UK MP Carswell introduces bill to stop fractional reserve banking

September 23, 2010 by · Leave a Comment
Filed under: Policy News 

This has been a taboo subject since the Great Depression in the 1930’s almost everywhere.   Keynesians seems to have won out and making sure the growth of credit was not hampered and the prevention of deflation was the number one priority.  The problem is the in a debt-based monetary system where ” P< P+I”, this creates the environment that you have to have growth and inflation or face dire consequences.

Fractional reserve banking is the method that is universally used to let banks generate credit and this is a major reason why we see constant inflation over time without pause.  MP Carswell has made a well thought out argument against this form of banking and has introduced a bill to change the system in a way where banks can only do fractional reserve banking is with investment savings accounts and not on demand deposit (checking accounts).

The point where I agree the most is the fact that when the economy heats up, banks use the demand deposits to create more credit and this will be more than normal because demand is greater and with factional reserve banking, it amplifies the effects of this demand.  Carswell said that instead of the current system, banks should instead increase the interest rate they pay for investment deposits and that would in effect draw savings into the fold and that would create a natural brake and would create credit proportional the the savings available in the economy.  This would limit the major portion of projects that normally get financed that have no chance of being paid back.

Once the boom is over, we bailout and create money to cover losses so the system doesn’t crash and creates more inflation that devalues our money.  That system is not fair to everyone and is especially harsh on savers that did not get into the bubbled frenzy.  We will need to watch how this plays out in the United Kingdom and we could learn a thing or two and try and reform our credit / debt generation system in the United States.   Please comment if you have an opinion.

Positive Money Org. – That leave be given to bring in a Bill to prohibit banks and building societies lending on the basis of demand deposits without the permission of the account holder; and for connected purposes.

[Demand deposits are bank account deposits that can be withdrawn on demand – you don’t need to give any notice before demanding your money back, for example.]

“Who owns the money in your bank account? That small question has profound implications. According to a survey by Ipsos MORI, more than 70% of people in the UK believe that when they deposit money with the bank, it is theirs—but it is not. Money deposited in a bank account is, as established under case law going back more than 200 years, legally the property of the bank, rather than the account holder. Were any hon. Members to deposit £100 at their bank this afternoon or, rather improbably, if the Independent Parliamentary Standards Authority was to manage to do so on any Member’s behalf, the bank would then be free to lend on approximately £97 of it. Even under the new capital ratio requirements, the bank could lend on more than 90% of what one deposited. Indeed, bank A could then lend on £97 of the initial £100 deposit to another bank—bank B—which could then lend on 97% of the value. The lending would go round and round until, as we saw at the height of the credit boom, for every £1 deposited banks would have piled up more than £40-worth of accumulated credit of one form or another.

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