Bank of England Head Mervyn King Proposes Eliminating Fractional Reserve Banking

George Washington's picture

Washington’s Blog

Mervyn King - the governor of the Bank of England - has proposed abolishing fractional reserve banking.

As the BBC noted last week:

Mervyn King, the governor of the Bank of England,
has tonight made a big intervention into the debate on banking reform.
In a speech at Buttonwood, New York, he [listed] much more radical
proposals.

 

1. Forcing the riskiest banks to hold capital "several times the magnitude" of requirements at present.
2. The Volcker rule-style enforced breakup of banks into speculative and non-speculative arms.
3.
The "Kotlikoff proposal", which forces banks to match each pool of
risks with a requisite amount of capital, preventing losses in one
spilling over into another.
4. Stunningly, Mervyn King imagines the "abolition of fractional reserve banking":

 

"Eliminating
fractional reserve banking explicitly recognises that the pretence
that risk-free deposits can be supported by risky assets is alchemy. If
there is a need for genuinely safe deposits the only way they can be
provided, while ensuring costs and benefits are fully aligned, is to
insist such deposits do not co-exist with risky assets."

 

King
does not advocate any of these radical plans - but the fact that he
goes out of his way to list them, and to place them on the agenda of
the UK's Independent Commission on Banking, means that we are not yet at the end of the debate about long-term reform of the banks.

 

***

 

Beyond
the technicalities, the fact that a central banker in a G7 country is
prepared to imagine such outcomes is itself significant.

Moreover, King wrote to Ben Dyson and stated:

You suggest that banks should be forced to conform to the underlying purpose of the 1844 Bank Reform Act. You might be aware that I have said publicly that I think ideas in this spirit - such as those advocated by John Kay - certainly merit serious consideration in
the debate as to how we reform our financial system. I remain
sympathetic to these views. But as I said in my previous letter, I do
not want to prejudice the outcome of the Banking commission's
deliberations. Now the Commission has been set up, I think we all should
wait to see its conclusions."

As Dyson explains:

The
1844 Bank Charter Act ('Reform' is a typo) was a piece of legislation
that prohibited commercial banks from printing paper notes (£1, £5, £10
and so on). Before this law was passed, banks were permitted to print
as many paper notes as they wanted, up to the point where they printed
too many and went bankrupt (as everyone cashed in their paper notes at
once).

 

That situation should sound very similar to the situation
that we have today - we currently allow commercial banks to 'print'
money in the form of digital bank deposits (the numbers in your bank
account). In the years up to 2007, the banks 'printed' far too much of
this digital money, to the extent that they - and the economy - started
to collapse.

 

The 'underlying purpose' of the 1844 Bank Charter Act was to prevent the commercial banks creating money and
to restore that privilege to the state. It had become obvious to the
government of the day that if banks were allowed to create money, they
would keep creating money up until the point where it destabilized the
economy, so they could not be trusted with this responsibility.

So, in plain English, Mervyn King appears to be saying:

 

"I
agree that banks should probably be stopped from creating money, and
recommend John Kay (or Laurence Kotlikoff's) proposals. But it's not
for me to say - let's leave it to the Banking Commission."

 

It's
very reassuring to know that the top guy at the Bank of England
understands the root of the issue and is promoting solutions that would
go a long way to addressing it. Both John Kay and Laurence Kotlikoff's
proposals would prevent commercial banks from creating money (or
'issuing credit') for their own benefit at the expense of the wider
economy and the public.

Ironically, while King is proposing the potential elimination of
fractional reserve banking (i.e. a return to 100% reserves), Ben
Bernanke has proposed the elimination of all reserve requirements (i.e. requiring no reserves):

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

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paragshah12's picture

Merv did not do anything wrong, I don't think he voiced any concerns that were not shared by almost everyone. I think the inexperienced Tories, and especially the Libs who must admit the could never honestly have dreamed of ever being in this position, must be congratulated on some tough decisions - but they could do with Nulabs (Bliars if possible) PR!
http://www.prime-targeting.com/mervyn-king-bank-of-england/

Happy Days's picture

Yeah...I just checked my Bull****-O-Meter and it's pegged all the way to the right and the pointer is bent. Now I have to get a new one.

