Letter in the Financial Times.

 
 

I managed to persuade a few economists and one university chancellor to sign a letter to the FT opposing fractional reserve banking and advocating the alternative, i.e. full reserve (aka Vollgeld / Narrow banking / Sovereign Money). The letter was published yesterday.

The university chancellor is Bryan Gould (former UK politician) who is now patron of Positive Money New Zealand.

What the FT actually published was a shortened and somewhat altered version of the original, but they got most of the basic points in. The basic points in the original were as follows.

1. Fractional reserve is inherently risky because it involves banks in having assets (i.e. the loans they make) which can fall dramatically in value when it turns out they have made silly loans, which most banks do at some time in their life. Meanwhile, bank liabilities are FIXED in value in that they promise depositors that depositors will get back exactly what they deposited (maybe plus interest and maybe less back charges).

That has led to repeated bank failures for hundreds of years.

2. The arrival of taxpayer backed deposit insurance and multi billion dollar bail outs for banks in the mid 1900s was not a big improvement in that that luxury for banks is not enjoyed by other lenders, who in total lend about as much as banks. For example there are pension funds which lend to corporations when the buy corporate bonds.
 
3. Depositing money at a bank with a view to the bank earning a return for you is the same as depositing money with a stockbroker for the same purpose in that both activities are commercial in nature, and it is not the job of taxpayers to support commerce, absent very good social reasons for doing so.

4. As for the alleged merit of fractional reserve banks, namely that they create money / liquidity, unfortunately they do so in a pro cyclical manner, which means central banks and governments have to counteract that. Plus private banks are totally incapable of creating the huge amounts of extra money needed in crises like the present Covid crisis. Hence stripping private banks of their ability to create money (which is what full reserve involves) would do no harm, as Martin Wolf, chief economics commentator at the Financial Times argued.