Monday, 8 February 2016

Former senior Barclays Bank executive pontificates on full reserve banking.

The individual concerned is Geoffrey Gardiner, former director of the Financial Services Division of Barclays Bank, and the article is here.

I could of course try to deal with Gardiner’s article in the comments after the article. But the relevant site is a University of Missouri - Kansas City site, which tends not to publish comments which are too critical. Universities nowadays, far from being havens of free speech and debate, are if anything, centres of bigotry: e.g. see here, here and here.

I’ve re-produced Gardiner’s article, which is quite short (700 words) and interspersed that with my own comments in green italics. Here goes. (Incidentally, there’s nothing wrong with the first third or so of the article).

Jurists have demonstrated that every right must have a corresponding duty, or it is worthless.

The same is true of financial assets: for every creditor there has to be a debtor.

Money is assignable debt. The debt should be negotiable, that is it can be transferred to another owner without reference to the knowledge of the debtor.

There are primary debt and secondary debt. An example of primary debt is when a borrower draws down a bank loan by making a payment to someone. That someone pays the money received into a bank account, thus creating the credit which finances the loan. New money has been created.

The new money can then circulate in either of two ways. It can be spent, which means the payee becomes the new holder, and the payee too can spend it. Thus new money can be spent over and over again until it gets used to repay a debt, when it ceases to exist.

Or the new money can also be lent on, creating secondary debt.

Although banks are said to create money by granting loans, really the bank is only a midwife: money is created by the borrowers.

It is possible to make sure that the only money created by primary debt is state debt.

To achieve it every one has to be a customer of the central bank and all his or her payments and receipts will be recorded there. The accounts are to be called ‘transaction accounts’. The central bank will not make loans to the public but only to the state. The state’s payments will become deposits in the transaction accounts of the members of the public who receive payments from the state.

As Positive Money (PM) literature explains, there is no need for “everyone” to be a “customer of the central bank”, although that’s certainly one option, an option which PM coincidentally has just recently started to advocate. It’s also an option advocated by William Hummel.

The other option is for existing commercial banks to act as AGENTS for the central bank: i.e. commercial banks offer customers totally safe accounts where money is only lodged at the central bank and/or invested in short term government debt (an option advocated by Milton Friedman). Money market mutual funds will soon be offering that sort of account in the US, incidentally.

Customers will be allowed to make transfers from their transaction accounts to commercial banks which will use them to make loans to people or businesses up to the limit of its deposits and no further. The bank will make a loan by transferring money from its own transaction account to the transaction account of the borrower. In its own books it will credit ‘transaction account’ with the amount of the loan and debit the account of the borrower, following normal bookkeeping principles of ‘debit value in’ and  ‘credit value out’. In the books of the central bank these transactions will of course be reversed.

Note. A transaction account at the central bank may never be overdrawn as that would be allowing the customer to create money.

The system of transaction accounts at the central bank will be used to keep track of the population. Every person will be allocated an account at birth and vital details will be recorded and updated. The records will include a record of the person’s genome. The bank will issue identity documents. The transaction account number will be the person’s identity and passport number, and also the number of his or her tax account. Transaction account statements will be sent automatically to the tax office, which will have the duty to debit it with all assessed taxes. Every immigrant or visitor to the country will get an account and give similar identity details.

Gosh: so the central bank will have records about everyone! Shock horror. I have news for Geoffrey Gardiner: the tax authorities, the police and other organs of the state already have VOLUMINOUS amounts of information about everyone. So nothing much changes there.

In any case, and to repeat, there is no need for everyone to have an account at the central bank in order for PM’s system (i.e. full reserve banking) to work.


Use of coins and banknotes will be discouraged and eventually banned so that every transaction a citizen makes will be visible to the security services.

The decline of physical cash is taking place anyway, in case Gardiner the so called “banker” hasn’t noticed. Moreover, numerous economists, apart from full reserve advocates and PM supporters are currently discussing the desirability of banning physical cash.

And not only that, but there is no need whatever to ban physical cash in order for full reserve banking to work. In fact ALL PHYSICAL CASH nowadays is central bank issued. To that extent advocates of full reserve banking have no big problem with physical cash.


Credit cards will be forbidden.

Total and complete nonsense. Under full reserve, (Milton Friedman’s version, Lawrence Kotlikoff’s version of PM’s version) the bank industry is split in two. On half accepts deposits which are designed to be as safe as is possible in this world: the relevant money is simply lodged at the central bank or put into government debt. The other half lends in a more risky fashion (to mortgagors, businesses, etc) but that is funded by equity or equity like liabilities, like bog standard corporate bonds. There is nothing to stop the second half making loans via credit cards.

To complete the total control of the credit supply, trade credit will be forbidden as will be bills of exchange and peer to peer lending.

Complete and total garbage: none of the various versions of full reserve advocate forbidding one firm to supply goods to another and not ask for payment for a month or two.

Unfortunately secondary lending probably cannot be stopped entirely and no doubt, as in all recorded history, the public will devise methods of creating credit instruments and therefore money.

Note that it will not be possible to finance all government expenditure for ever from creation of state money as the quantity of money in circulation would be so great that the currency would become worthless as has happened so often in the past. Therefore some taxation will be inevitable.

Of course the banking system will be far less flexible and in particular the inability to overdraw will annoy many citizens.

More drivel: there is no “inability to overdraw”. As the advocates of full reserve – Friedman, Kotlikoff, PM etc - make perfectly clear, borrowing IS PERMITTED under full reserve. But only from entities that are funded via equity or equity type liabilities.

1 comment:

  1. It is wilful misunderstanding,as you say an ex banker should know better,he really needs to read about his subject before he launches into embarassing ctitiques.


Post a comment.