The End of Capitalism As We Know It

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Something is happening in the world economy that has not happened before within historical memory. It concerns the future of nation states of the world – all of them.

It concerns a way in which state activity is essential to capitalism.

You won’t hear this from orthodox economists and commentators for they do not take account of the way that money creation distorts the operation of the “free” economy. And they do not appreciate why the creation of vast amounts of new money is necessary to the functioning of capitalism under the current economic model. This is primarily because the classical economic theory which, in spite of undergoing development in the twentieth century, remains largely intact with its fundamental flaws preserved. And the most basic flaw in orthodoxy economic theory is that it refuses to see the economy as a dynamic changing system. It attempts to understand what is happening as if the whole economy were static and subject to simple mathematical equations.

The key to constructing a dynamic realistic economic model is to understand the working of money creation, debt and interest payments and how these interact with the real economy. The money supply is the amount of money there is in the economy at any one time. The way this is measured is open to question but it includes not just notes and coins but all money deposited in bank accounts and all debts owed to banks. The money deposited is only a small fraction of the debts owed to the bank due to the “fractional reserve” system.

When a debt is paid off, it is destroyed but the aggregate amount of debt in the world, and in pretty well all industrialized countries, is increasing.

Ellen Brown writes “According to Margrit Kennedy, a German researcher who has studied this issue extensively, interest now composes 40% of the cost of everything we buy. We don’t see it on the sales slips, but interest is exacted at every stage of production.”

Debt upon debt is piling up. The constant creation of new debt is just one of the dynamic forces in the economy.

But what is now changing the world economy is not private debt. It is not even the corporate debt of companies. What is now at issue is the debt of countries – sovereign debt. This is currently most visible in the unfolding car crash that is the euro crisis. Each week it seems a new country is added to the list of Eurozone countries that cannot pay their debts. As we know this started in Greece, which we were constantly told was a pipsqueak of an economy on the European stage. It then moved on the Spain, Italy, and the other “PIIGS” then to France and horror of horrors, even the solid-as-a-rock economy of Germany may now be broke.

Meanwhile, that the USA is insolvent is old news and, as for the UK, there are few left who really believe that at the end of the Coalition’s term of office the national debt will be reduced by a single pound. In fact there is little doubt that in spite of all the misery and strife that the austerity measures are creating we will be more in debt at that time.

There are two orthodox economic responses to this. The Keynesians who say we should borrow yet more money from the banks to stimulate government spending and the Neo Liberals who say it is all the fault of big government. The Neo Liberal view holds sway in the Kingdom as everything is cut and the profligacy of New Labour blamed for our problems.

Apart from this, we are told that there is absolutely nothing fundamentally wrong with the way we run the economy. Just keep taking the medicine, tweak the regulations a bit, wrap the knuckles of those greedy bankers and after that just carry on as usual. In this it is pretty sure that anyone from the badly paid unskilled classes right up to upper middle professional and managerial classes will lose heavily, but, that’s too bad, the laws of economics cannot be changed.

What this analysis leaves out is any critique of the way in which money is created. Let’s continue this from the point of view of the state borrowing, for this is where the current crisis of capitalism is being played out. At present when the state needs money it goes to the “markets” to raise the money. That is, it borrows the money from “private” sources. States then find that a year later they still cannot balance the books and so like any debt-junkie they borrow more and so it goes on in a vicious spiral. Finally the debt is so large that it becomes impossible for the state to ever repay the “creditors”. It can no longer even pay the interest on its debts. That is where we are for some states and the others are getting there.

This is the system has operated for the most part of the twentieth century. But we have now reached an impasse because the nations can no longer service their debts to private banks. And the banks are refusing to lend more. The usual reason given for the bank’s refusal is that they are worried they won’t get paid back.

The real reason is that they are worried that they won’t get bailed out. Banks in France and Germany happily snapped up Greek debt a few years ago not because they believed that Greece would repay the debt – they aren’t that stupid. They did so in the knowledge (so they thought) that they would be bailed out when, repeat when, the Greek debt when belly-up. What has changed the game now is that governments are saying they won’t do the bail out – at least not in full like they did in 2008. They won’t because they can’t.

The reality is that there is no fix within the orthodox economic model. This is why this piece is titled as it is. Capitalism cannot survive in its current form where the private speculative banks create the money and governments borrow it to balance their books. We have to move to the new economic model whereby it is the government (the state) that creates the money. This new money will be interest free and so will avoid the accumulation of massive amounts of debt in the economy.

