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A Case For Central Banking - Safe Storage of Electronic Money -- 100% Reserve Digital Cash

The (usually) transparent process of inter-bank lending works so well that most of the time we don't even think about it. This process has largely weaned the public away from physical paper money. Note that most money (about 90%) now exists only as entries on bank ledgers, backed by loans (debt). Also, note that possessing physical paper dollars is like having equity in the economic output of the United States of America, and has no credit risk associated to it. Physical paper money is not anyone's liability.

Bank deposit money, on the other hand, does have credit risk associated to it. That risk consists of the liability of the bank in which the deposit resides. Strangely enough, most of the time the credit risk of bank deposit money is lower than the theft and physical-loss risk of physical paper money.

That is why we use bank deposit money more than physical money. Through this (normally) transparent process of inter-bank lending, the banking system acts like a huge clearinghouse (essentially a giant ledger) which clears payments between its customers without the physical transfer of cash, and keeps track of who has how much money. Most money in the world economy is not physical (paper cash or gold) but logical (ledger entries).

To summarize: physical paper money is equity. Bank deposit money is backed by debt (actually that's not 100% true--reserves at the federal reserve system are also equity, essentially an electronic version of physical paper cash).

That difference -- that physical paper money = equity in the nation's economy, and that a bank deposit = debt (a bank obligation) causes great confusion.

We have become very comfortable with bank deposit money, without thinking much about the credit risk we are taking. Bank failures, when they happen, create confusion and chaos because the vast majority of businesses and individuals use checking accounts for convenience (they can write checks rather than handling physical paper cash) and they don't really think much about the credit risk that is normally associated with keeping their money (their most liquid capital) in a bank in a checking account. In fact, in most cases users of checking accounts do not want to take a credit risk. But in the current banking system there are no alternatives.

Is There a Better Way?

Consider the banking industry's contribution to society. The banking industry provides three major services to the public:

1. It provides a "safe" place to hold the public's most liquid assets (cash).

2. It acts like a giant clearinghouse (settling checks without physical paper cash transfer).

3. It is a source of loan money (banks evaluate the credit worthiness of borrowers). Think of "credit worthiness evaluation" as a service to society. If bankers do a poor job at evaluating credit worthiness they will end up mis-allocating economic resources.

What I am asserting is that it is possible to have a banking system where a customer would get benefits 1 and 2 described above without taking a credit risk, if banks gave people a choice between a regular account and a special "100% reserve account."

These special accounts, which are not available to the public today, would have no credit risk. The money in such accounts would not be lendable. There would still be fraud risk, of course. A bank desperate for cash might be tempted to "dip" into the reserves allocated to their 100% reserve accounts. Of course we would make such "dipping" illegal. The 100% accounts would be the electronic equivalent of storing physical paper bills in a safe deposit box at the bank. The total reserves of a bank would be "safely electronically stored" at a central bank (much like reserves at the FED).

I know that Misesians and libertarians and ZH readers don't like central banks and are very suspicious of them. But I wanted to write this blog and start a discussion. It seems to me that electronic version of physical paper cash (i.e., digital cash) is the next natural step. Much like airline tickets are now mostly issued as e-tickets and not as negotiable paper tickets. By its nature "digital cash" would have to be stored on some central bank on a computer hard-disk (i.e, an electronic ledger) and it would also contain the owner's identifying information (i.e., the bank account number). Such "digitial cash" would NOT be debt money (as are bank deposits today) but would be "equity" money (like physical paper cash). Ofcourse we could go a step further and back-up the "digital cash" with gold reserves in the vault (but I am NOT proposing that we do this). I am trying to understand the Misesian and libertrarian distaste for a central bank. By the way I want a central bank as a safe repository of electronic money only and nothing more. I don't think a central bank should try to influence interest rates or lend money like the current FED.

Such accounts would have no credit risk (like physical paper cash) but would have the benefit of being used in electronic transactions and be accessible by personal checks. Of course, a 100% reserve account would not earn interest but would most likely have monthly maintenance fees associated to it (similar to a safe deposit box; it would also be very much like the reserve accounts that banks have with the Fed).

