Abstract
The idea of full reserve banking (under various names) has been adopted by parts of the green and ecological movements (e.g. Green Party of England and Wales). The paper argues that full reserve banking (FRB) would represent a ‘green monetarism’. As with monetarism, FRB would focus on inflation and its control through the money supply. FRB would face problems with the control of the effective money supply as other means of payment developed. Its major problem would though come from the connection which would be established between the budget deficit and changes in the money supply. Fiscal policy would become completely subordinated to the control of the money supply. There is no reason to think that it would enable fiscal policy to be set in a manner conducive to high levels of employment, and at times would lead to substantial unemployment, and at others to ‘overheating’ of the economy. Through denying fiscal policy’s role as an ‘automatic stabiliser’, full reserve banking would be a force for instabilities.
Highlights
There have been a number of similar proposals under headings of full reserve banking, positive money, sovereign money and 100 per cent reserve banking which have attracted favourable attention from the ecological and green movements2
The crucial element of ‘full reserve banking’ is that the banks hold reserves which exactly match the volume of deposits held with the banks by the public and which are treated as money – that is are accepted as a generally accepted means of payment and are readily available and transferable from one to another
Under ‘full reserve banking’, the volume of money in circulation would in effect be determined by the amount of money issued by the central bank with the amount in ‘transactions accounts’ of banks backed by 100 per cent reserves of central bank money
Summary
There have been a number of similar proposals under headings of full reserve banking, positive money, sovereign money and 100 per cent reserve banking which have attracted favourable attention from the ecological and green movements. The crucial element of ‘full reserve banking’ is that the (clearing) banks hold reserves (in the form of central bank money) which exactly match the volume of deposits held with the banks by the public and which are treated as money – that is are accepted as a generally accepted means of payment and are readily available and transferable from one to another. There is an intimate link between the budget deficit and the change in the stock of money, and the amount of money which remains in circulation is a decision of the central bank and not the public. The full reserve proposals are designed to place the stock of money under the direct control of the central bank As such it shares many similarities with the ill-fated proposals of Friedman (1960) and others for the achievement of a specified growth rate of the stock of money. As indicated below the precise relationship between the budget deficit and central bank money depends on the degree to which the budget deficit is bond funded
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