Full reserve banking

Linked on our blogs with Meine Frage vom 28. Juni 2010, with Verleih und Rückzahlung von Krediten – meine Gretchenfrage, with About democracy and development, with Geld, Gier und Grössenwahn, with Edward Griffin’s view on the FED and its video: Creature From Jekyll Island, a second look at the FED, 42.15 min, with Confessions of an Economic Hit Man, with … and specially this publication, with and with It’s a strange system, and it’s not in our best interests.

Published on openEconomy, by Sylvia Rowley, 30 November 2010.

Banks make money. That’s their business. But should it be allowed? Right libertarians, greens and Islamists join in thinking not … //

… How to make money from nothing: 

In modern commercial banking, banks keep in reserve only a fraction of the money that we deposit with them, and lend out the rest over and over again. This is called fractional reserve banking. Prior to the crisis, on average, for every £1 of cash minted by the Bank of England, the banking system was able to create around £80 of new bank money (the numbers in your bank account]. As Martin Wolf, chief economics commentator at the FT says “The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending.”

Under this system, we can access our money whenever we want without having to pay for banking services or take risks. Even though the money we’ve deposited has been invested elsewhere, when we want our money back, we’ll be repaid. Banks benefit from lending most of this money out many times over – essentially creating new money and charging interest on it.

But what if the bank uses our money to invest in risky assets and loses the lot? To deal with this, the British government has a deposit insurance scheme, whereby the state guarantees that anybody who deposits money – up to £50,000 – in any eligible account will get it back even if a bank goes bust, taking away the risk to the customer.

This is not good news for the taxpayer, because as Mervyn King explained in a recent speech, the use of short-term debt (our bank deposits) to fund long term, risky investments makes banks “inherently fragile”. “Many [people] treat loans to banks as if they were riskless,” he says. “In isolation, this would be akin to a belief in alchemy – risk-free deposits can never be supported by long-term risky investments in isolation. To work, financial alchemy requires the implicit support of the tax payer.” In 2008-09 this taxpayer support amounted to £18.9 billion.

Boom and bust: … //

… The future of monetary reform:

Ben Curtis from Positive Money says that the campaign he and colleague Ben Dyson started two months ago will step up a gear over the coming year. “We’re trying to take the issue mainstream, to get media coverage, to reach out to the public through organisations such as the Federation of Student Islamic Societies, to work with more MPs, and to bend the ear of the Independent Commission on Banking,” he says.

So for now it looks like the unlikely union of leftwing, rightwing, green and Muslim interests is set to continue. This is vital, argues Curtis, if the banking lobby is to be countered.

“There’s no interest group working on the other side of the banks,” he says. “Banks are obviously going to lobby for whichever system enables them to make the highest amount of profit. There’s nobody representing society’s point of view so that’s what we’re here for, to make the best monetary system for people who use the money.” (full long text).

Comments are closed.