Further detail about the document from 1939, “A Program for Monetary Reform” (aka PMR). In this installment, Pete and Joe discuss the PMR’s take on the alternative to fractional reserve banking, full-reserve banking, aka 100% Reserves, or as PMR co-author Irving Fisher titled his book, 100% Money.
Another great video guys. Keep up the good work. I really enjoy your discussions.
Joe,
thanks found your link on “naked capitalism” and started answering there. Thanks for this site as it breaks down the discussions.
on fractional reserve. I think I fully agree with the “evils” of the system, namely that the banking system creates money as debt and collects a tax on society. Furthermore when the economy defaults, the banks foreclose on assets. So the banks end up owning all these assets having done no work for it. As a final note, I have rarely seen a modern treatment of CDO in this framework, namely that the monetary mass is not set by reserve ratios anymore (forget MMT’s narrative) and that until legislation captures flows there is no way to control monetary levels. The closest I have seen has been Andresen’s work (keen collaborator).
Anyway, onto my doubts about the proposed remedy.
1- The move could create a massive depression. GDP is linked linearly to the flow of credit, not the stock of credit. The point of FRB is to allow for 10 dollars of debt for each dollar of deposit. If all the sudden you go to 1$ deposit resulting in 1$ in debt, you will create a 90% depression in the GDP assuming same rate of deposit. I have read some of Zarlenga’s argument (in his 32 pages pamphlet) and found them seriously lacking.
2- If you are going to go to pure govt money, and the banking system cannot do FR lending then to match the 10x rate, you need to 10x the rate of spending by govt. In Zarlenga’s pamphlet he describes that all new deposits come from govt spending. If you don’t 10x the spending, you go back to 1 (serious GDP depression). If you 10x then you get into the discussion of whether it is smart to have a centrally directed economy.
3- then the conclusion is naturally that on top of money creation for deficit financing the govt needs to engage into the business of lending new money into creation. So the conclusion of zarlenga that “banking is not a function of gvt, money creation is” falls apart. If you nationalize money creation, if follows mathematically that you must nationalize the lending activity and therefore the banks themselves.
4- Do you know how the ECB work and how china works? I have no idea personally. Is the ECB a semi-public entity like the FED? how do the chinese manage their money and fractional reserve system? any pointers or literature there would be helpful.
forgot to conclude: I agree this would nix the banking system. However at this stage it seems to ingrained in the form of flow of credit and therefore GDP. Extirpating it could prove too costly as per the points above. Curing the illness would kill the patient.
To marcf at 4:55
marc
Thanks a lot. Moving slowly forward, I hope. So much from the conference to discuss.
Talking point – monetary mass is not set by reserve ratios – viola!
Until legislation “captures” flows, no way to control monetary mass. Agreed.
In conclusion: When the Constitution gave Congress the power to create the nation’s money and regulate its value, they didn’t foresee that the Congress would give it over to private bankers, who would give it over to the capital markets – and the only way we can regain that control is with a public money administration acting under legislation that prevents money(debt) creation to finance speculation.
Done.
Onto your doubts
1. – Would you think that the esteemed economists who developed the Chicago Plan, or the ones who developed the 1939 Program, or Milton Friedman for that matter, all of whom advocated full-reserve banking, wouldn’t foresee the failure of providing adequate circulating medium(stocks and flows) in the economy at all times? So, you really think we can’t pull that off?
Oh, jeezum, 90 percent GDP drop. What did we forget? Your comment lacks any basis that I can see, and I invite you to provide any criticism of Stephen Zarlenga’s proposal, partly because if they’re valid, we would want to fix them.
2. Your second point is even a little further afield.
Forget reserves. It’s the amount of money that counts. A fair consideration should be based on the fact that either a ‘0’ percent reserve or a ‘100’ percent reserve is capable of having the exact same amount of money in circulation. You can’t really move forward without that.
You really need to think through your own assumptions. When Zarlenga proposes that all new money(deposits) is created by the government, the amount in any one year would be ALL the money that is needed to meet the potential GDP. If the $13 Trillion economy can increase GDP by 2.5 percent next year, that means we need $325 Billion of new money, whether useing fractional or full reserves. The government creates that ($325B)money by spending it into existence within its $4 Trillion Budget, the balance being collected via taxes.
3. Given the mistaken premises of 1 and 2, the conclusion of 3 is equally off the mark. There would be no money-lending by the government for any purpose other than to meet temporary critical market needs. But those are part of the following year’s consideration. As a result, Zarlenga’s proposal that the government be out of banking is maintained as surely as the bankers get out of creating money.
4. I would have a hard time saying whether China’s system follows the reserve or the capital-requirements base. But all other IMF members work on the basis of private, fractionally-based “credit” creation, using debt-money.
Extra conclusion – Ummm, this would not “nix” the banking system – this would save the banking system.
The rest comes under the conclusion that you never actually read Dr, Yamaguchi’s paper, which confirms Zarlenga.
Actually, making the change to the American Monetary Act debt-free money system can result in eventually ending government debt as we know it, have moderate but real economic growth without inflation.
Thanks for the comment.
And, let’s talk.