YHC-FTSE's picture

Here, here! Of course the fractional lending ban has been suggested on numerous occasions in the past by people far more pragmatic and enlightened, but my goodness, whether you view Mervyn as a pathological liar, a political tool, or a product of consensus in the context of his peers, I am heartily glad he said it. 

 

Along with speculative trading in food staples, it's probably one of the most evil inventions devised by man to fuck his neighbours.

Dismal Scientist's picture

Any discussion at all of the nature of fractional reserve banking in public, is better than none. For this one should commend King, regardless of his previous track record.

iota's picture

That's like saying you should stroke a viper for not biting you. There's an angle there, it just needs to be found.

Lord Peter Pipsqueak's picture

Don't be fooled by King, he is a f*****g liar. He promised he would never bail out the banks:

King's stark warning to banks: we won't step in if risk goes wrong

Published Date: 11 June 2008
By PETER MacMAHON and BILL JAMIESON
MERVYN King yesterday warned Britain's banks that they could no longer count on the Bank of England coming to their rescue if they founder on the back of ever-more risky quests for profit.
The Governor of the Bank's hard-hitting intervention came as Stephen Green, the chairman of HSBC, declared "the end" of the high leverage business model for banks.

The blunt dual warnings were delivered at the annual meeting of the British Bankers Association in London yesterday.

Using unusually colourful language, King spelled out the Bank's tough approach in the wake of the credit crunch and the collapse of Northern Rock.....

http://business.scotsman.com/business/King39s-stark-warning-to-banks.4171575.jp

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And then did the exact opposite:

UK banks receive £37bn bail-out

Brown and Darling explain bail-out

The government is to pump billions of pounds of taxpayers money into three UK banks in one of the UK's biggest nationalisations.

Royal Bank of Scotland (RBS), Lloyds TSB and HBOS will have a total of £37bn injected into them.

In return for the investment, the government will get a say in how the banks are run, including controls over the bonuses paid to management.

BBC business editor Robert Peston said the banks faced "absolute humiliation".

It would "count as perhaps the most extraordinary day in British banking history", he added.

http://news.bbc.co.uk/1/hi/business/7666570.stm

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In fact RBS was bailed out not once but THREE times in one year!:

Time to call the greedy bankers' bluff

By Alex Brummer
Last updated at 12:59 AM on 04th December 2009

Among the firmament of rotten banks, none has been quite as badly mismanaged as the Royal Bank of Scotland.

Sir Fred Goodwin's ill-conceived, hubristic dash for greatness in the boom years has landed the taxpayer with the equivalent of an 84 per cent shareholding in the Edinburgh-based bank which - were it not being kept alive by tens of billions of assistance provided through the Bank of England - would have sunk beneath the waves last year.

When anything goes wrong in the global financial system you can bet your bottom dollar that RBS will be the biggest loser.

So it is no surprise to find that RBS is the biggest Western creditor to Dubai World, the Gulf-based property speculator which has run out of cash, sending convulsions through the world debt markets.

Yet astonishingly, despite the fact that RBS has been bailed out three times by the Exchequer in 12 short months, the new RBS board, chaired by former J Sainsbury boss Sir Philip Hampton and run by former investment banker Stephen Hester, still thinks it is fitting to award its top traders up to £1.5billion in bonuses for their efforts over the last year.

http://www.dailymail.co.uk/debate/article-1233099/ALEX-BRUMMER-Time-greedy-bankers-bluff.html#ixzz0Yoql1bBM

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He is also supposed to be controlling inflation, but when even the fiddled government figures show it is above the 2% target it is always explained away by King saying it is "Temporary" and he expects it to fall back later in the year,the actual rate has been above the target for over four years now:

