Isabella Kaminska opines on full reserve banking – unfortunately.

I dealt with just under fifty (50) criticisms of full reserve banking (FR) here. The criticisms range between the moderately well thought out to the laughably stupid – mainly the latter.

The opponents of FR never seem to give up, and the latest clever clogs to claim they’ve spotted a flaw in FR is Isabella Kaminska in a Financial Times. She clearly knows precisely and exactly nothing about the subject. Her argument runs as follows.

She starts by making the point that central banks do not compete with commercial banks when it comes to granting loans to mortgagors and businesses. (She makes that point in a paragraph copied from a Bank of England publication. That’s the paragraph starting “The 1844 act…”.)

She then says, “This, we suggest, illustrates why Positive Money’s campaign to take the power to create money away from the banks is somewhat naive. Namely, because, a central bank with a clear-cut reputation to protect is never going to be as competitive as the private sector when “money printing” and risk is concerned. Which means, there will always be a market for some sort of entity to come in and undercut it in the private market.”

Now hang on. How is it possible to “undercut” another firm in providing some service or other, when that firm is not (as Kaminska correctly points out) actually providing that service? That is, as she correctly points out, central banks do no provide loans to mortgagors etc, so how can commercial banks “undercut” central banks there? This is nonsense.

Money creation and risk.

Next, note the way Kaminska runs “money printing” and “risk” together. The implication is that some sort of useful service is provided by that activity or combination of activities.

WELL THAT’S THE CENTRAL BONE OF CONTENTION BETWEEN ADVOCATES OF THE EXISTING SYSTEM AND FR!

She’s begging the question!!

To expand on that, under the existing system, commercial banks create money when they lend, but there is no such thing as a totally safe loan or set of loans. So money creation by commercial banks involves risk. Indeed, banks have gone bust regular as clockwork ever since Roman times, a fact which seems to have escaped the notice of half the supporters of the existing banking system. Thus the existing system combines money creation with risk.

Now money is one of the basic and essential bits of plumbing that keeps the economy ticking over, so a system where the economy’s stock of money can disappear into thin air at any time is not too clever. As Irving Fisher put it, “The most outstanding fact of the last depression is the destruction of eight billion dollars-over a third-of our "check-book money"-demand deposits.”  

But there is an alternative! Indeed the alternative is already being implemented on an unprecedented scale: it’s to have CENTRAL BANKS not COMMERCIAL BANKS issue the money supply.

And there’s no risk there at least in that central banks cannot go bust.