This action might not be possible to undo. Are you sure you want to continue?
(IN PLAIN ENGLISH)
a few simple changes to banking that could end the debt crisis
HOW MUCH MONEY SHOULD WE CREATE? HOW SHOULD WE SPEND NEWLY-CREATED MONEY? HOW CAN WE PAY DOWN THE NATIONAL DEBT? HOW DO WE STOP INFLATION? WHAT ABOUT MY CURRENT ACCOUNT? WHAT ABOUT MY SAVINGS ACCOUNT? HOW SAFE WILL MY SAVINGS BE? THE BANK OF ENGLAND AND THE PAYMENTS SYSTEM HOW WOULD BANKS MAKE LOANS? WILL THERE BE ENOUGH LENDING & CREDIT? WHAT ABOUT OVERDRAFTS? WOULD THIS MAKE BANKS MORE STABLE?
Full-Reserve Banking in Plain English | 2
INTRODUCTION4 7 10 13 17 20 23 25 28 31 33 35 36
Full-Reserve Banking in Plain English | 3
his proposal for reform of the banking system explains, in plain English, how we can prevent commercial banks from being able to create money, and move this power to create money into the hands of a transparent and accountable body. It builds on the work of Irving Fisher in the 1930s, and James Robertson and Joseph Huber in 2000.
tioneering’, 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. The Monetary Policy Committee would decide how much money needs to be created in order to meet the inflation targets by analysing the economy as a whole - not the spending needs of the government, nor the needs of the banking sector. They would use ‘big picture’ statistics to judge whether meeting the inflation targets requires more or less money injecting each month. They would also have access to all the research resources that they require to make an informed decision. Upon making a decision to increase the money supply, the MPC would authorise the Bank of England’s Issue Department 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. Consequently, the decision over how newly-created money is initially spent would be made by the
Removing the power to create money from the banks would end the instability and boom-and-bust cycles that are caused when banks create far too much money in a short period of time. It would also ensure that banks could be allowed to fail without bailouts from taxpayers. It would ensure that newlycreated money is spent into the economy, so that it can reduce the overall debt-burden of the public, rather than being lent into existence as happens currently. The content in this paper was written in May 2010, and has been occasionally updated since then. In mid-2012 Positive Money will release, as a book, a much more comprehensive guide to these reforms, which will also address some of the common objections and misconceptions about the implications of ‘full-reserve’ banking.
A QUICK OVERVIEW
Firstly, 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 the Bank of England would be able to increase the total quantity of them. The Bank of England 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 elecwww.positivemoney.org.uk
These Transaction Accounts would then be 100% safe . 6 months).g. since Transaction Accounts are inherently risk-free for the customer. banks will appear to operate very much as they do now. 60 days. 30 days. banks will not be permitted to lend the money held in Transaction Accounts (the equivalent of today’s current accounts). and many banks are likely to ‘swallow’ the costs and waive Transaction Account fees completely in order to attract customers who are then more likely to take out mortgages and other products with the bank (a loss-leader approach to marketing).5%. .by taking money from savers and lending it to borrowers (rather than creating new money (deposits) whenever they make a loan.Full-Reserve Banking in Plain English | 4 government. banks will need to find customers who are willing to give up access to their money for a certain period of time. In practice. and walking a tightrope between maximizing profit and becoming insolvent). and also means that the government’s guarantee on deposits can be withdrawn. even if their bank was to become insolvent. 7 days. Instead. As the rates of interest on current accounts are rarely higher than 0. but the government would have no control or influence over how much money is created. 2 years. These fees will in any case be outweighed by the significant financial benefits to every individual that arise from preventing the privatised creation of money as debt.the equivalent of putting the money into a safedeposit box with the customer’s name written on it. for example) or set a minimum notice period that must be given before the money can be withdrawn (e. competition for market share between the banks will keep those fees as low as possible. The implications of this for the customer are as follows: • Money in their Transaction Account is 100% secure and can never be ‘lost’ www. • There will probably be monthly or annual fees for the use of a Transaction Account.since the money is technically held at the Bank of England. this is not a significant loss. IMPLICATIONS FOR CUSTOMERS OF BANKS To the average person. IMPLICATIONS FOR CURRENT ACCOUNTS (KNOWN AS TRANSACTION ACCOUNTS AFTER THE REFORM): Post-reform.uk IMPLICATIONS FOR SAVINGS ACCOUNTS (KNOWN AS ‘INVESTMENT ACCOUNTS’ AFTER THE REFORM) In order to lend money after the reform is implemented. any money held in these accounts will be held in ‘fiduciary trust’ by the bank on behalf of the customers. because the banks are unable to lend this money. Banks will then operate in the way that most people think they currently do . since the bank needs to recoup the cost of providing payment services. However.positivemoney. the necessary ‘behind the scenes’ changes required to prevent banks from creating money will mean that there would need to be a few subtle changes to the terms of service on current accounts and savings accounts: • Transaction Accounts will not pay interest. This guarantee does not expose either the government or the Bank of England to any financial risk whatsoever. the customers are guaranteed to be repaid.org. this means that the customer will need to invest their money for a defined time period (1 month. However. and in practical terms will be considered to be held in a ‘Customers’ Funds Account’ at the Bank of England . 6 months.
positivemoney. www. this means they will only be able to earn a rate of return (interest) if they are willing to give up access to their money for a certain period of time.org. Note that this policy completely eliminates the risk of a bank run and gives the bank much more stability.uk .Full-Reserve Banking in Plain English | 5 For customers of the bank. as it is able to plan its future outgoings up to 12 months into the future (a much greater degree of stability than they have right now).
productivity or other fundamental changes in the economy. But that doesn’t necessarily mean that the economy will run smoothly on a fixed amount of money . commercial banks have been creating new money so quickly that the money supply has grown by an average of 7. As a result. If the person or organisation making the decision to create more money also stands to benefit personally from the creation of that money . and how it will work. regardless of the needs of the economy as a whole. side of always lending more money.8% every year. Like a junkie coming off heroin.as do profit-seeking bankers and vote-seeking politicians .org.we may still need to increase the amount of money in the economy in line with rises in population.HOW MUCH MONEY SHOULD WE CREATE? Full-Reserve Banking in Plain English | 6 W ouldn’t ‘printing’ new money just push up prices and make everything more expensive? Only if we ‘print’ too much. independent body who have no misaligned incentives and who do not benefit personally from increasing the money supply. Elected politicians are unlikely to do much better. They will stop making decisions to raise or lower the base interest rate and will instead make a WHO DECIDES HOW MUCH NEW MONEY SHOULD BE CREATED? The last few decades show that we cannot trust profit-seeking banks with the power to create money. Over the last 30 years. which would result in money being created without any reference to the needs of the wider economy. The temptation the government to increase the money supply in order to pay for things like high speed rail and university tuition fees is likely to be great. The following section explains what this source of new money should be. Consequently. we need an alternative source of new money. rather than the benefit to the economy as whole. So if we can’t trust profit-seeking bankers or voteseeking politicians. to the stable. and therefore always increasing the money supply. it laid the foundation for the recent financial crisis.uk . There are also issues as we make the transition from a debt-fuelled economy that requires new money to avoid collapsing under the weight of the debt.positivemoney. Because almost all of this newly-created money was lent into the economy and was matched by the same amount of debt. once we have stopped money creation by commercial banks. Under our proposals the Bank of England’s existing Monetary Policy Committee will become responsible for making decisions on how much new money should be injected into the economy in each period of time. then we must find a neutral. The reforms that we are proposing would make it impossible for high-street banks to create new money when they make loans. Their incentives stack up firmly on the www.then decisions over the supply of money to the economy will be taken on the basis of the benefit to the decision maker. our economy might need to be weaned off continual injections of new money over a period of time. they won’t be able to increase the money supply of the nation every single year. low-debt economy that this reform would create.
Note that they will not be creating as much money as the government needs to fulfil its election manifesto promises – the needs of the government will not be considered. This is very important. the measure of www. and then smooth any increase in the money supply over each month. The government can then withdraw the money from its Central Government Account and add it to the pool of tax revenue.uk 1.by making a credit without making a matching debit.the policy of trying to ensure that inflation stays within a small range . companies and households) needs to function healthily. suggestions that this reform would cause a ‘Zimbabwe situation’ have no basis in reality. The Committee will continue to base its decisions on the basis of ‘inflation targeting’ . the MPC will need to stop creating new money until inflation has started to fall again. They will likely take a 12-month or 2-year view of the economy. It is pointless to attempt to make decisions affecting the whole economy using a measure of inflation that ignores inflation of 10% per annum in house prices when housing is the most expensive item in anyone’s ‘basket of goods’. As discussed in the section ‘Guarding Against Inflation’. The Monetary Policy Committee will also still be subject to all the rules regarding transparency of its decisions.org. 3. as it prevents harmful political ‘tinkering’ with the economy. In other words. In absolute figures. They will not simultaneously reduce the balance of any other account .5% per annum. This makes it impossible for the MPC to create a Zimbabwe-esque inflationary spiral. Over time. It is important that the MPC cannot be overruled by politicians. and the amount of the authorised increase in the money supply will be made publicly known. the amount of money that should be created each year will probably start at around £100billion . and no more. It is also important that the MPC is sheltered from conflicts of interest.neither too much nor too little.such as between 1. they should try to ensure that any change in the money supply is neither inflationary nor deflationary .less than the banks have been creating for the last few years. THE MECHANICS OF CREATING NEW MONEY When the Monetary Policy Committee has authorised the creation of a specified amount of new money.5% and 2. and then use it in accordance with the principles discussed in the . inflation used must be redesigned to take account of asset price inflation (such as a housing price bubble). The Bank of England’s Issue Department will simply increase the balance of this account by the amount authorised by the Monetary Policy Committee. known as the ‘Central Government Account’ with the Bank of England.Full-Reserve Banking in Plain English | 7 decision to increase or reduce the money supply. The MPC will continue to be politically independent and neutral. whose decisions will be swayed by political matters rather than the long-term health of the economy. The government will hold an account. if inflation starts to rise. 2. they are creating new money. it will be created in the following way: SO HOW MUCH SHOULD THEY CREATE? The Monetary Policy Committee (MPC) would authorise the creation of as much new money as they calculate the economy (in other words. as the economy stabilises and the overall level of debt falls.positivemoney. the amount of money that we can create each year before inflation starts to rise will probably stabilise at around £50billion a year. Note that for this to be effective. Under this requirement. and lobbyists for the financial sector.
