NEF-Southampton-Positive-Money-ICB-Submission

Part III: Addressing Common MisconcepPons about Full-­‐Reserve Banking
1. ‘Full-­‐reserve banking would lead to a shortage of credit’
The first issue to recognise is that the current level of demand for credit is more accurately described as a
dependence on debt. This dependence arises for two reasons:
1.The only method by which the public, collecGvely, can get access to bank deposits (‘money’) is by
taking on loans from a bank. Therefore, if the economy needs more money, this new money must be
borrowed from a bank. This means that the lack of an alternaGve method of injecGng money into the
economy ensures that the demand for credit is arGficially inflated.
2.The fact that every bank loan issued creates brand new, addiGonal purchasing power is a major
contribuGng factor in inflaGon. The 150% (£1.2 trillion) increase in the money supply from 2000 to
2009 was undoubtedly significant in the 197% increase in house prices 15 , given that the bulk of new
money created as a result of lending goes directly into the housing market. This implies that the
demand for credit now is arGficially inflated by the ability of bank lending to inflate house prices and
require members of the public to borrow more in order to buy a house.
As a result, we would say that the fracGonal reserve banking system arGficially inflates the need for credit,
and that the demand for credit will always be higher under a fracGonal reserve banking system than under a
full-­‐reserve banking system.
In other words, there will be less need for credit in a full-­‐reserve banking system.
In addiGon, the introducGon of a new source of ‘debt-­‐free’ money via the Monetary Policy CommiOee and
government spending (or tax reducGons) will allow the public to reduce their overall level of debt. With lower
debt, households will have higher disposable income and therefore less need to borrow.
The implicaGon is that, following a period of transiGon, the need for credit will be much lower under full-­‐
reserve banking than under a fracGonal reserve banking system.
The transiGon between our current, high level of dependency on credit, and a lower level of credit under full-­‐
reserve banking, can be managed so as to avoid any form of short-­‐term credit crunch. There are various
methods of easing this transiGon, such as the Bank of England and MPC creaGng addiGonal new money that
can be lent-­‐on by the banks, in order to fill the temporary gap between the current demand for credit and the
current level of real savings. As the benefits of full-­‐reserve banking start to play out in the economy, this
temporary provision of credit may be gradually phased out.
2. ‘[Full-­‐reserve banks] Pe up bank deposits, rather than allowing them to be made available to
fund producPve investment through financial intermediaPon.’
This statement, adapted from the Commission’s Issues paper, has a number of problems.
15 See M4 figures from the Bank of England’s interacAve staAsAcal database, and NaAonwide’s House Price Index.
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