CPI inflation has been above the target for much of the past four years, and above 3pc since the beginning of the year, persistently requiring Mr King to explain why the MPC is not tightening monetary policy to combat higher prices.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7945739/Bank-of-England-boss-Mervyn-King-set-to-write-inflation-letter-to-Chancellor-George-Osborne.html

----------------------------------------------------------------------------------------------------------------------------------------------------------

He then has the nerve to raise concerns about the high rate of inflation he is supposed to be controlling:

The  Governor of the Bank of England warned of the dangers of ‘destructive’ high inflation after admitting his surprise that the rise in the UK cost of living continues to overshoot targets. 

Invoking the spectre of 1970s- and 1980s-style price rises, Mervyn King said inflation would remain above target until the end of next year due to the planned hike in the VAT rate. Policymakers would do whatever it takes to ensure that inflation does not run out of control and derail the economic recovery, he added.

Read more: http://www.dailymail.co.uk/money/article-1304059/Mervyn-King-warns-destructive-high-inflation.html#ixzz141UMepCg

-------------------------------------------------------------------------------------

After raising those concerns about inflation he then says the economy is suffering from a shortage of money and threatened to push inflation below the 2% target!!!!!

Mervyn King, Governor of the Bank of England, claimed in a recent speech that the British economy is suffering from a shortage of money. This shortage, he argued, was a drag on economic growth and threatened to push inflation below the 2pc target over the medium term, a prospect warranting consideration of a further round of quantitative easing (QE)....

http://www.telegraph.co.uk/finance/comment/8100664/Forget-QE-the-UK-needs-rate-rises-to-fend-off-the-threat-of-inflation.html

------------------------------------------------------------------------------------------------------------------------------

 

I think after reading the above it is quite clear that 1

 1.The Bank of England has abandondoned the 2% inflation target 2.King is a pathological liar and cannot be trusted. 3. The UK govt and the Bank of England have, like the Fed painted themselves into a corner with ZIRP and QE from which they cannot escape. 4. Interest rates can now never go up in the foreseeable future, if they do they will be massively negative compared to the real rate of inflation 5 QE can never stop as politicians refuse to cut govt spending. 6 In the absence of governments cutting spending and raising taxes,and encouraging a savings based banking system it can only end in an inevitable hyperinflationary bust.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Silversinner's picture

England sold 2/3 of it's gold reserves,action speak louder

than these shallow words.Fuck king he is without clothes!!

Snidley Whipsnae's picture

You are correct and King managed to pick damn near the absolute bottom in gold to sell.

Lots of speculation that this sale of English gold was to benefit Kings friends. I don't know if any fraud was uncovered but the gold sale circumstances certainly smell like dead fish!

All_the_kings_horses's picture

Actually it wasent King who decided to sell, it was Gordon Brown the then current LABOUR Chancellor, who made the decision.

http://www.timesonline.co.uk/tol/news/politics/article1654931.ece

The guy who promised "no more boom and bust", and we know how that turned out!

Josephine29's picture

Unfortunately if you follow the sppeeches of Mervyn King you will realise that he likes to be abit controversial maybe to wake people up but soon returns to the convention. During this speech according to notayesmanseconomics he said of banking reform.

"One criticism of Basel III with which I have no truck is the length of the transition period. Banks have up to 2019 to adjust fully to the new requirements."

So as the article concludes.

"So whilst he strives for some street credibility by name-checking some reform plans I notice that any actual reform were it to be a can has yet again been kicked down the road"

http://t.co/Y9pm2Ce

Silversinner's picture

Got my own 'fractional' reserve system.Filled with fractions of gold

and silver;most of them weighting one ounce.

bingocat's picture

Someone please explain to me how, under full reserve banking, one gets people with money to want to lend money to people without money? 

