Tuesday, 9 March 2021

George Selgin supports full reserve banking, perhaps inadvertently.

George Selgin (GS) has been one of the more heavyweight and vociferous opponents of full reserve (aka 100% reserves) over the last ten years or so. But he now seems to support the the idea in a recent Tweet. The tweet (which you may need to scroll down to see) reads “I favor @DanAwrey's suggestion that FinTech payment service providers (not to be confused w/ Pass-Through Investment Intermediaries) be exempt from most bank regulatory requirements, provided they back customer deposits 100% w/ Fed Master Account balances.”

The above “Dan Awrey suggestion” is actually one which I dealt with on this blog recently: see here.

I probably wouldn’t have bothered commenting on GS’s above tweet had that been the ONLY instance of his backing full reserve. But it’s not the first time he has backed it – deliberately or inadvertently I’m not sure.

The REASON the above tweet amounts to support for full reserve is as follows.

First, full reserve consists of making totally safe bank accounts available to everyone, where those accounts are safe because either they are actually offered by the central bank and are run by the central bank. So called “Central Bank Digital Currency” is an example of that arrangement: an arrangement which looks like becoming a reality in China quite soon.

An alternative is to have commercial banks offer those sort of accounts, but ensure that for every dollar in such accounts, the commercial bank concerned has a dollar deposited at the central bank. Ben Dyson, founder of Positive Money advocated the latter option in his book “Modernising Money” and in later publications. 

Now an account at a fintech backed “100% with Fed Master Account balances” to quote GS’s tweet comes to exactly the same thing as the latter Dyson suggestion.

As for “available to everyone”, given that almost everyone has a smart phone, PC or similar, nowadays, then those fintech accounts are to all intents and purposes “available to everyone”.

Another important element of full reserve banking is that once anyone who wants a totally safe account of the above sort has one, there is then no point in having government (i.e. taxpayers) back accounts at private banks. And indeed GS has long advocated what he calls “free banking”: that’s a system where banks enjoy no state support and do anything they like as long as they obey the laws that other corporations have to obey, like the law of contract.

However, it could be argued that not everyone has a smart phone or PC, thus what GS is advocating is not EXACTLY the same as full reserve. But it's certainly very near.  


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