The Emperor’s New Clothes: How to Pay off the National Debt & Give a 28.5% Tax Cut

I offer a £1,000 reward for anyone who can tell me why this logically won’t work, practical politics, for now, being another matter.

What follows is an attempt to show you that this can be done.

Remember the story about the Emperor whose only concern was not the welfare of his people but the state of his clothes?  Lacking a new outfit for his procession, he instructs the finest clothe-makers to propose designs.   Step forward Slimus and Slick, promising that only clever people will be able to see their splendiferous garments; they will be invisible to anyone stupid. In exchange for gold coin – real money – they make something special for the King. The King, seeing nothing when presented with these designs made out of thin air, worries that he must be stupid because he pretended to the fraudsters that they were wonderful. Word goes round that only clever people can see the garments, so everyone cheers the naked King during his procession.  It takes a small child, on top of his father’s shoulders, to exclaim: “the Emperor has got nothing on!” Everyone falls silent. Then, one by one, they start muttering, “the Emperor is naked!”

I am going to tell you that our Emperor – the government – has no clothes and is indeed naked with respect to our money. The sooner we realise this the better.  Then we can make real progress and prevent the imminent misery. Indeed, the realisation of its nakedness should reveal that we have a unique moment in history to do something very special: to make banking secure, pay off the national debt, and even enable a 28.5% income-tax cut.

We all know what notes and coins are: money, or cash.  It allows us to exchange the fruits of our work for the goods of others. When we deposit cash in Bank A – say £100 – we lend this money to the bank. This may come as a surprise to most, as we think what we deposit in a bank actually remains “ours” beyond this point.  But as soon as you make a deposit it becomes the bank’s i.e. “theirs.” They then lend what is called credit of £100 to an entrepreneur, who banks it in bank B. Like magic, we now have you, who have a claim to “your” £100, and the entrepreneur, who also has an equally valid claim to “his” £100. This happens 33 times for every £100 deposited in the UK economy on average, meaning that for every £100 deposited, it is lent out to 33 people. Some of the banks did this up to 60 times. This cash cannot exist in two places at the same time, let alone 60 places at once. So what bank A does, is write you an IOU. Yes, your bank-statement is a mere IOU, the bank saying “ bank A owes you £100 on demand.” This is called a demand-deposit. We now see that demand-deposits are created out of thin air! Indeed, these are just ledger-entries from one bank customer to another.

Tesco groceries can be paid by electronic transfer. All we are doing is moving our bank’s IOU to Tesco’s bank in exchange for their groceries. This is how the world works.  Do we care that we are buying goods and services out of thin air? Like the Emperor, does he care – as long as all believe he is clothed? Well, the customers of Northern Rock did. So when more than a small percentage of them asked for their IOUs from Northern Rock to be repaid – or, as they thought, for “their” money back – it could not be, as the bank had already lent it many times, making it impossible to reimburse all they owed. Indeed, if the government had not pledged to underwrite all deposits, then there would be a very good chance that the whole system would have collapsed.

If we accept that the Emperor is naked then the path to solving all our current financial problems becomes clearer.

Consider this following programme of reform:

  1. Print cash and replace all the demand-deposits/IOUs that exist in the system with that cash. This means the government printing approx £850 billion in cash and injecting it directly into the vaults of the banks and into the accounts of individuals. Thus, if you deposited £100 once thinking it was “yours,” it now really exists in cash, with the bank acting as custodian of your money.
  2. Mandate all banks to hold your cash (100% reserved) on demand at all times.
  3. Wipe from the bank ledgers all the demand-deposits/IOUs as banks would not owe you money anymore. This means the “thin air” money disappears, to be replaced exactly with cash money.  Note: this is not inflationary, as the cash replaces the demand-deposit which acted as money. As we have established, it is only thin-air that the banking system has created to facilitate the multiplicity of lending of the same bit of money, so its total replacement with cash would mean the money supply stays exactly the same.
  4. Require all banks to lend real savings that people knowingly place with banks to lend to businesses to get a return of interest and capital back when the business repays that loan. This is nice, simple and safe utility banking. This is what Mervyn King advocates.
  5. As you are not a creditor of the bank anymore, the banking system will only have its assets and its capital, i.e. no liabilities. This means that there never again could be a bank run.
  6. As for the banks, not having you the depositor as a liability anymore, they will suddenly be £850 billion better off, with no current liabilities and only assets (loans to business etc), post reform. The government can now put those assets into Mutuals, which would then immediately pay off the national debt, and leave the banks in exactly the same position net worth wise as they were prior to the reform, owned by their existing shareholders. As the national debt is still just under the £850 billion, which would be available as surplus assets of the banks, this could still be achieved.
  7. No national debt means no interest costs (currently £40 billion p.a) associated with paying for our borrowing. Therefore, give an immediate 28.5% income-tax cut. Total income-tax raised is £142 billion.

The boy in the story stood on his father’s shoulders. I stand on the shoulders of great men who have advocated part of this reform: Irving Fisher, the greatest American economist, the Nobel Prize winners Soddy, Hayek, Buchanan, Tobin, and Allais. Recently, Kotlikoff of Boston University has published an excellent book, “Jimmy Stewart is Dead” advocating a similar reform. It is endorsed by more Nobel Winners: Akerlof, Lucas, Fogel, Prescott, and Phelps. I count 36 endorsements from the great and the good for the book. All endorse Kotlikoff’s move to what he calls Limited Purpose Banking which is another way to get 100% reserved (i.e. secure) deposits backed by cash rather than thin-air.

The Economist Huerta De Soto, in “Money, Bank Credit & Economic Cycles,” has seen the opportunity that presents itself to reform for 100% money while also paying off the National Debt. Following on from this, I suggest a substantial wealth-creating tax cut for the people. Just like the boy in the story, I do hope that people start to realise that the emperor really has no clothes, and that an enlightened approach can address this.

463 Comments

  • stephen kirkham says:

    It seems the net effect is to print money to pay off the national debt. This is inflationary and this is the flaw in the argument. If you do not accept that patingin money to repay debt is inflationary then I dont think you will ever be paying out the £100.

    There is plenty of case history of governemtns trying to do this and causing (hyper-)inflation. see for example John Law.

    • To Stephen Kirkham

      Stephen it is a shame you have not understood why this is not inflationary.

      I wrote this to the Commentator Ellie, it may change your mind;

      “If you had a glass full of cash at the bottom 5 % and air for the remaining 95%, the glass is 100% full of cash and air right?
      If a full glass represents 100 money units, the total money supply is 100 money units.
      If we added 10 more money units to the glass to sit on top of the 5% cash and to sit on the 95% air (if it could) then 10 extra would go on the full glass. This would be a 10% money inflation as there would be 100 + 10 money units.
      If we went back to just 100 money units of which 5 we call cash and 95 we call thin air, if we take the 95 out of the glass and “bin them” and replace with 95 money units of cash, we still have 100 money units. No inflation possible. One type of money has been converted into another type.
      I hope this is clear.”

      Perhaps if you have time to re read this article with this understanding in mind, it may well appeal to you in another way.

      By the way, John Law was a murderer, financial con man, inflationist and great inspiration for J M Keynes. I stand against everything he stood for.

  • Tim Lucas says:

    Dear Toby,

    I think that you have accurately described a method by which a transition to a 100% reserved banking system may be made. While I think that this would likely be a very good thing in the long run, it is worth examining the short-run implications of such a transition. The change in the price structure following a transition is the principle problem I think.

    Currently, assets in the UK are priced on the assumption that there be an ever-expanding growth in credit. As such, interest rates are currently far beneath where they would otherwise be following the transition to your system. The reason for this is that under your system only savings would fund demand for cash, rather than savings + credit expansion. This is the reason that houses are still 6x average income etc.

    Upon transition to a fully-reserved system, the market interest rate would increase, the value of assets would drop, and – quite conceivably – the residual assets in the banking system would not cover the national debt.

    The only way in which the central bank could maintain interest rates where they are currently (and thus preserve the current structure of prices) would be to fix interest rates at their current low-level (which is only possible through printing more money, which is – of course – inflationary….overseas bond holders would require an additional premium for this and so if this course of action were followed , then interest rates would rise/pound drop etc).

    Although your suggestion is likely the best method of transition to a fully-reserved system, it would still be very painful.

    Our problem is a lack of capital! An extended period of low interest rates has meant that we have been consuming capital. A lack of capital implies that high interest rates will ensue once credit expansion is removed, as there will be a surfeit of borrowers and not enough savers.

    • To Tim Lucas:

      Tim, I agree with the thrust of everything you say.

      I would like to point out that by doing this reform; we make a money deflation impossible.

      What I see is that once enacted, businesses that were marginal would not get real saved resources and would ultimately go bust freeing up capital for better wealth creators to create wealth with.

      The interest rate is the reflection of the time preferences of people. I said to another commentator here something that might be worth repeating;

      “1. Human beings act.
      2. Humans act purposively. If they tried not to, they would be acting with purpose. This is the starting axiom of economics for the great teacher of Hayek, L von Mises.
      3. We all act to satisfy our most urgent needs; indeed we rank these and do the most urgent things first.
      4. We demand present goods now more than we do in the future. There is thus a spread between what we are prepared to pay now today for our present goods and what were are prepared to pay for future goods.
      5. Each one of us has a different time preference for jam now or jam tomorrow.
      6. I may have accumulated many goods, and have surplus money or purchasing power to have command over more goods that I do not need now, so I lend them to someone like you who has a thirsty time preference to buy a house to have now in exchange for that purchasing power and interest back (more purchasing power) at a later date.
      7. This spread between goods now or people savings for goods later IS the interest rate.
      8. The money market rate is one part, the most obvious part of what the interest rate is.
      9. I as an entrepreneur offer my current goods, meat and fish in exchange for money as we all offer what we do for money, the profit being the interest for which I do this and everyone else does.
      10. The rate of profit in society is interest.

      So if we have a base rate of 0.5% and inflation at 5.3% as we have today (RPI) then we have negative real money rates of interest. This would seem to reverse the logic of above!!! This means people are happy to put money away today, forgo consumption now and get back less later!

      Continuing a policy as daft as this will encourage less lending and more consumption only. This is the perversity of letting a government decide what an interest rate is.
      The reality is the money rate should approximate to the rate of profit in society. Better still, with no money deflation or money inflation; finally we may well be able to get government out of doing things like setting the money rate of interest. As you say you are a free marketer, you will be against the state planning of the money supply and its attempts to control the rate of time preference (interest) in society. Yes, interest rates will rise and more money will be available for lending and society’s average rate of profit, or the natural rate of interest.”

      So Tim, I do see a adjustment period in which interest rates will go up which will mean that those currently supported by the welfare state of credit will go bust, on the flip side there is more money available to support real business that is not based on bubble activity.

      I believe this banking reform proposal will be a correction in a much more orderly fashion than a wild cat style naked money deflation or a Sovereign debt default that we are heading to or the at best scenario which seems to be very high inflation.

      Take your pick Tim as to which one you like for the short term!

      Thank you for your very helpful and stimulating comments.

      • Tim Lucas says:

        Thank you for the detailed and courteous answer to my email, Toby. I agree all that you say and would like very much to see your suggestion come to pass. My comment about the short term consequences of such an action were not intended to be a criticism but rather an illustration that enaction of your proposal would not be painless. It feels only fair to warn that in order to get to paradise it may be necessary to walk across some hot coals and that these coals will be hotter for some than for others.

        What a good idea it was to make the offer of £1000 for a winning answer. I am continually exasperated by the number of people who have absolutely zero interest when I wax lyrical about Austrian economics, and its particular relevance today. These are THE SAME people who are interested in politics, investment, etc. It must be my fault. All power to you!!

        • Afternoon Tim,

          Thank you for your kinds words. Your words of caution are fine. If you want to write anyhting for our site on Austrian / Liberal matters , please feel free to submit, we need to be continually appealing to our political / investment friends who seem to have no or little understanding of economics. Watch this space for events as we are picking up some momentun now as well.

  • Dan M says:

    Apologies if this has already been covered, I haven’t had time to read all the posts.

    A full reserve banking system with a fixed money supply would result in deflation as the economy grows. Although this wouldn’t cause a problem if prices can be adjusted to suit, some prices such as wages are ‘sticky’ and this could have deleterious consequences and high adjustment costs.

    • To Dan M

      Dan, thank you for your comments.

      Of course this is a very debateable point both you and I could not give a definitive answer.

      However I draw comfort from the fact that during the 19th Century we opened the century with very similar prices to that which we closed the Century with. During this period we had the whole of the industrial revolution and the massive expansion of the British Empire which was a trading Empire first and foremost.

  • Anzon says:

    The main reason it won’t be adopted (I don’t have the knowledge to say whether it could or couldn’t work) is the main thrust of Bishop’s 1st Law:
    “The ability to change is inversely proportional to the cumulative spend.”

  • Tony says:

    Toby

    I posted comments before at 15.05 20th May. You kindly said I had added to the how the plan would work! I also explained why the plan would not work but you did not seem to understand my argument.

    Before dealing with the problem in your plan let’s be clear what I am disagreeing with in the plan:

    I do not have any disagreement that the plan could be used to create a “real money” banking system. I believe there are significant practical problems with the plan and I do not believe a “real money” system would work. But I agree in theory the plan would work in this respect.
    The issue in the plan which is completely incorrect is the statement that the Government can use the excess funds to pay off the national debt thereby saving £40bn which would allow a significant tax cut.
    I can see where you are going wrong from your response to my posting. In your response you say:
    “Your options in your 1 and 2 I think fall away if you understand that when the government prints new cash it does not create any liability at all on itself or us as taxpayers. “
    This conclusion is fundamentally flawed.
    To understand I am afraid you will need to understand “what is money”. This always sounds an easy question but is actually one of the most difficult concepts in economics.
    Can I suggest?
    The old favourite Adam Smith Wealth of Nations Chapter 5 and while I normally hate wiki links in this case this is a useful article:
    http://en.wikipedia.org/wiki/Store_of_value
    I hope these can help you to understand that money in a system is a medium of exchange. The money on its own has no value what gives it value is the ability to exchange it for a good or service (let call this Value).
    I know this can be difficult to grasp but it is at the root of all economic theory. So you need to understand when we describe the pound as the monetary unit of the UK we are not referring to a note or coin but to a concept of Value. The pound is not a physical asset it a measurement of Value.
    So a £5 note is not £5 of Value it is a physical promise by the issuer to pay £5 of Value to the holder. We may knock the “I promise to pay” on the note but that’s what it is.
    Before the removal of the gold standard it was of cause a real promise to exchange gold for the note. If this was still the case it’s easy to understand the flaw in the plan since the amount of gold physically limits the notes in issue. If you issue more notes there value against gold must fall leading to a fall in the value of the currency against gold and by definition other currencies.
    When central banks came off the gold standard they lost this physical constraint but the economics are unchanged. A note or a coin does not have value it just represents Value.
    This is why when currencies left the gold standard it was necessary to limit those who could issue notes and coins. Only by limiting who can issue them and by limiting the amount in issue do you preserve this illusion that the notes and coins represent Value.
    Therefore the 850Bn of pound printed by the Government is not value unless the holder believe that the issuer will exchange the paper for Value.
    So unless the new 850Bn of notes creates an obligation on the issuer in this case the Government and therefore the tax payer to be prepared to exchange them for £850Bn of Value. They are just a very big pile of paper.
    I hope this explains your error in this aspect of my plan. You can contact me regarding the £1,000. Or since I only proved half the plan was wrong I will accept £500.

    • Current says:

      Tony,

      Though I disagree with some of what you wrote, you are right about one critical thing. Creating money creates no new wealth.

      The real burden of the national debt cannot be eliminated. All that can be changed is how that real burden falls.

      Monetary reforms though may assist by making entrepreneurial calculations more accurate. They may prevent the distortion of prices by inflation.

      • Yes Current, that is right, post reform the burden will be on the Mutuals to pay off the debt when they get loan repayments from business assets that they own.

    • To Tony

      Tony , I have written a co authored paper on What is Money which was in its original forms (has been updated with new data since) one of the top ten most downloaded papers on the Social Science Research Network.

      Here is the link. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1416922

      I can assure you I make no error and you may do well to update your thinking. Money is a commodity which is the final good for which all things exchange. It is the most marketable of all commodities hence it is chosen. It has its value because it could buy something the day before. This is summed up in the Regression Theorem of Money by Mises.

      You say

      “Therefore the 850Bn of pound printed by the Government is not value unless the holder believe that the issuer will exchange the paper for Value.”

      If the paper exchanges for goods and services it is money and it has value.

      As I propose no new increase in money, this value still stays the same. This is the point you miss. This is what I said to the commentator Ellie on the matter last night.

      “If you had a glass full of cash at the bottom 5 % and air for the remaining 95%, the glass is 100% full of cash and air right?

      If a full glass represents 100 money units, the total money supply is 100 money units.

      If we added 10 more money units to the glass to sit on top of the 5% cash and to sit on the 95% air (if it could) then 10 extra would go on the full glass. This would be a 10% money inflation as there would be 100 + 10 money units.

      If we went back to just 100 money units of which 5 we call cash and 95 we call thin air, if we take the 95 out of the glass and “bin them” and replace with 95 money units of cash, we still have 100 money units. No inflation possible. One type of money has been converted into another type.

      I hope this is clear.”

      “So unless the new 850Bn of notes creates an obligation on the issuer in this case the Government and therefore the tax payer to be prepared to exchange them for £850Bn of Value. They are just a very big pile of paper.
      I hope this explains your error in this aspect of my plan. You can contact me regarding the £1,000. Or since I only proved half the plan was wrong I will accept £500.”

      I hope you can see your error. Sorry Tony, no money for you. However I would like to thank you for raising the standard of the debate, you clearly have a keen understanding of economics.

  • TomSki says:

    Sorry if this has already been answered (should really read through all the comments I know, but am supposed to be working…) – Isn’t the problem that once the new system is in place the multiplier effect of credit will disappear and therefore economic growth with it?

    On a side note my personal pet theory for ‘saving the world’ from the credit crunch was rather than buying toxic assets through quantative easing it would be a better idea to give every individual £x into their private bank accounts (with a time limit on withdrawals) and therefore boost the banks’ capital balances and restore their credit making abilities. No doubt inflation would be its downfall though…

    • Current says:

      Economic growth doesn’t rely on any “multiplier effect of credit”.

      Investment and savings can still continue under the scheme, though in different forms – through equity and bond ownership.

    • Tomski

      Lending takes place as it does today via timed deposits.

      If money supply is fixed as per the reform, as more productivity takes place, good price deflation (think computer prices) sets in and the purchasing power of money goes up.

      Economic progress. Not the end of it, but the very start of it on solid foundations.

      Thank you for taking the time to enter the debate.

  • Rob Havard says:

    I still can’t get my head round the deflationary aspect of this – and to be clear I’m not that worried about deflation either.

