People are angry – you can understand that. They see that the problems have largely been caused by the banks and are saying – hey let’s return to full reserve banking where a bank has to have all the money before lending it to you. That way there can’t be any problem. Others are saying – hey we don’t need banks. Just look where they’ve got us!
I understand these positions and have some sympathies. But I want to consider the effects of either of these two.
Suppose banks couldn’t write loans unless they had all the money. Let’s assume that the Central Banks do not print money willy nilly so consider to start with the definition of money.
It is, in effect, a means of storing your labour. People say that time is money. No, money is time – or rather time multiplied in some way by what is called value, which is a rather nebulous concept since the value is dependent on the market worth. We can go round in circles on this one or I could write a whole load of equations down filled with integrals and the like.
So an example. You dig a hole in the ground for a farmer and get paid. The farmer can’t sell the hole in the ground so it is not valuable even to the farmer next door. It only has value to the farmer and he needs it for drainage – not to have it would mean his livestock would die. End of.
If you take the money you have earned to the market and use all of it to buy food, some of that food may rot before you can eat it. So you use a bit to buy food and keep the rest somewhere – under the mattress, in the bank, wherever. Maybe you pay some rent, buy some shoes for the kids etc. Either way, the money represents your labour which you turn into goods and services over time.
Inevitably two things happen. Firstly the hole you dug fills with water because it rained afterwards or some such event which means that your work was not perfect so it may have to be drained or re-dug. Secondly the food you buy is also imperfect and you end up wasting some of it, your kids wear out their shoes. You see the way this is going? Once you spend the money, you can’t get it back. Just as work is not conserved and is not reversible, neither is money. The world is full of people who imagine that money is some constant. It never has been and it is always being wasted. Get used to the idea.
Therefore to promote economic activity, money needs to be created all the time or the economy stagnates. This is just to cope with the continuous waste of money. It is as if money is a bastion against entropy – that process which is always increasing and is a measure of disorder. If we do nothing, the bridge will fall down. Where does the incentive to keep the bridge repaired come from? Unfortunately we cannot do it just for love – it doesn’t feed our family or put a roof over our heads so we would go cold, hungry and soon die. No, we do it for money.
As a society we have to do work to keep going. Maybe we do too much these days and live on the high wire. But doing too little is more dangerous – society will stagnate.
The upshot of all this is that money needs to be created continuously. A mechanism for this – perhaps not the only one and clearly not perfect – is fractional reserve banking. This means that there is discipline that work will be done and that the lender is solvent enough to be able to create the money in the first place – that enough real cash is available if required for people to hold in their hands.
Full reserve banking is a recipe for recession, stagnation, deflation and everything that goes with it. Worse, as it implies a conservation of money, it means there is little room for newcomers and most money will remain inherited. There will be no abundance, no room for the entrepreneur who creates wealth, no room for new ideas and work.
In the same way, doing away with banks is just an extreme version of full reserve banking. You can use credit unions, Zoppa, building societies, or store your money under the bed but none of these can generate the money that will rebuild that bridge, educate your child or otherwise make for progress.
Because, by agreement, only banks can create the money. This is the hold they have over us. As a society, we need to have a hold over the banks, which is why I have proposed the Three Taxes so that they pay for this privilege. We needed this hold years ago but hey – it’s not too late! D’you want to let them get away with another hundred years of plundering?