this should lead to a better outcome overall. In contrast to printing physical cash or coins . £20bn could be added to the economy in a little under 20 minutes.positivemoney. They have absolutely no conception of how their activities fit into the wider health of the economy. this tends to lead to disaster. at the admin cost of just a few hundred pounds. Post-reform. . the total amount of money (defined as ‘bank deposits’ .the numbers in your bank account) is increased whenever a bank makes a loan.Full-Reserve Banking in Plain English | 8 section ‘How Should We Spend Newly-Created Money?’. it would also require witnesses and formalities to be observed.which costs a few pence for every £1 created (According to the Bank of England’s annual reports. While there are always issues when decisions are made by small committees of ‘wise men’.a creation of money electronically is costless. and an incentive to support the economy rather than to maximise their own bonuses. Of course. Consequently. To create £20bn or £200bn both requires one authorised official with the right passwords and a computer connected to the Bank of England’s central accounts system. they spent £38million in 2010 printing physical bank notes). Each of these individuals is motivated by a bonus on each mortgage or loan that is issued. AN IMPROVEMENT ON THE EXISTING SYSTEM In the existing monetary system. and therefore their only incentive is to issue as many loans and mortgages as possible. As revealed in the financial crisis that started in 2007. and the lending priorities of bank directors. the health of the whole economy will be considered before a decision is made to increase or decrease the money supply. increases as a result of the individual decisions of thousands of loan officers and mortgage advisors. we believe that it would be hard for the Monetary Policy Committee to do a worse job of managing the money supply than the banks have done to date. but all in all. the money supply www.uk .org. With a holistic view of the economy.
the elected government of the day could choose to reduce the overall tax burden. health care or public transport. National Insurance etc. We will now look at each of the options above in more detail. and one that is outside of our work.uk . but any government using the proceeds of this reform to reduce taxation should aim to reduce or eliminate some of the worst market-distorting or most regressive taxes. They would then make up the shortfall with the newly-created money. the Bank of England’s Issue Department will add that money to the government’s Central Government Account. If the public have elected a government that promises to increase public spending. without increasing the tax burden on the public.positivemoney. Since the newly created money will simply be added to tax revenue. Tax reform is a huge issue. if the public elected a government that promised to reduce the overall tax take. then the government can use the money to this end (by using this money to cover existing spending and reducing the overall tax take). there is no need for a special process to decide how to spend it.org. Therefore the government may choose to: a) reduce the overall tax burden b) increase government spending c) make direct payments to citizens (sometimes referred to as a ‘citizen’s dividend’) 1) through maintaining the current tax regime but redistributing the newly-created money back to the public via tax rebates (payments) after the year’s taxes have been received 2) by actually reducing the rates of tax charged on income. Likewise.HOW SHOULD WE SPEND NEWLYCREATED MONEY? Full-Reserve Banking in Plain English | 9 W hen the Monetary Policy Committee authorises the creation of a certain amount of new money. The government is free to use this money however it chooses in order to achieve its democratically-mandated policy objectives. Although the money has not been raised via taxation and therefore doesn’t ‘cost’ anything at this REDUCTION OF THE OVERALL TAX BURDEN Rather than increasing government spending. VAT. INCREASING GOVERNMENT SPENDING By using the newly-created money to increase government spending. corporation tax. 3) by completely cancelling particular taxes – VAT (the UK’s sales tax) would be a strong contender for elimination. then the government can justifiably use the money for this purpose. The tax burden could be reduced in one of three ways (or a combination of all): www. the government can increase the provision or quality of public services such as education. d) pay down the national debt The exact mix of the above will depend on the priorities and ideology of the government of the day. being both hugely regressive (hurting the poor more than the rich) and a distortion to markets. Decisions on exactly how the newly-created money is spent would fall to the democratically elected government of the day. therefore collecting less money from taxation.
the amount of money that the Monetary Policy Committee decided to DIRECT PAYMENTS TO CITIZENS One alternative to both increasing public spending and reducing taxes is to make direct payments to citizens. the same issues apply to newly created money as apply to all tax revenue – is it well spent. and to ensure that the money is not wasted.Full-Reserve Banking in Plain English | 10 point. the first priority should be to reduce our overall debt burden (at a household. if part of the tax reduction falls on employer’s National Insurance contributions. we would reduce the tax burden to allow citizens to pay down their own debts. Consequently the government has a public duty to ensure that the newly-created money is spent on the projects that will bring the greatest benefit to society as a whole. a direct payment of £2. with taxes to rise at the end of it. avoiding the impending cuts to public services but with no major new spending projects. and do the public get value for money? OUR RECOMMENDATIONS The current staggering level of household and corporate debt is a consequence of the debt-based monetary system that we have had in place for the last few hundred years. which – considering the highly indebted state of the vast majority of households right now – will most likely be used to pay off debts. our personal recommendation is that in the 5-8 years following the implementation of the reform.org. the same money can’t be spent to build 5 large hospitals or a couple of hundred schools. credit cards. then companies will themselves be able to reduce their debts. or at least reduced to within a small percentage of the nation’s GDP. Any newly-created money should then be used as much as possible to reduce the overall tax burden. government spending should remain flat. This will leave people with around 20% more disposable income. in the same way that many households are currently taking advantage of low interest rates to over-pay on their mortgages. It would also reduce the risk of the newly-created money being spent inefficiently by central government. Consequently. (Of course the public sector should continue to try to reduce waste and provide maximum value for money). personal loans and mortgages. government) debt. In short. In reality. corporate and government level) back to a ‘healthy’. Instead. It could be made explicit that this would be a 5-8 year partial ‘tax holiday’.uk . It is likely that as the economy stabilises and the debt burden falls. www.e.positivemoney. There are some significant advantages to this – the most democratic way of spending newly-created money is to give every single citizen power over how to spend their share. to be phased out. At the same time. by actually reducing tax rates and allowing the public to keep and spend more of their income. Over time. the government would likely use a proportion of the newly created money to gradually pay off the debt. PAYING DOWN THE NATIONAL DEBT We believe that it is in the public interest for the ‘national’ (i. £100bn may sound like a lot. ideally by 20-25%. If the amount of newly-created money in a particular year was £100billion. it still has a massive ‘opportunity cost’ – if the government chooses to use the money to build a Millennium Dome. which should make it easier for them to expand and increase employment. Once we stop issuing all new money as debt. natural level. or on VAT. but it is less than the banks have created in every year since 2004. These provisions are discussed more comprehensively in the ‘How Do We Pay Down the National Debt?‘.222 could be made to every eligible voter (regardless of income). the newly-created money should not be used to increase government spending.
when things are less ‘hectic’ – the government could then look at using the newly-created money for public infrastructure projects.org. the overall level of debt has fallen significantly. If they tried to. whilst simultaneously battling the after-shocks of the financial crisis and also implementing this reform.positivemoney. the stimulus from using the newly-created money to increase spending would come later. In the current environment. www. As a result. it is likely that much of the money would be wasted. There is a practical consideration involved in this suggestion too. and be less effective.Full-Reserve Banking in Plain English | 11 create in any year would fall. making it necessary for the government to collect more revenue via taxation. it is hard to believe that any UK government will have the capacity to successfully engage in big infrastructure projects over the next few years. than a direct stimulus from reducing taxes.uk . When the economy has stabilised. and the banking system has adapted to this new financial regime – in other words.