    Although I accept their wont be a reduction in the money supply from your proposal immediately there is bound to be over the course of the following year/s a reduction in the types of people/businesses supported with credit. The whole point of this is to prevent/reverse malinvestment and so malinvested money will not be RE-offered to underserving businesses or near insolvent borrowers. Credit will be more expensive and its allocation more discerning. This re-alocation of capital will be a good thing but it will still mean that captial flows away from bad investments. I think you might agree that there are many bad investments/businesses suported by the current banking/credit system. Many of these busineses employ people who have mortgages to pay – they will lose their jobs. How quickly will they be able to re-train so that their capital (in the form of labour) can be re-allocated more efficiently?

    I repeat that I don’t think this is a bad thing, just that it it will happen.

    I also think that it would be better to get a short, sharp re-adjustment (a la Rothbard) than to use some mechanism to draw out the process.

    I think the greatest risk to the 100% reserve system is when we start to tinker with the system, to plan and to trust the interventions of men over those of the market. What follows the thin end of the wedge?

    • To Rob Havard

      I have MUCH sympathy with what you say.

      However, the system is so unstable, just think; one bank going bust on September the 15th 2008 can send the world into economic collapse. One small European country that is only 2% of the Euro economy can make telephone calls from the White House happen to European leaders saying “bail out or we will all collapse again.” This is a staggeringly unstable system.

      Make the system solid. Do the reform.

      Then as you say, no bank created credit to support bubble business and you will soon find the bubble ones going under, but not system wide collapse.

      As this is happening, purchasing power is going up as real non bubble business have more command over the same resources to now do more things aka the recovery.

      Do a naked Rothbard style deflation and the whole system, like a Zombie you thought you killed, wakes up again, and again to wreak havoc. Kill the Zombie once and for all.

      • To Toby, I agree with the need for your reform.

        However, first we kill the zombie and then apply the new rules.

        In your proposal instead of buriing the killed zombie you are gold-plating the corpse and incorporating it as an exchange unit.

        Nice way to hide a zombie corpse in plane view!

        • I meant plain view – forgive my English – not a native speaker.

        • To Ellie,

          The rate we are going we will kill it via our own stupidity with a sovereign debt default. If this happens, then the Zombie is dead if this reform is done. I would accept that. I would rather avoid a debt default and all the pain that will cause many people and would kill it now.

          Both views are valid, you fall on the side of kill post deflation, I say kill now and avoid a money deflation.

          I am glad to note we both want to kill the system.

          • !!!!! To make the swap you have to close every demand deposit that is covered with the new cash!!!!

            If you have the cash in the vault and the demand deposit in the books you are just doubling the money supply in the bank.

            So the new cash has to be handed out physically to the people who deposited the money and the account has to be closed.

          • Actually the demand deposits have to be closed with cash other than the new one.

            Because you have to have one unit of closed demand deposit to swap for one unit of new cash.

            But if you close them with another cash than you don’t need the new cash anyway.

            There you go.

            Is this flawed enough for 1000 UK thin air money supply units?

  • Anzon says:

    I own £100 worth of value which is represented by a piece of authorised paper and I lend it to a friend who then lends it to his friend. Note that in this circumstance there is only one piece of paper and although it has been passed-on through my friend to a second party it still has only one ‘owner’.
    If I ask my friend for the return of my piece of paper he cannot fulfil my request without making a similar request to his friend. If we eliminate ‘Emporer’ paper (IOUs) then surely the underlying premise is that ‘borrowing’ can no longer be part of the financial structure. Money could only be obtained through wealth-creation or by the act of ‘giving’.
    With my limited knowledge it seems to me that if the principle of ‘borrowing’ is outlawed then the wheels of the machine will grind too slowly to be practical.

    • Current says:

      Toby is only proposing to limit borrowing through demand deposits. Borrowing through fixed term loans and savings bonds would still be possible.

    • Good Evening Anzon

      May I respectfully suggest you confuse two things, lending real saved money with cash and lending money created out of nothing via a banking system directed by a central bank soviet style planning authority.

      http://en.wikipedia.org/wiki/Money_creation I typed “money credit creation multiplier” and got this in google . Any introduction book to economics will explain it – I say nothing controversial in this respect.

      I suggest read and then re read the article I have written and get back to me and I will help with anything else I can re understanding this.

  • Hi Toby,

    I’m not economist so I’ve got a few questions that may seem a bit simple but are puzzling me:

    1. Is it better to do this overnight after all the money has been printed or in stages, say £50 billion a month for 17 months?
    2. Surely, due to the large amounts of money banks deal with we aren’t going to be dealing with everyday cash, or the costs of producing the cash and storing it would be huge. In reality would these end up being special denominations of money that can only be used by the banks and not as legal tender by every day people?
    3. If I put £100 into a savings account and it is lent out, is the bank then just lending on my behalf and my balance would show up as less than £100. Or would you have your balance as in the money you have saved/earn interest on, and then your available balance that is the money the bank physically has and you can access? in which case what happens when you need all of your savings to spend, would you contact the bank to have them make your available balance 100% and then they distribute that by reducing the available balance of every other saver? And if so would that require regulation making banks not lend more than say 80% of the value of a person’s savings.
    4. I’m still confused as to how we magically wipe our national debt overnight. By your own words, we aren’t cresting more money by printing this cash, just replacing one form of currency with another. Where is the extra money coming from?
    5. Slightly unrelated, but would income tax be the best tax to cut in this scenario? For example, wouldn’t it be better to halve VAT with the money we save from interest payments, which would reduce the cost of purchasing goods making people willing to spend a bit more. It’s just a case of, why cut a fairly progressive tax when there are much less progressive taxes out there that could be cut.
    6. Final point: would Vince Cable know about this? Overall, besides the points of confusion above, this seems like a good idea even if it didn’t pay off the national debt, as it leads to a banking system the public understands. And the new government is probably the best time to have this implemented. So it would be important that Vince Cable knows about this and is able to at the very least consider it in any banking reform.

    • To Martin Pilkington

      1. I would think it is easier overnight as you could then outlaw fractional reserve free banking there and then.
      2. That is what they used to do. In fact the cash system or promissory notes – I promise to pay the bearer in gold (1st cash) were made especially to get around the problem of having to take gold and silver around with you everywhere.
      3. Pre and post reform, when you save on a timed basis, the note in the passbook is what you have placed with the bank to on lend. They owe you the money but have nothing to pay you until the time you have agreed to be repaid comes to pass. If you asked for your money back before your contractually agreed date, they would have no obligation to pay you. In my experience they would usually charge you a big redemption fee and wipe out any interest due.
      4. The government can print it for very little cost on paper and ink. How many fractions of a pence would it cost to print each £20? I do not know but at most pennies.
      5. All tax is a bad. It would not matter to me. Easier for the political class to sell if you think you will get 30% more disposable income next month in your pay packet. Vote for that!
      6. I would doubt it very much. He strikes me as a very conventional thinker. But I always live in hope that somebody might want to point this out and get a debate going.

      I do suspect they will be left talking to the likes of me as public spending = deficit = monetize debt = sovereign debt default or at best rampant inflation and economic chaos. Their options are running low.

      Thank you for joining the debate.

      • Martin says:

        Thanks for your answers. With point 4 I wasn’t talking about printing the money. Our national debt wasn’t caused by the banks not dealing in cash. I’m just confused as to how reforming the banking sector by replacing numbers on a computer with cash in a vault, leads the UK government to having just under £1 trillion spare to pay off the national debt

        • Martin a quick summary for you that I said to another on this site.

          1. Convert demand deposit money into cash money. This is a straight swap and creates no inflation.
          2. Now the banking system has no current creditors but only its share capital and assets, its net worth has gone up exactly to the tune that the demand deposits were valued at i.e. £850 bn.
          3. To take the banks back to their pre reform net worth, require them to place assets up to this amount into special purpose vehicles. I have said Mutuals, but they could be other types of wrappers, owned and run by the banks or the banks shareholders , or anyone really, I am not to fussed, you could own them all, on the one condition, that the loan repayments received in these vehicles pay off the national debt .

          I hope this helps.

          • To covert the deposit money into cash money you have to close the deposit accounts by handing out the cash (physically) to the people who deposited the money.

            So after you convert the demand deposit into cash you have no creditors, because you closed the demand deposits by handing out the cash.

            The bank is left with just its share capital and assets.

            The £850 bn in cash is now in the mattress, under the pink flamingo in the back yard or in some other place that is not the bank’s vault.

            People may wish to deposit the cash back in your bank later or they may not.

            I wouldn’t.

          • If you close the deposits without handing out the cash physically you have to destroy the left over bank notes physically.

            The printed bank notes are not allowed in your bank vault after the demand deposits are closed.

            Unless somebody who got the notes when closing the demand account opens a new deposit with them. Then you can store them in your vault, but you have a creditor.

            And I can have my £1k now ?

  • Patrick says:

    This all has a certain “John Law” feel to it. But putting that aside, you mention in your bio at the bottom that your idea has been explored and supported by an impressive amount of economists through the ages, my question remains–why hasn’t this solution been implemented long ago?

    • To Patrick

      100% reserves are as old as mankind.

      100% reserves is how the vast majority of companies have always operated unless they were / are insolvent.

      Modern fractional reserve banking in its pure form i.e. fiat, or by the decree of government has only existed when the final link to gold was broken on the 15th of August 1971 by Nixon.

      This will take away the government’s ability to inflate its way out of its debt mess i.e. it will not be able to lawfully default on its creditors by diminishing the purchasing power of money.

      If enacted government would have to go to the people and say “we want £X form you to give £X to £Y person or interest group.” This does not sound as good as “I will give you £X if you vote for me.” Governments would be forced to be honest and come to their citizens for money only.

      Banks would not be allowed to use the current creditors money. This means like all other business in the world, they would have to diligently make products that people want, when they want it and for value for money prices.

      Pity the banker and pity the politician; they will have to conduct their business like you and me in an HONEST fashion.

      Two powerful interest groups right?

      But never as powerful as right reason , truth and all of us who care!

  • Bruce Robbins says:

    Thoroughly enjoying this debate. Some of it is going right over my head but I’m learning fast. ;-)

    Just a minor point but for the sake of accuracy, the term is quantitative easing and not quantitive easing as you refered to it earlier. Maybe just a typo but I thought I’d mention it.

    Good to see that two influential Tory MPs (Hannan and Carswell) are drawing people’s attention to your website.

    • Thank you Bruce.

      I am a very poor dyslexic / idiosyncratic speller, so you will see some odd ones especially if I am replying fast etc.

      Also, please take note the support of Steve Baker MP for Wycombe who has so much to offer this debate and more, also he was instrumental in the establishment of this Centre.

    • Toby Baxendale says:

      I should add, Carswell and Hannan are brave and intellectually honest people and true visionaries. If parliament were made up of men like this, the UK would be a far better place. They are ridiculed by the mainstream yet the Lib Con ruling party has adopted most of their localism and Direct Democracy agenda. Glory to the both of them.
      At first you are a wide eyed mad man, then you are theoretically correct but totally impractical , then it was their idea all the time and they had been having conversations with you all the time. This is how the acceptance of ideas takes place in politics. This is the well trodden route this will take.

  • Some further Reading:

    The Cobden Centre’s literature, particularly the final chapter of Huerta de Soto, Money, Bank Credit and Economic Cycles

    By our own trading money man James Tyler: Money is not working, My Journey to Austrianism via the City, Some people doodle pictures, The violation of Mr Smith, How to deal with the Banksters.

    What is money? — a better measure of the money supply.

    Irving Fisher, 100% Money, 1935 — a precis of Fisher’s proposal for 100% reserves

    The kindness of geniuses — on planning and markets — and Economic Interventionism, Banks and the Crisis

    FT.com — “Wall St profits from Fed role” — how QE widens wealth inequality and damages the economy.

    How economic thinking becomes entrenched and a fresh perspective

    Our archive of Insight Articles

    Speech by the Earl of Caithness in the Banking Bill debate 2009.

  • Freddy says:

    In point 6) you say “The government can now put those assets into Mutuals”.
    Can you clarify what you mean by that ?

    • Evening Freddy

      The government , in a non inflationary way has made the banking system , on the left hand side of the balance sheet, have no current liabilities i.e. they do not owe anything to anyone. So on their right hand side, they only have what they are owed by business that they have lent to. The share capital is the same , but the net worth has gone up to the exact extent that the current liabilities has gone down by.

      In exchange for this act of largess, I say the government can require all banks (it owns majority stakes in two of the big four and all can only exist with a Central Bank in place) to place into Mutuals that they can all still own, the excess assets, to the exact tune that their liabilities have fallen by: they now have to pay off the national debt with those loan repayments.

      I hope this is helpful.

      Shareholders are left in exactly the same situation as before and we get the national debt paid off. Depositors have exactly the same purchasing power as before.

      • Freddy says:

        Umm, not really, I’m afraid.

        Your point 2) has effectively made the normal business of banking illegal. Having a bank account will now be more like having a safe deposit box. Because banks annot earn interest by on-lending people’s money, they will have to charge a fee for holding it. All those basic banking services that we get for free – cheque clearing, ATMs, DDs, etc. – will now have to be paid for directly, as they will no longer be subsidised by the interest that banks earn on our current accounts.

        It is not clear how this reconciles with your point 4) which seems to be opening up bank lending again. I guess you need a more precise definition of what you mean by “real savings” (in bold in point 4) as opposed to “cash” in your point 2). Can you clarify this ? Do you mean current accounts as opposed to any other sort of account ?
        (I can’t remember the last time I went into a bank and gave them some actual cash.)

        You also need to clarify what you mea in your point 1) by “replace all the demand-deposits/IOUs”. Banks get their funds from lots of places, including long-term bond issues. Are you including such bond issues under the generic term IOU ? (Which is what they are, of course).

        Anyway, in point 6), your government is clearly taking the banks assets in exchange for all the money they have put in. (It is not clear if you mean all their loan assets, or just those loan assets that match the amount of the demand deposits the government has paid off – hence my previous question.) In effect, by the end of the first sentence of point 6), you have nationalised the UK lending business.
        What I am trying to understand is what you mean by the next part, where you “put those assets into Mutuals”.
        By “Mutuals” do you mean financial businesses that are owned by their customers, like the Building Societies used to be ? (Unfortunately there aren’t very many of them left – do you intend to set up new ones ?)
        When you say in your comment above “require all banks … to place into Mutuals that they can all still own” do you mean that the bank own the mutuals ? If so, how is this different from the banks owning the loan assets directly ?
        And when you say “they now have to pay off the national debt with those loan repayments.” the overwhelming question is what risk do the holders of the natinal debt take in all this ? Will they still hold an obligation of the UK of GB and NI, as today ? Or will they hold an obligation of some bunch of banks and/ormutuals ? If the latter, they have just suffered a massive decline in the credit quality of their loans. I imagine they will not be happy about this.

        Anyway, I shouldn’t get ahead of myself. To return to my basic point, what is a “Mutual” in your plan ? What sort of company is it, and who owns and controls it ?

        • To Freddy

          Freddy, you ask for clarification and I seek to give it to you.

          Fractional reserve banking will be illegal.

          I00% reserve banking i.e. making a bank run like all other business will be legal. Bring it under the normal commercial law will be the way forward. Removing its privilege to use its creditors money without permission and creating money out of thin air will be illegal.

          If you want easy and safe access to your money, why not pay for it, that is a fair service offered ?

          In reality most people will want a return on their non hand to mouth money, so they will lend it on a timed basis. This is when they give up ownership for a specified time period and receive the capital and interest back at pre specified dates.

          Real savings is when you forgo consumption and save to consume at a later date. To have real savings you will have to have done some productive act for money that you have been paid for. This act of production provides vital investment for the use of commerce to make the very goods and services that you will consume in the future with your savings when returned to you with interest.

          This is contrasted with bank created credit, which has no prior productive act supporting it. We have established this in the article, and it is so in all introductory text books on economics, it is clear, this is credit not back by productive effort. If you are lucky enough to be given bank created credit, like a counterfeiter, you can use credit money, with no prior production to exchange for real goods and services that someone has produced. This is the problem with bank created credit.

          If a bank issues a bond, it has a long term liability to pay its creditors. These are not current creditors hence I have not mentioned them.
          The government could take the excess assets that are created by virtue of making the banks not have current creditors or they could simply mandate that all banks, to the exact extent that they have increased their net worth by the reform, place into a Mutual (could be many other type of wrappers as well) that they run, whose shareholders are the same as the banks, and instruct it to divert the loan repayments that the assets generate to pay off the national debt.

          Lending is not nationalised. Lending carries on a time basis as over 50% of it does today. Just most of it will now be done in this fashion.

          If I was unfortunate to be a bond holder of a UK government gilt that was paying out less than inflation i.e. my purchasing power was diminishing, I would rather be paid off by productive business assets.

          I hope this is helpful, please get back to me if it is not and you need more info.

  • JohnF says:

    I’m not an expert, so apologies if I’m failing to grasp something basic.

    Surely, in the current fractional reserve system, much of the money on deposit with banks is itself money that has been borrowed from banks (“created out of thin air”). Suppose the fractional reserve ratio were suddenly raised: banks would have to call in a lot of loans to comply with the new ratio, and the repaid thin-air money would then cease to exist.

    Ending bank lending against demand-deposit accounts amounts to raising the fractional reserve ratio to 100% for banks, so all bank loans made against demand-deposits either (a) have to be called back by banks, or (b, which I think you mean) now become assets of the government in return for it replacing the banks’ liabilities with hard cash (a sort of nationalisation of fractional reserve banking). Either way, when these loans are repaid using the newly created physical cash, surely that cash should be physically destroyed, otherwise the money supply has ultimately been massively inflated.

    • Evening John,

      Bond holders of the national debt have relinquished their rights over their money to lend it to HMG i.e. the money is in the system. When the loans are paid back post reform , under my proposal, the bond holders will get their money back by loan repayments from outstanding loans to business, the money is still the same and still in the system. So if £850 bn is lent by the bond holders, £850 bn gets paid back to them, everyone is squared off. No money supply increase.

      The new cash created is swapped for a different form of money called a demand deposit. There are £850 bn of these and these are swapped for cash (of which there is currently only £60 bn in the system – both demand deposit and cash function as money), they do not need to be destroyed as they are only a bank ledger entry anyway. A decree from HGM saying the are all to be deemed redeemed, will mean you still only have £850 bn here.

      I hope this is helpful.

    • Evening JohnF,

      On another point a shrinking bank balance sheet means business will not be supported. This is a money deflation. This proposal stops that dead in its tracks if you swap demand deposits for cash at the same time.

  • Dave says:

    Toby,

    Apologies if I’ve missed it, but I can’t see anywhere that you’ve addressed my point about the decreased velocity of circulation?

    • Evening Dave,

      9.20 pm post tonight and earlier ones this evening.

      I hope this helps.

