interest on to borrowers.
In
short the bank won’t charge interest simply for creating money. But it WILL
CHARGE long term borrowers interest, because for every £X of long term loan,
there has to be someone making a long term deposit (or a series of people
making longish term deposits).
Debt
free versus debt encumbered money.
The
above points have implications for the full reserve versus fractional reserve
argument.
Checking
up on the value of collateral involves a significant number of person hours,
plus they aren’t cheap person hours: the people who do it are skilled. In
contrast, the costs of producing central bank money in the form of physical
cash is roughly 1% of face value. As to central bank digital money, that costs
next to nothing to produce. So debt free digital money beats digital debt-money
when it comes to cost of production. And that’s a point in favour of full
reserve banking, though clearly there is much more to the full versus
fractional reserve argument than the latter point.
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