Such accounts, if widely used, would lessen the impact of bank failures on the economy in terms of a contraction of the money supply, chaos and confusion--but would not completely eliminate them.

Lending involves business risks (credit risks). If a customer were to choose a non-100% reserve account then he would be subject to losing his money. This would force the public to do some homework before handing money over to a bank (in essence, customers would need to consider banks' credit ratings, quality of management, etc.).

Of course, in this type of setup, a non-100% reserve account would probably have to pay a higher interest rate than the fractional reserve accounts do today. In fact if the public had a choice of 100% reserve accounts, there would be no need to impose legal reserve requirements on non-100% reserve accounts. There would be a clear separation between accounts that have a credit risk and accounts that don't. The accounts with credit risk would need to set their interest rates high enough to attract depositors.

If our banking system were set up this way, we would avoid huge systemic risks in the future, since a major part of the money supply would likely be sitting in non-lendable accounts. Many enterprises probably should not take any credit risk with their liquid capital (utility companies, municipalities, states, hospitals, etc.). In any insolvency or bankruptcy the 100% reserve accounts would receive priority, and unless the bank was fraudulently “using” these reserves the deposit owners of such accounts would never lose their money. If an electronic deposit account with no credit risk were available, then any individual or business choosing not to use such an account would be subject to losing their at-risk deposit. If such an alternative were available, then the depositor who chose the lendable money account would be warned that he or she could lose money if the bank became insolvent.

Once this choice is given to the public, the banks can then be allowed to fail without severely impacting the payment system which is needed to conduct day-to-day commerce. The only job of the FDIC would then be to insure smooth transfer of 100% reserve accounts to another bank.

I will go a step further and state that the availability of such accounts (non-lendable, 100% reserve accounts) should be mandated by Congress through force of law. Each business and individual should be able to choose whether they want to take a credit risk or not.

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I'd add a few points to the above.

Firstly, the most critical service offered by banks is borrowing short and lending long. Maturity transformation. There is a good case to be made that a modern technological society can't exist without it.

Secondly, if there is no physical cash option then banks have to manage ALL money. They'll charge for this service which means that carrying costs will attach to even your 100% reserve electronic accounts. This will represent a negative rate of interest. Since these 100% reserve funds can't be loaned out the interest rate on them could not be positive.

Thirdly, cash effectively does not exist in this system since deposits can never be converted into a guaranteed 0% bearer bond that is independant of the banking system, and assuming such checking accounts were subject to service fees this fee could not be avoided - so this is a cashless economy. If the economy is cashless, how then is an individual account holders equity in the economy measured?

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I'd add a few points to the above.

Firstly, the most critical service offered by banks is borrowing short and lending long. Maturity transformation. There is a good case to be made that a modern technological society can't exist without it.

Secondly, if there is no physical cash option then banks have to manage ALL money. They'll charge for this service which means that carrying costs will attach to even your 100% reserve electronic accounts. This will represent a negative rate of interest. Since these 100% reserve funds can't be loaned out the interest rate on them could not be positive.

Thirdly, cash effectively does not exist in this system since deposits can never be converted into a guaranteed 0% bearer bond that is independant of the banking system, and assuming such checking accounts were subject to service fees this fee could not be avoided - so this is a cashless economy. If the economy is cashless, how then is an individual account holders equity in the economy measured?

1) I have no problem with maturity transformation. But when maturity transformation is done with demand deposits or even with time deposits with mismatched maturities there is an issue. The investor (the depositor) must understand that all investing involves taking risks (credit risk in this case). I can make long winded very strong argument that banking as it is practiced today assumes that there will not be a mistake big enough to bring down the whole system and shove us into another dark age. The entire banking system can and will someday go out of balance (systemic failure) because we are taking a credit risk with the entire banking system (most of the cash in the economy).

