Sunday, 14 February 2021

Dan Awrey backs full reserve banking.

Dan Awrey is a law professor at Cornell and has just published a paper entitled “Unbundling, Banking, Money and Payments”.

This paper is long (about 25,000 words) and very detailed: it has 300 references. I basically agree with it, but what is odd about this paper is that it essentially re-invents the wheel.

That is, the basic proposal is that everyone should have access to a bank account which is 100% backed by money at the central bank. But that’s what Irving Fisher proposed in the 1930s and what Milton Friedman advocated in his book “A Program for Monetary Stability” published in 1960 (see in particular Ch3 under the heading “Banking Reform”). Plus there are a good sixty other economists who back that idea: see here. (Awrey’s basic proposals start half way down his p51).

But Fisher is not mentioned in Awrey’s work, nor is Friedman’s advocacy of the “100%” idea. Nor did I spot any other above mentioned sixty, though quite possibly I missed one or two.

There are of course different ways of giving everyone the right to a “100% backed” account. One way is so called “Central Bank Digital Currency” where anyone can quite literally open an account at the central bank. Another possibility is to let any institution (not just existing banks) offer accounts which are 100% backed by money that those institutions have at the central bank. Awrey backs that option and Positive Money has advocated that option since its foundation about ten years ago. But again, like all other advocates of that system from years or decades ago, Positive Money is not mentioned by Awrey.

But clearly anything written by a law professor will have plenty of detail on the law that currently governs banks and on what changes to the law are needed to implement full reserve / 100% reserve.

Awrey seems to claim (though, to my mind, he is not very clear on this) that IN ADDITON to 100% accounts, banks should be allowed to continue their present practice of accepting deposits which are supposed to be totally safe, while at the same time, lending out money. See his para starting “Perhaps more than….” (p52). That is precisly what has led to hundreds of bank failures thru history: it involves banks having liabilties which are FIXED in value, and assets which can crash in value (when it turns out that a bank has made silly loans). Certainly Milton Friedman and Positive Money’s proposals do not allow the latter practice.

In contrast, I see nothing wrong (as I explained here) with a bank or other institution accepting savers’ money while lending out money and saying that the institution will TRY TO repay savers $X for every $X deposited. But there must be no ABSOLUTE GUARANTEE that saver / depositors will not lose money.  


  1. I would agree as long as everyone understands the risks. But deposit insurance has to go in that case. It might make banks a bot more wary of overextending their loans and also make depositors more alert and involved with what is happening to their money. That cannot be a bad thing for prudent banking.

    1. Agreed. Re "deposit insurance has to go", that of course is implicit (if not explicit) in Positive Money's "investment accounts".

  2. Hey, Dan Awrey here. Thanks for your interest in my paper! However, you seem to have missed a rather fundamental point: my proposal expressly does *not* apply to banks. It applies to firms that accept deposit-like liabilities that are not currently regulated as banks. Indeed, the reason why I don't mention the Fisher/Friedman/Chicago Plan/Positive Money literature is precisely to avoid this type of confusion. I hope my proposals, of which the 100% reserve requirement is only one, make more sense when viewed in this light!

    1. Dear Prof Awrey, I find your claim that your paper is not concerned with banks very bizarre. The words "bank" and "banking" appear over FIVE HUNDRED times in your paper..!!!


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