A 500 word explanation as to why banks’ artificial privileges should be withdrawn.

1. Depositing money at a bank with a view to earning interest amounts to asking the bank to lend on your money, so that the bank itself can earn interest and pass some of it on to you. If the interest the bank earns is only enough to help cut the cost of running your account (i.e. no actual interest is credited to your account) you are still effectively asking or expecting the bank to lend on your money.

2. In doing that, you have entered into a commercial transaction, just as much as if you deposit money with a firm of stock-brokers or a unit trust or a mutual fund or a private pension scheme with a view to their lending on or investing your money.

3. But there is an obvious anomaly there, namely that those who have a bank lend on their money are protected by taxpayer backed deposit insurance and billion dollar bailouts if things go wrong at a bank, yet there is no such protection in the case of all the other above mentioned forms of lending. Indeed there are yet more forms of lending where no taxpayer funded protection is available: peer to peer lending and trade credit - (that’s where one firm supplies goods to another and gives the latter a longish period of grace before paying).

4. That is a blatant anomaly. It amounts to giving banks a privileged status, or what amounts to a subsidy for banks.

5. One obvious way of putting banks on a level playing field with respect to other lenders would be to offer the same privileges to all other types of lender. But there is no obvious reason why all forms of lending should be subsidised.

6. A better solution is to abolish taxpayer funded protection for banks, while retaining totally safe bank accounts for those who want them, where relevant money is simply deposited with government or the central bank, with depositors getting little or no interest. And there is no reason for that service to be provided for free: i.e. depositors should have to pay for relevant costs.

7. Indeed, the latter sort of accounts already exist, first in that anyone is free to stock up on state issued money (e.g. £10 notes or $100 bills) and store them in a safe deposit box or under their mattress. Plus in several countries there are state run savings banks (e.g. “National Savings and Investments” in the UK) where depositor’s money is simply deposited with government.

8. The latter sort of savings banks do not quite fit the bill in that most money deposited is loaned to government, which government then spends. But never mind: those savings banks are near to what is required. 

9. And what do you know? The above sort of arrangement where the only sort of totally safe bank accounts are run by the state, while those who want their money loaned out (i.e. who are into commerce) are on their own, is what is known as “full reserve” banking or “Sovereign Money”. 

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There is an expanded version of the above argument here.  Plus I have submitted a version of the latter (about 20% longer) to this conference due to take place in September.