Full Reserve Banking

In todays world the banks can create money by creating debt, so Debt=Money. This aspect of the current model can be considered a sestemic weakness. Full reserve banking is an alternative model where can only be created by a central autority and results in debt free money.

Positivemoney.org.uk explains full reserve banking as:

  • The rules governing banking are changed so that banks can no longer create bank deposits (the numbers in your bank account). Currently these deposits are considered a liability of the bank to the customer - after the reform, they would be classified as real money and only a Central Bank would be able to increase the total quantity of them.
  • The central bank would then take over the role of creating the new money that the economy requires each year to run smoothly, in line with inflation targets set by the government.
  • In order to meet these targets, the decision on how much or little money needs to be created would be taken by the Monetary Policy Committee. To maintain international credibility and avoid ‘economic electioneering’, the MPC would be completely separate and insulated from any kind of political control or influence - in other words, the elected government would not be able to specify the quantity of money that should be created. Upon making a decision to increase the money supply, the MPC would authorise a Central Bank to create the new money by increasing the balance of the government’s ‘Central Government Account’. This newly-created money would be non-repayable and therefore debt-free.
  • The newly-created money would then be added to tax revenue and distributed according to the elected government’s manifesto and priorities. This could mean that the newly-created money is used to increase spending, pay down the national debt, or replace taxation revenue in order to reduce taxes, although the exact mix of these options would depend entirely on the elected government of the day.

 

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