I personally have no issue with full reserve banking as a concept, but I am wondering if anyone has an idea of how one gets there from here... even if you have a slim equity cushion on your home, how does your debt get credited when all that money disappears? It would seem to me that one has to net everything out, but doing so would require that the assetholders take a huge hit, which means everyone whose net assets as a percentage of gross assets are tied up in positive equity on their house end up getting hammered into bankruptcy...

Someone please explain...   If it is simply netting out, along with confiscatory tax policy on assets (i.e. rich people pay for less wealthy not going bankrupt) then so be it, but I have yet to see anyone plot a roadmap from here to there...

Snidley Whipsnae's picture

Bingocat, I am not the one to plot a road map of what happens to various assets if banks were suddenly required to hold a high ratio of REAL reserves to loans.

However, I can tell you that prior to the great depression many homes were constructed with cash and the work was completed piecemeal, as the 'new home owners' earned and saved money to invest in materials and labor to complete their new home. The term 'journeyman' carpenter is from the era when a skilled carpenter traveled from one home site to another as work/money became available to pay the journeyman's wages.

Another route to becoming a home owner, back then, was the baloon mortgage (baloon mortgages are not a new concept), usually issued for a term of five years. At the end of five years the new home owner had to pay off the baloon mortgage or forfeit the home to the mortgage holder/bank. As partial collateral for the bank, the land was usually owned outright by the wanna be homeowner and was pledged as collateral for the baloon loan.

The whole idea of long term mortgages for homes, first 15 years, then 20, then 30, etc) really didn't get a big push untill after WW2, when the government got involved via VA/FHA home loans for returning war Vets. Prior to this most workers with families were life long renters and this was considered the norm.

I have no idea how we get from where we are now back to where we were in, say 1925. Maybe those holding mortgages (lenders) will tell current 'home owners' that they have five years to prepare to pay off their mortgage in full (baloon payment) or lose their home? I do know that little people, like us, are going to get screwed in some manner by the creditor/renteir class. I have prepared by getting all assets out of 401Ks and CDs and into physical gold/silver. We drive ten year old autos that are perfectly mechanically maintained and we have no credit, except credit cards that are paid off each month. My preparation is not perfect but is the best we could do with our resources. So far, so good, and we have hope that we won't be pummeled by a disintergrating dollar. 

Perhaps what King is really saying is that going forward ordinary working stiffs, like me, will not be able to afford homes because austerity will be the new normal and renting will become the new normal?

I wish you good luck in future. 

bingocat's picture

Thank you. I wish you good luck too.

My point was that I have yet to see a prescriptive measure to get from a situation where the banking system is 10x levered to one where it is 1x levered. That means reducing the amount of money extant by 90%.

I tend to think that in such a case, money actually has to disappear (one cannot reduce the gross amount of debt vs assets in the system without also reducing the amount of money supply backing it) without spurring outright inflation, but that does not help anyone except to devalue the dollar by 90%. This dramatic deflation, including for silver and gold would be "helped" because demand would fall to such a low level that the only thing that most people would have of any worth to trade would be their labor, and in any positive economic effort, remuneration for labor is a lagging feature of growth on a macro scale (the alternative is withholding labor, which does not push growth forward).

The other issue I see with full reserve banking is that as long as the rest of the world does nothing (i.e. does not simultaneously embrace full reserve banking in exactly the same ways), there is dramatic GDP contraction on a nominal basis and real basis, or there is dramatic GDP contraction on a real basis, but not on a nominal basis, leading to devaluation of the dollar vs the rest of the world. Once that has settled in to its new equilibrium state, then the dollar would appreciate again as a dramatically smaller export-led economy (your foreign made TVs would cost 10x as much but your salary would only be 3x as high as before) would be driven by worker savings (not enough money to spend, and noone gives you debt, so you save every penny you can).