Thirty years ago debt was an issue with private citizens. Then it moved to companies and many firms went bust as a result. Then debt problems shifted to the rock solid banks who, in spite of their massively privileged position of being able to create money, were overtaken by unimaginable venality and themselves went bust – only to be saved by governments. In the last transfer of debt, it has now gone to governments.

But there is a big problem. There is nowhere else to pass the parcel. Governments are left holding debts that they can never ever repay.

This story has a further horrifying sequel. Meanwhile a lot of the cash that was created in the times of boom and booming debt is still out there and so the power again returns to the banks who can use this money to play the debt markets. They are right now pursuing a strategy of (1) targeting countries, then (2) shorting the pants off them with heavy speculation (3) watching their currencies fail and then (4) profiting from the distress. Having wrecked the already struggling economies of weak countries they will then turn on the stronger ones. As Bengt Saelensminde, writing in the investment magazine Money Week, pointed out recently Britain’s time will come. Against the power of those controlling trillions of dollars we will have no defence.

This is the endgame of the current model of capitalism. If we do not change it, those who control the global walls of money will ruin us all as they accumulate more and more wealth turning from nation to nation in a worldwide turkey shoot. They will reduce all but the superrich (and maybe the Chinese, who wisely have a different model) to impoverishment and debt slavery.

These are turbulent times. No less than the balance of power between the superrich and the rest of us is at stake.


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  • @mikeriddell62

    Simplifying the cause is necessary to get traction on the new model for capitalism. Look at how the press criticised the #OWS movement for not making clear a single defining demand. I suggest this:

    “We demand another currency that makes better things happen.”

    The world needs to understand the harm that ‘money’ does to people and planet. Another currency to counterbalance the corrosive effects on communiy is now required so that people can have real choice about outcomes. Another currency that rewards contribution to community (through teaching, giving, learning) would be a better way of valuing the more important things in life.

    Measuring success according to GDP is no longer appropriate. We need to measure Gross National Contribution instead.

  • Liz McLellan

    What I do not understand is this. For the last 50 years – debt to the “developing” nations has been extended by central banks/IMF and then used to force austerity measures and wholesale pillage of natural resources, militarization to address resistance, and a pressure to diminish human rights and sovereign control of those natural resources – NOW it is happening to us and we act like its “NEW”…It’s not.

    • Peter Kellow

      I absolutely agree. I could add that to understand what is really going on you have to see that those with the immense wealth owe allegiance to no country. Their assets are distributed in various tax havens and the nationality of their various operations dispersed. Their power derives in part from their supranational status and this is what puts our elected politicians in awe of them. After all an elected leader only has real power over the limited territory that defines their nation. This pails in comparison to those with the reach that global finance enjoys. The term Master of the Universe might be an exaggeration but Master of the Planet is certainly what they are.

      • Liz McLellan


  • Steve

    Do you not really been think that all this is in fact fully CONTRIVED?….. The fullest fiscal straight jacket can only be fitted on to us after we have been fully demoralised?? In what other circumstance could democratically elected Prime Ministers be superseded by anonymous BANKERS virtually overnight!

  • Joseph Hitselberger

    Perhaps to be a little harsh, the use of the term “capitalism” as an economic term is largely useless. All economic systems use “capital.” The term was largely promulgated by Marxists who wanted to oppose any existing economic system that was not theirs.

    The economics that we should reject is the debt/credit standard, where money is created from debt and credit. Most economic styles of analysis would work (and worked) far better with lower percentages of debt.

    There was also a neo-keynsian criticism in this piece. However, the premises of Keynsianism can support positive money conclusions. That is, the Keynsian diagnosis of weak aggregate demand is best solved by positive money (rather than debt driven government spending). It works that way for many other schools of economic thought as well, that positive money solves the basic premises or problems addressed or discovered by other schools.

    It is that way with monetarism as well. Monetarism addresses a quantity of money problem, but they address this problem through banking. Positive money addresses that same quantity of money problem, but the use of banking and fractional reserve banking is not used (as the monetarists would have it).

    • Peter Kellow

      Ouch! I have never been accused of being Neo-Keynesian before. Keynesianism is basically a sticking plaster solution to the problems of the current economic model. Like their adversaries, the Hayekians, Keynesians assume that it is the nature of things that we are going to be shafted from time to time by an economy that relies on a money-creating speculative banking system as economic governor. The Keynesians want to smooth out the worse effects by turning on the tap of government borrowing financed by speculative banks. The Hayekians to do the opposite purging the system by turning the tap off. Both give up on the problem allowing a fundamentally malign system to continue.