and typically borrow a little bit more for additional spending.org. 2. The government borrowed £179. While the government talks about reducing the deficit. the government typically does not pay off enough to reduce the total national www. This is like paying off one credit card with another.4bn in 1919) and World War II (from £7. the reality is that the total national debt will keep growing. taxpayers will continue paying £120 million a day in interest on the national debt for eternity. The recession triggered by the banking crisis led to redundancies and bankruptcies. By giving the government an additional source of revenue (the newlycreated money coming from the Monetary Policy Committee). Instead they just borrow the money they need to pay the interest on the debt. It also shot up significantly in 2008 onwards. because our proposed reforms would reduce instability in the economy (think of the credit/debt-fuelled boom-bust cycle).7bn (1949)). The national debt tends to shoot up during wars such as World War I (from £650m in 1914 to £7. At the same time. This would mean that the government will not need to spend so much on unemployment benefits.uk . so government expenditures went up WHY THE DEBT WILL ONLY GO UP IF WE KEEP THE CURRENT SYSTEM The debt is currently higher (in absolute terms) than it’s ever been before. with more people redundant. This added up to mean that less tax was being paid. look at what would have to happen to actually start paying down the debt: HOW DID THE DEBT GROW IN THE FIRST PLACE? The national debt is the total amount of money that governments have borrowed over the last few centuries. Since 2002.1bn in (1939) to £24. To understand why.positivemoney. so the government’s revenue (income) fell. where your payments reduce the total amount of debt every year. At the same time. reduce taxes. there were more people claiming unemployment benefit.8bn to bail out RBS. meaning that even if they stop the debt growing. Full-Reserve Banking in Plain English | 12 debt. unlike a debt like your mortgage. However. there is more chance that they will be able to use some of their revenue to make downpayments on the national debt. The government may choose to use some of the newly-created money to pay down the national debt. Lloyd’s and Northern Rock. for two main reasons: 1. along with less spending in the economy. freeing up more revenue for public services or to reduce the national debt. there would be fewer and less severe recessions. as the amount of money created will be restricted to be just enough to keep inflation low and steady. the government has simply borrowed the money it needed to pay the interest on the national debt. This would not simply be printing money to pay off the debt (which would be considered to be an underhand way of defaulting or reneging on the debt). It is almost impossible for the government to reduce the debt. 3. which should lead to lower unemployment.HOW CAN WE PAY DOWN THE NATIONAL DEBT? HOW WILL THIS REFORM ALLOW US TO PAY OFF THE NATIONAL DEBT? Our proposed reform allows the state to take back the exclusive power to create new money and to use any newly-created money to increase public spending.
government would need to raise taxes so high that it would be thrown out of office at the next election. If we decided that we want to pay off £30bn of national debt every single year. As the interest currently stands at £43bn this year this means that in order to stop the national debt growing. the government must raise another £43bn this year in taxes. then we’d need to raise another extra £30bn in taxes: equivalent to doubling council tax. so these make up the ‘safe’ part of the portfolio. interest) is government bonds. with the added bonus that they pay interest. www. To see why it is crucial that we do not pay off the debt too quickly. Even at this level. The big concern for us is the 40% of government debt that is owed to pension funds and insurance companies.equivalent to shutting down a fifth of the NHS. So far in this example. to run a ‘balanced budget’ right now. Government debt) because they know these bonds will always be repaid (as government can always tax people to get more money). and higher-risk. simply to stop the debt growing. In summary. the national debt will never go down and tax money that could have been used to fund public services will be used to pay interest on the national debt. higher-return investments. or cut public services by £22bn . So even after the £43bn interest on the national debt is paid.Full-Reserve Banking in Plain English | 13 1. it needs to raise taxes even further.e.6% more than it took in in taxes every single year. especially those with a large number of customers near retirement age. Firstly. rather than simply borrowing more money to pay the interest.org. In order to actually reduce the debt. it would take 30 years to pay down the national debt. we force these pension fund managers to shift their investments from bonds to 2. Around 40% is owned by foreign investors. bonds are much safer than stocks and the pension fund will not want stock market volatility to wipe out its (and its customers) assets. will use government bonds to make up a large percentage of their portfolios – after all. or reduce public spending even more. The fund manager needs to ensure that the investment portfolio has a range of low-risk. The lowest-risk investment that still offers a return (i. However.positivemoney. which would most likely reduce the value of pensions and therefore harm pensioners. the government spent an average of 10. pension funds. As long as we keep the current banking system. you need to step into the shoes of a pension fund manager. excluding the effect of the banking crisis. we are actually reducing the quantity of government bonds in the market.e.uk . Bonds are therefore considered as safe as cash. Consequently. 3. REASON 1: Paying it off too quickly could harm pensioners… The bulk of government debt is not owed to the banks. in the five years before the crisis. Pension funds like to buy government bonds (i. WHY WE HAVE TO PAY THE DEBT OFF SLOWLY If we paid off the national debt too quickly it could destabilise financial markets. it would need to raise an extra £22bn in taxes. steady return investments. If we reduce the quantity of bonds in the market too quickly. the government needs to start paying the annual interest on the national debt each year out of tax revenue. the government has raised VAT by 30% and cut £22bn of public services and has still only managed to stop the debt growing any further. which is equivalent to raising VAT (sales tax) to 30% (from its current level of 20%). When we “pay off” part of the national debt.
For this reason. In contrast. However. Fund managers would be well aware that government bonds were being ‘phased out’. REASON 2: The National Debt is ‘Cheap’ While Personal Debt is ‘Expensive’ The overall interest rate on the national debt works out at around 4.3% per annum (from 2000 to 2010). as people started to fear that the bubble was getting too big.3% interest. By phasing out government bonds as an investment option. we need to gradually remove bonds from circulation over a period of time. the average interest rate is undoubtwww. As a general principal. which would harm pensioners and those in middle-age most of all. However. paying off the national debt has other benefits for the economy. The effect of over £1trillion (the national debt) shifting from the bond market to the stock market and corporate bond market would be like tipping a bath of water into a small pond – creating huge waves in the market.uk edly higher for households than it is for the government. That doesn’t mean we shouldn’t make inroads into paying down the national debt. but would have around ten to fifteen years in which they could gradually shift their investments away from the bond market and into corporate bonds and the stock market. we would recommend that the national debt should be paid down by around £30billion per annum. It is realitively low because government debt is assumed to be risk free. the interest rate for household debt ranges between 6% and above for mortgages. probably creating a bubble in the stock market. prices of stocks would start to rise. The result would be. when they are still paying an average of 8% on their own debts of £1.Full-Reserve Banking in Plain English | 14 other investments. and safeguard the value of pensions. it is better to divert more money back to the public (via tax cuts.positivemoney. This would avoid causing any bubbles in the market. using government revenue from taxation and/or the year’s newly-created money. avoid a flood of ‘cheap’ money into the corporate bond market (which would most likely lead to some pointless and badly chosen corporate takeovers if done quickly). Let’s assume that the interest rate for all household debt averages out at 8% per annum. ONE BENEFICIAL SIDE-EFFECT OF PAYING OFF THE NATIONAL DEBT Besides saving up to £200 million per day on interest costs (if national debt rises as expected up to 2014). a decimation of the value of pensions. once again. they would start to ‘pull out’ of the market by selling shares.464 billion. A basic principle in debt management is to pay off the most expensive debt first. right up to ~17% on credit cards and up to ~29% on store cards. public spending or direct payments to citizens) than to aggressively pay down the national debt. using all the newly created money to pay down the national debt as quickly as possible would be like taking £925+bn from the public in order to pay off debt at 4. such as corporate bonds (riskier) and the stock market (much riskier). This may trigger another stock market crash as pension funds rapidly try to move their money into cash.464billion compared to slightly over £1 trillion as of March 2012). we force pension funds and other investors . Firstly. Overall.org. so pension funds and other buyers of government debt are willing to accept low returns in return for a near-zero risk of default.555 per eligible voter). The money directed to the public will then allow them to pay down their more expensive debts. To avoid this. If we acknowledge that national debt is really the debt of the UK’s taxpayers (amounting to approximately £20. then the national debt is the cheapest debt and should be paid off later than household debt. Total household debt is significantly greater than total government debt (£1.
positivemoney. By investing in bonds or even new share issues from these companies. www. Consequently the banks will themselves need to look for other investment opportunities. The end result of phasing out government bonds is that small and medium businesses will start to find it much easier to get investment and funding from banks. At the same time. we channel more credit / investment to businesses rather than to government.uk . By clearing the national debt. which should be beneficial for the economy. which in theory should lead to lower costs for customers. they will have no need to borrow from banks. FTSE 100 corporations. The next safest option after government debt is the debt of the ‘blue chip’. when large corporations can borrow cheaply from pension funds looking for a safe haven for their money.Full-Reserve Banking in Plain English | 15 to look for alternative investment options. these companies should be able to pay off more expensive debt. or more jobs being created.org. They will need to shift their focus to investing in small and medium sized businesses. or more profit being declared and therefore more tax being paid.
the most common misguided criticism of the type of reform that we are proposing is that it will cause significant inflation. and almost certainly in the single digits. This has led to inflation over that time of hundreds of percent. If you cut the money supply by 50%. • At no point must the annual increase in the money supply exceed the average of the last 30 years in which banks issued the money HOW WELL HAS THE CURRENT SYSTEM PREVENTED INFLATION? Over the last 30 years. especially in the housing market.uk . you would cause asset price bubbles and very high inflation. For one thing. you would cause an economic collapse. In fact. some people automatically react with the suggestion that this would cause inflation. through creating endless amounts of new debt.positivemoney. In other words. Indeed. • The total annual increase in the money supply should not exceed x% of the current total money supply. This prevents any wild fluctuations in the amount of money created from month to month. the banks have been inflating the money supply by an average of 7. The needs or desires of the elected government do not factor in this decision at all.HOW DO WE STOP INFLATION? When we suggest that the state (or the Bank of England) should be allowed to create new money. inflation is significantly less likely under the reformed system than under the existing system. as an irresponsible government prints as much money as it requires for its own needs. the following safeguards could be put in place (but note that they are not included in the reform proposal at this stage): • The absolute amount of the increase in any one month must be no more than x% greater than the previous month. and depending on the level of ‘x’.8% per year.613%! www.org. Politicians will have no influence whatsoever in the amount of money that will be created. while house price inflation has been much higher at 8. If you doubled the money supply in the space of one year.554%. total general inflation was 2. Common sense suggests that the ‘safe’ rate of growth in the money supply will be somewhere close to 0%. FURTHER SAFEGUARDS AGAINST INFLATION If further safeguards are needed to reassure people that hyper-inflation is not a risk. The Monetary Policy Committee will be instructed to consider the needs of the economy as a whole in deciding how much new money should be injected into the economy. between 1950 and 2010. In fact. in one year. As long as the MPC keeps the annual increase under 7% per annum (the average growth rate since 1980) then inflation should be less than it has been under the old system. decisions on changes in the money supply will be made not by vote-seeking politicians but by an independent body (the Monetary Policy Committee). Full-Reserve Banking in Plain English | 16 From this we know that annual increase in the money supply of 7-10% will cause inflation. the members of the MPC should be expressly forbidden from considering political matters or the intentions of the current government in making the decision. so we already know our upper-limit on how much new money should be created. ensures that it would take decades before they could create sufficient levels of money to cause hyperinflation. There is absolutely no risk of this happening in the environment created by this reform.
