The benefits of implementing this proposal for full-reserve banking are enormous. By returning the exclusive right to create money to an independent agency of the state, preventing it from creating money if inflation is rising, and using any newly created money to reduce taxes and fund better public services (rather than simply pumping much of it into an over-inflated housing market), we get the following benefits:
- Government spending and taxes
- Government and tax payers exposure to banking crises
- The currently-inevitable cycle of boom and bust would end, creating a stable economy and one of the best environments for business in the world. The current banking system creates economic instability – our modernised system would create stability.
- There would be permanent and stable money supply. It could not grow too quickly and cause a boom (fuelled by debt) as it has in the past, and with no booms, there wouldn’t be any recessions.
The economy would not be entirely dependent on the lending activities of the banking sector. A credit squeeze would not cause a severe recession or rise in government debt.
- Retail spending would remain relatively stable from year to year, rather than skyrocketing in ‘good’ years and crashing through the floor in a recession.
- The Reserve Bank would no longer need to manipulate interest rates as a way of countering the inherent instability of the current banking system. The current system of raising interest rates to ‘slow down’ the economy and lowering them to ‘stimulate’ it is much like sharing the wheel of a car with a madman who presses the accelerator whenever you hit the brakes, and who hits the brakes when you try to accelerate. Lowering interest rates to ‘boost lending’ (read: increase debt) throws thousands of pensioners into poverty. Raising them again when the economy is ‘overheating’ threatens to bankrupt the very people who started the recovery by borrowing when interest rates were low, all contributing to further economic instability.
- The banking system can be changed from being pro-cyclical (constantly accelerating until we inevitably crash) to being counter-cyclical (regulating the ‘speed’ of the economy to keep it stable).
The payments system and money supply would be technically separate and insulated from the lending business, meaning that ‘component failure’ in the lending business would not affect the users of the payments system.
Government spending and taxes
- The drastic cuts in public services could be avoided (although it’s right that any wasteful spending should be reduced)
- There would be an alternative to implementing further tax rises
- If any new money is created and injected into the economy, it could be used to cover existing government expenditure and allow taxes to be reduced by a corresponding amount.
- The majority of the national debt could be phased out over the next 20 years, saving huge amounts on interest payments, and freeing up money for public services such as schools, universities and health care.
- By not incurring so much interest on borrowing to fund infrastructure projects, the government and therefore taxpayers would save up to 60% on the overall cost (i.e. capital plus interest) of infrastructure projects such as public transport and the building of hospitals and schools.
Government and tax payers exposure to banking crises
- The modernised system would completely remove the exposure of the government, and thus taxpayers, to banking crises. The changes would allow the removal of the state guarantee on deposits, which is effectively a state guarantee on risk-taking by banks. The risks – and costs – of bad investment strategies would fall on those who endorsed the strategy.
- Poorly managed institutions could be allowed to fail without threat to the wider economic system or the payments system. No bank under full-reserve banking would be ‘too big to fail’.
- There would be no need for future deposit insurance or even bailouts.