      For brevity I did not mention the problems with the term “capitalism” in this blog but since you mentioned it, I think “capitalism” is a very accurate word for a system we should leave behind. Capitalism is a system where capital is everything, that is to say accumulated wealth dictates policy. We should move to a system where work and innovation are what matter. Studies show that the two biggest wealth creators in a modern economy are (1) business start ups and (2) R&D. These are what we need more of. I would like to see the reduction of “capitalism” and see it being overtaken by a free market entrepreneurial economy – combined with sound public services.

      Monetary reform of the type proposed by Positive Money would in my view do exactly that, reducing the power of capital, and focusing on the real engines

      • Joseph Hitselberger

        Thanks for the response. I am just trying to go further out. Of course, in the critical areas we all agree. My style of thought is more of convergence (bringing ideas together). To an extent, it is counter-productive to attack dominant schools of thought when you want to win them over. Some of Keen’s debt-watch blog is attack, attack, attack.

        I like your thoughts on business start-ups and R&D. Much of the money created through the lending and debt process does not involve the production of goods and services or risk taking investment. To be more speculative, to stimulate this process, some redistribution should be considered. Much of the wealth accumulated to the top .1% has been accumulated by the lending/debt/speculation process, not by the production of goods and services. It might be worth considering a William the Conqueror style “Doomsday Book” and implement and initial wealth tax at the top. I’m sure some Occupy people go further out and advocate a more substantial leveling, and there are actually some valid arguments for that too, but it would be no good to crush free market incentives without better alternatives (another discussion).

  • @mikeriddell62

    Positive Money is an idea to bypass the banks. Anyone who thinks that the banks and their buddies will let that idea ride, is frankly bonkers.

    Money is the issue. It’s corrupt for the reasons PM explain in their video, and consequently corrupts everything it touches.

    We don’t need more money – we need another currency that makes better things happen. What we don’t need is more economic theory – we need a system that rewards good behaviour not greedy, and that means giving not taking. If you want to make change happen, you need to simplify – greatly – the solution.


    • Simon

      We need a system that values someone who cares for two ill relatives full time much more highly than a banker, or premiership footballer. The present system of corporate capitalism and debt based money has failed in that regard.

  • RJ

    “This is currently most visible in the unfolding car crash that is the Euro crisis”

    The Euro is a problem because countries have given up their monetary sovereignty (centrla bank).

    These countries have very foolishly given up their central bank so if they now want money they must get this money from the commercial banks either directly or from the market. The market gets money from commercial banks initially backed by non Govt debt.

    So all money in Euro countries to fund deficit spending is backed by NON GOVT debt unless the ECB buys Govt bonds.

    Euro countries could fund Govt bonds using the ECB but Germany will not let this occur to the extent required. This will destroy trade deficit countries ie not Germany and other trade surplus countries in the Euro.

    Although the impact of trade deficit countries struggling will eventually effect Germany

    • DozyHole

      I knew what you were going to say before I read the comment RJ:)

      I think you are saying that MMT allows a country with its own central bank to spend money into the economy, hence creating as much interest free money as it likes?

      This is not the case of course as it’s not allowed under current EU laws.

      Let me know if I have got this wrong. What would be useful is if you posted a concise explanation on the forum as to what your views are and why positive money are asking for something that already exists.

      It can be debated better and in more depth on the forum in my opinion.

      • Rick

        Hi DozyHole
        This article by Ellen Brown might help give some sort of explation:

        I found it helpful.

        • RJ

          A very good article by Ellen.

          Her work around to this problem (Govt owned banks) could work but only if the ECB would loan the Govt bank this money. So the bankers still call the shots.

          The problem is that once a Govt gives up their central bank they are then owned by the banks. Or the market.

          Especially trade deficit countries who will lose money to trade surplus countries.

          I think the future for Europe is very bleak.

          • RJ

            “The eurosystem is a lender of last resort for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty.”

            But this section makes no difference at all to the UK

            Only economic ignorance is stopping the UK spending more or taxing less to solve their current money problem.

            Spend using BoE reserves. Then remove these reserves and deposits by issuing Govt bonds. It cancels out.

            Central banks were set up to free Govts from total bank control. The Euro has returned it to the banks.

            It will however destroy the prosperity of countries in the Euro. And with it many banks.

            Times have changed and what worked once to the banks total advantage no longer will.

          • DozyHole

            “Spend using BoE reserves. Then remove these reserves and deposits by issuing Govt bonds. It cancels out.”

            Is the government allowed to spend using BoE reserves? Then, can the BoE create reserves for the purpose of government spending? Then, would the government have to issue bonds for the exact amount of spending, what if it was deemed necessary to have the money in circulation?

        • DozyHole

          Thanks Rick, very interesting.