inflation is much less of a threat under the reformed system.8% per annum leads to a 6-fold increase in housing prices. This would provide a limit of around 7. In short. and the worst financial crisis since the 1930s. For that reason. Allowing banks to create money is therefore akin to pressing both the accelerator and the brake at the same time – and the results are equally painful to watch! In contrast.org. including housing costs. you will start repayments in September. whereby the state creates all new money. In September you are immediately poorer than you were before you took the loan (even though you may have more ‘stuff’) as your disposable income is reduced by the amount of the repayments. Whether we should therefore aim for 5% instead (to avoid any risk of inflation) or stay at 10% (to pull ourselves out of this recession with a quick stimulus) needs further analysis.8% growth in the money supply per annum. but the new debt acts as an immediate drag on the economy. rather than from commercial banks. under the current regime the MPC may increase the interest rate to limit inflation. for the Monetary Policy Committee to be able to make good decisions about the money supply. Which system would you expect to have the greatest stimulating effect on the economy? For that reason. It seems logical that if creating 7. It is disingenuous to claim that inflation is around 2. we can assume that a 10% increase in the money supply. When commercial banks increase the money supply.5% per annum and that the Bank of England has successfully ‘managed’ inflation when the cost of housing – which makes up the bulk of people’s spending – is increasing at over 10% per annum. This is akin to pressing the accelerator with your foot clear off the brake. it must use a ‘basket of goods’ that really represents how ordinary people spend their money.Full-Reserve Banking in Plain English | 17 supply. the debt-free injection of money from the Bank of England is free from the immediate sedative of an equivalent amount of debt.positivemoney.uk NOTE: THE MEASURE OF INFLATION MUST INCLUDE HOUSE PRICES For inflation to be effectively prevented. than under the existing system (whereby new money is created as debt by private commercial banks). when created as debt-free money by the Bank of England. then staying below this limit should have a much less destructive effect. they do so by creating an equivalent amount of debt. the MPC will cease to make a decision on the base interest rate. THE DIFFERENCE BETWEEN BANK-CREATED DEBTMONEY AND STATE-CREATED ‘POSITIVE’ MONEY A 10% rate of growth in money supply is a very different thing when that additional money comes from the state. This argument is no longer relevant. Consequently. but then see the CPI rise due to the effect of higher interest rates on mortgage costs. . and interest rates will be set by markets. The new money acts as a stimulus to the economy. the Consumer Price Index (CPI) currently used by the government is completely inadequate. You spend less in the shops and the real economy loses your regular spending). it is essential that the measure of inflation used by the Monetary Policy Committee includes house prices. however. debt. One of the arguments for excluding housing cost from the existing Consumer Price Index is that. would be far more of a stimulus to the economy than the same rate of increase when caused by commercial banks issuing www. since mortgage costs are determined by the current interest rate. The actual measure of inflation that will be used after the reform is very important and requires further consideration. (If you accept and spend a personal loan in August. as under this reform.
are generally used for payment services (cheques. without having any impact on the bank’s overall financial health.WHAT ABOUT MY CURRENT ACCOUNT? Your ‘current account’ will be replaced by a Transaction Account. As they will still incur the costs of providing payment services (cheque books. 3. one bank were to withdraw their money on a single day. These accounts may still offer overdrafts. electronic fund transfers etc. Present-day ‘current’ accounts.and post-reform situations. (The on its financial health and no need for emergency provision of overdrafts is a key. which is dealt with in a later assistance from the Bank of England or government. It is technically impossible for the money to be lost. debit cards. However. cash machines. cash handling etc). ATM cards. The money paid into Transaction Accounts will be held in full within an account at the Bank of England. WHAT IS STILL THE SAME 1. which will provide most of the same services. Customers will still have instant access to money bank’. Even if all Transaction Account customers of in the Transaction Accounts. Payments between individuals and businesses will still be made from one Transaction Account to another. but will be 100% safe and secure. we’ll be using the technical term Transaction Accounts. BENEFITS OF THE CHANGES The government and taxpayer would have absolutely no exposure to problems with individual banks. electronic fund transfers). WHAT IS DIFFERENT It would now be impossible to suffer a ‘run on the 3. debit cards. they will almost certainly need to implement account charges to cover these costs. but complex part of the reform. 4. These accounts will all be held ‘off the balance sheet’. the bank would be able to pay with no impact 4. and receiving money (such as a monthly salary). and could be repaid in full (to all customers) at any time. There would be no ceiling limit on the amount that is safe. Because the banks are unable to use the funds placed in these accounts to invest or lend. Transaction Accounts will still provide cheques. A bank will no longer be able to use the money in Transaction Accounts for making loans or funding its own investments.org. the money is ‘in the bank’ at all times. 2. and not be considered part of the liabilities of the bank. Full-Reserve Banking in Plain English | 18 2. We would never see another ‘Northern Rock’ (or chapter). Salaries will still be paid into Transaction Accounts. Washington Mutual in the USA). and a bankrupt bank would still be able to repay all its Transaction Account holders. a transaction account will appear to be almost exactly the same as a present-day current account. 1. and members of the public will probably continue to call them ‘current’ accounts. To the customer.uk Money placed into a Transaction Account would be 100% safe. to differentiate between the pre.positivemoney. and the ‘guarantee’ has no . www. cash machines. they will be unable to earn a return on these funds. In other words. These current accounts will be replaced by ‘Transaction Accounts’.
In addition.uk . and maintaining the bank’s main computer systems. If a bank collapsed. the time for payments to show up in the recipient’s account could be as little as 30 seconds (as compared to 2 hours to 4 days as at the moment). This would provide a better service to both individuals and companies and would make the economy more efficient.in other words. How much would the fees actually be? The following is a realistic breakdown of the current yearly costs of providing a current account. they will want to recoup the costs of providing payment services through charging account fees.1% . there will be significant market pressure to keep account fees as low as possible. nothing. the post-reform payments system may be significantly cheaper to run than the present-day clearing system. because the banks can not use these funds any more to make loans. Someone who had an account balance of £1000 for a whole year would only earn £1 in interest at the end of the year.Full-Reserve Banking in Plain English | 19 real or potential cost for the taxpayer (because the money can not be lost). It is also worth remembering that the interest ‘paid’ on current accounts is often as low as 0. The loss of this interest is therefore insignificant. as there would be no need for a complex ‘clearing’ system (transactions would be instant and final). the fee that banks charge would be more than outweighed by the savings of between £700 and £6. and no money would ever be at risk. In the current system.org. In practice. Note that even today. it would only be an administrative procedure to move the Transaction Accounts over to other banks. many accounts pay no interest at all.750 that the average working adult could expect to make as a result of the reform (these savings are discussed later). provided by a consultancy firm that has set up new banks (Cut Loose): www. £5 Hosting £2 Total £59 Source: Cut Loose . Because of the way the clearing system under this reform would work (see ‘The Payments System’). In addition they will no longer wish to pay interest on balances in these accounts.positivemoney. Checkbook £10 (per book) Debit Card £2 Branch £5 Call Centre £8 Staff £15 Banking engine £4 CDD £8 (one time cost at account opening for Customer Due Diligence) MC/Visa £2 Link £2 BACS etc. these costs are incurred by the bank. While no-one likes to start paying for something that was previously free (although it should be noted that many banks are already introducing fees on current accounts). plus a little extra for profit. This means that the only significant costs would be creating the physical ATM cards and cheque books. offering customer service.Making Banks Happen This equates to a cost of around £5 per month. COSTS OF THE CHANGES ACCOUNT FEES As mentioned above. and recouped from customers via £30 unauthorised overdraft charges and other unexpected charges.
credit cards and mortgages. and recouped from their investment earnings.org. In short.someone who banks with you for normal payment services is far more likely than the average consumer to save with you and come to you first for overdrafts. post-reform banks will need to attract customers who wish to make investments with them. www. They would do this for the same reason that they currently offer free overdrafts to students .positivemoney.uk . the cost passed on to customers is likely to be minimal. As a result.Full-Reserve Banking in Plain English | 20 As the next chapter shows. competition between banks for market share means that the costs of payment services may be ‘absorbed’ by the banks as a cost of acquiring market share. to be able to make loans. One way to attract customers and gain market share is to run a ‘loss-leader’ campaign with their Transaction Accounts.