2) Deposit insurance will not work in the event of a very large mistake. Therefore, deposit insurance is false security for our society. A very large mistake will require huge amounts of principal to be applied toward deposit insurance premiums (essentially reducing the banking system's deposit liability to the public). The debt (deposits) will then start acting like equity (as in breaking the "buck" in a non-FDIC insurance money market fund). The way systemic risks are handled today is that deposit insurance (FDIC) is backstopped by the government (tax payers) and ultimately the printing press (which risks currency collapse and societal chaos).

3) I am proposing a new type of deposit "A 100% credit risk free deposit" (electronic equivalent of paper cash - like the reserve at the FED). This would not be debt money (fractional reserve money) but would be 100% reserve equity money just like physical paper bills in my wallet. Yeah I know that the dollar is really a "Federal Reserve Note" implying a debt instrument. But paper cash acts much more like equity (that is why I don't need FDIC insurance for the paper bills in my wallet) than debt.

4) Sure there would be a "checking account monthly fee". Just as I would pay a "bailment" fee to warehouse my gold coins. Sure, it would count as "cash". Not very different from physical paper cash in my wallet (except I can access it via a personal check or a debit card or other electronic transaction). The money would then be counted as "base" money just as it is today in the Federal Reserve Bank reports.

5) Yes. Today's modern economy cannot exist without maturity transformation. That is why we have equity markets. I buy a share of IBM stock (fully aware that I am taking a investment/credit risk) which funds a huge long term project called "IBM". And of course I can liquidate my portion of the investment any time in the equity markets. Maturity transformation belongs in the equity markets not in debt markets. All debt should be maturity matched (see writings of Professor Antel Fekete for justification). Cash should not be lent out unless the cash holder fully understands that they are taking a credit risk.

Edited by mansoor_h_khan
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1) I have no problem with maturity transformation. But when maturity transformation is done with demand deposits or even with time deposits with mismatched maturities there is an issue. The investor (the depositor) must understand that all investing involves taking risks (credit risk in this case). I can make long winded very strong argument that banking as it is practiced today assumes that there will not be a mistake big enough to bring down the whole system and shove us into another dark age. The entire banking system can and will someday go out of balance (systemic failure) because we are taking a credit risk with the entire banking system (most of the cash in the economy).

the banking system won't fail if withdrawing money from it is impossible. By advocating that all cash is electronic, cash cannot be withdrawn from the banking system. So some individual banks could fail but the system as a whole can't suffer from a run.

2) Deposit insurance will not work in the event of a very large mistake. Therefore, deposit insurance is false security for our society. A very large mistake will require huge amounts of principal to be applied toward deposit insurance premiums (essentially reducing the banking system's deposit liability to the public). The debt (deposits) will then start acting like equity (as in breaking the "buck" in a non-FDIC insurance money market fund). The way systemic risks are handled today is that deposit insurance (FDIC) is backstopped by the government (tax payers) and ultimately the printing press (which risks currency collapse and societal chaos).

I agree re deposit insurance. And having deposits act like equity is exactly what I propose should happen when the economy encounters problems. That is, negative interest rates apply. The inability for deposit debts to adjust below the 0% bound is the single source of systemic instability to which all other issues with banking (and capitalisnm) can be traced.

3) I am proposing a new type of deposit "A 100% credit risk free deposit" (electronic equivalent of paper cash - like the reserve at the FED). This would not be debt money (fractional reserve money) but would be 100% reserve equity money just like physical paper bills in my wallet. Yeah I know that the dollar is really a "Federal Reserve Note" implying a debt instrument. But paper cash acts much more like equity (that is why I don't need FDIC insurance for the paper bills in my wallet) than debt.

Yes I know but such deposits are largely pointless and harmful at the macro level. Because they can't be lent out they will still cause problems as if many people dump money in these accounts, the money in circulation will fall by exactly the amount invested in these accounts which will lead if perpetuated to a debt deflationary depression. As the rest of the debt based money supply contracts and prices fall, these deposits are essentially earning a strongly positive real rate of interest, which is exactly the opposite of what you say such deposits should be - a no risk no return deposit.

