Positive Money’s “Conversion Liability”

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This post arises from a flawed criticism of Positive Money made by Frances Coppola (FC). Details are thus.

FC claimed in an article a few years ago that in order to implement full reserve banking, a very large amount of money needs to be credited to the accounts of commercial banks in the books of the central bank, which is correct. (Article title: "Full reserve banking: the largest bank bailout in history.") She concluded from that that full reserve is therefore a large subsidy or “bailout” of commercial banks.

In fact that problem, unsurprisingly, was spotted by Ben Dyson (founder of Positive Money) in the book, “Modernising Money” he co-authored with Andrew Jackson (published in 2012). The solution advocated in Modernising Money (“Step 3”, Ch8, p.228) was for an equal amount of money to be given by commercial banks at some stage to the central bank. Thus there is no subsidy or bailout.

Since Modernising Money is out of print at the moment, I thought I’d reproduce the relevant passage from Ch8. So here it is (in green italics.)

“If removing the demand liabilities from bank balance sheets were the end of the process, then the UK banking sector in aggregate would have lost around £1,031bn of liabilities.  With their assets unchanged, this would have increased their collective net worth and shareholder equity by £1,041bn. This would represent a huge paper profit for banks and their shareholders. To negate this effect, we replace the old demand liability to customers with a new liability, the “Conversion Liability”, which is to the Bank of England. This means that the net worth and balance sheet of the banks is completely unchanged, as the aggregate balance sheet for the banking sector shows below. The asset side is also unchanged, as reserve accounts – deposits of banks at the Bank of England - have simply been converted into the new Operational Accounts, which are still held as an asset of the commercial bank.

This liability to the Bank of England would in effect be a charge, at face value, for the state-issued money that the Bank of England created to extinguish the bank’s demand liabilities to customers. The liability would be repayable to the Bank of England at a schedule that matches the maturity profile of the bank’s assets (i.e. as the bank’s loans to business and the public are gradually repaid, the bank will repay the Bank of England).”