Full-Reserve Banking in Plain English | 21 on which the customer wishes to be repaid the full amount of the investment. WHAT IS DIFFERENT: 1. credit cards. The broad categories of investment. 2. The maturity date is a specific date www. At the point of opening an account. We call them Investment Accounts. 5. and then be used for making various investments. the taxpayer). the bank would need to attract the funds that it wants to use for any investment purpose (whether it is for loans. and the bank will note that it owes the Investment Account holder the amount of money that they invested. In some accounts. See the later section on Investment Account guarantees for further details.e. 2.org. These accounts would still pay varying rates of interest.positivemoney. 3. for the sake of clarity and because it more accurately describes the purpose of these accounts . customers lose access to their money for a pre-agreed period of time. Any investor opening an Investment Account will be fully aware of the risks at the time of the investment. and a consumer-friendly rating system for the risk of those investments. Investment accounts will still be used by customers who wish to ‘put money aside’ or earn interest on their spare money (‘savings’). along with the expected risk level. 3. Customers would agree to either a ‘maturity date’ or a ‘notice period’ that would apply to the account. At this point. while on others a large proportion of the risk will fall on the investor. the money will belong to the bank. rather than falling on a third party (i. Any money ‘placed in’ an Investment Account by a customer will actually be immediately transferred to a central ‘Investment Pool’ held by the bank. 4. and those who do not wish to take any risk will be able to opt for an (almost) no-risk (and consequently lowreturn) account. This would be a legal requirement . There would no longer be any form of ‘Instant Access Savings Accounts’. via their Investment Accounts. These funds would be provided by customers. mortgages.WHAT ABOUT MY SAVINGS ACCOUNT? ‘INVESTMENT ACCOUNTS’ REPLACE SAVINGS ACCOUNTS Your savings account would be replaced by an ‘Investment Account’. the risk will fall entirely upon the bank.as a risk-bearing investment rather than as a ‘safe’ place to ‘save’ your money.uk . The risk of the investment now stays with the bank and the investor. At the point of investment. plus any interest/bonuses. long term investing in stocks or shortterm proprietary trading). the bank should be required to inform the customer of the intended uses for the money that will be invested. The notice period refers to an agreed number of days or weeks notice that the customer will give to the bank before demanding repayment. rather than the Investment Account holder. They would still be provided by normal ‘highstreet’ banks. After the reform. The Investment Account will never actually hold any money. WHAT IS STILL THE SAME: 1. will be set by the authorities.
and identify any future shortfalls that need to be prepared for (for example. we minimise confusion for the public. they will know the statistical likelihood of an account being redeemed within the next ‘x’ days. 2. By retaining the strong similarities with presentday ‘savings accounts’. the amounts that the bank will need to repay on any one day will be statistically far more predictable than under the current system. With regards to minimum notice periods.positivemoney. We consider this to be easier for members of the public to understand than asking them to invest in mutual funds.Full-Reserve Banking in Plain English | 22 KEY ADVANTAGES OF THE CHANGES: 1. If a bank makes bad decisions and loses money. www. with a much greater degree of certainty than under the present-day banking system. so it is not a big leap to apply this to every type of savings account. what percentage of customers with maturing accounts will ask for the investment to be rolled over for another period (in other words.they will also know. At the same time. and every Investment Account has a defined repayment date (or a maturity date). on their loans-made side. from experience. 3. The government and taxpayers will be neither implicitly nor explicitly responsible for losses of banks. the customers who provided the money for those investments will lose money.uk . or asking them to buy some form of investment certificate or investment bond from the bank. See further discussion of this under ‘Risks to Consumers’ below. by scaling back loan making activity and building up a buffer). and therefore increase loan making activity to soak up the surplus. and so be able to plan the payments that will come due on any particular day for up to 6 months into the future. Because the customer making an investment has explicitly agreed to accept the risks of the investment. a collection of contracts with specified monthly repayment dates and amount. what percentage of accounts will not need to be repaid on the maturity date). There are already many savings accounts with minimum notice periods or fixed term savings accounts of up to 5 years. For Investment Accounts with Maturity Dates. In addition. Banks will be better able to manage their ‘cash flow’. it will be able to identify periods when the money coming in will be greater than the repayments due to customers. they know almost exactly how much money they will receive on any particular date up to 24 months in the future (allowing for a small degree of variance due to defaults and late payments). because they have. there is no need (nor a justifiable case) for the government to guarantee any investments.org. they will know the exact amount that must be repaid on any particular date . Consequently the banks’ computer systems will easily be able to forecast cash flow (money coming in and out) over the next 6 months or so. Since all the investment funds that will be used by the bank come from Investment Accounts.
a third party (the taxpayer) will reimburse the savers who have money invested with that bank. For example. it works as follows: PROBLEMS WITH THE CURRENT SYSTEM Under the existing system. Consequently.maybe expressing concern www. A WORKED EXAMPLE: Let’s look at a worked example. if a bank fails due to bad investments.Federal Deposit Insurance Corporation). or 80%.8% overall (over all the funds invested in this type of mortgage). This creates ‘moral hazard’ and encourages the banks to take greater risks in their investments. The government-backed guarantee on funds in any UK bank accounts means that bank account customers do not need to pay any attention to the activities of the bank that they choose to invest with.uk . interest) Full-Reserve Banking in Plain English | 23 that large sums of money go in to risky proprietary trading. the normal case rate-of-return will probably be around 7. or the ‘Financial Services Compensation Scheme’ in the UK.HOW SAFE WILL MY SAVINGS BE? Under our reform proposals you have two options: Keep your money in a Transaction Account and ensure that it is 100% secure (regardless of how much money you keep in that account. (This scheme is called deposit insurance. Imagine that a bank wants to attract funds to fund conservative housing market loans to middle-income families. It means that one group stands to benefit if the bank is successful in its investments. or requesting accounts where the money is ring-fenced for certain types of investment. If customers bear at least some of the risk of the investment. 2. This creates a few serious flaws or ‘distortions’ in the economic system: 1. It charges an interest rate of 8% on the mortgages. Practically.org. for example. guaranteeing to pay 2%. allowing for defaults. 1. 4% or 5% interest.positivemoney. it should encourage them to be more vocal in how the banks invests their customers’ money . and in the very worst case scenario. in the very worst case scenario it is still likely to make a return of 2%. or 60%. the rate of return might drop to 2% (with the losses of the defaults being canceled out by the interest paid by those who don’t default). the bank may say that a particular Investment Account product guarantees to repay the investor at least 100%. there will be no cap on the amount that is guaranteed) Put your money into an Investment Account and accept some risk in exchange for a return (i. of the amount originally invested. then it knows that investing in this market is effectively 2.e. It means that the banks can gamble with their customers’ money in the knowledge that the government will step in to cover any serious losses. and it knows that only a tiny percentage of the loans that it makes to these middle-income families will actually default. while another group (taxpayers) stands to lose if the bank is unsuccessful. Because the bank knows that. The institution may also offer a guarantee on the rate of interest that will be paid on the Investment Account product. In the USA a similar scheme is run by the FDIC . with a high rate of defaults. An institution has the option of offering Investment Account holders a guarantee that they will be repaid a minimum percentage of their original investment. Our proposal contains a few simple rules that collectively ‘fix’ these fundamental problems in the current design of the banking system.
mortgages for middle-income families). the investors would lose 40% of the principal. The possible return here is much higher.Full-Reserve Banking in Plain English | 24 ‘risk free’. This makes this a ‘risk-free’ investment for the Investment Account holders. and investors who are happy with a low rate of return will be able to invest effectively risk-free. However. While this is likely to be unpopular with savers who have. and guarantee a rate of return of 2%. However. if it is unsuccessful. been able to save without taking any risk at all (thanks to the taxpayer-funded guarantee) there is no morally or economically justifiable reason why savers/investors should have their investments effectively insured by UK taxpayers. www. and provides a good investment vehicle for savers/investors who don’t want to take much risk and don’t need a very high return. The potential interest rate that it will offer if its investments are successful is 8%.in other words. in that it is highly unlikely to lose more than the bank originally invests. In this case. Investors who want a high rate of return will need to take on some of the risk themselves. NO GOVERNMENT GUARANTEE ON INVESTMENT ACCOUNTS The Treasury and government do not back the guarantees made by the banks. but the risk of loss is much greater too. it could end up losing up to 50% of the funds invested. It would then need to cover its losses with its own profits . to date. Imagine that the bank wants to raise funds for investing in a risky. each investor would have been made aware of the guarantees. THE FSA OR BANK OF ENGLAND MAY FORBID SPECIFIC GUARANTEES We have allowed whichever institution that is charged with supervising the UK banking system to forbid an institution from offering a particular rate of return on a particular Investment Account product. emerging market.uk . Some of us may read the figures above and say that it is not ‘fair’ that the bank only risks 10% while the investors risk 40% of their investment. and the market turns out to be a bubble about to burst. If a bank went bankrupt. Let’s look at another scenario. and to offer a guarantee of 60% of the principal invested. If the investments were made badly and the bank actually lost 20% of everything it invested. it would still need to repay the entire original sum to each Investment Account holders. the bank holds all the risk of the investment. and the bank would need to make up the other 10% of the losses from its own profits. These two ‘guarantees’ set up the conditions in which competition between the banks will lead them to offer a full range of products for every type of investor. Consequently. The bank wants to limit its own risk by sharing some of the risk with customers. This would attract funds but would force the investors to share the risk with the bank. if they really miscalculated their investments). it may offer to guarantee the original sum invested. plus 2% interest. knowing the risk to them and the potential upside. the bank may opt to offer no guarantee on the rate of return. This provision is necessary to prevent banks from offering unrealistic guarantees. In this situation.positivemoney. Investment Account holders would become creditors of the bank and would have to wait for normal liquidation procedures to take place to see if they will get back part of their investment. bad investments by the banks would wipe out their profits for the year (or the next few years.org. and therefore made their own decision to invest in a particular Investment Account. in order to attract more funds into its Investment Accounts in order to fund more lending in this particular market (i.e. If the investments failed badly. in every case.
www. If the bank tries to offer an Investment Account product with a guaranteed rate of return of 8%.org. The guarantee they offer may be one that is based on the ‘best case scenario’. In short. hotel construction.Full-Reserve Banking in Plain English | 25 We know from history that professionals in the financial sector are not very good at identifying bubbles while they are in one. a bank has an incentive to offer a better guarantee than all its competitors in a particular Investment Account product in order to attract the maximum amount of funds for investment in the bubble. and therefore the bank will end up with a shortfall. and therefore the FSA or Bank of England should be allowed to disallow any guarantee in order to maintain the stability of the banking system. When a bubble takes off in say.uk .positivemoney. which will increase the likelihood of the bank going bankrupt or appealing to the Bank of England for emergency funding. the FSA may judge that it is highly likely that the investments themselves will not generate a return of 8%. offering a guarantee (on either the rate of return or the principal) which bears no relation to the real risks of the investment makes it more likely that the bank will run into financial difficulties.