  • RJ

    “Meanwhile, that the USA is insolvent is old news and,”

    Why are US interest rates still so low. And why do they have no problem funding their deficits.

    Not bad for an insolvent country.

    • Joao Granchinho

      “Why are US interest rates still so low. And why do they have no problem funding their deficits.”

      Because the US dollar is perceived as safe by investors. US bonds are seen as the safest investment on Earth. It’s the world’s reserve currency. But that’s going to change as well. You won’t be able to argue for much longer that “they have no problem funding their deficits”. The old ways of devaluing currency by printing more money to pay the debts are coming to an end as the compound interest needed to be paid grows larger and larger so does the amount of money needed to be printed. The US dollar will collapse, maybe even before the Euro. That’s why eurobonds are not the answer for the Euro zone. It will buy us at most 5-10 years, but it’s not a solution to the problem. It would crumble down like all the others, unless it is issued as positive money, debt-free.

      • @mikeriddell62

        Now I’m imaginative, but even I can’t imagine ‘money’ ever being issued debt free. Another currency, yes, but money?….No!

      • RJ

        The US will not collapse if they keep their own central bank. Its impossible

      • Peter Kellow

        The US dollar has to collapse as Joao Granchinho says. That means the USA can declare bankruptcy and rat on its overseas debts leaving the Chinese et al holding the baby.

        Meanwhile its real economy is still so powerful and its internal market so huge that it would rapidly power itself back into growth and liquidity, while the rest of the world floundered.

        Others would still want its prime quality goods (no one else can produce movies or software like the USA to name just two obvious things). Soon everyone would want to lend to it again.

        No one ever went broke going bankrupt.

        • RJ

          Money is created by many journal entries. Monetary sovereign countries can produce all the journal entries they ever need.

          The US will never not be able to fund their deficit and only people who are ignorant of the money and banking system will ever make this claim.

          The danger for the US is

          -Monetary inflation if bonds are not issued to cover large deficits.
          -Currency depreciation if the US Govt spends recklessly. But funding social security is not reckless spending.

          And also remember. Govt deficits create Govt bonds. Govt bonds = a non Govt ASSET especially needed by pension funds to invest in.

          • Peter Kellow

            “The US will never not be able to fund their deficit and only people who are ignorant of the money and banking system will ever make this claim.”

            When people say that the USA will not be able to fund its deficit (under the current economic model) they normally mean they it will not be able to sell its bonds for this purpose. The USA is rapidly approaching a point where it needs to sell bonds just to cover the interest payments on those that already exist (it may already be there). It will quickly go past the point where it won’t be able to sell enough bonds to do even that.

            A crucial factor that you have not mentioned in your (very short) list of dangers for the USA is that the dollar at some stage will almost certainly lose its status as the world’s reserve currency. This will mean China and others will buy few of its bonds – assuming they are still in the market for buying other nations’ bonds. The USA pension funds will not step in to take up the slack, they are not big enough.

            The USA could then start to print dollars to pay the interest but many of these dollars will be going abroad. This is the recipe for hyperinflation.

            It is not generally acknowledged but true hyperinflation (i.e. inflation in three figures or more) only occurs when you print money to pay foreigners (as in the Weimar Republic and Zimbabwe). That is why the strategy of printing dollars to pay interest on bonds would be disastrous.

            I cannot see how the USA can continue to fund its deficit into the future on the current economic model. This is widely held view and so there are a lot of “ignorant” out there

          • RJ

            “It will quickly go past the point where it won’t be able to sell enough bonds to do even that.”

            Google monetary sovereignty if you want to know why this is not correct.

            There is no actual limit to US Govt debt. The US Govt could pay everyone in the US 1 million each. And then make then invest in low interest pension bonds. Where the bond only pay interest out after retirement. and revert to the Govt when the holder dies

            Govts should really run much higher deficits (by tax cuts) to generate the money and Govt bonds needed for pension savings

    • Simon

      Interest rates are low because they “print” money through QE

      • RJ

        Its nothing at all to do with QE.

        • RJ

          Correction. Almost nothing to do with it. QE is to try and reduce interest rates but in the US rates are low for other reasons

  • Ancient Wanderer

    I would very wary of any ‘new’ currency promulgated by the G20 or the Banking sector.

    Their plans are in the public domain, you just have to do a little digging, but the World Bank/IMF/BIS trio wish to create a world currency.

    In fact many G20 governments fund this already, it’s called Special Drawing Rights or the SDR.

    Our government puts good money in to this IMF Ponzi scheme too.

