It would be better for the banking system to collapse

It would be better for the banking system to collapse and for the system to reset than to continue the State guarantee of bank deposits

The State guarantee of banking deposits is intended to prevent a collapse of the banking system arising from the inability of banks to redeem the entirety of their deposits...

It is this guarantee which allows commercial banks to increase the money supply and reduce the purchasing power of money already circulating in the economy. Preventing a failure of the banking system in this way is not sufficient compensation for the damage done to Society resulting from the extra inflation.

If the banking system collapsed (without State monetisation of commercial bank liabilities) the money supply would reduce dramatically and be held by those who were first to withdraw their money. This would have the disadvantage that the distribution of money could be held in an uneven way and it is unfair for those who do not get their money back.

However, there are ways for the Government to make things fairer, perhaps by abolishing taxes for a period of time (financed by deficit spending) which would cause inflation and allow more people to get their hands on some money.

At the moment, private banking institutions are able to deprive the rest of the economy of wealth by lending existing deposits to new customers. This is a very unstable system and unfair to everyone who does not gain directly (the banks and the State).

Allowing banks to enact Fractional-reserve lending has no advantage and only privileged entities are permitted to carry it out. It is damaging to Society because wealth is transferred without the consent of the dispossessed...

Monday 23 March 2009


Update: Eventually all bank liabilities become liabilities of the State (they are replaced with Treasuries) which means the question is no longer whether or not the State guarantee is reliable, it becomes a question regarding the credit-worthiness of the State itself. Clearly, if all the debt is monetised, meaning that the State issues either new paper money or synthetic central bank money (narrow money), the previous value of State debt (and bank deposits) will be restored. If the State refuse to print new money (for whatever reason) it will be a collapse of the currency... If we assume (predict) that the State is willing (and able?) to print the money (and that the guarantee to exchange bank liabilities with Treasuries is reliable) then we can say that "credit is money". If either of these assumptions is false (more likely the former) then it is not true to say that "credit is money". 24th March'09

Update2: For as long as the market continues to price the Government guarantee (and promise to monetise the debt) as reliable... then we can consider there to be three (or four) types of money circulating in the economy: i) Narrow money; notes and coins ii) Bank liabilities iii) Government debt iv) Unfunded Government obligations (such as unfunded pension promises). The first two are on demand liabilities, meaning that they can be redeemed at any time (for cash). Government debt (Treasuries) can only be redeemed for cash at maturity but they can be exchanged for cash at the (discounted) market price. Similarly, unfunded Government obligations can be considered to have a "fair" market price. Someone who owns this promise will have more money to spend on other things, they can even promise their pension payments to someone else in exchange for valuable assets. 24th March'09