THE CUSTOMER FUNDS ACCOUNT This is the account in which all of each bank’s Transaction Account funds are held.positivemoney.org. own capital. When a Transaction Account holder makes a payment to someone who uses a different bank. receive repayments from borrowers. the balance of this account will increase. The Bank of England already has a computer system. 97% of it . Each of these accounts may be split into subaccounts to help the bank manage and segment its own funds. With that in mind. THE INVESTMENT POOL ACCOUNT This is the account that the bank uses to receive investments from customers.now has no physical form. HSBC and Nationwide (and every other bank) would in turn hold accounts with the Bank of England. and these changes are easily misunderstood if the nature of money itself is misunderstood. When a payment is made to a Transaction Account holder by someone at another bank. it should be remembered that unless you are referring to physical cash. Full-Reserve Banking in Plain English | 26 EACH BANK WOULD ‘BANK’ WITH THE BANK OF ENGLAND In the same way that you or I might hold personal bank accounts with HSBC or Nationwide. 2. BANK OF ENGLAND HOLDS ALL DIGITAL MONEY Firstly. THE BANK’S OPERATIONAL ACCOUNTS This is the account where the bank can hold funds for its own purposes . make payments back to Investment Account holders and make loans to borrowers. www.THE BANK OF ENGLAND AND THE PAYMENTS SYSTEM We now look at the bigger picture and explain how the payments system works in the post-reform economy. all digital money (other than cash and coin) would be ‘held’ in a central computer system under control of the Bank of England. Understanding the payments system is a pre-requisite for understanding how loan making and investment will take place in the post-reform banking system. known as the ‘RTGS (Real-Time Gross Settlement) Processor’. and with a few small tweaks can be used to handle full-reserve banking under the Positive Money proposals.at least. This is important because our reform requires some subtle changes to the computer systems used in the banking network.uk . Each individual bank would have three main accounts (stored in the Bank of England’s RTGS Processor): 1. money to pay staff wages etc. It is merely numbers in computer systems. which records the amount of ‘central bank money’ or ‘reserves’ in the reserve account of each bank in the UK. It is only recorded in one computer system or another. the balance of this account will decrease.retained profits. This computer system handles millions of transactions every day. 3. money is never actually ‘kept’ or ‘stored’ anywhere. It is important to understand that money .
In the present day. it would not hold any information on individual customers or customer accounts. they can ensure with 100% certainty that it is impossible for money to be created by anyone other than the Bank of England’s Issue department. and clicks ‘Make Payment’.21 Mr W Riley: balance £1942. we need to look at computer systems to understand how the monetary system will work. under the new system. This would be the responsibility of the individual banks. both to Investment Account holders and to borrowers.org.78 The Investment Pool Account is money that technically belongs to the bank. where it would belong to the individual customers). each bank would need to keep records of all its ‘contracts’ and agreements. A WORKED EXAMPLE: PAYMENT BETWEEN TWO ACCOUNTS Imagine that a customer.positivemoney. money is simply information.Full-Reserve Banking in Plain English | 27 INDIVIDUAL BANKS MANAGE INDIVIDUAL CUSTOMER ACCOUNTS While the Bank of England would hold the real ‘money’ (in digital form). the bank will need to have a record of: • the amount invested • the date the investment was made www.52 Mr J Heath: balance £26. The three accounts at the Bank of England would be huge ‘pots’ of money. the Bank of England gets to determine how the commercial banks can interact with this money. a commercial bank will not have the power to create money electronically. As a simplistic example. the money would belong to the banks (with the exception of the Customer Funds Account. a bank’s database may look something like this: Mrs K Smith: balance £546. Consequently. each bank would record the amount of this money that is owned by each and every one of its individual customers. it needs to know: • the amount lent • the agreed interest rate • the date of monthly repayments • the quantity of repayments to be taken. • and so on. Legally. However. Jack. As a result. However.uk • the maturity date or minimum notice period • whether the minimum notice period has been exercised • the interest rate agreed MAKING TRANSACTIONS BETWEEN ACCOUNTS Understanding the following is not essential to understanding the wider reform. For each Investment Account. The first thing that must be understood is that. Jack logs in to his internet banking and fills in the landlord’s account number and sort code. . banks with HSBC and pays using internet banking to transfer £400 in rent to his landlord. just as you do not have the ability to log into your internet banking and change your own account balance. For borrowers. For its Customer Funds Account. so the bank would not have corresponding records to divide this pool up between customers. even in digital form. If the landlord banks with HSBC. an understanding of the following will dispel a few misconceptions and misunderstandings about how the reform works. and the transactions made in and out of each customer’s account. then HSBC will simply adjust its internal records to reduce the balance of Jack’s Transaction Account by £400. the amount he wants to pay. Since all real digital money will be held in the Bank of England computer systems.
The payment has now been completed and cleared within fractions of a second. and simultaneously increase the balance of Barclay’s Customer Funds Account by £400 (in other words. The entire process outlined above could be done in less than 30 seconds. The computer systems at Barclays’ would then update their own customer account record by increasing the balance of the landlord’s Transaction Account by £400. Tell Barclays that the payment is for account number 295283742. The Bank of England’s computer system will then send a message to Barclays that will www. 4.co. The payment was sent from HSBC Account number 192384192 (‘Jack Smith’).’ 3. then HSBC must: read. The Bank of England will then decrease the balance of HSBC’s Customer Funds Account by £400. say Barclays. The message. it will transfer £400 from HSBC to Barclays). Send a message (via the computer system) to the Bank of England.’ 5. we can now look at how loans will be made after the reform. 295283742. in plain English.. 1. with the sender’s reference ‘Here’s the rent. since this was an internal transfer within HSBC. but in reality the technology behind this process is actually much simpler than the technology that allows you to order a book at Amazon. in plain English.uk . if the recipient (the landlord) is at another bank. the above may sound complicated. The balance of HSBC’s Customer Funds Account at the Bank of England remains unchanged. will read something like this: Transfer £400 from our Customer Funds Account (CFA) to Barclay’s CFA.just a little more heavy-duty to handle billions of transactions a day!) With an understanding of the post-reform payments system.uk . 2.. Reduce the balance of Jack’s Transaction Account by £400. (For those with little experience of computer programming.Full-Reserve Banking in Plain English | 28 and increase the balance of the landlord’s Transaction Account by £400. and the funds would have ‘cleared’ instantly and be immediately available to the landlord for making payments to other accounts.org. on behalf of account 192384192 (‘Jack Smith’). However... something like the following: You have received a payment of £400 for Customer Account No. with the sender’s reference ‘Here’s the rent.positivemoney.
the process of making loans after the reform is very mechanical. a) the money that bank customers have given to the bank for the purposes of investment (specifically. a bank will only be able to make loans using money from one of the following sources: Full-Reserve Banking in Plain English | 29 the investment contract made between the bank and the customer). . the behind-the-scenes transaction will actually involve money being taken from the customer’s Transaction Account and transferred into the bank’s own Investment Pool. HOW BANKS WOULD MAKE LOANS: When the bank wishes to make a loan. All loans will be made from this account. HOW CUSTOMERS WOULD REPAY LOANS When a customer wishes to make a repayment on the whole or part of a loan (or when the bank regularly takes its deposit).HOW WOULD BANKS MAKE LOANS? Unlike the current system. known as the Investment Pool. This account will be held at the Bank of England. it will need to instruct the Bank of England’s computer system to transfer the amount of the loan from the bank’s Investment Pool into the bank’s Customer Funds Account.positivemoney. the money that bank customers have used to open Investment Accounts) b) the bank’s own funds.org. In contrast with the current system. In the post-reform banking system. To do this. rather than creating new money (unlike the current system). FILLING UP THE POOL: When a customer opens an Investment Account. all money in Transaction Accounts (which would currently be held in ‘current’ accounts) is ‘off limits’ to the bank’s loan-making side of the business. and update its internal records for the borrower’s Transaction Account. (Recall that the customer’s Investment Account is really just a customer-friendly way of representing www. THE INVESTMENT POOL: Each bank will hold an account at the Bank of England. it will effectively transfer the amount of the loan from its Investment Pool into the borrower’s Transaction Account. money will be transferred from the customer’s Transaction Account back into the bank’s Investment Pool. starting with a customer who wishes to invest some money. HOW BANKS WOULD REPAY CUSTOMERS’ INVESTMENT ACCOUNTS: When an Investment Account reaches its maturity date or notice period. for example from shareholders or retained profits c) any borrowings from the Bank of England (when permitted). the bank transfers the money that it owes to its customer from its Investment Pool into the customer’s Transaction Account. and all loan repayments will be paid back into this account. The process would move money from A to B.uk WORKED EXAMPLE: MAKING A LOAN: Let’s look at a worked example.
