In reaction to my recent post on this topic (Monday, 7th April) it’s been pointed out to me that when loans by private banks (PBs) are handed over to the central bank (CB), it would actually be PBs who continued to collect interest and repayment of capital on those loans, since CBs don’t have the resources to do the job. And that’s a good point. But that point can be taking into account without significantly changing the balance sheets set out in the above post. The changes needed are as follows.
It would be necessary to debit commercial banks (in the books of the CB) with a sum equal to the capital value of those loans (maybe in a special “capital repayment” ledger). So the only change to the balance sheets is the DESCRIPTION of the £0.6X at the extreme bottom left of the balance sheets. (That’s the asset side of the CB’s balance sheet immediately after conversion to full reserve)
That is, “Loans (formerly owned by commercial banks)” becomes something like “debt owed by PBs to CB and equal to the capital value of loans which former bank depositors do not want to fund” – bit of a mouthful, but hopefully not totally incomprehensible.
The result would be that PBs would collect repayment of capital on those loans and hand the money over to the CB, and the interest on those loans would cover the cost of that collection work.
I glossed over treatment of existing bank shareholders in the above mentioned post. The best way to treat them is perhaps as follows (and I’ll assume Lawrence Kotlikoff’s system rather than Positive Money’s).
First, set up a mutual fund specially for former bank shareholders, where the assets of the fund consists of loans equal in value to the above shares.
To that extent shareholders are treated much the same way as former depositors who want to fund loans (“investment accounts” in the case of Positive Money’s system).
However, the above “special mutual fund” would contain an additional characteristic, namely that those investing in the mutual fund have a right to the profits or losses that arise from the repayment (or non-repayment) of loans mentioned above.
And that would be entirely reasonable because shareholders would have benefited from the latter profit or born the latter loss had PBs never converted to full reserve.
As to how those shareholders are treated in the balance sheets, they’d appear in the “commercial banks after conversion to full reserve” balance sheet (3rd one down). And the way they are treated is so similar to the way depositors who want their money lending on or investing are treated that the only change needed is a few additional words on the liability side. That is “Deposits in PM’s investment accounts or Kotlikoff’s mutual funds” becomes something like “Deposits in PM’s investment accounts or Kotlikoff’s mutual funds plus shareholders’ stakes in the mutual fund specially set up for shareholders”.
Where do PBs get base money?
A possible objection to the above is that CBs deal only in base money. And since PBs in the decade or so immediately after the switch to full reserve are paying the CB fairly large amounts of base money every year (in respect of the repayment of loans where PBs collect those repayments), then the question arises as to where the base money comes from.
Well the answer is that government and CB would be spending base money into the economy to make up for the deflationary effect of the latter repayments. Problem solved!