      • Dave says:

        sorry Toby, I can’t see that it’s addressed directly.

        basically my point is, right now the system allows the bank to use 97% of the amount in my current account for lending.

        under the new system, only money i put into a nominated savings account can be used for lending. but because i need much more than 3% of my salary for current expenditure, i am going to put much less than 97% into the savings account.

        therefore, instead of potentially circulating immediately, that cash is going to drip through the system over the course of the month. (as stated to ‘current’ in my other post, no incentive or disincentive is going to make me take that money out of the account, as i need to have it to pay rent and shopping etc.)

        so surely that is a decreased velocity of circulation?

        and if the money supply is stable, but the velocity of circulation decreases, surely that is deflationary as per MV=PQ?

        • Dave you are a hard one to please.

          Current at 10.46 tonight has made valid points re the banking system and what it does with your salary type instant demand things.

          Please do me a favour and read this http://www.cobdencentre.org/2009/09/qe-errors/ as I do keep trying to refer you to and then come back and tell me if you think your velocity point is valid.

          Wealth is only and always created by the entrepreneur getting the existing factors of production, forgoing from some consumption, investing in some better capital intensive method of production to sell more goods and services at lower prices delivered in a better way.

          • Dave says:

            Thanks Toby,

            I’ve read it and I take on board most of what you say, though I’d have to do a bit more reading around the subject before being entirely convinced. (hard to give up a shibboleth!)

            ok, but even if you don’t give weight to the velocity issue, there is still one thing i don’t get:

            97% of the value in my current account is available for lending. under your proposals it wouldn’t be unless i specifically moved it into a savings account or invested it in some other product (bond, life insurance etc.) but i need more than 3% of the amount in the account to fund current expenditure. so the difference between 97% and the amount i can afford to save/invest is no longer available for lending.

            now you can call it decreased velocity, or reduced liquidity pool, or anything you like, but still the amount available for lending is going to be reduced. for reasons i outlined in an earlier post (ignorance, risk aversion, apathy, adjustment) i think the amount made available for lending is not only going to be less than before, but in the short-run is not going to be ‘optimal’.

            so surely that has to have SOME impact? and i think you’re underestimating what the impact will be, and the short-term pain.

            to clarify, i support the proposals and have faith in the operation of markets so i believe in the medium/long term this is a better system. but i think the short term pain is a flaw, even if not an insurmountable one.

            • To Dave
              Thank you for reading my debunking of the Quantity Theory of Money – it really is only a tautology.
              Far better to think of the ancient Equation of Exchange or what Mises calls the Money Relation.
              If your demand to hold cash balances goes up, you are not transacting as much as before. If your demand for transactions or put it another way to use your money to facilitate exchange stays the same, as it would in your salary example, then why would there be any change in the level of transactions in the economy that relate to you and all the other people in the same boat?
              I know a money deflation cannot happen under the post reform system . I am also confident the Money Relation will stay the same.
              You and Current have made some of the most informative contributions , thank you.

              • Dave says:

                Hi Toby,

                Sorry to post twice so quickly, I answered Current before I noticed this point.

                I’m very pleased if you think my comments have been informative – it’s 10 years since my A level economics so it’s great to know some of it has stuck! Needless to say they didn’t teach us anything about the Austrian school so I’m not that well up on it but most of what I’ve read certainly makes sense.

                Ok, maybe I am missing something but my hunch that this will cause short term problems rests as much on my old supply-side biases than as the velocity of circulation or anything like it.

                you say “If your demand for transactions or put it another way to use your money to facilitate exchange stays the same, as it would in your salary example” but i dispute that it stays the same. if currently 97% is available to be lent on, it doesn’t just satisfy my demand for transactions but is part of the supply of credit that funds other people’s demand for transactions. but under the new system nothing like 97% of my account value is going to be available to supply credit.

                i don’t know of anything that can explain why a contraction of the supply of credit is not going to affect the economy at large. or, more pertinently, why given that a contraction in the supply of credit has had such a negative impact under our current system, why it would have no effect under your proposed system?

                also, and forgive me if i’m really being ignorant here, but you’ve stated several times that under the new system there can be no money deflation given that there is a stable supply of money. i agree, which is why i mentioned velocity of circulation (not knowing the Austrian school don’t accept it!). however, if you don’t accept MV=PQ (or MV=PT as you have it) then surely just because there is no MONEY deflation or inflation, it doesn’t logically follow that there can be no PRICE deflation or inflation?

                and if the supply of credit falls, the price of credit rises, right? and in an economy, when credit rises other prices fall right? and this is a recession or deflation?

                • This might help your understanding.

                  If your purchasing power is made up of 3% cash money and 97% demand deposit money, you have 100% purchasing power.

                  Post reform you will have 100% cash and still the same 100% purchasing power.

                  Observe no contraction of the money supply.

                  Equation of Exchange / Money Relation.

                  If your demand to hold cash stays the same, the implication is the amount you spend on goods and services stays the same.
                  So the system is “reset,” what exists will still exist as there is no contraction.

                  Granted, ongoing, business that existed wholly on credit only will find it harder and harder to get as the pool of real savings will be lent to the best risks first etc. Marginal business that exist on the welfare state of credit, will not be supported in the brave new world. This is where there will be pain as we adjust out of supporting via money welfare (interest rates under the natural rate) as marginal projects will be abandoned. As this is going to happen at some point in time anyway, I do not consider the inevitable as a negative to the plan. This way only the marginal get hurt and not everybody which is what would happen in a deflation.

                  Price inflation / deflation is the most observable feature of the system. Productivity gains (think falling prices of computers etc) should mean falling prices and greater purchasing power. With an inflating money base, this never happens, despite this being the aim of all us capitalist entrepreneurs: to produce things at better prices than our competitors, we only have money and price inflation! Price deflation = good, money deflation = bad.

                  Credit will not exist , just savings being lent. As savings going up and down this regulates the flow of funds to invest in commerce to pay back the capital with interest to by the goods that the new investments have made possible. Savings is the foundation of prosperity and not consumption. The price oscillation will display the health of the nation.

                  You have a lot of the conventional tools in your head that prevent you from seeing this clearly at first, I hope I am being helpful now to you. I too had those conventional tools in my head and had to liberate myself to understand the world better.

                  • “3% cash money and 97% demand deposit money”

                    When you close the demand deposits you will be left with the 3% cash capital.

                    • If pre-reform you have $3 cash and this is 3% of your money and the rest 97% is demand deposit money – post reform the $3 will be the 100% of your money, because you will no longer have the demand deposits.

          • Current says:

            Dave,

            In the above discussion my main point was that what you have described isn’t a decrease in velocity. You are quite right though that there will be a decrease in funds for lending.

            One of the main reasons that checking accounts became popular was because of the difficulty of dealing with fixed income bonds. Many households couldn’t estimate their future budgets well enough to save significant amounts in bonds. Bankers though were able to fill the gap by creating an aggregate pool from many households and businesses, and assessing how it’s size fluctuates.

            If that ability is lost then the amount of loanable funds will decrease. That said, it’s hard to say how much of an impact this would have, and foreign funds would likely cover some of the shortfall.

          • Current says:

            By the way Toby, on the above point see Hayek “The Monetary Theory of the Trade Cycle” page 189-191.

      • Dave says:

        Sorry Current and Toby, but hold on one second…

        whether you call it a decreased velocity, a credit crunch or whatever, you’re not disputing that currently 97% of the value of my account is available for lending, but under the new system less than 97% is going to be available for lending. (if you are disputing that, please explain why as i’ve obviously missed that in previous posts.)

        now the last few years have clearly illustrated that a reduced supply of credit has severe short term consequences. it may have medium term benefits in reducing property speculation and lending to non-credit-worthy individuals and businesses, but these simply do not mitigate the short term pain caused.

        moreover, the new system relies on individual decisions to invest in savings and bonds to make funds available for credit, and for all the reasons i’ve explained before (ignorance, risk aversion, apathy etc.) the new level of funds are unlikely to be at a level considered ‘optimal’ by a rational actor model. again, if you’re disputing that i’ve missed it somewhere, so perhaps you could explain it again?

        so you’re left either asserting that for some reason under the new system a credit crunch won’t cause similar damage – even to viable businesses – to the current problems, which is surely naive; or else you’re using medium term solutions (new financial products from mutuals, life insurance companies etc; investment of foreign funds) to the short term problem (the difference between the 97% of my account now available for lending and the significantly smaller % available under the new system) which i think is both naive and disingenuous.

        in summary, please explain why there won’t be any signiferent difference between the 97% of my account available to lend now and how much is available under the new system*; or alternatively, if you accept that there will be a difference, why in the short-run it won’t cause any problems?

        *if you can explain how i can get by on 3% of my salary i’ll consider giving you a grand!

  • David Wheeler says:

    Toby.
    There is one absolutely obvious reason, why your suggestion will never be countenanced – and that is Bankers. At present, as you say, they can re-lend deposits up to 60 times, and collect interest – often at exorbitant rates – each time. Under your system they can only lend a deposit once.
    The reason, that they can, and have, lost trillions, and gone home with huge bonuses, is that they control the system to their own advantage.
    I’m afraid, that in my vocabulary the words ‘bank’ and ‘robber’ are now synonymous.

    David Wheeler.

    • I agree.

      I will continue to try to change.

      Make bankers and the political class honest.

      I am glass half full not empty.

      Thank you for joining the debate.

  • Tony Allen says:

    Toby you have no cloithes – very fishy

  • Mrhackit says:

    come on government this really is a no brainier do it others might just follow and we can escape the firestorm which is coming from europe :)

  • PeterMartin says:

    Tony,

    What you are saying is that current the Banks are allowed to effectively create new money by lending the same deposit many times over. So under your scheme the Government, which really means all of us, will have to create (lend?) 850 billion of new money in return for the banks not being allowed to do this.

    Of course with any loan there is a chance that the money will not be repaid, and this risk needs to be accounted for, either as an interest rate premium or by some default insurance which will need to be paid by someone.

    If the government insisted it be paid by the banks they would demand compensation. If it was paid directly by the Government then this would cancel out any interest received from mutualisation. So, either way, the bill would have to be footed by the taxpayers who aren’t going to see any tax cuts!

    • Morning Peter,
      You have missed the point of the article. A demand deposit is a bank journal entry not cash, although it functions as money. Convert the demand deposit into money and the banks now have now current liabilities and only assets. In a one off move their net worth has risen by £850 bn with no effect on the tax payer or the government. To the exact same extent that the assets have gone up, the government can require the banks to place these assets into Mutuals , that they can own and run and this use the money from them to pay off the national debt.
      You may find it helpful to read the article again.

  • Wayne says:

    This sounds very much like my scheme for returning to the moon. I figure that by grasping the bootstraps of my boots I can pull myself up, one leg at a time. I see two impediments to my scheme; first, I’ll need to hire an appropriate space suit from NASA, and second, I’ll need some place to stand between steps.

    I am currently awaiting NASA’s quote for the hire of the suit.

    • To Wayne
      You are an unthinking juvenile commentator. I approve the publication of this one as you are only 2 of nearly 200 that is not saying something of remote interest to this debate. If this is way over your head, stay out of the debate.

  • PeterMartin says:

    Sorry I should have said Toby not Tony! I hope that doesn’t jeopardise my prize money:-)

  • Tony B says:

    As has been said indirectly, a bank note is only a promissary note – it is not ‘money’ in the strict sense. Now if the government issued us all with gold coins to the value of £850 billion then it would work.

  • Daniel says:

    the idea hinges on the assumption that the deacrease in the velocity of money compensates for the increase in the quantity of money.
    whilst the velocity that arises as the result of deposit banking (the liquidity that keeps being lent and relent) disappears, the economy still needs to conduct a huge number of transfers daily so it is concievable that cash would continue to transfer through the system at a much higher rate than would be nesecary to counteract the huge increase in the supply of money (we still need to buy things, whether on credit or debit card). therefore with the amount of money in circulation increasing much faster than velocity decreases we get a large increase in prices (assuming output stays constant, an assumption that seems fairly valid). therefore this wouldnt work.

    a much more simple critique would be that having aboslished banking we would be unable to borrow to finance our deficit(which i think will still exist even without interest payments). this would mean tax rises not a tax cut. hope this helps

    • Daniel says:

      actually having re-read article second paragraph hinges on the list of things the cash banks can lend to being only businesses.

  • PeterMartin says:

    Toby,

    Have I really misunderstood your argument? I don’t think so.

    You say “a demand deposit is a bank journal entry not cash, although it functions as money”. Yes that’s right.

    also “Convert the demand deposit into money and the banks now have now current liabilities and only assets” Agreed.

    and ” injecting approx £850 billion in cash into the vaults of banks and accounts of individuals ….. is not inflationary, as the cash replaces the demand-deposit which acted as money.” Yes. That is true

    then “In a one off move their net worth has risen by £850 bn with no effect on the taxpayer or the government.”

    With every scheme which sounds too good to be true, there is usually a reason why that is literally so! In this case the promise is that the taxpayer will have a lower tax burden. Therefore taxpayer needs to beware!

    In this case, I do challenge your use of the word “injecting” and that there is really no cost or no risk to taxpayers, or the government, if you prefer. You really mean lending and you haven’t specified the terms of the loan. Is it interest free? As the economy grows, and also to allow for general inflation, there will have to be further ‘injections’.

    Are you saying that the UK banks are sufficiently wealthy and can find enough additional assets to be able lend them back to the government to cover the £850 billion, which will need to stay in their vaults and in the bank accounts of their customers? The £850 billion cannot be in two places once.

    • To PeterMartin

      Peter, the government can create money units for very little cost by just instructing the printers to do so at fractions of pennies. If it does this as I suggest and places in the vaults of demand depositors, there is essentially no cost in doing this if the demand deposits are wholly replaced all that has been done is one type of money with purchasing power has been replaced in full with another type with the exact same value of purchasing power.

      It is a swap.

      So it is not a loan.

      It is a gift.

      As this costs the taxpayers nothing, nothing should be levied to do this.

      If you have understood this so far, you can now see that current creditors i.e. former depositors are no longer owed money by the bank. The bank now only has assets and share capital. The increase in the net worth of the bank is exactly matched by the decline in the current liabilities , it is its mirror image. This increase in net worth can be used to divert these loans (the assets) into Mutuals owned by the same banks to pay off the debt.

      I hope this is clearer for you now.

      Please get back to me if it is not.

  • Tedgo says:

    I wrote

    In your new world I have £10,000 in a demand current a/c. I decide to put it into a timed saving account. The bank transfers my bank notes to the timed a/c vault. The bank has brief access to those notes.

    Later in the day my business brother comes in for a £10,000 loan. The bank agrees to the loan and puts the money into his business current demand a/c. With your system the bank now has to move the bank notes back from the time vault to the demand vault.

    The bank will only have access to the timed vault bank notes if it does not lend any money out, but it then has a problem paying interest to the time depositors.

    Current wrote

    As I understand Toby’s proposal this is wrong.

    When you invest in a timed savings account the bank doesn’t put the cash in a vault. It lends the cash out, and pays you your interest with the interest it gets from the borrower.

    Under Toby’s proposal the only thing that changes is the operation of demand deposits, such as checking accounts and most savings accounts. Bonds, equity and debts with maturities continue to work as before.

    My response

    I think my interpretation is correct, and Toby has not refuted it. The £850 billion simply makes fractional banking impossible. You (Current) are suggesting a 2nd type of demand account. Why is my brothers demand business account, which received the loan, any different to my demand current account.

    On the loan anniversary my bother has to pay back say £2000 off the loan and £800 interest, both of which will pass back into the banks time vault. All Toby has created is a need for a fleet of armoured bank cars and an end to fractional banking.

    What I still cannot see is how Toby’s scheme helps to get rid of the national dept. If I have a load of government bonds they are not sitting in any form of bank account, they are under my bed.

    First thoughts are when the bonds mature I present them to the governments banker who gives me cash from the governments demand current account. Second thought is the government is in debt so there is not enough in the account to go round.

    The latter though gives rise to what happens to demand accounts which are in debt or overdraft. When a bank grants an overdraft facility it has to transfer notes to the demand vault.

    Perhaps a flaw in Toby’s scheme is what to do with the existing timed deposit accounts and overdrafts, does one need to print another £850+ billion for those so the scheme might work.

    Thinking in fundamental terms, that there is only so much stuff in a system, perhaps the current demand and timed amounts are one and the same, that is the current timed deposits have already been allocated and are part or most of the demand accounts.

    Christopher asked

    The government can now put those assets into Mutuals, which would then immediately pay off the national debt, and leave the banks in exactly the same position net worth wise as they were prior to the reform.

    Toby replied

    These are very good questions that need to be answered as they get into the detail of the matter. For now forgive me if I pass on this one and address at a later date. The first point to get out there in the big world of the internet is to see if there are any objections in logic only to the scheme i.e. “is it theoretically possible?” To me that is very much still a yes. The devil in the detail does need to be worked out.

    I think this is the flaw in Toby’s scheme, the fine detail has not been worked out. My experience is fine detail always kills hair brained schemes.

    I cannot see how the injection of the notes in anyway alters the assets of the banks, which in turn can then be mutualised to the governments benefit.

    • To Tedgo

      The bank will lend to your brother who will pay back the capital and interest at the agreed times. This is what goes back to the original depositor less the banks slice.

      Your brother’s demand deposit account has use of your former money that you held in a demand deposit account that moved to a savings account, that moved into his account for immediate use.

      Your demand deposit account is empty as you moved it to a savings account. The £10k moved from you to him.

      You have no demand deposit account with anything in, so from a reform perspective, not cash is injected into your vault.

      This is why your demand deposit account is different to that of your brother’s.

      This “hair brained scheme” is very similar to that presented to the world by Irving Fisher, the founder of American Monetarism and probably its most famous economist in 1935. The Founder of the Chicago School (with their Chicago Plan), Frank Knight, Lloyds Mints, Henry Simons and their pupil Milton Freidman , future Nobel Winner himself , who advocated this right up to his death and was publishing about this in the early 90’s. Jesus Huerta De Soto in 1998 advocated this. He is one of the greatest living Austrian School Economists . So I presume your using casual blogging language when you refer to it as “hair brained.”

      How it works;

      1. Convert demand deposit money into cash money. This is a straight swap and creates no inflation.
      2. Now the banking system has no current creditors but only its share capital and assets, its net worth has gone up exactly to the tune that the demand deposits were valued at i.e. £850 bn.
      3. To take the banks back to their pre reform net worth, require them to place assets up to this amount into special purpose vehicles. I have said Mutuals, but they could be other types of wrappers, owned and run by the banks or the banks shareholders , or anyone really, I am not to fussed, you could own them all, on the one condition, that the loan repayments received in these vehicles pay off the national debt .

      Please get back to me if you need more clarity.

  • SimonD says:

    The main reason why this would not work is the population simply do not understand the illusion of asset value that is perpetuated by low interest rates resulting from a continual increase in credit/money supply.

    Take away the crutch of a continual expansion in money supply and sit back and watch as asset values implode. The result would be negative equity across the vast majority of the middle class. The resulting negative wealth effect would plunge the economy into a depression that would make the 1920’s in Britain or the 30’s in the US look like a blip.