positivemoney. The bank then transfers £1000 from this customer’s Transaction Account into the bank’s Investment Pool. purchasing power or ‘credit’ to be created within the banking system as a result of the loanmaking process (or indeed any other process). If Bank A wishes to lend £1bn to Bank B. money can only be moved from one account to another. The Bank of England will have no £1000. On a bigger scale. If the money is with Bank A. whereby the borrower’s account is credited with the amount of the loan but the original depositors are never told that their money is ‘on loan’. At the same time. The bank now has £1000 in its Investment Pool Account to the Operational Account or Investment Account at the Bank of England. This is in direct contrast to the current loan making process.uk . which bank owes what to ring £1000 from the Investment Pool into the who.Full-Reserve Banking in Plain English | 30 1. NOTE THE MAJOR CHANGE: Note that in all these transactions. The customer decides to invest £1000 in an Investment Account with the same bank that he normally uses for his Transaction Account. or record of. shareholders’ funds etc) c) Banks should not make interbank loans with funds that they have borrowed from the Bank of England. it simply instructs the Bank of England’s clearing system to transfer £1bn from its own Operational 3. 2. the borrower’s Transaction Account balance by £1000 in its internal records. which it can use Pool of Bank B. matter for Bank A and Bank B to arrange between 4. There is no need for the amount of a loan to match the amount of an individual investment – the £1000 loan could just as well have been funded by 5 people investing £200 each.org. the figure of £1000 is used for simplicity. In other words. It is impossible under this reformed system for new money. The legal contract or agreement dictating how and when the loan will be repaid is a to fund new loans. The Investment Account does not hold any money – it is simply a user-friendly way of representing this investment. www. INTER-BANK LENDING Interbank lending in the post-reform system is very simple. and no money creation would take place at any point in the process. the balance of another account is decreased by an equal amount. interest rate paid and so on.) a) Funds in the bank’s Investment Pool b) The bank’s own capital (retained profits. As with loans to the general public. it creates a record of an Investment Account of £1000. it can’t be used by Bank B. a bank may only make a loan to another bank using: (Note that in the example above. Clearing between the two banks would be instantaneous and final. Consequently. The bank makes this loan by transferinterest in. it is impossible for both banks to use the same money at the same time. there would be thousands of investors and thousands of loans. He chooses the account type and agrees to accept the terms and conditions of the account. belonging to the customer. with parts of each investment going into each loan. It will only record the amount of money in bank’s Customer Funds Account and increasing each of the banks’ accounts at any one time. and records details of the maturity date. A different customer applies for a loan of themselves. with interbank lending. every time the balance of one account is increased.
Under the existing fractional reserve banking system. Consequently. Before we explain why a reduction in credit (lending) will not be a problem after the reform. This poor financial health is not the natural state of affairs – it www. the economy doesn’t have a money supply. Full-Reserve Banking in Plain English | 31 is a symptom of a monetary system where all new money is created by the banks. lending – available in the economy. is used to point to the importance of credit in a modern economy. and is therefore earning interest. If we say that businesses depend on access to credit. we are all so far in debt because we allow our money to be created as debt.5% of the existing money supply was created as debt. we need to clear up a few misconceptions about ‘credit’. CREDIT = DEBT The term ‘credit’ is used misleadingly. in reality. the idea of significantly reducing the amount of available credit (lending) raises alarm bells for many people. most of these concerns stem from an incomplete understanding of how the monetary system works.uk . and businesses having debts as much as their annual turnover. dependence on credit is a symptom of a malfunctioning economy and a malfunctioning money supply. By definition. In reality. the only way the public can get money is to borrow it from banks. if the economy needs ‘credit’ to continue functioning. this is not a natural state of affairs – it is a product of a system where almost all money only comes into existence when someone takes out a loan. Considering that the authorities focused on the ‘credit squeeze’ as the biggest problem in the recent financial crisis. bank ‘credit’ means ‘debt’. However. However. But in this case. Over the last few decades we have all become accustomed to having total debts equal to 5 or 6 times our annual salary. while economists argue that easy access to credit is essential to a well-functioning economy. from around 100% of the existing money supply to around 50-60%. and the fact that the economy grinds to a halt whenever ‘credit’ dries up. ‘debt’ and ‘lending’.WILL THERE BE ENOUGH LENDING & CREDIT? This reform will reduce the amount of ‘credit’ – or more accurately. When 97. The debt-based monetary system actually creates the need for companies and households to access credit (debt). ‘Credit’ has positive associations – everyone wants a good credit rating. we are saying that their financial situation is poor enough that they urgently need to go into debt. it points to a chronic shortage of debt-free money in the economy. if banks don’t lend. This means that.org. we are dependent on debt. but the fact that many businesses will go bankrupt as soon as banks stop offering them further debt points to the poor financial health of most businesses. very new businesses and businesses which are expanding rapidly will need access to credit/debt. This is the main cause of our dependence on debt/ credit. In other words. WE ARE DEPENDENT ON CREDIT/DEBT BECAUSE OUR MONEY SUPPLY IS DEBT The absolute dependence on ‘credit’. and your salary appears in your bank account under the ‘credit’ column. The reality is that our dependence on credit is not a natural aspect of the economy – it is a direct result of allowing banks to create the nation’s money as debt. Of course. it creates inflation (especially in housing) that necessitates people borrowing more simply to survive.positivemoney.
tax rebates and government spending. rather than the stop-go economy that we’ve had for the last few decades. created. newly-created money will be injected into the economy. This newly created debt-free money provides a stronger stimulus than debt-based money created by the banks. this will allow individuals and companies to gradually pay down their own debts and start to increase their savings. WE WILL HAVE LESS NEED FOR CREDIT As we create and inject debt-free money into the economy. the money in your account) have increased by a staggering amount in the last 30 years (by a factor of ten. Thus the idea that there is something inherently wrong with a reduced amount of lending is clearly nonsense (if not positively hilarious). e.org. As a result. www. and improve their financial position. not as a debt into the housing market.positivemoney. NINJA mortgages. relative to GDP). AS DEBT-FREE MONEY CANCELS OUT THE DEBT. This has brought with it some lending which has been clearly irresponsible and on a massive scale. debt-free money. people have less dependence on debt. AS THE AMOUNT OF CREDIT FALLS AFTER THE REFORM. the economy should improve.uk .g. In other words. these can be met by the MPC choosing to create more money (if all the other economic indicators also point to the need for more money). With greater savings. DEMAND FOR LENDING WILL ALSO BE FALLING The amount of credit/lending available after the reform may gradually fall to around 50% of the current level. At the same time. and people will be better able to pay off their existing debts. which can help to cancel out the debt and reduce our debt-dependency.Full-Reserve Banking in Plain English | 32 The answer to our debt-dependency is not more debt (despite political leaders shouting “We must get banks lending again!”) but newly created. but as tax cuts. pay down mortgages. for example. or by lending money directly to banks on the condition that this money goes into ‘productive’ lending – funding businesses rather than consumer credit cards. and therefore access to credit (debt) becomes less critical to the health of the economy. since there is no need to pay an interest charge on the money as soon as it is THE CURRENT SYSTEM SUPPLIES TOO MUCH CREDIT/ DEBT Bank assets (loans) and liabilities (bank deposits. the demand for credit will fall in tandem with the availability of credit. With lower taxes and a more buoyant economy. If there are any shortfalls in the amount of credit available during the ‘transition’ phase between the two systems. the need to go into debt will fall and apply to fewer people. A system that provides less credit than fractional reserve banking is much more likely to lead to a steady and stable economy.
and to the economy as a whole of removing the overdraft functionality from Transaction Accounts.positivemoney.e. and could therefore mean that the economy needs a greater injection of new money. tion Account holders.org. INDICATING CHANGES IN THE NEED FOR MONEY IN THE ECONOMY The balance of one overdraft may fluctuate wildly through the month and at different times in the year.WHAT ABOUT OVERDRAFTS? Overdrafts on Transaction Accounts can play a key part in the post-reform banking system. they will provide a very useful indicator on the need for more (or less) new money to be injected into the economy. people on average are going further into their overdrafts) then it indicates that people do not have enough money to meet their regular expenses. On the other hand. If this average balance is increasing (i. if an individual’s bills need to be paid just a few days before their salary is paid into the account). to the customer. Secondly. However. Full-Reserve Banking in Plain English | 33 ‘THE LIQUIDITY BUFFER’ Overdrafts provide short-term liquidity and allow businesses and individuals to smooth out temporary mismatches between their incoming and outgoing cash flows (for example. There would be no advantage to the bank. averaged over millions of Transac- www. Firstly. if average overdraft balances are falling (people are – on average – paying off their overdrafts) it could mean that there is ‘spare’ money in the economy and point to the possibility of inflation in the near future. from money that the bank has borrowed from customers (who will have put the money into investment accounts). they will provide a short-term ‘liquidity buffer’ to households and businesses. This means that changes in this average balance will indicate significant changes in the economy. HOW OVERDRAFTS WILL BE FUNDED Overdrafts will be funded like any other loan. the average balance will be fairly stable.uk .