It would likely usher in a new age of craftsmanship and handyman/journeyman labor as people 'forage' for work however they can. The entire 'service economy' would cease to function the way it does now, because it would cease to be necessary (people pay for services in a giant trickle down because their labor (and therefore their repose) is worth more than they are paying for the service, but when you have ZERO extra money, you don't spend it on service (no McDs, no interior decorators, no Walmart greeters; everything becomes self-serve)).

And anyone in the bottom 3/4 of the economy (i.e. anyone who has a lower ratio of assets to debt than the ratio of existing debt to new debt after a move to full reserve banking) is worse off than now.

I think the level of misery this would bring upon western civilization, if implemented in one-shot, is akin to societal nuclear winter. I am not terribly bothered by the likelihood of this. I think there is not a politician alive (and every anarchist is a politician when successful) who would want to put people through this without taxing all assets (effectively nationalizing the economy - totalitarianism gone wild!) and I don't think that even the bottom 3/4 are looking for that.

Snidley Whipsnae's picture

King's thoughts, if implemented, would mean that banks would not/could not lend to anyone without 100% solid collateral to back the loan.

It sounds like the era of the first great depression, when loans were very difficult to obtain, even by farmers needing seed and  fertilizer, to plant a crop, even when the farmers routinely pledged their farms as collateral.

All forms of credit that we now take for granted would disappear, ie; credit cards, student loans, auto loans, most home loans, etc....of course, the elites with lots of money would still have access to credit.

King's proposal, or idea, would usher in an era of extreme austerity, no doubt.

I think King is simply running this one up the flag pole to see what sort, and how much, flak it encounters.  

The Alarmist's picture

Actually, the monetary regime suggested by the elimination of fractional reserve banking is already seen in places like Afhanistan, Sudan, Yemen, Bangladesh, etc.

 

Chappaquiddick's picture

Cool - so can we expect Sharia Law too??

Chappaquiddick's picture

Sounds like they've finally cottoned on to the exponential money creation issue.  The idea is a step back not to the first great depression but would send us all the way to the middle ages.  No credit without collateral means no progress towards prosperity for almost everyone.  No student loans - that's a step in the right direction IMO. No mortagages - well that's bad for prices but great if you have savings.  No credit cards - well that's the end of the consumerist eutopia - again not a bad idea either.

Yes apart from the middle ages smurfdom for the masses (it was there all along anyway if we're honest) this looks like a good idea.   

Now what the fuck does that means for the price of silver??

Miles Kendig's picture

The "we had open and robust debate" action in full view.  Simply depleting the ambient level of O2.  Next we'll hear Ben talking about being able to normalize interest rates because housing is so robust.

All_the_kings_horses's picture

There is a movement in  the UK to change the banking system.

http://www.bankofenglandact.co.uk/

So perhaps mervin is taking some notice?

Sean7k's picture

I have two words for you: Corn Laws. Now, once you do your history assignment, let me know if you really want to dump that crap in our living room.

doggings's picture

which numpty junked this? the founder of the bankofenglandact.co.uk site is Ben Dyson, who is mentioned in this article.

As Dyson explains:

The 1844 Bank Charter Act ('Reform' is a typo) was a piece of legislation that prohibited commercial banks from printing paper notes (£1, £5, £10 and so on).

I have had correspondance with Mr Dyson and Mervyn King is aware of, and broadly supports the concept.

the main campaign site is http://www.positivemoney.org.uk/

and the best of luck to them, at least someone's doing something..

 

 

 

ThreeTrees's picture

Well at least he's acknowledged the root of the problem...

ebworthen's picture

Bernanke apparently said:

"...will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system."

Only a Central Bankster could dream up such a thought!

This is like a homeowner saying "...deposit and payment requirements impose costs and distortions of my budget system."

