Full reserve banking is based on a very simple and widely accepted principle.

That principle is that it is not the job of government, i.e. taxpayers, to support any employer, industry or corporation unless there are clear social reasons for doing so.

In contrast, under the existing bank system, banks are very much supported by government. As Martin Wolf, chief economics commentator at the Financial Times put it, “Banks are part of the state, effectively. And bankers are simply the most highly paid civil servants we have.”

Or as Warren Mosler (founder of Modern Monetary Theory) put it, “banks are public/private partnerships.”

For example, bank depositors are insured by an artificially powerful insurer (i.e. government) via deposit insurance, not to mention hundred billion dollar bail outs for banks during a bank crisis.

As for the excuses commonly offered for government support for banks, a popular one is that such support results in more lending to employers and thus more investment. But if that argument is valid, why don’t advocates of the latter argument also propose government support for other ways in which employers and corporations borrow? For example corporations borrow via bonds: why no “deposit insurance” for bond holders? And what about shareholders?

Plus many firms borrow via trade credit. Why don’t we subsidise trade creditors?

Indeed a two month term account at a bank for example is basically just the same as a bond issued by a corporation which has two months to run before maturity.

Moreover, the argument that X, Y or Z results in more investment, ergo X, Y or Z must be beneficial just won’t wash, unless some very clear reasons are provided for thinking there is a less than optimum amount of investment.

To illustrate is widely accepted that the viability of the UK’s multi billion new HS2 rail line is highly questionable. Thus it is far from clear that the amount of investment in sub-optimal in the UK. If HS2 is any guide, the amount of investment may even be excessive.


No bank subsidies under full reserve.

Under full reserve banking, the bank industry is split in two. One half lends on depositors’ money, (where depositors want that option), but there is no deposit insurance: i.e. if silly loans are made, then depositor / investors take a hit, just like they do when investing in stock exchange quoted shares or mutual funds / unit trusts, or a private pension scheme.

As for depositors who want total safety, their money is lodged at the central bank where it will earn little or no interest. But there is no reason for that system or facility not to be run on a commercial basis: that is, it would be perfectly legitimate for central banks (and commercial banks) to charge customers for all costs involve in that service.

In short, under full reserve banking there are no subsidies for banks, nor anything that could even be construed as a subsidy.


Do central banks exploit their monopoly position?

An argument sometimes put by advocates of free banking is that a system where the only form of money is state issued money is also in effect subsidised because of the monopoly powers of the state or central bank.

Well the first answer to that is that one of the main objections to monopolies, if not the main objection, is that individual people, mainly the rich, pocket the profits from monopolies. In contrast, in the case of central banks, its profits are remitted to the treasury each year and are thus in effect dispersed among the population as a whole. So that objection to the alleged monopoly powers of central banks falls flat on its face.

A second flaw in the “monopoly” accusation against full reserve is the point that monopolies distort prices: i.e. they result in a set of prices which do not maximise GDP.

Well there’s a slight problem with that argument, namely that the costs of issuing central bank money (base money) are essentially zero. As Milton Friedman put it,"It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances."


A third problem is thus. The idea that the free market left to its own devices gets us out of recessions within a reasonable time is nonsense, as Keynes explained. Ergo there has to be a way of letting government implement stimulus in a recession. And quite apart from economics, the idea that it would be politically possible for a government to just sit on its hands come a recession and say "we're leaving this problem to market forces" is straight out of la-la land.

Now how do governments and central banks implement stimulus? Well one option is to simply create new money and spend it (and/or cut taxes), which is actually what several large countries have done in recent years in a  round about way. To be exact, they have implemented what might be called "traditional fiscal stimulus" (i.e. government borrows $X, spends it and gives $X worth of bonds to lenders) and then had their central banks create $X of new base money and buy back those bonds. And that all nets out to "government (along with its central bank) creates / prints money and spends it, or cuts taxes.

Another option is to cut interest rates, but that's done by having the central bank create money and buy back government debt. All in all, there is just no realistic way of disposing of "government created money" / base money, or whatever you want to call it..