The two economists are David Beckworth and Dan Awrey, and their “discussion” is entitled “Dan Awrey on Unbundling Banking, Payments and Money” published by Mercatus.
To be more accurate, Awrey is actually a law professor at Cornell who has launched forth on the subject of banking, money etc, and therein probably lies the problem. That is, and to illustrate, if the roles were reversed and a professor of economics launched forth on some legal issue, the hypothetical professor would be skating in thin ice.
I’ve actually pointed out the mistake that Awrey (and now Beckworth) make on this blog about a month ago. But A & B clearly haven’t got the message, so run through this again, concentrating on the more recent Mercatus publication.
The three roles of banks that need unbundling.
Awrey begins his explanation as to exactly what the different roles of banks that need unbundling under the title “Three Roles Banks Play in our Lives”. Unfortunately he only mentions TWO roles under that heading. At any rate, taking that section and the heading of the article, it’s pretty obvious that the three roles to be unbundled are lending, money creation and payments.
Now the latter unbundling is exactly what full reserve banking consists of (also called “Sovereign money”, “100% reserves” and “narrow banking”). That is, under the existing (fractional reserve) system, a bank creates money when it lends: that is, it credits the account of the borrower with $X, while telling depositors their money is still there and is safe. Ergo the money supply rises by $X.
In contast, under FULL RESERVE, a bank is not allowed to do that. If it wants to lend, it has to persuade a depositor to buy into a fund which lends, and the stake the depositor has in that fund is in the nature of equity, not money. I.e. the stake holder can lose money. Ergo there is no rise in the money supply.
As to how the money supply is actually increased under full reserve, that is done by government and central bank when the latter two think stimulus is in order. So under full reserve, lending and money creation are “unbundled”.
Now full reserve, i.e. the idea that banks should not be allowed to accept deposits at the same time as lending is a good 2,000 years old and arguably 3,000 years old according to an article by David Fuller, published by the Cobden Centre and entitled “100% Banking and Its Advocates: A Brief History.”
Of course banks two or three thousand years ago were arguably very different creatures to banks nowadays. But as Fuller shows, banks in some shape or form have been in existence constantly over the last three thousand years, and have constantly evolved, with full reserve certainly being discussed, if not actually implemented at some stages.
As for more recent advocates of full reserve who refer to “unbundling” or “separating” different bank functions, there are any number. For example this work from about ten years ago says “We believe that the banking sector would be more stable and robust under a full reserve banking model where the transaction function of banking, the payments system, is separate from the lending function.”
Or for another example, Irving Fisher in the 1930s advocated unbundling money creation and lending when he said, “We could leave the banks free, or at any rate far freer than they are now, to lend money as they pleased, provided we no longer allow them to manufacture the money which they lend” (His booklet, “100% Money and the Public Debt”).
But Dan Awrey and David Beckworth appear to be totally unaware of the history of the full reserve idea. Given that their Mercatus publication is about 8,000 words, you’d think just one sentence mentioning the history of the full reserve idea would be in order.
To be strictly accurate, A & B do mention “The Narrow Bank”, which was a recent attempt in the US to set up a bank whose assets consisted just of reserves at the Fed. That’s what might be called “half” of a full blown full reserve / narrow banking system. But the other half, i.e. forcing those who want their money loaned out to bear relevant risks is not included in the latter “The Narrow Bank” proposal, so I don’t count that as a full blown narrow banking / full reserve system.