    Any government imposing this reform would not just be defeated but would cease to exist at the next election.

    So the answer to your question is it would “work” but the costs of this reform would result in such a decrease in wealth that no sane politician would ever vote it in.

    • To Simon D

      I would urge you to consider that with a fixed money supply there can be no deflation of money, so I do not see the destruction you talk about.

      Also I see a one third increase in all taxpayers disposable income as being a populist measure.

      Thank yor for taking the time to read and respond.

  • SimonD says:

    It is in the expectation of available credit where the main problem with your idea lies.

    If you fix the money supply, the interest that can be charged on money will go up significantly.

    The expectation of low interest rates is one of the key components of asset values, take this away and you reduce asset values. The impact of your tax break in my view will be like a speed bump compared with the size of the negative wealth effect.

    • To SimonD

      I would be most grateful if you could think of the following re interest rates that I said to someone else on this site

      “What I see is that once enacted, businesses that were marginal would not get real saved resources and would ultimately go bust freeing up capital for better wealth creators to create wealth with.

      The interest rate is the reflection of the time preferences of people. I said to another commentator here something that might be worth repeating;

      “1. Human beings act.
      2. Humans act purposively. If they tried not to, they would be acting with purpose. This is the starting axiom of economics for the great teacher of Hayek, L von Mises.
      3. We all act to satisfy our most urgent needs; indeed we rank these and do the most urgent things first.
      4. We demand present goods now more than we do in the future. There is thus a spread between what we are prepared to pay now today for our present goods and what were are prepared to pay for future goods.
      5. Each one of us has a different time preference for jam now or jam tomorrow.
      6. I may have accumulated many goods, and have surplus money or purchasing power to have command over more goods that I do not need now, so I lend them to someone like you who has a thirsty time preference to buy a house to have now in exchange for that purchasing power and interest back (more purchasing power) at a later date.
      7. This spread between goods now or people savings for goods later IS the interest rate.
      8. The money market rate is one part, the most obvious part of what the interest rate is.
      9. I as an entrepreneur offer my current goods, meat and fish in exchange for money as we all offer what we do for money, the profit being the interest for which I do this and everyone else does.
      10. The rate of profit in society is interest.

      So if we have a base rate of 0.5% and inflation at 5.3% as we have today (RPI) then we have negative real money rates of interest. This would seem to reverse the logic of above!!! This means people are happy to put money away today, forgo consumption now and get back less later!

      Continuing a policy as daft as this will encourage less lending and more consumption only. This is the perversity of letting a government decide what an interest rate is.
      The reality is the money rate should approximate to the rate of profit in society. Better still, with no money deflation or money inflation; finally we may well be able to get government out of doing things like setting the money rate of interest. As you say you are a free marketer, you will be against the state planning of the money supply and its attempts to control the rate of time preference (interest) in society. Yes, interest rates will rise and more money will be available for lending and society’s average rate of profit, or the natural rate of interest.”

      So I think we will be setting oursleves up better to match the investment and consuming needs to society by doing this and take out credit induced boom and bust. With a large tax boost on the way, I am hopeful that this would propel growth.

  • Tyler says:

    Not that I expect to get paid out on the £1000, but I’ll tell you why your idea won’t work without creating huge problems.

    Firstly, in a nutshell, you don’t seem to understand fractional reserve banking properly. Banks don’t magic money out of thin air. When they lend your deposited £100 they leave behind a liability. When this happens 33 times, as you say, it creates a string of liabilities, not £3300. It helps money get to where it is needed for spending or investment, but it doesn’t create new money.

    Banks are obliged to match their assets and liabilites at the end of each day. If they have lent more than the value of their assets, they have to go and borrow it short term in the money markets. They can’t just create money out of thin air – they can alter the duration of borrowing though. What this does allow them to do though is lend far more than the assets they hold as they only have to have enough liquid assets to satisfy people’s short term withdrawal demands -the fractional reserve part.

    Which brings me nicely to the misconceptions you seem to have about the problems at Northern Rock. That bank was really just a mortgage lender. They lent long (mortgages) and funded this in part through their deposits, but mostly through short term money market borrowing. When liquidity in the money markets dried up in the wake of Lehman’s collapse, they were suddenly unable to fund themselves and were effectively bankrupt. It wasn’t the run on the bank’s deposits that caused the collapse (though it certainly didn’t help other bank’s view of their credit worthiness), it was the inability to access short term borrowing.

    Let’s quickly look through your points;

    1. This can be done, but changing an electronic ledger £100 to coin changes nothing. As I mention above, you and fractional reserve banking haven’t quite clicked. This step creates no “new” money.

    2. Wipes out money markets, and the mortgage market with it. Banking is about the ability of the institution to change the duration of money by lending and borrowing over different time frames. By forcing banks to have 100% cash reserves, you effectively submit to the idea that all borrowing and lending should be of matched maturities – otherwise your system can never balance.

    3. See point 1 above. You’re right – it isn’t inflationary, as you are now creating new money. You are actually locking it in one place, which is deflationary.

    4. How can you tell what is a “real” saving anyway? If I have some of my own capital, and some borrowed, can you distinguish the apart?

    5. No liabilites = no lending. By lending someone your £100 the bank creates a liability to repay the asset. To repay you, the bank borrows from someone else.

    6. Again see point 1 (you can’t magic liabilities away as you suggest), but I get the impression from your statement that what you really intended was a form of QE. Printing money most definately is inflationary. The problem with QE is that it’s really debt by another name. You basically intend to inflate debt away, at the cost of currency value.

    7. Finally something we can agree on – no national debt means no interest costs. We don’t agree on how to get there though – your plan simply doesn’t work unless what you really intend is QE, and if you do intend QE then it would be massively inflationary.

    By mnoetizing the assets in fractional reserve banking system you create no new wealth. That is the main error you have made. If I owe money to you (though it looks like you are going to owe me £1000), monetizing it does nothing for my ability to pay you back. If we do the trade through a bank intermediary, it might make it safer for you to lend to me, but it forces the bank to make good from somewhere else if I don’t cough up.

    Implicitly you are saying the government should step in and become the universal gaurantor of last resort, and print enough money such that anyone can access their capital at any time. That’s lovely in theory, but in practice simply cannot work.

    Why?

    You would have to print enough money to cover all debts for the system to operate. Mortgages, credit cards, overdrafts but also all corporate lending as well. It wouldn’t be the £850bn you suggest….it would be in the trillions somewhere. That would spark massive hyperinflation. Why would someone pay back their debt when the government is willing to step in and provide cash to make the creditor whole? You could just rack up endless amounts of debt as the printing presses would be forced to cover the difference – after all, this process has to be repeatable, doesn’t it? The government won’t jsut step in once and once only if it was this easy to wipe out its own debt. The governmetn itself would be printing money to gaurantee its own spending.

    Here then, we get to a recognisable and very sad place, which history has seen on a few occasions. The Weimar republic. Zimbabwe.

    I’m sorry, but you are simply quite wrong. Your idea isn’t a solution – it’s a massive disaster, as has been proven by history.

    • To Tyler

      Thank you for your comments.

      Some corrections for you.

      I will pay out to anyone who can say why in logic this is not possible.

      As I always refer to the fact that demand deposits are exactly matched by equivalent assets, I must surely know the nature of fractional reserve banking do you not think?
      They do create money out of thin air, this is called bank credit and yes it is balanced by an equivalent asset. This is very non controversial and is in every “A” Level economics text book or undergraduate text book and banking course. Nothing controversial about this at all.

      Northern Rock, the depositors queuing up outside and not being paid is a bank run in my books, yes I agree with you, the run started when people knew the maturity mis-matching was not working that well. Bank run nevertheless, depositors not being able to get their money is a bank run and this is undeniable.

      1. I 100% do not want new money or purchasing power to be created. You Tyler have not understood what this article says. Convert demand deposits to cash. If demand deposits were £850 bn, the conversion would leave cash as £850 bn, net growth in money = zero.
      2. Matched maturities are a very large part of banking, with the reform it will become a bigger part. With no need to lend “risk free” to hungry Leviathan state, Life, Insurance, Friendly Societies and Pension funds with a significant longer term time horizon will become much more important in these market places.
      3. If it is locked as you say, it cannot deflate. No money deflation unless you burn it and do not replace it.
      4. Real cash, forgone consumption being placed in savings accounts for onward investment by the bank.
      5. Timed deposits got no mention in this reform plan as they are not touched, only demand depositors. As the owners are not current creditors by longer term creditors of the bank, they stay in the same situation as they were before.
      6. Yes we can as described in this article. No to QE as this is new and additional money, I just say convert demand deposits to cash
      7. You have not understood what has been said. I hope you will read again in the light of these comments.

      I want the government post reform as far away from the banking system and from the money supply as possible; it is far too serious a business for the government to be involved with. Post reform we should look at routing our currency back in some kind of commodity that sits outside political interference.
      In the meantime constitutional rules to handcuff the govt.

      • Tyler says:

        Not that I ever expect you to pay out, but you are very wrong.

        Fractional reserve banking does not create money out of thin air. You are very clearly missing one of the great principles of the system. Every time a bank lends money to an individual, it is forced to cover that money or effectively be insolvent. They can do this from their depositor base, or from money markets. The “fractional reserve” part comes as their despositor base only needs to be a fraction of their total loans, adjudged safe such that individual depositors can reclaim their deposits and the bank has enough working captial to continue to function. The rest of the money loaned is recovered from money markets in short term borrowing.

        This is where Northern Rock blew up. It had long term loans (mortgages) which it couldn’t sell as it’s only assets. These were financed by short term MM borrowing, but when the money froze up, they simply couldn’t find the capital to cover their liabilites. The run on deposits didn’t help, and certainly reduced their working capital, but was not the cause of the banks’ collapse.

        As for the rest of what you say;

        1. If you are creating no new money, where is the money coming from to convert the demand deposits to cash?

        If it is coming from the government, it is QE. If it isn’t it has to be coming from the liquidation of assets (loans). What if those people can’t afford to pay their loans back?

        Without new money, your assertion that the government could pay off all it’s debts and we could also have a massive tax cut is also laughable.

        please tell me, where is this money coming from?

        2. Banking is all about lending long and borrowing short, and pooling liquidity to do that such that people can still access their captial when required. By fixing cash deposits at 100% you force every loan into contractual territory between the holder of the real capital and the debtor, and turn banks from liquidity providers into glorified safety deposit boxes.

        If banks are forced to hold 100% reserves, they will not be able to lend depositors cash,only their own equity capital.

        3. If it becomes harder to lend, the money supply will decrease, as will inflation.

        4. What if I borrow money from Bank A and place on deposit at Bank B?

        5. As I say before, if you cannot create a liability, you cannot lend. Are you suggesting the abolishment of debt?

        6. See 1. Where is this money going to come from? The government? Debtors being forced to repay the bank immediately so banks can fullfil their obligations to the demand depositors?

        You can’t just take two sides of a balance sheet and tear one up without providing the money to do so.

        7. I don’t think you really understand fractional reserve banking and asset/liability accounting.

        Let me re-iterate my killer points, in the vague hope you’ll concede and pass me a £1000.

        Q1:If you are creating no new money, where is the money coming from to convert the demand deposits to cash?

        Q2: If you are creating no new money, where will the government get the money to immediately repay all it’s own debt, as well as giving us a massive tax cut?

        • To Tyler

          You are the only person on the planet who declines to agree with all of economics that there is such a thing as the bank credit money multiplier.= Here is one link. http://en.wikipedia.org/wiki/Money_creation that explains.

          1. The government at costs in pennies relating to the numerical value produced, can print it all up.

          QE is an addition to the money supply when 100 units becomes 110 units.
          This reform as we have established is when we convert one of the components of the 100 – demand deposits into cash , thus there are still only 100 units. It is not QE.

          Directly from a post submitted earlier, you may not have read yet, this should give you an answer as to where the assets are going to come from.

          “Submitted on 2010/05/23 at 7:28pm
          To Tyler

          For you I will try again.

          Pre Reform

          Share Cap £10m
          Assets £100m
          Liabilities £100m
          Net worth £10m

          Post Reform

          Share Cap £10m
          Assets £100m
          Liabilities £0m
          Net worth £110m

          Note : demand deposits are liabilities. Cash in a safe deposit box is not. Just like if you place a gold bar in a rented bank deposit box, the bank does not owe you the contents of that box, it owes you nothing. It provides you with a safe keeping service. Therefore note new increase in net worth of £100m”

          2. Over 50% of loans today are conducted via timed deposits. They will become not just the majority method, but also the main method. Life , Insurance, Pension, Friendly Societies eyc will also explode in growth and fill a role they used to fill in a much bigger capacity as lenders rather than buying “risk free” govt debt in the quantities they do now.

          3. Money supply is fixed, it can go neither up nor down unless a constitutional rule is adpoted saying only 3% PA as Milton Friedman suggested. Better still look to route the currency in a commodity so it can not be messed with by govt in the long term.

          4. You owe bank A what you have borrowed. Bank be post reform is your custodian.

          5. No lend via timed deposits. They require no reserve as the lender as relinquished ownership for the duration of the loan of the money.

          6. Govt just prints it.

          7. I do to both.

          No killer points. No £1k.

          Q1. Answered in 1 and 6.
          Q 2. Numerical answer in one must now show you how the system becomes post reform, pregnated with asset. This is the pot from which the government can pay its debt and no debt means no interest service which means tax cut.

          Thank you Tyler, if I can be of any further help, please stay in touch.

          • Current says:

            I’m not sure if Tyler is criticising the money multiplier, but the money multiplier isn’t universally acknowledged to be correct. Or at least, it’s interpretation is open to question. Neither Hayek or Mises specifically state the theory as it’s presented by monetarists. Hayek criticised aspects of it (though not directly), as have later Austrian economists.

            Consider a bank that has excess reserves (that is more reserves than are necessary). According to the common presentation of the multiplier theory it will lend out until it has no excess reserves. This isn’t necessarily the case though, in order to lend the bank must have good creditors to lend to. These don’t necessarily exist.

            Really, what the money multiplier indicates is the maximum amount of fiduciary media that can be produced in a banking system backed by a central bank if there is an inexhaustible supply of good creditors. That supply isn’t necessarily there.

            The money multiplier isn’t really a general theory of economics. It’s a special theory of banking systems that use central banking. In central banking systems commercial banks can use the minimum legal reserve ratio because of the presence of a central bank that provides a “lender of last resort” facility. Without a central bank there are other limitations.

            If good borrowers can’t be had then the money multiplier fails. Currently the theory doesn’t predict reality, many banks are running reserve ratios much higher than those predicted by the money multipler model. This is mostly though because the central banks started paying interest on reserves.

          • Tyler says:

            Current explains it quite well, but i’ll make a few more points. You seem to think that £100 deposited will get leveraged up 33 times that. It won’t. Even you wiki article suggests only 5 times the initial amount….but the banks still have to make whole at the end of every day.

            The money supply IS NOT FIXED. Where do banks get their funds from? Pension funds, overseas (through FX swaps) and from central bank windows. Money. Supply. Not. Fixed.

            Sure, you can lend more than you have, and credit can be created, but that £100 you have on deposit doesn’t go whizzing around the world hundreds of times, and most importantly, the bank in question has to cover it (short term) when it lends the money, and has to have suitable reserves dependent on their total lending.

            Your bank example is simply wrong. If the government prints £100m and gives it to the bank, apart from increasing the money supply by £100m (though experiment – under your rules if every despoitor withdrew their money from th ebank, the bank is still worth £110m. Therefore money supply has increased) you have also created another liability…..the bank owes the government £100m.

            Otherwise what is there to stop me personally forming a bank. I take deposits worth £20m say. I lend the money to my brother. The government gives my bank £20m, which I duly return to my customers (thus have committed no crime)….yet my brother still has £20m, which he owes…to me! We duly split the proceeds and live a nice life in the carribean.

            2. You can’t exactly match borrowing and lending, be it in timing or size. That’s the banks job. If they can’t activate deposits, and are totally reliant on share capital or CB windows lending as we know it will cease to function.

            3. Money supply is most definately not fixed. UK normally measure M4 off top of my head.

            4. Moot point unless both banks have all my financial reords.

            5. Trueish, but how are you going to match every debtor to a creditor? Who wants to loan someone masses of money for 25 years to buy a house? Doesn’t work. See 2.

            6. Aha! Government just prints it. Congratulations – the government has just increased M1 money supply (by its very definition) and debased the value of the currency. Inflation is the next step. How many times is the govt planning on doing this? A few times, like in the Weimar, or every few days a la Zimbabwe?

            7. Seriously, you clearly don’t. If you presented these ideas anywhere other than a blog, you’d get laughed out of the room. It’s faintly embarrasing to even be having this argument.

            Your answer to Q1 is that the government prints money. Your answer to Q2 is that the government prints money to pay it’s own debts off.

            This is called “inflating your debt away”. It doesn’t work.

            I’ll spell it out for you again. Your system does not work. It involves the government printing money, which increases the money supply drastically. Banks don’t suddenly become hugely wealthy overnight – otherwise I’ll be living in the carribean. Forcing 100% cash v deposits basically knocks lending on the head. None of it works.

            Not that you’ll listen, or for that matter give me £1000. You can’t magic value out of thin air, which is what essentially you are saying you can do.

            • Money supply is not fixed today as you can see from the Wiki article you have written, it can be created out of thin air, which you have always denied.
              Money supply would be fixed under this reform and adjustments take place via purchasing power changes.
              The UK banking system was 33 leveraged prior to the Lehman demise.
              In your £20m e.g. if today a company was just given £20m then it would be inflationary.
              I am saying convert it’s already existing £20m from demand deposits to cash. Not inflationary.
              2. No they also have timed deposits something in all of your blog posts you entirely ignore.
              3. See the money supply point in the above.
              4. Do not know what you refer to here.
              5. Life companies have money invested for life, and pension companies have money invested for significant time periods. As they used to be the key source of mortgage funds, so they could be in the future.
              6. You do not understand what converting demand deposit to cash means i.e. if there were 100 units of demand deposits functioning as money, there still will be 100 units of cash functioning as money post conversion and no demand deposits. This blind spot prevents you from seeing that the Emperor has no clothes.
              7. The founder of monetarism and probably the USA’s greatest economist Irving Fisher in 1935 recommended something very similar. Frank Knight the founder of the Chicago School, Lloyds Mints, Henry Simmons and their pupil Milton Friedman , later a Nobel Winner was certainly writing out it into his 90’s. The great Austrian School Economist , Jesus Huerta De Soto wrote about it in 1998. I could go on and on. So I am standing on great shoulders of great men.
              You may de well for yourself to read some more about it if you want to be taken seriously on the matter going forward.

          • Current says:

            Tyler,

            I generally agree.

            If we could demand as many assets as we like by banking then what would happen to the insurance industry? It demands huge amounts of assets.

