Alex Tabarrok points us to news that the Swiss are voting on whether to require (commercial) banks to hold 100% reserves. Now, the vote here is with regard to 100% reserves on deposits, here are a few thoughts/questions one may want to ask as we consider this:
- Do you think that curtailing the ability of commercial banks to create private money via the deposit mechanism would forestall the creation of private money overall? Even within the commercial banking sector, ask the following: what share of their total liabilities are now funded through short-term immediately redeemable instruments? In an era of zero-low interest rates, I am sure banks like this idea less than in an era of higher rates.
- (or 1a) Wouldn’t it follow that since we can’t quash the demand for folks to hold immediately redeemable short term credit instruments, we’d end up seeing a lot more “private money” creation in the “shadow” banking sector? Wouldn’t we prefer a world, if we are enjoying the idea of regulation, where we can see the deposits and leverage?
- Were the most recent crises created because commercial banks were engaged in “excessive” money creation? And even if it were, think of the tools at the disposal of “policymakers” regarding this. Why is the question not asked, “what forces can possibly prevent banks from creating “too much” private money?” After all, if there were serious redemption threats on commercial banks by both their customers and their competitor banks, how could it ever get to the point where everyone was creating too much money without some underlying institutional support for such a regime?
- While I am nonetheless sympathetic to the call for 100% reserves (maybe for other reasons), I don’t see how that conclusion follows from the cited problems. Wouldn’t a complete elimination of the central bank be a similarly logical conclusion? Note that I am not calling for such an outcome, but as a logical matter I cannot see how one particular conclusion follows absent a pile of empirical evidence on how successful central banks have been in curtailing “excess” money creation vis-a-vis alternative institutional arrangements.
Ordinary fractional reserve banking is one thing, credit cards are another. The idea that banks are a necessity for the protection of depositors’ money is technologically obsolete, since the money no longer exists in a physical form. It’s just pixels in a server somewhere. What sense do demand deposits make in a computer age? Why not a company that simply records electronic deposits and makes them available for transfer at a small rate, at least for those so inclined to use a computer piggy bank? Or is this what credit unions actually do?
Such a service would be a big blow to fractional reserve banks because they then wouldn’t have a reserve to fractionalize. Rationally, banks should make loans against collateral based on their equity, just like pawnshops do. While the pawn shop actually takes possession of somebody’s trombone as collateral for a loan, banks that issue mortgages on property have a real titular interest in it. The difference is that the pawn shop is using its own money, the bank is loaning that of someone else.