Tuesday, 21 January 2020

Full reserve banking has free banking in check mate.

Free banking, as the name implies, is a system where banks do pretty much what they want, plus there’s no deposit insurance or bailouts for banks which fail.

But at the same time (at least under some versions of free banking) people are free to stock up with central bank issued notes ( $ bills, £ notes, etc). Moreover, in the UK (and doubtless some other countries) people are free to deposit money at state run savings banks which invest only in base money and government debt (National Savings and Investments (NSI) in the case of the UK). Thus under the above versions of free banking, people would be free to have accounts at NSI type savings banks presumably. 

And stocking up on central bank bills / notes plus depositing at savings banks like NSI come to the same thing as the safe accounts offered under full reserve, where depositors’ money must be matched by base money at the central bank.

Now deposits at a free bank come to the same thing as the “Investment Accounts” advocated by Positive Money and similar accounts proposed by other advocates of full reserve banking. Those are accounts where deposited money is loaned on or invested, and depositors carry the risk, i.e. take a hit if silly loans or investments are made. For a list of advocates of full reserve, see article entitled “Some of the economists who oppose the right of private banks to create money out of thin air”.

Under stricter versions of free banking, there is no role for a central bank. However it is very hard to see why those who want complete safety for their money (or at least something as near complete safety as is possible in this world) should not have it.

Moreover, having a totally safe way of storing and transferring money strikes me as a basic human right.

It could be argued that a central bank’s ability to provide complete safety derives from the right of the central bank’s owner, i.e. government, to extract limitless amounts of money by force from taxpayers to make good any money lost by the central bank. However, there’s a weakness in that argument: under full reserve, the central bank (unlike commercial banks) does not take any risks with depositor’s money: that is, such money is not loaned on or invested.

Moreover, if there are in fact any risks involved in accounts at the central bank, it would be perfectly legitimate to charge depositors an insurance premium in respect of those risks.
Conclusion      The best form of free banking comes to the same thing as full reserve banking, thus advocates of free banking should give up and admit that full reserve banking has free banking in check mate.

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