            Suppose I insure 20 houses against fire at a reinsurance rate of 1/10. That means I try to buy enough assets so that I can pay if 2 houses burn down from my 20. Now, I can only do that if I can find the funds to do it, it’s not automatic. If I can’t find the funds then I can’t sell the insurance without risking my own capital. That means if, at the price people pay for insurance I can’t gather enough to cover 2 houses then I can’t do it. Money redemption and insurance are similar in this regard.

            The example of a scheme between your brother and yourself is a little tricky. But, I think the rest though is quite right. The scheme would cause price inflation. To the general population the money saved by cancelling the national debt would be spent on higher prices later. There is no net gain.

  • John Moore says:

    Mr. Baxendale, I think this will answer your question — beware it may not be the answer you expect or like but the reasoning is sound. I believe the concepts and practices in American banking carry over to British banking.

    1) Print cash and replace all the demand-deposits/IOUs that exist in the system with that cash. This means the government printing approx £850 billion in cash and injecting it directly into the vaults of the banks and into the accounts of individuals. Thus, if you deposited £100 once thinking it was “yours,” it now really exists in cash, with the bank acting as custodian of your money.

    Ans.:This would provide a lot of new physical currency but may not increase spending. Even if the demand deposits are fractionally reserved the depositer still has access to the purchasing power of cash should he/she need the money. The depositor still must feel financially able to take the cash and spend it.
    What this really does is relieve the bank of it’s responsibility to provide liquidity to its’ depositors.
    Fractional reserve banking was discovered when bankers noticed that most of their depositors seldom took delivery of their funds. The same thing would happen in this example, a good portion of the new cash would just sit in the bank vault.

    2) Mandate all banks to hold your cash (100% reserved) on demand at all times.

    Ans.:This means the bank cannot earn any income from deposits, since it is required to hold all accounts at full cash. Depositors of course require some interest nowadays on their deposits. The bank would be unable to provide any interest to the depositors since it is unable to generate any income from the deposits. So is this really a bank anymore?

    However since the banks’ capital is now free from obligations it is available for lending. The new rule requires that demand deposits be 100% cash at all times. A loan typically in the US creates an account which acts like a demand deposit, giving the borrower (rather than depositor as in the first case) immediate access to the funds. In many cases, like a home or car loan, the full loan amount is withdrawn immediately. So the bank is limited to lending based only its’ shareholder equity and paid-in capital (since no fractional reserve lending is allowed it would only lend total time deposits not in excess of SE and PIC above). I doubt any bank would be able to survive on the meager income based on these limited assets.

    3) Wipe from the bank ledgers all the demand-deposits/IOUs as banks would not owe you money anymore. This means the “thin air” money disappears, to be replaced exactly with cash money. Note: this is not inflationary, as the cash replaces the demand-deposit which acted as money. As we have established, it is only thin-air that the banking system has created to facilitate the multiplicity of lending of the same bit of money, so its total replacement with cash would mean the money supply stays exactly the same.

    Ans.:This is just a re-iteration of points 1 & 2

    4) Require all banks to lend real savings that people knowingly place with banks to lend to businesses to get a return of interest and capital back when the business repays that loan. This is nice, simple and safe utility banking. This is what Mervyn King advocates.

    Ans.:”Real Savings” must mean savings accounts as opposed to demand deposits. This suggests that savings account monies could be lent and therefore not kept at 100% cash balance. So we are back to square one, only with savings accounts instead of demand deposits. Fractional reserve banking can be practiced with savings accounts but not demand deposits.

    This takes us back to the same rules bankers have now for minimum capital requirements and estimates of borrowers capacities for repayment. Since savings accounts have time limits the cash required for redemptions can be more accurately estimated but there must still be certain reserve requirements.

    So this proposal takes banking back to the 19th century before digital electronics allowed instantaneous and accurate determinations of bank cash inflows and outflows. The managing of fractional reserve demand deposits which are invested by modern banks is made possible by digital electronics.

    The effect will be to shrink the available pool of credit to the nation. This is of course deflationary.

    5) As you are not a creditor of the bank anymore, the banking system will only have its assets and its capital, i.e. no liabilities. This means that there never again could be a bank run.

    Ans.:This is just not true. The savings accounts in the previous question make the bank a borrower from those citizens who placed their money in time deposits. Therefore those citizens are in fact creditors to the bank.

    Even the demand depositors are still creditors, since the bank must hold their cash assets in it’s vault, the depositors have full claim on the new money created for this purpose. In effect the bank holds the asset in trust for the depositors.

    6) As for the banks, not having you the depositor as a liability anymore, they will suddenly be £850 billion better off,

    Ans.:This is where the “wheels fall off the vehicle”. Fractional reserve banking allowed the banks, prior to the passage of the proposed new law, to support a great deal more currency than their absolute level of reserves, capital and shareholder equity. The banks never had L850 Billion, only 1/10 or 1/100 of that. So poof—sorry, there is not L850 Billion only L85 Billion at best, L8.5 Billion at worst.

    with no current liabilities and only assets (loans to business etc), post reform. The government can now put those assets into Mutuals, which would then immediately pay off the national debt, and leave the banks in exactly the same position net worth wise as they were prior to the reform, owned by their existing shareholders. As the national debt is still just under the £850 billion, which would be available as surplus assets of the banks, this could still be achieved.

    7) No national debt means no interest costs (currently £40 billion p.a) associated with paying for our borrowing. Therefore, give an immediate 28.5% income-tax cut. Total income-tax raised is £142 billion….”

    Ans.:This is not true, since this is based on L850 Billion which does not exist as shown in item 6 above.

    L1,000 is very generous, thank you,

    Best Regards,
    John

    • To John Moore

      1. It is not designed to increase spending , just designed to replace one form of money with another form. Purchasing power stays exactly the same. The only cash that would sit in the vaults is hand to mouth cash as most people wish to earn interest i.e. they would move to savings that would pay interest.

      2. Banks will lend out savings in times deposits as they do today – approx 55% of all lending in the UK. Banks will still offer all their other services, why not?

      4. When a saver saves, he / she relinquishes his / her purchasing power to the bank to lend to another. This transfer of ownership requires no 100% reserve as a transfer of ownership has willingly happened.

      As the money supply is fixed by this, there can be no money deflation. It is impossible. You are mistaken on this.

      5. The vault money the bank is custodian for, it does not , post reform form part of their balance sheet as it does today. So for demand deposits, which we are talking about, you are no longer a creditor to the bank. Savings accounts or time deposits, which we are not talking about and do not form part of the conversion into cash process, you do sit as creditor to the bank with a longer term liability to you.

      6. You have demonstrated that I have not made this reform proposal clear enough to you.

      I copy and paste an answer I gave the commentator PeterMartin earlier
      Peter asks.

      “Consider this scenario. Maybe an illustration, or an example, will help everyone understand a little easier.

      A bank currently has approximately £100 million in deposits and £100 million in loans. The stock market vaulation of the bank, through its assets, its business value, and own internal capital etc, is $10 million

      The taxpayer makes a gift of £100 million so now the bank is worth £110 million and each account holder has real money in their account.
      A couple of questions:

      1)How, exactly, does the taxpayer make use of this increased value, bearing in mind that the whole point of the exercise is to put real money into the banks vaults, and that £100 million has to be left there?

      Pre reform the bank is worth £10m.

      Post reform £110m.

      Answer to 1.

      The £100m increase is caused by the fact that the £100m placed into the accounts of the demand deposit holders no longer sits as a liability i.e. on the left hand side of the balance sheet. In fact, just as if you rented a safe deposit box and placed your family art work in there, the safe box owner, who is renting it to you, does not own the art work in there he owns the box that he is renting. So you should now see where I am going here, your cash , if kept on demand is yours and not the banks, so it forms part of your balance sheet and not the banks. So the money stays in the vault as a custody arrangement and not a loan arrangement.

      Now you should be able to see that the £100m increase in net worth is a real increase . Why gift it to shareholders? There lies the opportunity to bundle these assets up into special purpose vehicles and leave the shareholders at their pre reform level, I have called Mutuals that can be run by the banks for a fee and whose only responsibility is to pay down the national debt. “

      So sorry John, I know I am right on this.

      No £1k, but nice try and thank you for taking the time to read and write about this.

      • Tyler says:

        No, the bank is not worth £110m post reform. It can’t touch the £100m of deposits it has on its books (as you yourself say, they are custody only), so it is still worth £10m.

        • To Tyler

          For you I will try again.

          Pre Reform

          Share Cap £10m
          Assets £100m
          Liabilities £100m
          Net worth £10m

          Post Reform

          Share Cap £10m
          Assets £100m
          Liabilities £0m
          Net worth £110m

          Note : demand deposits are liabilities. Cash in a safe deposit box is not. Just like if you place a gold bar in a rented bank deposit box, the bank does not owe you the contents of that box, it owes you nothing. It provides you with a safe keeping service. Therefore note new increase in net worth of £100m

          • Tyler says:

            Brilliant! You have found the magic formula to make us all instant billionaires. Given that this is possible, will you now pay me the £1000 you owe me?
            Failing that, go and take a course in basic accounting.

            You are busy telling me that by printing money you can make everyone richer without debasing all asset prices in sterling. You have no option other than the money coming from the government. SO the bank OWES hte government money….thus you have liabilites of £100m again. QED.

  • PeterMartin says:

    Toby,

    Consider this scenario. Maybe an illustration, or an example, will help everyone understand a little easier.

    A bank currently has approximately £100 million in deposits and £100 million in loans. The stock market vaulation of the bank, through its assets, its business value, and own internal capital etc, is $10 million

    The taxpayer makes a gift of £100 million so now the bank is worth £110 million and each account holder has real money in their account.

    A couple of questions:

    1)How, exactly, does the taxpayer make use of this increased value, bearing in mind that the whole point of the exercise is to put real money into the banks vaults, and that £100 million has to be left there?
    2)What is to stop the bank now shooing away its depositors? They are quite an expensive nuisance, always complaining about bank charges, opening hours, and wanting free cheque accounts etc! Ok they take their £100 million of government money with them but our bank still has £100 million of nicely performing loans on its books!

    • Afternoon Peter

      A very good question.

      Pre reform the bank is worth £10m.

      Post reform £110m.

      Answer to 1.

      The £100m increase is caused by the fact that the £100m placed into the accounts of the demand deposit holders no longer sits as a liability i.e. on the left hand side of the balance sheet. In fact, just as if you rented a safe deposit box and placed your family art work in there, the safe box owner, who is renting it to you, does not own the art work in there he owns the box that he is renting. So you should now see where I am going here, your cash , if kept on demand is yours and not the banks, so it forms part of your balance sheet and not the banks. So the money stays in the vault as a custody arrangement and not a loan arrangement.

      Now you should be able to see that the £100m increase in net worth is a real increase . Why gift it to shareholders? There lies the opportunity to bundle these assets up into special purpose vehicles and leave the shareholders at their pre reform level, I have called Mutuals that can be run by the banks for a fee and whose only responsibility is to pay down the national debt.

      Answer to 2.

      If you understand the above, the last part of 2 should now fall away. The first part is answered that most bankers will want you not for the facts they have to store cash, but all the other services they may get you to buy etc, just like Tesco selling £0.07 cans of Baked Beans which cost far more than that.

      • Tyler says:

        Absolute nonsense – you say that pre-reform the bank is worth £10m, and post reform it is worth £100m…..but then also say that the £100m doesn’t sit on the banks balance sheet. So whose assets are they?

        If they can be used by the bank, then there is an associated liability for doing so, and if they can’t then they can’t be put on the bank’s balance sheet. Either way the bank is still worth £10m.

        • Tyler you are now getting yourself really confused. £100m of liabilities, £100m of assets, £10m of capital pre the reform. Post the reform, £0 liabilities as the cash sits in the accounts with the bank as custodian (think safe deposit box, the renter of the boxes owns the content inside, not the box owner) , £100m of assets and £10m of capital. There are the assets to use for this reform. Get it yet?

          • Tyler says:

            OK, by your logic;

            I see up a bank with minimal equity capital. I take £Xm deposits. I lend £Xm deposits at incredibly low interest rates to another one of my companies (lets call it Company M).

            Government comes and gives me £Xm.

            Are you seriously telling me my bank is now worth £Xm? ((I’ll tell you for free it isn’t))

            Using the governments money, I now repay all my intial depositors, thus fulfilling my legal obligations to them.

            I then have company M repay all it’s loans to my bank. I am the sole shareholder in my bank. I am now worth £Xm by your logic.

            Wicked – sign me up…..if it were only that easy.

            Seriously though – give up. You are totally wrong.

  • tom says:

    If it sounds to good to be true it usually is.
    Foreign banks would probably lever up and flood the uk with sterling.
    Governments would still be reluctant to balance the budget and with huge obligations over the coming decades would most likely still find ways to borrow.
    If the government starts telling private companies what to do and messing about with their business investor confidence in the uk would most likely fall, the whole affair would also set a very dangerous precedent, emboldening government to ever more desperate attempts to get something for nothing, seizing your pension or giving your house to the Chinese government.
    The problems in the economy are almost always caused or made worse by governments, why give them ideas when they are incapable of running anything.
    The system is cleaning itself already, gold is on the move and the market will one day find a new favoured currency leaving the sterling and they debt obselete and worthless.

    • To Tom,

      All Sterling that exists is already in the money supply as only the UK govt can print it and a sterling denominated account to have meaning where ever it is must bank somewhere ultimately at a Bank of England licensed bank. If foreign banks wish to flood the UK with Sterling, they will have to buy Sterling assets to get it back over here. So all that will happen is there is a transfer of assets to foreign Sterling holders, from UK Sterling holders.

      I agree that governments would find it hard to be honest and balance their budgets. Constitutional rules may assist.

      The final part of the reform not mentioned here would be to route the money in a commodity or commodities so that it become very difficult for government to manipulate. This forces fiscal responsibility.

      Thank you for taking the time to read the article and comment.

      • Tyler says:

        FX swaps? You don’t have to buy GBP assets to gain acess to GBP, and the money supply isn’t fixed (given the GBP is fully convertable). Likewise, you can have GBP accounts at banks which are not licensed by the BoE.

        • They themselves will have to bank somewhere in Sterling to give any meaning to them having sterling as it is useless in their legal tender area.

          FX swap , you are gambling in your own currency I presume v a move one way or the other – what has this got to do with the banking reform?

          • Tyler says:

            FX swaps are not speculation on the strength of a currency – that is FX SPOT. They are a money market/funding trade. The point being that using FX swaps a bank can move it’s money supply from one currency to another without being exposed to the FX risk and without affecting their capital base. They use FX swaps all the time to manage their various account balances. Your assertion that supply of a particular currency is fixed is simply not true.

            Banks do not need to have UK based GBP deposit accounts to hold sterling, as sterling is fully convertable. All they need to be able to do is convert the GBP in their account. Likewise the USD isn’t legal tender here, nor is the South African Rand, but it doesn’t stop me having UK accounts based in those currencies, neither of which are regulated by the local central bank.

  • “Print cash and replace all the demand-deposits/IOUs that exist in the system with that cash. This means the government printing approx £850 billion in cash and injecting it directly into the vaults of the banks and into the accounts of individuals. Thus, if you deposited £100 once thinking it was “yours,” it now really exists in cash, with the bank acting as custodian of your money.”

    You assume that the cash in the vault and the demand deposit in the books is the same money. In fact they are both separate money supply – so you double the money supply in the bank.

    How do you “inject the cash into the accounts” – do you turn the bank notes into words? Wave a magic wand and the cash disappear to appear in the books?

    And if you add new cash to the account why are you not doubling the account? (before the person had $10 in the deposit – now the person has $10+$10 newly printed gift from the Gov)

    I don’t see the pound sign on my key board – so swap the $ with UK currency.

    When you get a new bank note to replace a damaged bank note you shred the damaged one so you don’t create inflation.

    I fail to see where you “shred” the demand deposit books. If you physically shred them you are in fact stealing all the money from the folks who deposited it.

    So you put the cash in the vaults – and what do you do to take the demand deposits out of the books?

    May be you put them on the government’s books, because the Gov gives you the cash – it is like the Gov buying toxic assets from the bank.

    Now the Gov owns all the demand deposits, but they bought them with printed money ?!?

    You plan is flawed from the beginning. So where is my 1000?

    • Ellie, we only have one money supply and it is made up of cash, demand deposits and time deposits.

      You physically deliver the cash to the banks where the deposits are.

      When you give the cash, you pass a law that says the bank owes its demand depositors nothing anymore.

      Not stealing depositors demand deposit money , replacing it with cash money to exactly the same value.

      Government owns nothing.

      No £1k.

      • Tyler says:

        OK, so what happens if the demand depositors all withdraw their cash? How does the bank finance all the lending it has made, given that it’s own equity capital won’t support it, and thanks to your new law (lets call it the saefty deposit box law) any deposits it takes can’t be used either.

        • To Tyler

          In a post reform world, there are no demand deposits – they have been converted into cash and are no longer a liability of the banks. There are custody accounts and timed deposits.

          • Tyler says:

            OK, answer the question then. How does a bank continue lending when it does not have any access to deposits (because it has to hold 100% cash against them)?

            • Tyler,

              As I keep saying it lends out what is put in savings accounts where no 100% reserve ration is needed as ownership of the purchasing power has been moved to the borrower.

      • “When you give the cash, you pass a law that says the bank owes its demand depositors nothing anymore.”

        At this moment you are stealing my money.

        You say my deposit of $10 does not longer exist.

        The only way my deposit can stop existing is if you give me back my $10. Your law is stealing my $10.

        If the bank does not have $10 to give me – it can borrow, sell some assets to get cash.

        Instead you give the bank a gift from the Gov to give me $10, because the bank was irresponsible and lost my $10.

        But my original $10 dollars are lost – not available at the bank – so you cannot swap the new $10 for my old $10, because the bank does not have it.

        If the King has no clothes – if you swap your trousers with the King’s trousers – you will end up naked yourself.

        The cash covering the demand deposits is missing from the bank – you cannot swap it for new cash.

        The new $10 you are giving me is a totally new account. You stole my $10 and then the government printed $10 for you to get you off the hook – so you can give me $10.

        If you want to give me a new account with $10 – it is nice.

        But don’t make up law that will say that the bank does not owe me $10 when the bank does owe me $10.

        Seems to me you owe me £1k (copy/paste)

  • Tyler says:

    Toby,

    I assume John Moore and I won’t be seeing our £1000 prizes then? Both of us have quite capably disproved your postulation, but for some reason you seem to ahve chosen not to reply to us….

    Anything?

    • You have been responded to.

      It is 25+ here in my garden and I do not have instant time to reply to you on days like this!

    • John Moore says:

      Tyler — we may have to give Toby some time — he has been very busy keeping up with this torrent of messages. As we have pointed out the problem with his proposed law is the transfer of the ownership of the cash demand deposits from the depositors to the bank by an undisclosed method. As presently stated that method would be theft.