5) Yes. Today's modern economy cannot exist without maturity transformation. That is why we have equity markets. I buy a share of IBM stock (fully aware that I am taking a investment/credit risk) which funds a huge long term project called "IBM". And of course I can liquidate my portion of the investment any time in the equity markets. Maturity transformation belongs in the equity markets not in debt markets. All debt should be maturity matched (see writings of Professor Antel Fekete for justification). Cash should not be lent out unless the cash holder fully understands that they are taking a credit risk.

the problem with equity is that the stock of it is limited. A company needing some short term financing for payroll purposes cannot realistically issue equity to investors to cover this shortfall. If you hold that equity should be used exclusively for maturity transformation, then equity is in fact money.

however money needs to be informationally insensitive. A bank deposit (bank debt) at one bank is pretty much the same as a deposit at another bank, when things are working properly. But one equity is very different to another - that is, it is generally profitable to speculate on the differences between two equities (because the info needed to do so is widely available), but it is generally less profitable to speculate on the difference of a £ in barclays and a £ in hsbc.

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the banking system won't fail if withdrawing money from it is impossible. By advocating that all cash is electronic, cash cannot be withdrawn from the banking system. So some individual banks could fail but the system as a whole can't suffer from a run.

Even if cash could not be withdrawn from the banking system and this source of systemic failure is removed how would you handle a massively insolvent bank like Citibank? The rest of the banking system or the taxpayer or the printer press would have to bailout such an institution. Where is the moral hazard? This is very un-capitalism like. One of the most important (very useful) feature of capitalism is that it allows/exposes economic failures and punishes bad economic behavior.

I agree re deposit insurance. And having deposits act like equity is exactly what I propose should happen when the economy encounters problems. That is, negative interest rates apply. The inability for deposit debts to adjust below the 0% bound is the single source of systemic instability to which all other issues with banking (and capitalisnm) can be traced.

It looks like that you want the banking system to act like a giant mutual fund. Why do you want to force the public to take a credit/investment risk? If I want to take a risk then I should buy equity or deposit my money in a at-risk lending account knowing full well that I can lose my money.

Yes I know but such deposits are largely pointless and harmful at the macro level. Because they can't be lent out they will still cause problems as if many people dump money in these accounts, the money in circulation will fall by exactly the amount invested in these accounts which will lead if perpetuated to a debt deflationary depression. As the rest of the debt based money supply contracts and prices fall, these deposits are essentially earning a strongly positive real rate of interest, which is exactly the opposite of what you say such deposits should be - a no risk no return deposit.

Debt money is the problem! If 100% reserve accounts are available and the lie of deposit insurance is removed then there will be very little debt money as the public realizes that lending money (even in a checking account) is inherently risky and should be treated as a non-riskless investment. At the point in time when these accounts (100% reserve) are offered and deposit insurance is removed (the conversion event) many, many banks will have to be rescued (the debt money will have to be converted to base money). Actually, I propose that all debt money be converted to base money on the a specified conversion date. The base money will not earn interest and will be 100% reserve and yes there will have to be a account maintenance fee (a small fee). From that point on, the banks (intermediaries) will have to set the interest rate high enough to attract deposits to non-100% reserve at risk accounts.

See this link for more details on how to handle the conversion event (http://seekingalpha.com/article/160269-a-radical-solution-for-america-s-insolvent-financial-system). So if the conversion event is handled properly there will not be a debt deflationary depression. Also, some people have commented that my proposal leads to hyper inflation as the debt money is converted to pyramidable base money. Remember, in order for a bank to pyramid base money into lots of debt money requires maturity mismatching. In my 100% reserve world there will be a lot less maturity mis-matching because of the fear of bank runs. Long term projects can still be funded in my world (but the depositor then has to commit long term) or it can be done via an equity investment.

