Monetary base belongs to the people.

Numerous plans have been proposed and implemented to rescue banks. Half of these plans involve governments / central banks creating money (i.e. monetary base) out of thin air and feeding this money to banks. Ostensibly such money is not given to banks, but the terms are often favourable compared those available to households or even to large profitable and solvent corporations. Thus in effect, a proportion of this money is a gift.

By what right? Why do a particular set of institutions have preferential right to this money? These are moreover institutions a proportion of which are clearly incompetent. The basic rule of free markets is to reward the competent and close down incompetent organisations. Of course the basic money transfer system cannot be allowed to collapse. This system is as important as any other utility: water or electricity supply, for example. But the other main activity carried out by banks, that is money lending, well, anyone can do that. Ordinary people, the self employed, etc are constantly forming and dissolving partnerships (formal and informal) and lending each other money. I recently lent a five figure sum to someone to do a building project. Looks like they’ll make a six figure profit and repay the capital and interest no problem. To that extent, I’m a better banker than the European banks who lent billions to no-hopers like Greece.

If a portion of the people chose to keep their share of a monetary base expansion under their matresses and ignore banks altogether, so be it. Banks should be entitled to allocate capital only to the extent that they are better at it than ordinary people or other organisations.


Let’s have two types of bank.

Banks should be split into two types (or at least people should have the choice of two types of bank account).

Type 1. These would be accounts which pay no interest and which contain money which banks are not allowed to lend to anyone else. These accounts would be state guaranteed. The availability of a totally secure bank account is a fundamental human right. The rate of interest on such accounts would effectively be negative, in that they would involve administration costs and it is fair enough to charge customers with the costs of any service provided. This is not a novelty: there are plenty of bank accounts that currently pay little or no interest but involve a monthly administration charge.

Type 2. Accounts which do pay interest and where the relevant money can be lent by the bank, but which are not state backed or guaranteed.

It is not the job of government (i.e. the taxpayer) to subsidise any commercial activity, e.g. money lending.


Objections to the above.

1. The reduced proportion of bank deposits being lent would be deflationary or hinder economic growth.

Answer: Fiat money (whether in the form of book keeping entries, cheques, credit cards or dollar bills) is not a real asset from the point of view of society as a whole. That is, fiat money is just a debt or claim by one person or entity on another person or entity.

In other words the initial effect of the above proposal might well be deflationary, but this is easily countered by expanding the monetary base.

2. Why is the above better than a Glass Steagall type split?

Answer. Glass Steagall distinguished between so called commercial and investment banking activities. The former involves loans to households, businesses, etc, whereas the latter involves a bank buying securities on its own behalf. However both activities are commercial in nature. The distinction is too fuzzy.

3. There is no need to split bank accounts into the above two types if banks are better regulated.

Answer: true in theory. The problem is the never ending, well financed, and often successful attempts by banks to water down bank regulations. In contrast, a split into two types of account, “totally non-commercial” and “commercial” might be cleaner and simpler to legislate for and administer.

4. The removal of state protection from accounts type 2 would raise the real cost of borrowing which would hinder economic growth.

Answer: borrowing costs would certainly rise. But they would rise to a level that reflected the real cost rather than a subsidised cost. Economic growth is not assisted by subsidising anything unless there is a clear case for a subsidy, e.g. obvious market failure. Put another way, far from maximising GDP, price distortions reduce GDP, unless there is a clear case for such distortions.

For a much more comprehensive list of suggestions for bank reform, see an article by Warren Mosler in the Huffington Post.


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