      • John Moore and Tyler.

        I would think something like the following:

        Increases in net worth of banks post reform , caused by the reform, are required by law to be placed in a special purpose vehicle i.e. a Mutual or series of them , whose shareholding mirrors the current banks owenership, is run and adminstered by the banks , who levy a fee for doing so, thats only purposes is to pay off the debt.

  • Dan M says:

    Toby,

    An excellent article and I agree with the basics of what you are saying after having given it some thought.

    However, I still think that ‘sticky’ prices, such as wages, would present a problem. With a 100% reserve system, if the economy was growing fast, the result would be deflation – not a bad thing if prices can be adjusted quickly to suit. But do you think people would be happy to see their wages go down, even if the purchasing power of their money remains the same? I think not! This is the biggest objection I can see with this scheme.

    • To Dan

      Thank you for your positive comments.

      I hear what you say. I have empathy with what you say. Truth of the matter is I do not know. I am happy when I pay less for things. I think wages would stay the same (not fall) and price decreases, in effect a pay rise in purchasing power terms, what capitalism is all about, would be the norm.

      Thank you for entering into the debate.

  • Current says:

    Somewhere in this enormous thread Toby has made some comments about “Velocity of Money”.

    I’m going to deal with this very quickly since it’s great weather outside ;)

    Austrian Economists rightly criticise the Money Quantity equation that Monetarists use, MV = PT. There are four main criticisms, firstly, the interpretation of the equation is mistaken. Secondly, the velocity of circulation can’t be assumed to be a fixed number. Thirdly, the effect of a change of quantity of money cannot be rigidly predictable since it takes place through Cantillon effects. And lastly, the equation has nothing to do with GDP output Y. I’ll deal with these in the sequence I’ve just given.

    1) Interpretation…
    The “velocity of circulation” – V – isn’t really a thing by itself. It’s related to the demand for money compared to the stock of it. This ratio Mises called the “money relation”. Economists at Cambridge University called it k, they wrote an equation: M = kPT this equation is just another way of writing MV=PT. However it’s phrased the equation is a tautology, which is used to interpret facts. Some say that one side of the equation deals with good and the other with money, that isn’t true both sides deal with both.

    (To be as precise as possible: k is the ratio of the aggregate accepted demand (the ex post demand) for money divided by the stock of money.).

    2) Constancy of velocity…

    Assuming constant velocity is another way (a more discrete way) of assuming constant average demand for money. This is unreasonable and doesn’t happen in practice.

    Let’s suppose that a person holds £3000 in deposit and in cash. On
    average that person recieves an income of £1000 per month and spends
    the same amount. So, every month that person makes £1000 of
    transactions. Now, if everyone else in the economy is the same then
    on average every pound will change hands every three months, that’s
    the velocity. If people demand to hold higher stocks of money and
    succeed in doing so then V will fall. That means prices must fall.

    Price inflation is *not* only connected to money inflation, it is also connected to money demand.

    3) Cantillon effects…

    Both Mises and Hayek tried to build more realistic forms of the money quantity theory in their writings. The Austrian Business Cycle Theory is an attempt to understand the non-neutral effects of money injections or changes in money demand. It’s an theory about how they impact the structure of production. The money quantity equation can’t do that, but it can tell us about the endpoint. It can tell about what happens to the price level once a money injection has spread all across the economy. Or, what happens when there has been a permanent rise in velocity -or to put in the other way, a permanent fall in money demand compared to stock- then after the effects of that have worked their way through the economy the price level be higher. But, in the intermediate time relative prices change. Those changes cause real changes in capital structure and wealth distribution. So, after a money injection the composition of the total goods transferred T isn’t the same as before.

    4) GDP…

    Sometimes monetarists write MV=PQ and label Q as GDP output. They then state that V in this equation is something slightly different, it’s the money velocity of income. This equation is not so easy to interpret. This V is not connected in a simple way to a anything else, it doesn’t have a simple interpretation.

  • Nigel Tinsdale says:

    Something like this just cannot happen and not have repercussions else where. It does sound lovely and simplistic but the ripples that this would send out to other areas has not been thought through. For example what are the consequences of paying off all the national debt? Firstly if we look at the pensions industry. When a pensioner receives a pension from their company scheme or if you buy an annuity with your pension fund the pension fund is required to cover its liability of future payments with government gilts, (fixed rate and index-linked), or other high quality bonds. Therefore suddenly pension funds and annuity providers all over the country will be left with a pile of cash which they can’t lend out at a decent rate in a sufficiently secure bond as the demand for the corporate bonds still in existence will rise pushing down yields. As you say this will not be inflationary, quite possibly it could send things the other way, no one being able to get a decent return for their capital as institutions are awash with it. Meanwhile the pension industry are still in a dilemma on how to secure future payments for their pensioners, they are not allowed to risk the capital in the equity markets as we all know what happens there, it crashes from time to time, and there is one thing certain, it will crash again. The consequences for the pensions industry would be dramatic. How would future payments to existing annuities be provided? Would the government have to step in and guarantee those liabilities? If so the solution to the problem just shifts the problem to somewhere else.

    There is no simple way out of this problem, it will be hard work, the government have to spend less and cut its own pensions liability. In addition private industry need to make more stuff and sell it overseas. The heart of the recovery will be with private businesses, small businesses that will be giants in five to ten years time.

    • To Nigel Tinsdale

      Please remember at this stage, the purpose of this article is just to see if anyone can think of reasons why this is logically not possible. I believe it has passed that test. The devil is in the detail with all these things as you so rightly suggest by seeking out more practical detail.

      Pension companies being forced to buy government gilts to provide annuity income has got to be a terrible thing as it reinforces this dependence on the state of the funds and gives the government a backstop lender that it can force to give it money. I would relieve this obligation so that the pension industry does not have to be the handmaiden of the state. It should sell an annuity based on its own calculations of what income it has coming through the system via its own investments like anyone else has to.

      Corporate bonds would become more in demand as previous on-demand money (interest instant access and the like) that formally got interest would seek that interest on going in timed deposits, but then so too would the need for them, as timed lending would be the main method going forward. Adjustments are always painful and this would be painful post the reform.

      I would say this would be far less painful than a sovereign debt default. With the government consuming more that 50% of GDP and the interest bill alone being nearly 20% of private GDP, the burden on the private sector is immense. Much as I wholeheartedly concur with your last sentiments, I am now of the opinion that radical alternatives need to be thought of and planned for.

      “There is no simple way out of this problem, it will be hard work, the government have to spend less and cut its own pensions liability. In addition private industry needs to make more stuff and sell it overseas. The heart of the recovery will be with private businesses, small businesses that will be giants in five to ten years time.”

      Thank you for your thoughtful comments. If you have time, it would be very helpful if you could provide this site with details of how the government requires the pension industry to buy its debt. My knowledge on this is just in general and not in detail. This I need to know more about.

  • The Spaniard says:

    My initial thoughts on achieving 100% reserve banking together with the elimination of the National Debt, which I take to be Toby’s goals:

    First, I think that the physical cash aspect in the discussion is something of a red herring. The important distinction is between publicly issued, debt-free central bank (CB) money and the current commercially issued, debt-based, bank-credit money. The desired reform is that all money is thereafter CB money, both electronic and physical. Bank credit money will cease to exist. This is then 100% reserve banking. The nature of ‘banks’ changes radically, they become simply custodians of depositors’ CB money and/or brokers between lenders and borrowers of CB money. Clients’ money does not appear on banks’ balance sheets. To facilitate maturity transformation of loans they pool investors’ (time depositors’) money much as traditional building societies used to do. However, expect more emphasis on investment through equity participation and corporate bonds than through loans.

    Now, the proposed transformation, or at least an approximation, as I understand it:

    1) All bank deposits (former bank liabilities) become central bank (CB) money.

    2) Ownership of an equal value of bank loans (former bank assets) is simultaneously transferred to a newly formed mutual fund (investment trust). Let’s call it the Gilt Replacement Fund (GRF). Banks thus lose assets and liabilities in precisely equal measure.

    3) All present owners of Gilts are obliged immediately to redeem their Gilts in exchange for shares in the new GRF, presumably in proportion to the current market value of their Gilts holdings.
    The initial assets of the GRF are debts for which the GRF is now the creditor. They are not actual money. Those debt obligations (e.g. mortgages, corporate loans, etc…) must perform over considerable time to produce the necessary money to compensate the GRF shareholders appropriately for their former Gilt holdings. Note however that shares in GRF would be tradable, should any shareholder (former Gilt holder) wish to sell quickly for cash.

    Currently Gilt owners rely upon HMG to repay them predominately by extracting the money from the UK economy, either through taxation or through rollover Gilt borrowing. GRF makes this relationship between former Gilt owners and the UK economy more direct and explicit, though arguably more risky, by removing ‘the middleman’ HMG.

    Toby, are you in fact proposing that current Gilt holders are obliged immediately to exchange their Gilts for shares in GRF? If so then your scheme could work, at least in theory, but you need to be more explicit and provide far more detail, particularly about how diverse Gilt holdings might be mapped to claims on the present and future assets of GRF. For example, how would you handle perpetual Gilts and index-linked Gilts? What guarantees, if any, would be offered to GRF shareholders to match their former security in AAA rated Gilts?

    Some other approaches to money reform:

    http://www.jamesrobertson.com/book/creatingnewmoney.pdf
    http://www.moneyreformparty.org.uk/
    http://www.bankofenglandact.co.uk/

    • To The Spaniard

      Many thanks for your very thoughtful comments.

      I have never quite thought about the reforms in these terms as you say,

      “3) All present owners of Gilts are obliged immediately to redeem their Gilts in exchange for shares in the new GRF, presumably in proportion to the current market value of their Gilts holdings.
      The initial assets of the GRF are debts for which the GRF is now the creditor. They are not actual money. Those debt obligations (e.g. mortgages, corporate loans, etc…) must perform over considerable time to produce the necessary money to compensate the GRF shareholders appropriately for their former Gilt holdings. Note however that shares in GRF would be tradable, should any shareholder (former Gilt holder) wish to sell quickly for cash.”

      As you note this could work. I see it myself as arguing more as a novation of HMG’s immediate liability to pay the gilts to the Mutual. The Mutual then discharging from its loan repayments.

      A novation to the mutual with HMG still standing behind it could also be a possibility.

      The Spaniard, please remember at this stage, the purpose of this article is just to see if anyone can think of reasons why this is logically not possible. I believe it has past that test. The devil is in the detail with all these things as you so rightly suggest by seeking out more practical detail.

      The detail is for the next stage of this debate which I do not doubt by your questioning and links, you will have much to say on the matter I am sure.

      I thank you for your time.

  • John Moore says:

    Hi Toby —- I’m reviewing your response step by step to determine our points of disagreement which should be the focus of our discussion. I admire your energy and individual replies to the many respondents. On items 1 through 5 we have disagreement only on deflation, we have difference on several other points which do not invalidate your theoretical ideal model. However on item 6 there is a fatal flaw in the model. My comments are in brackets directly under your patient replies.

    1. It is not designed to increase spending , just designed to replace one form of money with another form. Purchasing power stays exactly the same.

    [I agree on this point and did so in the original response, it was an observation more than a conclusion.]

    The only cash that would sit in the vaults is hand to mouth cash as most people wish to earn interest i.e. they would move to savings that would pay interest.

    2. Banks will lend out savings in times deposits as they do today – approx 55% of all lending in the UK. Banks will still offer all their other services, why not?

    [Yes, we agree the banks would lend the savings or time deposits, but what are the reserve requirements if any? Can 100% of the cash moved from the demand deposit to the time deposit be lent or should only 50% be lent, the remainder held for redemptions.]

    4. When a saver saves, he / she relinquishes his / her purchasing power to the bank to lend to another. This transfer of ownership requires no 100% reserve as a transfer of ownership has willingly happened.

    [Fine, then your reserve requirement is zero, 0.0%, the entire time deposit is lent on the behalf of the savings account depositor. What happens if the borrower of these time deposits defaults? Is the bank liable to the depositor under your scheme?]

    As the money supply is fixed by this, there can be no money deflation. It is impossible. You are mistaken on this.

    [Fine, you have no reserve requirement, the full time/savings deposit is lent. At this point we have no fractional reserve lending, unless the fraction is considered as 100% This step would prevent inflation at the bank level (but does not prevent the government from issuing more currency).]

    [Deflation is another matter. It is quite possible that one or more borrowers would default, those depositors providing the funds would be at a loss until litigation settled the matter. That legal judgment could be worthless if the borrower had insufficient or no funds. This would scare the particular time depositors away from further lending. During a downturn in the business cycle, such as Europe and the US are now experiencing, many depositors would become reluctant to lend and fewer borrowers would qualify for funding. This would lead to deflation because many of the former time depositors would return their cash to demand deposits where the money would sit idle but very safe. While the cash is not destroyed it is withdrawn from circulation and this is as deflationary as lighting a match to the currency.]

    [At this point we agree on everything in your ideal model except deflation. As a practicle matter the bank has an upper limit on total lendable funds outstanding equal to the total amount of cash transferred to time deposits from demand deposits. Cash deposits of the bank were funded at 100% by Government fiat currency. So if the bank, under the old banking laws, had a reserve requirement of, say, 2.5% on demand deposits, it would now have 40 times (2.5% is 1/40) the cash on hand after the fiat action and a reserve requirement of 100% on demand deposits and 0.0% on time deposits.]

    [This is interesting. What has happened here is that the currency multiplier effect which is normally a part of the banking system (the creation of new currency at the rate of 40 to 1 based on fractional reserve requirements for demand deposits) has been taken over by the Governments’ issue of the same amount of currency in the 40 to 1 ratio for all demand deposits.]

    [The theoretical upper limit amount of lendable currency has remained the same however the effective upper limit is not the same. Here’s why. With traditional demand deposits the bank lends the funds as immediately as possible without the permission of the demand depositor. Any losses to the depositor are insured by the bank. The bank creates new currency (actually credit) by the multiplier effect based on the reserve requirement. Under your proposed system the bank can only lend the funds that the demand depositors choose to place in time deposits. In effect the bank and the depositor must agree to lend the funds by transferring cash from demand deposits to time deposits. Since it is always more difficult to get two to agree than one there will be many more instances in which loans will not be made. Given this there may not be any insurance provided by the bank for loans gone bad since both parties, depositor and banker, agreed to the loan and the possibility of loss. The bank acts more as a broker, not a banker. Each party, depositor and banker, may be required to seek outside insurance on the deal — something like a CDS. (Credit Default Swap). This will definitely slow the issuance of new loans. However I see below that you may have avoided this need for insurance by allowing the time depositor to be a creditor to the bank.]

    5. The vault money the bank is custodian for, it does not , post reform form part of their balance sheet as it does today. So for demand deposits, which we are talking about, you are no longer a creditor to the bank.

    [We agree the bank is custodian for the demand deposits but does the bank have liability for losses from theft, either robbery or embezzlement while those cash demand deposits are in the custody of the bank? Will that liability be expressed as a reserve account and/or reserve ratio?]

    [I see below in your answer to Peter Martin that demand deposits are, in your ideal system, the same as safe deposit boxes and subject to whatever liability terms apply to safe deposit boxes and that the bank is not the owner of the cash. Of course the bank is not the owner of a traditional demand deposit either but the depositor (at least in the US) has lost the FDIC (Federal Deposit Insurance Corporation) coverage on his demand deposit. In America this is a very big deal, I don’t know if there is such a thing in Britain.]

    Savings accounts or time deposits, which we are not talking about and do not form part of the conversion into cash process, you do sit as creditor to the bank with a longer term liability to you.

    [Well we agree here too, the time depositors are creditors to the bank.]

    [So, Toby, in items 1 through 5 we have agreed on everything except deflation. We have differences on the effective maximum lendable funds though this does not invalidate your model it makes the lending process more cumbersome. We have a new twist to lending in the form of the government providing the money multiplier effect currently done by the banking system. ]

    [It is now clear that demand deposits have a reserve requirement of 100% and time deposits have a 0% reserve. We have a disagreement on the loss of FDIC coverage for demand deposits in US accounts for which there may be no British counterpart. ]

    [Finally we have agreed on the creditor relationship between the bank and time depositor but have left unspecified the assets which would provide coverage for loss on the part of the time depositor.]

    6. You have demonstrated that I have not made this reform proposal clear enough to you.
    I copy and paste an answer I gave the commentator PeterMartin earlier
    Peter asks.
    “Consider this scenario. Maybe an illustration, or an example, will help everyone understand a little easier.
    A bank currently has approximately £100 million in deposits and £100 million in loans. The stock market vaulation of the bank, through its assets, its business value, and own internal capital etc, is $10 million
    The taxpayer makes a gift of £100 million so now the bank is worth £110 million and each account holder has real money in their account.

    [We have a contradiction here Toby, by your words above the L100 Million is given to the depositors, not the bank.]

    [The bank merely rents the safe deposit box in which the L100 Million in new cash money is kept. Therefore by all accounting rules, both in America and Britain, the L100 million cash provided for demand deposits cannot increase the asset value of the bank. The stock market valuation of the bank remains at L10 Million.]

    A couple of questions:
    1)How, exactly, does the taxpayer make use of this increased value, bearing in mind that the whole point of the exercise is to put real money into the banks vaults, and that £100 million has to be left there?
    Pre reform the bank is worth £10m.
    Post reform £110m.

    [Again we have the same contradiction, Post reform the bank is still worth only L10 million. I have pasted your own words on this right below here:]
    5. The vault money the bank is custodian for, it does not , post reform form part of their balance sheet as it does today. So for demand deposits, which we are talking about, you are no longer a creditor to the bank.

    Answer to 1.
    The £100m increase is caused by the fact that the £100m placed into the accounts of the demand deposit holders no longer sits as a liability i.e. on the left hand side of the balance sheet. In fact, just as if you rented a safe deposit box and placed your family art work in there, the safe box owner, who is renting it to you, does not own the art work in there he owns the box that he is renting.

    [This is 3rd instance of this contradiction]

    So you should now see where I am going here, your cash , if kept on demand is yours and not the banks, so it forms part of your balance sheet and not the banks’. So the money stays in the vault as a custody arrangement and not a loan arrangement.

    [This is the 4th instance of the previous contradiction, if the demand deposit is now an asset on the borrowers balance sheet it can’t be an asset on the banks’ balance sheet]

    Now you should be able to see that the £100m increase in net worth is a real increase . Why gift it to shareholders?

    [I agree that it shouldn’t be gifted to shareholders, therefore it cannot appear on the banks balance sheet as an asset, the bank is still worth only L10 million]

    There lies the opportunity to bundle these assets up into special purpose vehicles and leave the shareholders at their pre reform level,

    [No, this cannot be done, you have already given the L100 million to individual depositors, not the bank. This is the fatal flaw in your model, Toby.]

    I have called Mutuals that can be run by the banks for a fee and whose only responsibility is to pay down the national debt. “
    So sorry John, I know I am right on this.