 

Miles Kendig's picture

Just imagine a world without a tax collector, police and other such nuisances .. In that world citizens would simply go to their local government clerical office twice a year and submit a report self disclosing their activities ... Which MUST be accepted as gospel. (Of course there would be exceptions for private matters, can't be too intrusive).  For government to question any aspect of the report would destroy free enterprise (the ability to set ones own monetary policy free of outside interference) as that citizen knows it and would therefore be prohibited.  This is free enterprise, federal reserve style since these are the circumstances the fed operates under.  Given this happy state of affairs it comes as no surprise to either of us that the fed would say that any impingement upon their activities would cause unpleasant costs & distortions.  ROFLMAO

The Navigator's picture

Tyler

Could you run a piece/vote on those that are prepped, their extent of being prepped, and recommendations.

All this is pieced together over many articles but it might be useful to re-hedge and prep better.

Thanks.

RockyRacoon's picture

I see a mysterious car or plane crash in his future....

tony bonn's picture

i propose ending central banking and fiat currencies.

Strongbad's picture

How will people buy houses and cars with no money down if commercial banks can't create money from nothing?  Cash?  That is sooooo old fashioned. :P

Bartanist's picture

Isn't that the point? It will maintain power for those currently with money and make future independent income generation more difficult.

bronzie's picture

"for those currently with money"

you mean silver and gold, right?

AUD's picture

"the 1844 Bank Charter Act was to prevent the commercial banks creating money and to restore that privilege to the state."

The state already has that privilege & they abuse it.

prophet's picture

Narrow thinking.

doolittlegeorge's picture

at least Vegas casinos aren't claiming to be a member of the "tax free discount club."  amazing story.  the future is now. 

dick cheneys ghost's picture

what took them so long?????????????

Sean7k's picture

I suggest the bigger question is why? No banker has ever been serious about the elimination of fractional reserve banking. There is another shoe that is going to drop and I have a feeling we won't like it...

CPL's picture

They had to wait until it was a decade too late to fix?

trav7777's picture

wow...this coming from the ultimate FR lender of all time, the Rothschild BOE?

WTF would England have ever been without fractional lending?  Certainly not the world's largest ever empire.

The problem with his proposal is that the capital simply does not exist nor will ever exist to pay back today's loans.

We are in a climate now of aggregate contraction and negative yield.  That means that even paying back today's credit base with all interest forgiven is a non-starter.

iconoclast63's picture

Actually ... if you have watched The Money Masters or read the legislation that's already been drafted and posted for your perusal at www.monetary.org ... .you would see that paying off the current debts is a simple matter and it would not be inflationary.

Printing United States Notes in a quantity sufficient to pay off all outstanding debts and bringing the banking system to a 100% reserve ratio is just a matter of deciding to do so.

LeBalance's picture

$600T++ (surely no impact to the $ confidence would result)....

iconoclast63's picture

You really aren't that dumb are you? Nothing about the derivatives market is real, therefore it doesn't need to be made whole. The only thing that needs to be made whole is the actual debts in the system, which represent actual money in the economy. If an amount of money were printed, in a new currency, which made the debts whole then the money supply would not be increased, because it would be paying off debts that already exist.

NO NEW MONEY would be created.

The banks who speculated would collapse, as they should, and the solvent banks would remain standing and have reserves totalling 100% of their liabilities ... with no new money entering the system.

Open your mind ....

CD's picture

Could this merely be a straw-man, good-cop vs. bad-cop routine? Against which some nominal/token reserve requirement can be deemed reasonable, even draconianly austere?

Herd Redirection Committee's picture

Yep, probably a means to frame the discussion, leaving out all discussions of bimetallism and soundy money.

Full reserves, and money backed by silver and gold.  Post collapse they will try to bring in global fiat, but obviously those attempts must be strongly resisted.

nmewn's picture

Change we can believe in ;-)

Peak Everything's picture

No further growth is possible due to declining net energy. We have no choice but to eliminate fractional reserve banking. The mathematics demands it.

digitalhermit's picture

Fractional Reserve = Theft through Counterfeiting

dlmaniac's picture

Finally one central banker starts to follow common sense.