Tuesday, 5 June 2012

The principles on which banking should be based.

Principle No. 1: Access to a 100% safe bank account is a basic human right.

Principle No. 2: If an account is to be 100% safe, the relevant money cannot be invested or loaned on by the commercial bank concerned: the latter involves risk, and risk is not compatible with 100% safety. Or put another way, if the money in an allegedly 100% safe account IS LOANED ON or invested, then someone somewhere carries the risk and it’s the taxpayer: the depositor and the relevant bank profit at the expense of the taxpayer.

Principle No. 3: With the exception of the above semi-commercial 100% safe accounts, it is not the taxpayer’s job to subsidise commerce: that is commerce in general or the commercial activities of banks. Thus where money deposited in a bank IS LOANED ON or invested, the taxpayer is under no obligation to come to the rescue if it all goes wrong. In the same way, the taxpayer does not rescue those who act in a commercial manner by investing in the stock exchange.

Indeed it is a blatant absurdity that when a household invests in corporate bonds and the corporation goes bust, taxpayers do not reimburse the household, yet when the same household deposits money in a bank, which in turn lends to the same corporation, the household IS REIMBURSED if the bank also goes bust as a result.

Principle No 4: Since private sector banks are demonstrably incapable of supplying a country with a stable money supply without the taxpayer periodically coming to their rescue (during financial crashes, credit crunches, etc), a nation’s money supply is best provided only by its government and central bank. That is, full reserve is preferable to fractional reserve.

(A good 95% of money in circulation is currently provided by private banks rather than central banks.)

Principle No 5: As pointed out in a Financial Times front page lead story, commercial banks will use any old fraudulent or deceitful argument to prevent the above sort of restrictions on their activities. A common argument they cite is that restrictions on commercial bank activities impede economic growth, or will be deflationary.

The simple answer to that is that any government in combination with its central bank can provide stimulus whenever needed, and in whatever amount is needed to counteract any deflationary effect that comes from restricting commercial bank activities.



  1. Principle 1 needs to clarify "safe": not only safe in nominal terms, but also safe against inflation.

    Perhaps the government should run its own deposit bank - sort of instant access NS&I index-linked certificates? But I guess that would pull too much cash out of the economy.

  2. Are there loans in this economy? If so, how are they dispersed? Is it possible for a corporation to 'borrow' 100 million dollars?

    1. It’s a common misconception that loans are not possible under full reserve. As regards large loans to corporations, there’d be nothing to stop corporation offering their bonds for sale, as happens today. Re smaller loans, e.g. a household getting a mortgage from a bank, the only difference between fractional and full reserve is that under the latter, the bank has to have $X deposited with it before it can lend $X: i.e. it cannot create $X out of thin air.

      Even better (and with a view to restricting maturity transformation or “borrow short and lend long”) banks would have to have $X deposited with them for longish periods before lending $X for longish periods.

  3. loans are fully possibe in a full reserve. in order to give loans, banks will have to borrow from the reserve bank and pay interest to the reserve bank, then loan out.

  4. In the transition period to Full Reserve banking, what would be the effect on curent creditors? Would there be a way to feed the new money into the economy in a "fair" way?

    1. Re trade creditors, they stay just as they are. Re the creditors of banks (which for the most part are depositors), they’d have to decide whether to put their money into safe / instant access accounts, or altrnatively into investment accounts where they carry the risk if the underlying loans or investments go bad. I’ve expanded on that point here:


      Re whether new money can be fed into the economy in a “fair” way, there is no objective measure of fairness. We just decide what is fair via the democratic process, e.g. we vote to have X% of GDP allocated to public spending. So when new money is fed into the economy under full reserve, and the government of the day is to behave in a democratic way it would need to channel X% of new money to the public sector and the rest to the private sector, i.e. household pockets.

    2. Thanks! And I will read the link ASAP.
      I got sort of a similar understanding recently somewhere, I think when reading the new paper The Chicago Plan Revisited which is so good to see.
      Kind regards,


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