Is 100% Reserve Banking Feasible?

The Icelandic Sovereign Money System Proposal has increased involvement inwards the possibility of 100% reserve banking. I am quite skeptical near 100% reserve banking, together with prefer the Canadian 0% reserve system. That said, I conduct hold non looked every bit good deeply at the details of diverse 100% banking concern reserve systems, such every bit the Icelandic proposal. In this article, I volition outline what I come across every bit potential problems alongside such a system.

The Proposals

Influenza A virus subtype H5N1 high grade summary of the key points of a 100%  reserve banking scheme is:

• The banking scheme is broken into 2 components, the rubber business office that takes deposits (which is "bank money"), together with the other element which undertakes lending to the individual sector.
• The rubber business office must concord reserves (deposits at the fundamental bank) or Treasury bills to describe of piece of work organisation human relationship for 100% of deposits. (In either case, these are fundamental authorities liabilities, together with they destination upwardly existence economically equivalent.)
• The lending element cannot bring deposits, lending is either funded alongside term deposits or equity.

For to a greater extent than details, I straight the reader to diverse proponents of 100% reserve banking:

• Monetary Reform: Influenza A virus subtype H5N1 Better Monetary System for Republic of Iceland (pdf).
• positivemoney.org (U.K.-based organisation, only has 17 sis organisations).
• Ralph Musgrave's spider web site which has a link to the pdf of his majority The Solution is Full Reserve/100% Reserve Banking (also available inwards paperback).

Criticisms From MMT Proponents

The next articles from supporters of Modern Monetary Theory betoken out flaws alongside 100% reserve banking.

• Bill Mitchell, Iceland's Sovereign Money Proposal - Part 1, together with Part 2.
• Neil Wilson, The Sovereign Money Illusion. 

My Concerns

I conduct hold non had fourth dimension to written report these proposals inwards detail. I uncertainty that I would conduct hold conclusions much dissimilar than Bill Mitchell together with Neil Wilson, only I desire to maintain an opened upwardly heed on the topic. The residuum of this article are high-level issues that I come across alongside the concept, only it may live that these issues are accounted for inside these suggested frameworks.

It Would Work, But...

As I explicate inwards the side past times side section, the entirely way a 100% reserve banking scheme would brand whatever departure is that non-bank finance ("the shadow banking system") would conduct hold to live basically eliminated (other than equity financing).  From what I conduct hold seen of these proposals, they conduct hold long complaints near the creation of coin past times banks, only tend to live soundless on non-bank finance.

If it was possible to clamp downwards on banking concern together with non-bank finance, the "financial accelerator" inside monetary capitalism would cease to exist. I follow the describe of piece of work organisation bike views of Hyman Minsky, together with it is rattling clear that debt-financed speculative financing of fixed investment is a major origin of economical instability. Since fixed investment is a major origin of describe of piece of work organisation sector profits (from the Kalecki Equation), it creates a self-fulfilling upward blast inwards the economy. Anything that clamps downwards on that positive feedback loop would stabilise the economy.

Since anything would exercise the job, the safest approach is to reform the existing scheme along lines of historical experience, rather than creating a completely untested system.In roughly cases, radical reforms are needed because at that topographic point are no historical precedents to render guidance, only inwards this case, nosotros conduct hold the lessons of the 1950s to examine.

If Non-Bank Finance Exists, It Will Replace Banks

If the non-bank fiscal sector is allowed to choke on operating inwards a fashion similar to the electrical flow environment, it volition force the hobbled banking scheme pretty much out of existence. The banks would conduct hold a regulatory together with upper-case missive of the alphabet burden that would brand them completely non-competitive.

The fact that deposits are "sticky" is i of the factors that makes the formal banking scheme relatively stable. This is implicitly recognised inwards credit analysis every bit good every bit regulatory norms. Being unable to utilisation deposits to finance the banking scheme eliminates i of import stabilising force.

Private Sector Will Work Around Tight Money

The British North American colonies (which subsequently merged to cast Canada inwards 1867) were somewhat indifferently managed from London. For most of the colonies, at that topographic point was a continuous shortage of copper coin (pennies together with half-pennies) which was needed for commerce, together with the colonial administrators did piddling to alleviate this shortage. The individual sector took matters into its ain hands, together with issued copper tokens.

In Lower Canada (which became Québec) had peculiarly shrewd shortages, together with the lineament of tokens declined. In 1837, the banks stopped accepting other tokens (except past times weight) together with they replaced them alongside their ain tokens. The pictured token on the left is an example, the Québec Bank One Penny/Deux sous "Habitant" banking concern token*. The banks were literally printing coin (or at to the lowest degree tokens), only this was welcomed every bit it replaced fifty-fifty to a greater extent than dubious forms of money.

This procedure of the creation of novel forms of coin is inevitable. If the authorities attempts to clamp downwards on the fiscal sector, non-financial firms volition honor agency to create coin substitutes inwards society to grease the wheels of commerce. 

This procedure of novel coin creation volition live pop together with volition live allowed to continue. Although someone who inherits wealth tin save roughly of it past times hoarding coin or gold, the reality is that you lot tin entirely create upwardly riches past times pursuing commerce. These ascent stars volition curvature the political environs inwards such a fashion together with then every bit to allow businesses to thrive. Therefore, no thing what rules are on the books, the individual sector volition honor a way to create money, together with politicians volition ratify those novel forms of coin during a crisis.

We Have Such Instruments, And We Do Not Use Them (Much)

We already conduct hold instruments that human action pretty much similar 100% reserve banking - Treasury mouth coin marketplace funds. And for roughly purposes, they are quite useful. But the reality is that the marketplace portion of such funds is non peculiarly large. The "revealed preference" of investors is that they would rather bring run a hazard to earn a small-scale yield spread over the Treasury mouth rate. Whether or non this is a skillful thought is irrelevant; the reality is that whatever reforms would live fighting against this economical force.

If We Abolish The Non-Bank Financial Sector, Where Do Existing Assets Go?

There is a skillful argue why the non-bank fiscal sector has grown together with then much: it matches the growth of fiscal assets. The increment inwards wealth inwards the middle classes has shown upwardly inwards pension fund together with insurance society fiscal assets. We conduct hold a created a policy environs that favours the create upwardly of these stocks of fiscal assets.

These assets conduct hold to live invested somewhere, together with the reality is that these investors conduct hold liabilities that tin entirely live matched to fixed income assets. If the non-bank fiscal sector disappears (outside of authorities bonds), this creates a serious work for these entities. Any reforms along these lines would also conduct hold to rebuild the entire pension system.

The Non-Guaranteed Parts Of Banks Will Remain That Way

I honor the belief that the authorities volition non bail out the non-guaranteed portion of the banking scheme to live quite amusing. We conduct hold decades of sense that shows that governments almost invariably swoop inwards to bail out the fiscal scheme rather than endure a depression. The latest illustration during the Financial Crisis was when the U.S. authorities guaranteed coin marketplace funds, which were always marketed every bit existence without a guarantee akin to deposit insurance.

* The habitant is the individual on the front end side of this token (not shown); this word is the origin of the chant "Go Habs Go!" i hears at Montréal Canadians games.

 (c) Brian Romanchuk 2015