creating a huge shortfall in their income and potentially bankrupting them. In short.org. As a result. This in turn triggers a wave of defaults.positivemoney. banks become increasingly willing to offer us more debt. the bank knows: • What it will need to repay to customers who have made investments. 2. This creates a ‘positive feedback loop’ – as we get further and further into debt. the design of the current banking system makes it fundamentally prone to collapse. which eventually become impossible to repay. The majority of the bank’s customers can demand repayment at any time from any accounts that do not have maturity dates or notice periods. the amounts that the bank will need to repay on any one day will be statistically many times more predictable than under the current system. money in a short period of time. the overall availability of loans increases. which in turn triggers a domino effect throughout the economy. STABILITY IN THE POSTREFORM BANKING SYSTEM The post-reform situation is much more stable. making the bank illiquid (unable to make payments). This develops into high levels of personal and household debt. If this continues. Every loan that the banking system makes creates more deposits (the numbers in your account). the bank becomes officially insolvent and would therefore be bankrupt. and when. Full-Reserve Banking in Plain English | 34 SOURCES OF INSTABILITY UNDER THE CURRENT BANKING SYSTEM Instability under the current banking system comes from a variety of sources: 1.WOULD THIS MAKE BANKS MORE STABLE? These reforms would make banks significantly more stable. and consequently funds more loans. and keeping them as low as possible in order to free money up for making further loans (to maximise profits). There are some major sources of instability in the current system that can be removed with a few simple changes to the way that banks do business. and every Investment Account has a defined repayment date (or a maturity date). as the money is stored in full at the Bank of England. as people’s financial situation gets worse and they take on more debt. Money withdrawn from Transaction Accounts doesn’t affect the bank in any way. The banks try to guard against this by keeping back enough reserves at the Bank of England to meet any likely payments. The stability arises from the fact that the funds a bank uses to make loans are now ‘locked in’ – customers can no longer demand them back whenever they choose. and when. such as seen in the sub-prime mortgage market in America. • What it will receive from borrowers making repayments on their loans. This is what happened to Northern Rock in 2007. Since all the investment funds that will be used by the bank come from Investment Accounts. but they continually walk a knife-edge between keeping reserves high enough to cover the maximum likely net withdrawals. As a result. This means that the loans that banks originally expected to be repaid are no longer likely to be repaid. and therefore doesn’t need to be ‘found’ from anywhere when it has to be repaid. This could result in the bank being required to pay back huge sums of www.uk .
on its ‘loans-made’ side. and all these account holders exercised their minimum notice period. because a bank has. if the cashflow accounts as they mature. what percentage of customers with maturing accounts will ask for the investment to be rolled over for another period (in other words. rather than pro-cyclical. On the other hand. Unlike the present day banking system.org. it can increase loan making activity to ensure that it does not end up with a swelling Investment Pool Account We believe that the risk of any bank or all banks full of ‘idle’ funds. there may be billions of pounds of liabilities subject to short-term minimum notice periods. it is both less likely to occur than under the current system. and so will be able to forecast the payments that will come due on any particular day for up to 6-12 months into the future. what percentage of accounts will not need to be repaid on the maturity date). Again. it should be remembered that the risk of defaults will be significantly lower throughout the entire financial system after the reform 2. the bank’s computer systems will be able to easily calculate how much money should be required on any particular day up to 2 years into the future. if a rumour spread that that bank had made some bad investments. This means that the banking system will not create debt-fuelled www.uk . suffering a ‘cashflow crisis’ is significantly lower post-reform than under the existing banking system. Uncertainty about the proportion of customers until it has built up a buffer to cover the upcoming who will (or won’t) roll over their investment shortfall. Uncertainty about the likely use of minimum notice periods. In addition. In an extreme case. However. while this is still a source of instability. the total impact on the bank would be far less. At any one point in time.positivemoney. a bank will know the statistical likelihood of an account being redeemed within the next ‘x’ days. from experience. the post-reform banking system is counter-cyclical. the bank may be required to repay £10bn in 30 days from now. imagine that a particular bank has £10bn in Investment Accounts that are subject to a 30-day minimum notice period. SOURCES OF UNCERTAINTY IN THE POST-REFORM BANKING SYSTEM There are three sources of uncertainty in the postreform banking system. for the following reasons: THE LOWER LEVEL OF SYSTEMIC RISK: 1. The risk of default by borrowers. With regards to minimum notice periods. and the other two relate to the bank’s potential outgoings: 1. The first source relates to the bank’s ‘in-comings’. and will also know. and if it does occur.Full-Reserve Banking in Plain English | 35 For Investment Accounts with Maturity Dates. a bank will know the exact amount that must be repaid on any particular date. Consequently. If it identifies any potential cashflow problems (such as a large number of Investment Accounts maturing in a short period of time and insufficient income from loan repayments to cover them all) the bank can rein back loan making activity 3. forecasts identify a period when repayments from existing borrowers are in excess of the amounts required to repay Investment Account holders. it knows almost exactly how much money it will receive on any particular date up to 6 months in the future (allowing for a small degree of variation due to defaults and late payments). a collection of contracts with specified monthly repayment dates and amount. For example.
This loan must always be used to re-credit the maturing Investment Account – it can not be used to fund new loans. 2. In reality. Consequently. ensuring that the emergency loan has no long-term effect on the money supply. In deciding whether to support the bank with such an emergency loan. the Bank of England has the discretion to make an emergency loan to the bank in question. and therefore fewer borrowers will be forced to default. However. This may sound a little like the taxpayer-funded bailouts that we have seen over the last few years. in other words. If a million people are no longer thrown out of employment every few years.positivemoney. recessions will be less frequent and less severe. if the cash-flow problem arises because the bank’s loan portfolio is ‘toxic’ and a large proportion of borrowers are defaulting. the Bank of England would probably choose to initiate ‘wind-down’ procedures for the bank in question. out of its future income. Note that this emergency loan should only be provided to meet a short-term liquidity problem – for example.Full-Reserve Banking in Plain English | 36 booms that soon turn into economic crashes. loan repayments are out of synch with maturing Investment Accounts).org. www. it may be unlikely the Bank of England’s emergency loan will be repaid. PROVISION FOR EMERGENCIES We have made provisions for the situation where a bank does not have sufficient funds in the investment pool to re-pay maturing Investment Accounts. it will be newly-created money. and will not cost the taxpayers anything. In this situation. This emergency loan will merely provide some liquidity for the individual bank in unusual cash-flow circumstances. this newly created money will be ‘destroyed’ again. Because the bank has limited funds for making loans (and because each loan does not create new deposits). In this case. However. and consequently the overall quality of a bank’s loan portfolio should be higher. If the bank needs to borrow significant amounts. If this is purely a shortterm cash-flow problem (i. Without regular banking-fuelled boom and bust cycles. then it is unlikely to earn a profit for a number of years. then fewer people will run into financial difficulties. the incentive for loan-making departments shifts from lending as much as possible. making defaults less likely. as the bank repays the loan. The economy will be generally more benign. to finding good quality borrowers to lend to.e. if a recession had caused a larger withdrawal from short-term Investment Accounts than normal. each bank’s loan portfolio is likely to be far safer than under the current system. the loan portfolio is healthy. it is completely different – the emergency loan will consist of nothing more than numbers added to a computer system.uk PENALISING BANKS FOR POOR ‘CASH-FLOW’ MANAGEMENT The Bank of England or the banking regulator can – and should – penalise banks that have to seek emergency funding. then the emergency loan should be made. and it’s clear that the bank will soon be able to repay the emergency loan. As a result. The borrowing bank will need to repay the loan in full. the banks are less likely to lend to bad-risk borrowers. There are a number of ways that they could attempt to do this: • By charging a punitive rate of interest on the emergency loan (reducing the bank’s future profits) • By charging a monetary fine • By launching an in-depth investigation into the bank by the banking regulator • By any other method that the banking regulator believes will prevent further transgressions by the bank in question or any other bank in the . causing a wave of defaults. the Bank of England should look closely at the bank’s loan portfolio and future income. 3.
we are keen that this should not be seen as state support for banks that are fundamentally unsound.org. broken up and sold off to either healthier banks or debt collection firms. If a bank is judged to be badly managed or have made bad investments across the board. NO BAILOUTS OF BAD BANKS The provisions above mean that the Bank of England would have the power to lend money to a bank in order to prevent it suffering a temporary cash-flow crisis. under our proposed reform it could actually be an opportunity for the state to profit in real and absolute terms.Full-Reserve Banking in Plain English | 37 industry. and that doing so would have absolutely no financial cost to the taxpayer.uk . we are referring to companies that would buy – at a discount – the legal contracts between the bank and its borrowers. However. (Note that by ‘debt collection firms‘. We should not see governments supporting ‘toxic banks’ in the way that we have seen over the last three years. then the bank in question should be wound down. www.positivemoney. held separately from the bank’s investments in the bank’s Customer Funds Account at the Bank of England. winding down a bank would be far easier and cheaper than under the existing system. for the following reasons: The funds placed in Transaction Accounts are 100% safe. meaning that all holders of Investment Accounts are likely to lose money. In the post-reform system. Rather than a bank in trouble representing a huge financial burden on the taxpayer. The taxpayer and government has no exposure or responsibility whatsoever for the funds owed to holders of Investment Accounts. according to the payment terms in the individual contracts. and insolvency law would govern whether and by how much they are repaid their original investment. and collect repayments over a period of time. The Investment Account holders would become creditors of the liquidated bank. No borrower would be requested to repay the loan earlier than originally agreed).
uk www.org/licenses/by-nc-nd/3.0/ .Written By: Ben Dyson © February 2012 Positive Money (Version 1) Positive Money 205 Davina House 137-149 Goswell Road London EC1V 7ET Tel: +44 (0) 207 253 3235 Email: firstname.lastname@example.org. To view a copy of this license. visit http://creativecommons.uk This work is licensed under the Creative Commons Attribution-NonCommercialNoDerivs 3.org.0 Unported License.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.