    [Sorry Toby, the L100 million belongs to the depositors not the bank, there is no L100 million in the bank to apply to reducing the national debt. The bank is only worth L10 million ]

    No £1k, but nice try and thank you for taking the time to read and write about this.

    [Thank you for your detailed and thoughtful response but I have to disagree Toby, the L1k is still owing.
    Best Regards,
    John Moore]

    • John, help me understand why the paperwork about who deposited what in the bank is considered money by Toby. He is swapping cash for paperwork – not cash for money.

      • John Moore says:

        Hi Ellie,

        I have had similar discussion with Russians/Ukrainians (I am assuming you are of that extraction). So I will answer you on several levels.

        Let me see if I understand your question. I believe you are questioning Tobys’ plan for the British Government to deposit physical cash pounds, attributed to each current demand depositor in the amount of that demand depositors’ existing balance.

        In other words Ellie, lets’ say you currently have a L100 cash balance demand deposit at the Bank of Toby. At this point, prior to passage of the new law, your actual cash on hand at the Bank of Toby is only a fraction of the actual L100. Fractional Reserve banking depends on the fact that only a fraction of total demand depositors will withdraw their balances at any given time. As long as you are the only depositor this week who wants to withdraw all her cash the fractional reserve account maintained by Toby will have enough to pay you. But if every demand depositor arrives in a line right behind you then we have a bank “run”.

        In America, during the Depression, there were “runs” on the banks which occured when all the demand depositors arrived at once and demanded cash. I believe something similar happened recently in England (London?) at Black Rock Bank(?). No fractional reserve bank can remain solvent at this point without some “special” access to a great deal of cash. In America this is when the FDIC & Federal Reserve (Federal Deposit Insurance Corporation, est. about 1936) comes in to provide oodles of cash and deposit it with the bank affected by the “run”.

        Toby has suggested a novel approach to this problem by authorizing the British Government to provide this cash, that would typically only be needed during a bank “run”, immediately. Therefore there would be no panic when everyone decides to get their cash at once, they would just go to their safe deposit boxes and get the money.

        The point here, that Toby and I are disputing, is the ownership of the cash which the British Government provides in the above example. Toby has claimed that the ownership remains with the depositors because they are only given safe deposit boxes —- not demand deposits (in the fractional reserve sense). However he later changes this premise and says the banks own the demand deposit money.

        Your second point is deeper. You are questioning what can be considered as money. There is a simple definition, that some may consider a tautology. “Money is anything that is used and accepted as money”. In other words I can go to London, exchange my US dollars (at a very favorable rate today), for Pounds. I can purchase a fine dinner with those British pieces of paper. So they pass the money test. In addition I can go to the theater and purchase tickets by showing a piece of multi-colored plastic with a magnetic strip on the back. I show the plastic and recieve the tickets. The credit card passes the test for money — so it is money too. Likewise with all credit instruments that pass the money test — home loans, car loans, credit cards etc…

        The other definition of money is as a “medium of exchange and a store of value”. In the old days gold and silver coins were the only legal money. All items of wealth (homes, cars, diamonds, cattle, land, mines, buildings, airplanes, ships, coal, iron ore, wheat, oil, shares of stock, dentistry, hospitilization and fine dinners etc..) can be converted into money, that is half of the concept of “medium of exchange and store of value”. That money can be placed in a conveniently small place and stored (store of value) away or transported elsewhere and converted back to wealth — exchanged for homes, cars etc. in another place.

        Gold in particular was well suited as money, because it is portable, durable (gold does not oxidize or react to salt water), divisible (a soft metal that can be cut with a knife) and importantly as a store of value –it cannot be manufactured out of thin air. Gold can be adulterated by mixing it with other metals, typically copper. So governments began to stamp coins with a very precise stated amount of gold mixed with very small amounts of other metals to increase the hardness and durability of the coin.

        The most common complaint about paper money is its’ failure to be a reliable store of value, not as a medium of exchange. When the money supply inflates the value of each pound decreases. So in the previous case if the traveler had put his wealth in paper money then later taken the money out of the mattress to buy a car he may have discovered that he no longer had enough cash. So value was lost, but not completely.

        During the Spanish conquest of the Americas in the 1500s much gold was brought back to the mother country. Guess what happened? Inflation!! Yes even gold can lose value when the supply of the metal far outstrips the production of the items of wealth. This is a fascinating case and well worth reading. Even gold can lose its’ ability to be a reliable store of value.

        I have probably gone on too far but let me add one other point. As far as I can determine there are only 3 nations on earth whose governments have lasted over 100 years and have always paid their debts, most of the remaining governments are only one lifetime in age. Those 3 are England, Switzerland and the US. (Perhaps Iceland, Norway and Sweden, not sure, maybe Monaco) Since governments issue paper money this record of stability and repayment become a very important element of currency value.

        Best Regards,
        John

        • Thank you, John! I learned a lot from you. It is true – I grew up in the USSR, but moved to the USA years ago – so my species have evolved :)

          I still cannot connect the dots.

          Let me try another example.

          Let’s say Toby loans me L1000.

          I have a paper that says: the Toby gave me L1000. I lend the L1000 to a friend so I don’t have the L1000 in my house anymore.

          Let’s say I have connections to the British government and I tell them: “Yo! Print me L1000 and ship it to my house. It ain’t gonna be new money because we are going to swap.

          I’ll give you a note from my records that shows Toby lent me L1000 and you are going to give me the UK banknotes in return”.

          Cameron says: cool, no problem. The cash is shipped to my house. If Toby wants his L1000 back – I pay him back.

          Where is the weak point in my plan?

          May be, the note from my record is not money – it is paperwork, bookkeeping scribble. So despite the swap – the UK cash is just L1000 newly printed money.

          • See it is an equal swap – I give them a note and they give me a note. One is a note from my accountant – the other is a bank note.

          • mrg says:

            Hi Ellie,

            I gather that in your example you are playing the role of the bank, Toby is a creditor-depositor, and your friend is the recipient of a bank loan.

            Under the proposed reform, the L1000 sent to you by David Cameron would belong to Toby (as the depositor).

            At this point (Step 5), a legal change of ownership has taken place. You as the bank no longer have any creditors, you are just holding L1000 that legally belongs to Toby. Because this L1000 belongs to Toby and not to you, you cannot loan it out to anyone new, and you cannot spend it. There is no longer any risk (short of a bank robbery) that you will be unable to repay Toby. At this point you have no liabilities (creditors); you only have assets (your loan of the original L1000 to your friend, on which you can expect interest).

            This obviously seems like a good deal from your perspective. To avoid this windfall to the banker, Toby’s proposal includes Step 6: the mutualisation of your assets.

            Have I interpreted your example correctly?

            Does my explanation make sense?

            Which part of the plan are you concerned about?

          • mrg,

            you understand my example correctly.

            I agree the money Cameron will send me will belong to Toby – he can have it anytime he wishes.

            What is mutualization of my assets mean in my example?

            Does it mean the government will take L1000 from me at some point? Are they going to shred it when I give it to them?

            When Cameron prints money and I add it to the money supply by giving it to Toby – Cameron has to destroy somehow the old money. Otherwise he is causing inflation in the Kingdom.

            At what point in my example the gov is withdrawing the equivalent of the L1000 Cameron is printing for me from the money supply?

            If he doesn’t there is no swap – the printed money is new money.

          • mrg says:

            See Toby’s comment above:

            “I have said Mutuals, but they could be other types of wrappers, owned and run by the banks or the banks shareholders , or anyone really, I am not to fussed, you could own them all, on the one condition, that the loan repayments received in these vehicles pay off the national debt.”

            The point, as I understand it, is that whoever takes ‘ownership’ of the assets (loans) is really just a custodian, because they are committed to hand over the repayments to the government.

            I suppose you could say that the government owns the loans. If this is so, I suppose you might ask why this isn’t made official.

            Presumably mutuals are suggested because those in the finance sector are better qualified than bureaucrats to manage the loans until the point when they are repaid. To ensure this management isn’t slave labour, I assume the mutuals would be allowed to keep (at least some of) the interest on the loans, and only hand over the loan capital to the government.

            We’re at the limits of my understanding here, and I hope I haven’t added to the confusion.

            As for “causing inflation in the Kingdom”, I think this point has already been answered by Toby and others, so I suggest you re-read those comments. Basically, there is no inflation because the cash replaces IOUs that were already functioning as cash.

            I can understand why all of this is difficult to grasp. On the one hand, the L1000 from David Cameron is “real” in that it wipes out your liabilities and justifies the seizure of your assets. On the other hand, it isn’t “real” in that it doesn’t contribute to inflation.

            Again, I’m not sure I’m really helping here, so I’ll step back and let the experts comment. Of course, the experts may be all “commented out” at this point :-)

            If you really want to understand the proposal, I suggest you read some of the books mentioned:

            1. Jimmy Stewart is Dead by Laurence J Kotlikoff
            2. 100% Money by Irving Fisher
            3. the final chapter of Huerta de Soto, Money, Bank Credit and Economic Cycles

            Hope this helps.

          • John Moore says:

            Thank you, John!

            [You are very welcome!]

            I learned a lot from you. It is true – I grew up in the USSR, but moved to the USA years ago – so my species have evolved :)

            [Welcome to America!]

            I still cannot connect the dots.

            Let me try another example.

            [OK we’ll go step by step]

            Let’s say Toby loans me L1000.

            [At this point let’s say the Bank of Toby lends you L1000 by creating a loan account for you. The banker, Toby, hasn’t actually deposited cash in the account under traditional fractional reserve lending. Tobys’ Reserve Account is not fully used so he can extend credit to you.]

            [Here is where the banker “majic” happens — so watch carefully. Let’s say British Banking laws require a 2.5% Capital Reserve account for all loans outstanding. Well Tobys’ Capital Reserve account has L10,000 unused. 2.5% of L1,000 = L25. So Tobys’ Capital Reserve Account sets aside the L25 for your loan and now has an unused balance of L9,975 in the Capital Reserve account. Toby simple creates a loan account for you in the amount of L1,000 by making an accounting entry — Presto an additional L1,000 in credit/money is now available for you to spend.]

            [Toby has run a credit check on you and has checked your employment and income and set out the terms for repayment of the L1,000 prior to creating the cash. You have signed the note and agreed to the repayment terms. So the note, the piece of paper stating the contract between you and the bank becomes collateral upon which the credit/cash was made available to you.]

            I have a paper that says: the Toby gave me L1000. I lend the L1000 to a friend so I don’t have the L1000 in my house anymore.

            [You do have a piece of paper that says you have L1,000 available to you, it is commonly called your bank statement or loan statement.]

            [Now you create another piece of paper, a check or bank draft in the amount of L1,000 and give it to your friend. Your friend goes to her bank and deposits the check in her account. Now her banker increases her account by L1,000 and your bank reduces your account by L1,000.]

            [You are still responsible to your bank to return the loan under the agreed and signed terms. Your friend may or may not pay you]

            Let’s say I have connections to the British government and I tell them: “Yo! Print me L1000 and ship it to my house. It ain’t gonna be new money because we are going to swap.

            [Well you can’t do this, because you have already spent the L1,000 by giving it to your friend. Your banker has the cancelled check from your friend as evidence of the “funds” (really just account entry changes via digital electronics and software) transfer.]

            [So Ellie if you were a big Wall Street Bank, like JP Morgan or Goldman-Sachs and you had been a good little banker and made numerous campaign contributions to certain Senators, and you had once worked as Treasury Secretary of the United States and then threatened the US Congress and Federal Reserve with the complete economic collapse of the US and there were enough gullible (or well compensated) Senators and Representatives to believe you — then and only then could you get the average US taxpayer to give you 3/4 of a Trillion dollars to pay off your losses! —and then you could even pay yourself a $Billion bonus for having such outstanding “talent”.]

            I’ll give you a note from my records that shows Toby lent me L1000 and you are going to give me the UK banknotes in return”.

            [This step could be done. You could write a check to your friend for L1,000 and he could give you L1,000 in cash. He could then take your check to his bank and cash it for L1,000. At this point each of you would now have L1,000 in paper currency in hand. You would still have a L1,000 obligation to your bank]

            Cameron says: cool, no problem. The cash is shipped to my house. If Toby wants his L1000 back – I pay him back.

            [This is the step above where Cameron gave you cash British Currency (this is what you meant by bank notes?) If you mean Cameron gave you a check or bank draft for L1,000 and you gave him cash then you could take the bank draft to your bank and deposit it, if it didn’t bounce then you loan would be liquidated at that point the currency/credit previously created would disappear.]

            Where is the weak point in my plan?

            [see above]

            May be, the note from my record is not money – it is paperwork, bookkeeping scribble. So despite the swap – the UK cash is just L1000 newly printed money.

            [This is a common problem when first confronting the majic of bankers. Banks can take a little bit of money (reserve) water it with a promissory note from a reliable borrower and create a mountain of credit which can then be exchanged for cash, as long as everyone doesn’t ask for cash at once. When the loan is repaid that credit/cash is extinguished and “goes to money heaven”, a net reduction in the money supply.]

          • John, Thank you so much!
            mrg, the inflation point is not resolved as far as I am concerned. I will continue to try, because I lived through 2 hyperinflations and I do not take this lightly.

            Demand Deposits are negative balances for the banks. However in the money supply formula they are used in they absolute value:
            [-1]=1 and
            That way:
            money supply= cash + [-L850 billion]= cash + L850 billion.

            This means there are L850b in the system, but they do not belong to the banks, because they are negative balance for the banks.

            Depositors have L850 and when Cameron prints the cash and gives it to the depositors – he is doubling their money, because the bank still owes them.

            They did not move their deposits to the Cameron bank – so Cameron can be repaying their deposits. They still have deposits in the original bank.

          • mrg, I will try to read more in the future.

            You guys are too smart and know so much abstract terms that you fail to see the obvious:

            1. the people lent L850b to the bank – the bank owes them L850b
            2. the gov prints L850b and gives them to the people
            3. the bank still owes L850b to the people
            4. the government makes a law: the bank does not owe L850b to the people
            5. the bank liabilities turn into bank assets. The bank now has L850b more assets.

            I call this stealing people’s money, because the bank never paid back the money to the people (instead the government gifted money to the people).
            The bank just kept the deposited money to itself and got L850 richer – by not paying back to the people.

            It is important part to understand in Toby’s plan.

            The people are not complaining that the bank stole their money and never returned it back, because the government reimbursed them for their loss.

            Toby says – it is not stealing – it is turning liability into assets – it is a swap: L850b to the people – and the L850b demand deposit are gone.

            However, the proper way to close the demand deposits is for the bank to pay back the money to the people. But the people already have the money from the gov. If the bank pays them back too – the people will have double the money.

            6. the bank has the extra L850b that the bank did not return to depositors – the bank gives it to the government to repay debt.

            At the end the government is paying the debt with the money that the bank stole from the people having demand deposits in the bank.

            The money supply before the operation: cash (means the currency in circulation – the bank’s assets are part of this cash) + L850 demand deposit

            The money supply after the operation: Cash (original cash + L850b(that is no longer demand deposit, but is turned into bank assets) + L850 cash that the government printed = original cash + 2xL850b

            Please, don’t dismiss my brain like I am an amoeba, because I am not an economist.

            Read this again and try to understand my point. It is important – if this is a real plan – it is crookery – robbery and it is inflationary.

            I hope it is just a L1000 logic exercise.

            The street smarts win and get the prize!

      • John Moore says:

        Ellie — one oversight on my part, add Canada, Australia and New Zealand to the list of long lived governments. However if we make a 200 year test then I believe only Great Britain, Switzerland and the US would pass. (still not sure on all the Scandanavian countries.)

        It is interesting (and a completely separate discussion) to note that with the exception of Switzerland (and French Canada), the other nations all speak English.

    • To John Moore

      I would love to pay you the £1k believe you me and go and enjoy my family , the wealth I have created with them and live in bliss with regards to the rest of the world, rather than commenting on this blog! Sadly, nothing you say leaves me to believe that I am wrong, thus I must still keep pushing this policy reform that could be very beneficial to all of us.

      You say point 6 has a fatal flaw. I would be most grateful if you give me the leeway to only address point 6 then initially rather than in the order the points are made.

      Your contention.

      “6. You have demonstrated that I have not made this reform proposal clear enough to you.
      I copy and paste an answer I gave the commentator PeterMartin earlier
      Peter asks.
      “Consider this scenario. Maybe an illustration, or an example, will help everyone understand a little easier.
      A bank currently has approximately £100 million in deposits and £100 million in loans. The stock market vaulation of the bank, through its assets, its business value, and own internal capital etc, is $10 million
      The taxpayer makes a gift of £100 million so now the bank is worth £110 million and each account holder has real money in their account.

      [We have a contradiction here Toby, by your words above the L100 Million is given to the depositors, not the bank.]

      [The bank merely rents the safe deposit box in which the L100 Million in new cash money is kept. Therefore by all accounting rules, both in America and Britain, the L100 million cash provided for demand deposits cannot increase the asset value of the bank. The stock market valuation of the bank remains at L10 Million.]

      The £100m goes to the individuals, not the bank. So the bank has NO CURRENT LIABILITIES. Consider in your mind on the left hand side of the balance sheet there was a £100m liability. As the depositor has now got cash, this does not exist anymore. So the balance sheet is zero on the left hand side and £100m of assets on the right hand side, supported by the £10m of shareholder capital. Thus the new net worth is £110m!

      No fatal flaw in the model = no £1k.

      2. Banks will lend out savings in times deposits as they do today – approx 55% of all lending in the UK. Banks will still offer all their other services, why not?

      [Yes, we agree the banks would lend the savings or time deposits, but what are the reserve requirements if any? Can 100% of the cash moved from the demand deposit to the time deposit be lent or should only 50% be lent, the remainder held for redemptions.]

      When cash is moved from a safe box to be lent, it does just that moves to the borrower. There is no reserve required as the lender does not have use of the purchasing power anymore until the loan agreement says it needs to come back with interest etc. Early redemptions in my experience cost a lot in penalty fees and foregone interest.

      Your point 4.

      Customers go bust on me all the time, I do not default on my creditors as I build in enough margin and keep costs as tight as I can. I presume a bank would do the same. If the bank was bad a business , it would go bust and people would lose their money.

      Yes, need to tie the hand of all governments ideally. Constitutional measure needed urgently.

      You describe a price deflation. In a recessionary environment this will happen and the correction is that the purchasing power of money buys more. This is the start of the correction.

      Re insurance in the UK, we have an implied government guarantee that it will let NO BANK fail whatever the circumstances.

      Please do get back to me if this does not satisfy you. I am happy there is no contradiction in what I say.

  • I know! I know!

    Toby,

    the information database about the demand deposits is not part of the money supply. The money that people deposited is part of the money supply.

    If the bank lent the money – that means the money is no longer in the bank.

    You are swapping cash for paperwork.

