Positive Money says Sovereign Money and full reserve banking are not the same.

That’s in an article of theirs entitled “Setting the record straight: Sovereign Money is not Full-Reserve Banking.”
 
Unfortunately the article fails in its basic objective, i.e. to show how or why there is actually any difference between FRB and SM.

The article says “Sovereign Money proposals are often mentioned alongside FRB proposals. And they do indeed have a same goal; that is to stop banks creating money in the process of making loans (or buying assets).” (FRB is short for “full reserve banking”).

But the next paragraph says “In the case of FRB it is done by forcing banks to hold reserves against their deposits. As the Bundesbank correctly notes, this doesn’t necessarily stop banks creating money – that is, it is quite possible for there to be money creation by the banking sector with 100% reserves.”

Well in that case, according to Positive Money,  FRB fails in its basic objective, i.e. stopping money creation by commercial banks!

Well the first problem there is that numerous leading economists, including a clutch of Nobel laureates, have advocated FRB and precisely because (as the Postive Money article rightly suggests) they want to stop money creation by commercial banks. Those “leading economists” include Milton Friedman, James Tobin, Laurence Kotlikoff, Irving Fisher, to name just four. For a more complete list, see here.

So do we take it that those leading economists have all made a bit of a blunder and advocated a system which is supposed to achieve an objective, but which in fact fails to achieve that objective? I think not.

The second problem concerns the Bundesbank’s claim that FRB “doesn’t necessarily stop banks creating money”. Well it’s true that under FRB there are no auditors or bureaucrats breathing down the necks of every bank employee in the country every hour of the day, thus it certainly would be possible for a bank to create some money for a while under FRB. However, under FRB, as under the existing system, banks do get audited. And one of the jobs of auditors under FRB (a very simple job in principle) would be to add up the total of all deposits at a bank and see whether that tied up with reserves held by the bank at the central bank. If it turned out that deposits significantly exceeded reserves, then it would clear that the bank had been creating money, and to make FRB work, a penalty would be payable by the bank large enough to ensure the bank did not disobey the rules again any time soon.

The Positive Money article then says “Our Sovereign Money proposal, on the other hand, does not suffer from this problem. Instead of backing deposits with reserves, we give people access to the state-created means of payment itself.” Well PM’s SM proposal quite clearly does not necessarily do that: that is, SM does not necessarily involve everyone being allowed to have an account at the central bank. Indeed, PM article itself says as much!

That is, the article says “….we would contract with the banks and/or other financial technology companies to administer our accounts for us”. In other words under full reserve / Sovereign Money (as is explained in other PM literature) instead of everyone having an account at the central bank, they could continue with accounts at their existing commercial banks, with the total amount of money deposited at each commercial bank being deposited at the central bank at the end of each working day.


Conclusion.

I’m not much impressed by this article. So I will continue to regard full reserve banking and Sovereign Money as essentially the same thing.