You see maturity mismatching as a "good" thing, I see it as "the" problem which leads to banking and financial system instability. According to you modern society is not possible without maturity mismatching (which is closely related to fractional reserve banking). Yes, we need to be able to fund long term projects by pooling small amounts of capital but this should be done via proper equity or debt (with matched maturity) investments. One of the benefits of "markets" is that they enable proper assignment of risk to each pool of capital so the proper "price" can be charged for the "risk taking" in question. The current banking system uses very low cost "deposits" to fund some very risky activities (possibly). The depositor is "lured" into making an investment with false sense of security(i.,e deposit insurance). Like I said earlier this false sense of financial security has be paid for with a socialized cost (i.e., deposit insurance) or taxpayer bailouts or the print press (which dilutes the value of money itself).

the problem with equity is that the stock of it is limited. A company needing some short term financing for payroll purposes cannot realistically issue equity to investors to cover this shortfall. If you hold that equity should be used exclusively for maturity transformation, then equity is in fact money.

If a firm needs short term financing it can always pay the appropriate cost (i.e., interest rate) to attract funds it needs. In my 100% reserve world there is always an option for the depositor to choose a non-100% reserve account and actually lend money. The difference is the "cost of money". In my world I will be charging the proper cost for the risk taken in the current banking system I am "forced" to lend this money and then the society pays for any improper "cost" charged via other means (i.e., deposit insurance or taxpayer bailouts or money printing).

however money needs to be informationally insensitive. A bank deposit (bank debt) at one bank is pretty much the same as a deposit at another bank, when things are working properly. But one equity is very different to another - that is, it is generally profitable to speculate on the differences between two equities (because the info needed to do so is widely available), but it is generally less profitable to speculate on the difference of a £ in barclays and a £ in hsbc.

100% reserve money is informationally insenstive. That is the whole point. Fractional reserve money should NOT be informationally insensitive. Risk profile of bank A is not the same as risk profile of bank B. The whole point of deposit insurance (which is a lie) is to make a depositor think that debt money is informationally insensitive. Markets (lenders or equity investors or non-100% reserve depositors) should be evaluating risk profiles of projects and demanding appropriate return for the use of their money. Investors should not be informationally insensitive. That is the whole idea behind capitalism.

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aha, I see you are basically another full reserve banking advocate with the small addition of the idea of electronic cash.

do you understand and accept the paradox of thift?

presumably you hold that a perpetual deflation (which is the result of economic growth and a fixed cash money supply) is workable economically? if so please explain how profits can be obtained by a typical firm investing in capital goods and so on for production to be sold at a later date in this perpetual deflation environment. Also consider what the motivation to invest at all is given that by merely holding cash one can earn a positive real rate of return for no risk.

how can an economic system in which one gets a risk free return on capital actually be stable? Isn't this exactly the same problem created by deposit insurance on bank debt?

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aha, I see you are basically another full reserve banking advocate with the small addition of the idea of electronic cash.

do you understand and accept the paradox of thift?

presumably you hold that a perpetual deflation (which is the result of economic growth and a fixed cash money supply) is workable economically? if so please explain how profits can be obtained by a typical firm investing in capital goods and so on for production to be sold at a later date in this perpetual deflation environment. Also consider what the motivation to invest at all is given that by merely holding cash one can earn a positive real rate of return for no risk.

how can an economic system in which one gets a risk free return on capital actually be stable? Isn't this exactly the same problem created by deposit insurance on bank debt?

1. Yes and no. I advocate "free banking". If a depositor chooses a 100% reserve account or bank, fine or the depositor may choose a fractional reserve account, that is ok too. The choice should be with the public and not the banking cartel. Public should not be "forced" to take investment/credit risk just to have "safe storage of money" which is accessible by personal checks and/or electronic transactions.

2. The issue I have with "paradox of thrift" is this: During most of history when money has been used in economic transactions (mostly gold and silver) did people not invest to create farms and factories and bridges and roads and infrastructure and in comissioning trading caravans. They did invest. Was there widespread deflation? Did new additional supply of gold and silver outpace real production of goods and services worldwide? I suspect that over long periods of time there was slight inflation (maybe 1% or 2%) or maybe no deflation or inflation. As you suspect how else would payback be expected (considering risk)?

3. You are correct deflation would be problematic for our NPV valuation and accounting systems. If slight inflation is necessary to make our NPV valuation and accounting systems work then the government can simply print certain amount of additional base money every year and spend it into circulation (perhaps 3% or 4%) - slightly more than long term growth rate of the economy. In the current system new base money or even additional debt money brought into existence dis-proportionately benefits the banking cartel.

4. Also, attempts to influence the price of money (interest rates) via open market operations is a disaster. It leads to wrong price signals, mal-investments and bubbles. It would be better for the government to print a set small percentage of money every year and not "game" the system by trying to match it to real economic growth rate. Both money supply and real rates of growth are hard to measure and subject to "gaming".

5. I don't see how deposit insurance on bank debt equates to risk free return on capital. Deposit insurance has to be ultimately paid by taxpayer bailout (same as breaking the buck) and/or money printing (dilution of purchasing power). Deposit insurance is equal to socialization of losses.

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aha, I see you are basically another full reserve banking advocate with the small addition of the idea of electronic cash.

Yes and No. I am a "Free Banking Advocate". If a depositor wants to safely store electronic cash in a 100% reserve account that is ok with me or if a depositor wants to "invest" his money in a fractional reserve account by depositing it there, that is also ok with me. The choice should be with the public and not the banking cartel. The benefit of check clearing and electronic access to money should not require me to take a "credit risk" with my money.

do you understand and accept the paradox of thift?

presumably you hold that a perpetual deflation (which is the result of economic growth and a fixed cash money supply) is workable economically? if so please explain how profits can be obtained by a typical firm investing in capital goods and so on for production to be sold at a later date in this perpetual deflation environment. Also consider what the motivation to invest at all is given that by merely holding cash one can earn a positive real rate of return for no risk.

I do understand the paradox of thrift. Here are my questions with respect to this theory. Historically, before fiat monetary systems when gold and silver coins were used as money people still invested in farms, factories, commissioning trading caravans and building ships. They must have performed "payback" analysis and expected risk premium on projects. Was there perpetual deflation in those times? I suspect that ongoing increase in supply of gold and silver money probably on average matched the real growth of the world economy or there was inflation or no inflation or deflation. If there was inflation it was probably very low (1% to 2% per year).

how can an economic system in which one gets a risk free return on capital actually be stable? Isn't this exactly the same problem created by deposit insurance on bank debt?

I do see an issue with our NPV analysis and accounting systems in a deflationary environment. But this problem is easy to solve. We simply need to have the government print enough money every year to create slight inflation on a long term basis (perhaps 3% to 4% per year on average) and spend the new money into circulation-- assuming long term growth of the real economy in 1% to 2% range. And we should make it as simple as that. Measuring real growth and money supply is a tricky business and subject to "gaming" by the government.

Attempting to influence the price of money (i.e., interest rates) via open market operations is a disaster. It leads to booms and busts, mal-investments and bubbles. The interest rate should be set by supply and demand.

In the current financial system the banking cartel disproportionately benefits from the new money creation (base money or debt money).

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aha, I see you are basically another full reserve banking advocate with the small addition of the idea of electronic cash.

Yes and No. I am a "Free Banking Advocate". If a depositor wants to safely store electronic cash in a 100% reserve account that is ok with me or if a depositor wants to "invest" his money in a fractional reserve account by depositing it there, that is also ok with me. The choice should be with the public and not the banking cartel. The benefit of check clearing and electronic access to money should not require me to take a "credit risk" with my money.

do you understand and accept the paradox of thift?

presumably you hold that a perpetual deflation (which is the result of economic growth and a fixed cash money supply) is workable economically? if so please explain how profits can be obtained by a typical firm investing in capital goods and so on for production to be sold at a later date in this perpetual deflation environment. Also consider what the motivation to invest at all is given that by merely holding cash one can earn a positive real rate of return for no risk.

I do understand the paradox of thrift. Here are my questions with respect to this theory. Historically, before fiat monetary systems when gold and silver coins were used as money people still invested in farms, factories, commissioning trading caravans and building ships. They must have performed "payback" analysis and expected risk premium on projects. Was there perpetual deflation in those times? I suspect that ongoing increase in supply of gold and silver money probably on average matched the real growth of the world economy or there was inflation or no inflation or deflation. If there was inflation it was probably very low (1% to 2% per year).