    If you want to re-enact the bank’s paperwork with cash. You should ship the cash described in the demand deposit’s database to whomever it was lent to.

    Now can you distribute 1000 of your wealth to me?

  • Dan Mosley says:

    Toby,

    Agreed that wages are a difficult one to figure out. Historically however, these have always been one of the problems that cause recessions. A shock to the economy in terms of a sudden lowering of demand can always be remedied by quick price adjustment to get back to equilibrium – but this is difficult for wages and is one of the factors that mean quick price adjustment is not possible and recessions are more severe than would otherwise be the case. This could cause problems with the full reserve system that you are proposing.

    In addition, the greater difficulty in getting a loan could cause problems in terms of technology advancement, innovation and enterprise. Risky technologies or innovations would be less likely to be able to obtain funding – and although, as you say, these sorts of companies contribute to the boom bust cycle, they are critical in terms of maintaining technology advancement and therefore growth in the economy.

    However, on balance I think that the positives do outweigh the negatives and that a big change is required to our current system, along the lines that you are proposing. Political considerations are obviously another matter!

    • To Dan Mosley

      You make a thought provoking point.

      At the moment , we try to make sure by positive policy proscription by the state that no adjustment takes place.

      With a fixed money supply, the adjustment is done via the purchasing power of money. A recession implies more demand to hold money and less demand to spend it. Goods become cheaper, therefore money commands more purchasing power over those goods and services, eventually, this is the point of the correction.

      A leading economist at the LSE told me that credit creation might well be worth the price paying as even if we know it is distorting, think of the companies that came out of the Dot.com boom and survived , are these not great contributors to society now? Even if we recognise 100’s go bust for every 1 shining star, it might be worth it.

      In all my experience in business, nothing stops a determined entrepreneur with a good idea, they get funding. I am not worried about the reform being a break on innovation. Stability is a very good platform for innovation, boom bust is not. Entrepreneurs struggle to make long term plans with so much uncertainty .

      I glad on balance you run with the proposal.

      Thank you for taking the time to comment.

  • Snowman says:

    Toby,

    sorry, you totally wrong. The wealth creation that we’ve witnessed since the War in particular has been due to what you’re trying to kill – credit. Your scheme would bring us to the level of some poor developing country with no or little financial service industry.

    Also, and its only a small point, you say the banks’ balance sheet would only have assets and shareholders equity. So how would you record the loans to businesses? Isn’t it just the opposite of an ‘asset’ in your proposal. In the current system, my deposit is a liability, the bank’s lending me money is an asset on the bank’s balance sheet. Your proposal reverses the denomination. So what, the business fails, and my money’s gone. How does it help?

    The problem ain’t credit per se, but the excesses in its creation. That’s what has gone wrong and should be put right.

    • Credit is fine. The problem is credit expansion in excess of real savings. I think we are agreed on this.

    • Current says:

      > The problem ain’t credit per se, but the excesses in its creation.
      > That’s what has gone wrong and should be put right.

      Yep. And the 100% reserves removes the excess, but it does so by also removing a lot of useful and growth creating credit.

    • To the Snowman

      I think you have missed the point.

      During the industrial revolution and the giant expansion of the British Empire, we did this on the back of solid savings being invested in capital intensive industry and very little bank credit as this was not an evolved industry then.. Why would this not happen going forward.

      Credit created out of nothing supports bubble activity . Bubble activity can only last until people realise it is a bubble.

      One system (lending savings) is stable and one (creating credit out of nothing with legal tender and a central bank) is not. I do not think this is a controversial thing to say.

      A loan to a business is always an asset.

      There is no reversal in asset and current liability – you have misunderstood, I suggest you read again.

      Excess creation is the problem.

      Thank you for your comments.

  • The Spaniard says:

    Imagine a barter society that recognizes for the first time its need for a universal means of exchange, that is for money.

    Someone offers to run this new system, on condition that he alone issues the necessary universal tokens of exchange. He proposes to lend out the tokens for everyone else to use to conduct their business, but only if they pay him interest for this use. Hence collectively the citizens can conduct their business only if they accept tokens exclusively from the proposer and agree to pay him back a greater number of tokens. He is offering a commercially issued, debt-based money system.

    Would you support his proposal or would you think it better that the whole population collectively issues its own adequate means of exchange, debt-free and persistently circulating?

    Should the means of exchange be issued collectively and debt-free as a utility for productive enterprise and trade, or should it be lent into existence at interest by a privileged but essentially unproductive minority, as a cost to and as a drag on everyone else?

    This is the nub of the matter which Toby has addressed.

  • The Spaniard says:

    ‘Credit’ essentially means debt-based money, brought into being with equal and opposite interest-bearing debt. As has been pointed out, this gives flexibility to the money supply, which can be of great benefit.

    However, there is no fundamental reason why debt-based money should not also be issued collectively, i.e. publicly, alongside and as a supplement to the bulk of debt-free persistently circulating money.

    The mechanism would be that ‘banks’ act as primary borrowers, and compete in regular reverse auctions to borrow into the economy new money issued by the central bank, i.e. issued by the nation. These primary borrowers could then compete in the money markets for secondary borrowers of the new money.

    Lending debt-based money into existence is far too lucrative and potentially unstable a process to leave in commercial hands. As we see, it grows inexorably to dominate the whole economic and political system.

    • To The Spaniard

      This is interesting indeed.

      I could not advocate it as I think it is far too important for the state to have ANYTHING to do with this whole money creation process.
      My reasons are spelled out here.

      “So How Much is my Pound Sterling Worth Today?

      The Maths

      One ounce of gold today is worth $1,093.40 and 1/20 oz therefore $54.67 but the dollar pre World War I was just a name in the USA for 1/20 of an ounce of gold: what would have cost $1 before World War I would cost $54.67 today. The dollar has lost its purchasing power. In fact it has lost 98.17% of its purchasing power in 100 years. One dollar today should buy something like a single person’s weekly food shop, not a single daily newspaper.

      The fate of the pound sterling has been even worse than that of the dollar. One ounce of gold today is £692.26. So if a pound sterling pre World War I was just a name in the UK for 1/4 of an ounce of gold, it would imply that the pre World War I purchasing price was 1/4 of £692.26 or £173.06. In fact the pound sterling has lost 99.42% of its purchasing power in 100 years. One pound should buy something like a good week’s food shop for a family of four and not just one daily newspaper like it would today.”

      Money , like language was created spontaneously by us the people, it needs no controls on it just like language needs not state control and direction.
      Ultimately money needs to be re routed back to a commodity from whence it came.

      Thank you for your thought provoking comments.

  • Wintermute says:

    Toby,

    Apologies if this has already been answered, but there are many comments to read.

    So we eliminate fractional reserve banking by simply creating real money for all the fake money that exists. Then, when the banks get capital payments back from existing credit (loans?), this capital goes into mutuals where it is further lent. The interest payments from these mutuals are then used to pay off the national debt.

    My problem here is that we appear to be forcing the banks to fore go interest payments on this money to pay off the national debt. Presumably, once the national debt is paid off, the banks can go back to collecting the full interest off the mutuals – i.e. back to normal business?

    How long would it take the banks to pay the debt off? Surely this kind of loss spread across all the UK banks will still hit them hard?

    • mrg says:

      Wintermute,

      I’m not sure when Toby will have a chance to reply, but I understood him to mean that loan capital would be used to repay the national debt, not just loan interest.

      See Toby’s earlier comment:

      “post reform the burden will be on the Mutuals to pay off the debt when they get loan repayments from business assets that they own”

      It’s not clear to me what happens to the interest. If I find the answer in the comments somewhere, I’ll post an update.

  • That sounds interesting. Does it have anything to do with the so called money accounts?

  • D_B says:

    “As you are not a creditor of the bank anymore, the banking system will only have its assets and its capital, i.e. no liabilities. This means that there never again could be a bank run.”

    Banks can suffer a run, even if they lend out only the funds that they have received from depositors. Those depositors might lose confidence in the banks’ lending policies or might require their cash before the borrowers’ term loans require it to be repaid.

    • To D_B

      Would this just not be a case of loss of confidence in that business ? This can happen to any business, point being if Microsoft went bust, there is not a “run” on all software companies i.e. the first act is not contagious as it is with fractional reserve banks.

  • The Spaniard says:

    Toby, you wrote:

    “As for the banks, not having you the depositor as a liability anymore, they will suddenly be £850 billion better off, with no current liabilities and only assets (loans to business etc), post reform. The government can now put those assets into Mutuals, which would then immediately pay off the national debt, and leave the banks in exactly the same position net worth wise as they were prior to the reform, owned by their existing shareholders.“

    The National Debt consists of a large set of debt obligations, HMG Treasury bonds or IOUs, called Gilts. These bonds must be serviced with regular dividend payments and (perpetual Gilts excepted) they must also sooner or later be redeemed.

    Could you please be specific about how you intend to “immediately pay off” these Gilts using the former bank assets? This step is crucial to your overall proposal.

    • To The Spaniard

      You are right to pull me up on this sloppy use of language and rhetorical posturing.

      Clarification needed.

      As soon as the Mutuals are established, they can take over the obligation to discharge the debt. Thus it moves from being an HMG obligation to being a Mutual obligation on day one.

      The commercial loans from day one will be repaying into the mutual and thus providing the funds to pay the interest obligations and amortisation. Redemption this year is only £38 bn and interest service is £40 bn, so in reality commercial loans are for far shorter durations than the 14 year average gilt maturity profile, this would imply plenty of money in the tank to effect a quicker repayment than the binds require. Some mathematically minded would need to get involved and calculate exactly, I would guess a full discharge within 5 years.

      Thank you for your time and a very valid point well put.

  • John Moore says:

    Ellie, let me give this another try.

    You guys are too smart and know so much abstract terms that you fail to see the obvious:

    1. the people lent L850b to the bank – the bank owes them L850b

    [The L850B new cash was supplied to the Depositors —- not the bank. However this wasn’t a gift from the British Gov.. The British Government just created physical cash to equal the existing credit balances of the demand depositors from the old fractional reserve system. In other words no Demand Depositor received a penny more (in new cash) than his current existing balance. Tobys’ new model placed all Demand deposits in safe deposit boxes under the complete control of the Demand Depositor. This also relieved the bank of its’ reserve requirement for Demand Deposits since all Demand Deposits now have full cash balances. ]

    2. the gov prints L850b and gives them to the people

    [Remember this is new physical cash but not new money. The credit balances of each Demand Depositor have merely been exchanged for cash balances. In accounting terms the credit asset has been reduced by L850B and the physical cash asset has been increased by L850B. Net money assets remains constant. The Demand Depositor already owned this money, it was their previous deposits which created their balances under the old fractional reserve system. Under the old fractional reserve system these were Credit balances not Physical cash balances. So there was NO gift from the British Government to the Demand Depositors]

    3. the bank still owes L850b to the people

    [Not at this point. Tobys’ new system is initialized by replacing the credit balances of the Demand Depositors with full cash balances of an equal amount, L850B in this case. The Demand Depositors had L850B in credit balances which were replaced with L850B in cash balances. In Tobys’ model these cash balances are the strict property of the Demand Depositors and are kept in safe deposit boxes. The Demand Depositors are free to add and withdraw cash without notification to the bank. In fact in short order no one will know exactly what the total cash balance will be because the bank has no ability to access the cash in the safe deposit boxes.]

    4. the government makes a law: the bank does not owe L850b to the people

    [Remember under the old fractional reserve system the bank had lent most of the old demand deposits. As these loans are gradually paid the cash should rightfully go to the British Government since it provided the cash, based on the amount of these outstanding loans when it placed L850B cash in the hands of the Demand Depositors. The bank would keep the interest on the loans but the principal would be the property of the British Government/British Taxpayer]

    [I think what you are saying is that instead of the pay-offs from the outstanding loans going back to the British Gov./people it would remain with the bank. This could be done but in more simple ways. However if you do it this way then you have inflated the British money supply by L850B. Why? because the L850B given to the Demand Depositors was the exact amount given out by the bank in loans from those Demand Deposits. So unless the L850B from the redeemed loans is returned to the British Treasury and taken out of circulation then we have the L850B Cash Demand Deposits + L850B paid-off loans from Demand Deposits (now the cash of the bank by law) = L1,700B Cash in circulation where previously we had only L850B cash in circulation (the loans from the Demand Deposits).

    [We have to follow the sequence of events as outlined by Tobys’ plan. First the Demand Depositors are initialized to a full L850B cash. Next the loans which were in existence at that moment that were lent from the previous fractional reserve Demand Deposits are paid off over the next several months or few years.]

    [Demand Depositors begin accessing their new cash in the safe deposit boxes. Some of the cash is spent outside the bank, some of it will go to Time Deposits]

    5. the bank liabilities turn into bank assets. The bank now has L850b more assets.

    [Well, I suppose a law can be passed to take anyones money.]

    I call this stealing people’s money,

    [Part of our confusion is the definition of People,Taxpayer,Depositor and Government. I assume the people,taxpayer and Government are one in the same, whereas Demand Depositor and Bank are two additional separate classes.

    So I would say in your terms the law giving the banks the cash from the redeeming loans which were based on Demand Deposits is indeed stealing from the British Government/Taxpayer/People but not the Demand Depositor.]

    because the bank never paid back the money to the people (instead the government gifted money to the people).

    [Here we have a problem. The British Government didn’t give a anything to the Demand Depositors (people??) in this case. The Demand Depositors already had this money, they earned it and deposited it in the bank. The British Government just converted their credit balances to cash but did NOT Increase their balances.]

    [If the bank is allowed to keep the principal pay-offs from the loans made from the Demand Deposits then this would be theft unless your new law allowed it. The reason is that the British Government injected cash equal to the total outstanding balance of loans made from the Demand Deposits to the Depositors thus relieving the bank of this responsibility. ]

    The bank just kept the deposited money to itself and got L850 richer – by not paying back to the people.

    [Yes, but I think this is what I said in my very first post. It wouldn’t be owed directly to the people but to the British Treasury which supplied the L850B to the Demand Depositors. However you said a law was passed to make this legal so it would be legalized theft.]

    [Toby never used the device of a law to legalize the theft. He just somehow assumed that the L850B became an asset of the bank.]

    [Look if the whole objective is to give the banks L850B then none Tobys’ model is necessary. Just do what the US Treasury and Federal Reserve did with TARP — give the banks the cash. It’s that simple. However I think this law of confiscation is your interpretation. Toby did not use a law
    like this in his model]

    It is important part to understand in Toby’s plan.

    The people are not complaining that the bank stole their money and never returned it back, because the government reimbursed them for their loss.

    Toby says – it is not stealing – it is turning liability into assets – it is a swap: L850b to the people – and the L850b demand deposit are gone.

    However, the proper way to close the demand deposits is for the bank to pay back the money to the people. But the people already have the money from the gov. If the bank pays them back too – the people will have double the money.

    6. the bank has the extra L850b that the bank did not return to depositors – the bank gives it to the government to repay debt.

    At the end the government is paying the debt with the money that the bank stole from the people having demand deposits in the bank.

    The money supply before the operation: cash (means the currency in circulation – the bank’s assets are part of this cash) + L850 demand deposit

    The money supply after the operation: Cash (original cash + L850b(that is no longer demand deposit, but is turned into bank assets) + L850 cash that the government printed = original cash + 2xL850b

    Please, don’t dismiss my brain like I am an amoeba, because I am not an economist.

    Read this again and try to understand my point. It is important – if this is a real plan – it is crookery – robbery and it is inflationary.

    I hope it is just a L1000 logic exercise.

    The street smarts win and get the prize!

    • To John Moore

      I am most grateful for your attempts to explain the reform proposal. In the most you are very accurate indeed.

      Some points of clarity I feel are needed on my behalf.

      Post reform when the net worth of all the banks has risen to the exact extent of the elimination of the demand deposits, I suggest that with the same ownership as the banks and the same bankers running the loan books, but in a protected special purpose vehicle like a Mutual, whose only purposes in to run down the loans and pay off the debt, should be legislated for and set up.

      You are comfortable that no new money is created at the reform point itself. You say that when the loans get repaid, there is in fact a doubling of the money supply and thus it is inflationary and thus the plan falls apart.

      Consider this, if I am a UK government bond holder, I have given the government money, be it cash or demand deposit , at this point in time does not matter. Either way money has left me and gone to the government prior to the reform who has spent it on X, Y and Z services it provides. So the money is in the system, it is in the £850 bn of demand deposits.

      Post reform, the Mutual now pays me back my Bond at some point in time; this is a transfer of real cash from the loanee to me. The lonee pays of his loan by providing goods and services he is making by offering these in final exchange for the cash of the people who hold the former demand deposits which are now cash. Remember with a fixed money supply, there cannot be more created out of nothing, just a cash move from one part of the economy to another part. Thus, there is no doubling of the money supply and no doubling of inflation.

      I hope this is helpful for your understanding. It is impeccable all apart from the last point.

    • John Moor, you say:
      The credit balances of each Demand Depositor have merely been exchanged for cash balances. In accounting terms the credit asset has been reduced by L850B and the physical cash asset has been increased by L850B. Net money assets remains constant. The Demand Depositor already owned this money, it was their previous deposits which created their balances under the old fractional reserve system. Under the old fractional reserve system these were Credit balances not Physical cash balances. So there was NO gift from the British Government to the Demand Depositors

      I say: you can spin it however you want – it is called stealing “their previous deposits”, John.

      You can’t possibly be trying to make the case that L850b were created to put in mutuals, but they were not created.

      There is a point where your elitism just gets too close to insanity, people.

    • John Moor, you say:
      Toby never used the device of a law to legalize the theft. He just somehow assumed that the L850B became an asset of the bank

      I say: let me quote Toby’s own comment from:
      May 23rd, 2010 at 15:29

      “You physically deliver the cash to the banks where the deposits are.

      When you give the cash, you pass a law that says the bank owes its demand depositors nothing anymore.

      Not stealing depositors demand deposit money , replacing it with cash money to exactly the same value.”
      ———————-
      I say: not so! The gov is the one giving the money to the folks. The bank is keeping their deposits and turning them into assets – how is that not stealing?

  • Robert Wiles says:

    So those “Demand Deposits” placed in the bank, subject to withdrawal by EFT, Check or at the counter must then be backed 100% by some specified set of assets or only by the fiat money of HMG?

    Therefor, with the elimination of ‘spread’ on those accounts, you’ll see charges for every service (you touched the counter, a tuppence for cleaning it!) and – in not so many words – you are proposing that the users of services pay for them. Admittedly, I suspect many pick their financial institutions in less-than-rational ways, so “competitive” approches might be fun to watch.

    • Correct.

      Thank you for commenting.

      N.B. Just as I have to sell salmon (I sell fish for a living) for next to nothing and it is 15% of my turnover to get my foot into the door to any restaurant I sell to, does not mean that I stop supply or charge a proper price as I can’t due to competition. So I suspect “free banking” may well still keep in place as banks need to get your non profitable current account in the door to sell you all the other services.

Comments are closed.