Full-Reserve Banking, the “Right” to Earn Interest, and “Financial Repression”

January 30th, 2012

Nick Rowe replies to Richard Williamson re: full-reserve banking (emphasis mine):

The key reading here (even though it appears to be about a different subject) is Milton Friedman’s “The optimum quantity of money”.

Foregone nominal interest payments is a tax on holding currency…. 100% required reserves mean you impose the same tax on chequing accounts …

My reply, edited and links added:

Nick, just because people (“the market”) want risk-free long-term holdings that pay interest does not in any way imply what seems to be the unstated assumption here: that the government is obligated to provide them, or that failing to provide them is a “tax” — a “taking” of something that they own or deserve by some natural right.

The government could issue dollar bills instead of t-bills without violating anyone’s rights.

This is no different from saying that foregone transfer payments to the poor constitute a “tax” on the poor.

You could call either (as in Carmen Reinhart’s “pity the poh’ bondholders” perorarations) “financial repression” — though the charge seems sadly misplaced in one of the two contexts. (This locution is the most egregious example I’ve seen of economists shilling for creditors. Witness its widespread repetition by said creditors, their congressional toadies, and their money-media water carriers.)

You could certainly say that either of these “foregoings” creates incentives similar (identical?) to those created by taxes. As long as it’s presented as such — which it decidedly is not in Friedman — it can serve as a useful pedagogical conceit. But the implicit, undeniable normative baggage must be ditched and explicitly disclaimed.

As for checking accounts, full-reserve banking might indeed result in account holders paying banks a fee to hold their money for them securely and conveniently.

And banks would be in the surprisingly novel situation of earning a living by providing a service to individuals in return for fees paid by those individuals.

It’s not immediately clear to me how that constitutes a “tax” on checking accounts.

Cross-posted at Angry Bear.

  1. Tom Hickey
    January 30th, 2012 at 10:33 | #1

    There is no operational requirement for issuing Treasury securities in offset of fiscal deficits under a non-convertible floating rate system in which the currency issuer is the monopoly provider. Taxes do not fund issuance in such as system, and do not bonds finance it. The currency sovereign is the currency issuer, not a currency user. The US could choose to issue currency directly, as President Lincoln did during the Civil War.

    Warren Mosler has pointed out that under the present system in the US, tsy issuance is simply a reserve drain that allows the Fed to hit is target rate. The Fed could do the same thing by either paying interest on reserves equal to it target rate, or else setting the target rate to zero.

    Once this is understood is become clear that issuance of interest bearing govt securities is not necessary operationally. Hence, doing so constitutes a subsidy to holders of tsys. All subsidies are dead weight and introduce inefficiency. The question becomes, then, whether some public purpose justifies the subsidy. If not, it should be discontinued as unnecessarily wasteful.

  2. Tom Hickey
    January 30th, 2012 at 10:39 | #2

    @Tom Hickey

    See Warren Mosler, “Soft Currency Economics” (1994).

  3. January 31st, 2012 at 16:19 | #3

    It irks me no end the way people misapply the word “tax”. I don’t know it is just a dumbing-down technique or if it intentionally preys on people’s dissatisfaction with government. But either way it is wrong. (I am agreeing with something I think you implied in the post.)

    “As for checking accounts, full-reserve banking might indeed result in account holders paying banks a fee to hold their money for them…”

    There is just no middle ground, is there? It’s either 100% reserve, no-money-creation banking or it is full-bore turn-every-dollar-of-base-money-into-60-dollars-of-debt insanity.

    How about limiting debt creation to just a few dollars for every dollar of money? No, the human mind cannot conceive of such a thing.

  4. January 31st, 2012 at 16:59 | #4

    @The Arthurian
    Should read the explanation at the previous post again. As it stands, banks can only lend 90% of what’s deposited. Any “multiplier” lending is dependent on capital, not deposits (they merge together, sort of, in the accounting, but this is still true). See also my explanation of The Fed The Bank at shewing, “Meanwhile there are…”:


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