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I'm afraid I've had that argument too many times to want to go over it again.

A generalised deflation over the long term is not compatible with credit money.

It is also not compatible with capitalism generally.

Can you provide a link to the discussion? or refer me some reading material?

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look up the HPC thread started by Traktion, entitled, 'Competing currencies' or something like that.

Thank you for taking the time to give me the reference to the discussion. I reviewed your comments in the thread.

Here are my thoughts:

1. I accept that deflation is not compatible with capitalism and is highly un-desirable.

2. I don't see why it is better for the new money that needs be created should be by private bankers as opposed to the government. The bankers get the initial benefit of "spending" or "investing" the new money. Since the whole fiat money/banking system is dependent on government why not have the government be the sole manufacturer of money and have banks distribute it (lend it or invest in other ways). This way, the initial benefit of putting new money into circulation goes directly to the public simply by spending the new money on government expenses. Yes, ofcourse the government needs to be disciplined about it and not create too much of it.

3. If the government was "charged" with all new money creation then we can have full reserve banking just like I proposed. Actually, I what really advocate is "free banking". Full reserve banking would just be one option for the depositor. In my free banking model there would be no deposit insurance since all depositors will have a choice of full reserve banking. The full reserve bank will be the central bank. No need for complicated reserve or capital requirements and corresponding regulation and army of bank examiners. Adam Smith's invisible hand will punish incompetent banks and greedy depositors. Just like it punishes any other business.

4. To combat deflation (and discourage hoarding of the currency) the government can tax central bank (i.e, 100% reserve) deposits (very similar to your "negative interest rate"). But in my model the tax on deposits would be more or less permanent (say 2.5% per annum rate on monthly deposit balance). Ofcourse, every citizen will have the ability to have a central bank 100% reserve deposit account. Again, the tax revenue from this tax can simply be used to pay for government expenses.

5. One problem I see is physical paper cash hoarding. This too can be taxed (beyond a certain threshold amount per person) just like bank deposits but is harder to enforce. We now do have the information technology to expire physical paper cash serial numbers and keep track of them.

6. If serious deflation ensued (maybe due to "paper cash hoarding" or bank deposit hoardring even with "deposit tax" for whatever reason) then the government can simply print money and spend it until deflation stopped (the spending can be on care and feeding of all the unemployed and poor resulting from the economic misery caused by deflation). We will need an honest and reliable way to measure inflation though.

7. If a citizen wants to avoid the "cash tax" then they can always store value in other forms (gold, stocks, bonds, real estate, art, etc).

8. My model has no "too big to fail issues" since medium of exchange and clearing has been cleanly separated from loaning and investing.

9. Off topic. Some of the bloggers and commentators on the topic of banking propose the libertarian ideal of anarho-capitalism. The closest to this is current day Pakistan and Afghanistan. They might want to study the economies of these countries and see how such a system might play out. These countries have very weak (very small in percentage of gdp terms) central, provincial and local governments.

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2. I don't see why it is better for the new money that needs be created should be by private bankers as opposed to the government. The bankers get the initial benefit of "spending" or "investing" the new money. Since the whole fiat money/banking system is dependent on government why not have the government be the sole manufacturer of money and have banks distribute it (lend it or invest in other ways). This way, the initial benefit of putting new money into circulation goes directly to the public simply by spending the new money on government expenses. Yes, ofcourse the government needs to be disciplined about it and not create too much of it.

Can I suggest we continue this on spaniards 'number merchants' thread in the main house prices and economy forum since your proposal above is basically identical to to the one spaniard makes at the head of that thread.

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Can I suggest we continue this on spaniards 'number merchants' thread in the main house prices and economy forum since your proposal above is basically identical to to the one spaniard makes at the head of that thread.

Thread continued on:

http://www.housepricecrash.co.uk/forum/index.php?showtopic=133934&st=150

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