Positive Money, a group of dynamic young economist in the UK, noting that the global financial crisis was a consequence of excessive money creation by commercial banks, have come up with a fairly ingenious solution, which they term full reserve banking. I would recommend that you take a look. The essence of the approach is to remove from commercial banks the powers of money creation and restrict this exclusively to the central banks. In other words bring the 1844 Bank Charter Act up to date!
An independent committee (like the UKs Monetary Policy Committee) would determine how much money should be created each year based on current and expected inflation rates. Importantly, they would look at both asset (e.g. house) and consumer price inflation. This money would be provided to the government to spend debt-free. They anticipate this would be in the region of 5-7% of GDP pa. This additional money would enable governments to lower taxes or increase spending.
Meanwhile banks would only be able to lend money they actually had, and only with the consent of the person who deposited the money. They would not be permitted to lend money from current or deposit accounts. There would be no need for deposit insurance and even if banks collapsed this would have no effect on deposits as these would be legally separate, owned by the depositor.
Those who wanted to earn interest on bank deposits could put the money in special 'investment accounts'. They would earn a higher return but at the risk of losing all their money. Banks would have a strong incentive to be financially sound as this would attract more investment deposits.
Seems like a brilliant system to me. The banks would hate it of course.
An independent committee (like the UKs Monetary Policy Committee) would determine how much money should be created each year based on current and expected inflation rates. Importantly, they would look at both asset (e.g. house) and consumer price inflation. This money would be provided to the government to spend debt-free. They anticipate this would be in the region of 5-7% of GDP pa. This additional money would enable governments to lower taxes or increase spending.
Meanwhile banks would only be able to lend money they actually had, and only with the consent of the person who deposited the money. They would not be permitted to lend money from current or deposit accounts. There would be no need for deposit insurance and even if banks collapsed this would have no effect on deposits as these would be legally separate, owned by the depositor.
Those who wanted to earn interest on bank deposits could put the money in special 'investment accounts'. They would earn a higher return but at the risk of losing all their money. Banks would have a strong incentive to be financially sound as this would attract more investment deposits.
Seems like a brilliant system to me. The banks would hate it of course.
Hi Anton, I reposted this in a group for the PPEists in my year at Oxford, because I thought this was very interesting. I hope you don't mind.
ReplyDeleteOf course not. Interestingly a recent paper from the IMF strongly supports the proposal. See
ReplyDeletehttp://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf