Wednesday, 17 September 2014

The removal of bank subsidies equals full reserve banking.

1. There is no justification for subsidising money lending (i.e. banks) any more than there is a reason to subsidise car production or any other commercial activity.
2. If all forms of taxpayer funded backing and subsidies for banks are removed, then all of those funding banks (shareholders, depositors, bondholders, etc) necessarily become shareholders, or shareholders of a sort. That is, they all stand to lose money if a bank goes seriously wrong.
3. That means that commercial banks are no longer a totally safe haven for money. But there is a perfectly legitimate demand for a totally safe method of storing money. Indeed such a method already exists in that anyone can store central bank issued notes (e.g. $100 bills) in a safe deposit box or under their mattress.
4. Ergo when all state backing for commercial banks is removed, the state should at the same time set up a totally safe method of storing money: effectively let every household and firm have an account at the central bank. That is clearly more efficient that safe deposit boxes, and safer than mattresses.
And that all amounts to full reserve banking.

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