    The world does does not need ‘Global Governance’ (just good governance by individual Sovereign Countries) by the WB/IMF/BIS nor does the EU need Fiscal Unity.

    Fiscal Unity amounts to a banker takeover of EU and strips nations of their Sovereignty. We were warned years ago this would happen.

    It’s called Totalitarian Creep and it’s real.

  • Crispin

    It’s great to see so many people having an intelligent discussion about this. I would like to simplify all this down to a very basic level – it’s an obvious comparison, but bypasses all the ‘monetary jargon’ that the financial industry and bankers cook up to bemuse the masses they’re trying to take advantage of. In a game of Monopoly there can only be one winner, at the expense of all the other players. What happens when the game is over? If you wish to play again, you must give each player their starting ‘bank’ by redistributing the wealth. But one player in monopoly is always the bank… If you don’t like this game, you will have to come up with a different game and convince the other players to play with you. Perhaps the bank needs to be forbidden from playing (i.e. from making money from money), while they hold power as the bank? Perhaps they can only be paid a minimum wage for their services, to encourage a rotation of this held position – like any civil servant. There is no reason why many different kinds of Monopoly game cannot be invented and played simultaneously…

  • Nasir Zubairi

    I am not a fan of the banks and am working hard to change the way the financial system works. However, articles like this do not help. Sound economic and logical argument based on facts creates thought leadership and support – propaganda, free of logic, based on myth and not fact makes a mockery of any movement towards alternative models.
    Of course, most countries can pay off debts. It requires cuts in spending (outflows on the Cashflow statement) combined with effective employment of capital to build the frameworks and environment to let people and, more importantly, entrepreneurs and business, flourish (income on the Cashflow statement – through increased tax). Countries have these debts because we, the public demand them for a level of national services beyond what we are willing to pay for out of our own pocket in tax.
    As for banks creating money – well, the simple answer is “nonsense” with a longer, logical argument requiring the forum that Mr. Kellow has been provided to voice his thoughts.

    • Ben Dyson (Positive Money)

      Hi Nasir,

      As for banks creating money – well, the simple answer is “nonsense” with a longer, logical argument requiring the forum that Mr. Kellow has been provided to voice his thoughts.

      There’s only really two ways to argue the “Banks create money” is nonsense. The first is that “Banks don’t create money, they just create credit”. If that’s the argument, then the fact is that all this credit is underwritten with a state guarantee, making it as good as state-issued money. It also means that we’ve reached a situation where the state has ignored its responsibility to supply money to the economy, leaving us completely dependent on using privately-issued bank credit as a means of exchange.

      The second way to argue it is to suggest that the Bank of England don’t know what their talking about when they says things like “The money-creating sector in the United Kingdom consists of resident banks (including the Bank of England) and building societies”. More quotes are below:

      If you have an alternative line of argument we could definitely debate this in a dedicated blog post.

      • Nasir Zubairi

        You must excuse my rhetoric, but it is the way in which the money creation has been portrayed that I have the issue with. Banks create leverage, and leverage is demanded by all, else it would not exist. The BofE and other regulators still have control over money supply. Capital limits under fractional reserve banking still cap the amount of money that can be awash in the system at any one time. Likewise, even if the bnks come up (as they do) with clever means of providing greater leverage for the market through financial engineering, the BofE can reduce money supply by issuing debt, though they obviously pay some level of interest for this process. Right now, the opposite is true, we need an increase in money supply and liquidity in the financial system. I’ll stop my waffling there for now.
        There is a reason why factional reserve banking is adopted across the globe.Eeven in Islamic banking, where,due to the prohibition of ‘Riba’ (interest) one would think full reserve banking would be the modus operandi, it is not. The issue is that there is a fundemental demand for credit, and, if not provided by regulated banks, would ultimately be provided by other unregulated sources. Likewise, if bnks could not leverage deposits for profit, they would more than likely need to charge consumers to look after their funds – would that be acceptable? if we did not have easy access to credit, how many people, particularly in London, would be able to afford housing, given that overseas demand for uk property is very high, and we can’t control what other countries do in terms of their financial system/credit system. As I say, I am not a fan of Banking, but there are some fundamentals of finance and economics that I would not change.

        • Nasir Zubairi

          Oh yes, one other thing; the gov guarantees £85,000 of deposits per person. Am I unaware of a change to an unlimited guarantee?

        • Peter J. Morgan

          “There is a reason why fractional reserve banking is adopted across the globe. Even in Islamic banking, where, due to the prohibition of ‘Riba’ (interest) one would think full reserve banking would be the modus operandi, it is not. The issue is that there is a fundamental demand for credit, and, if not provided by regulated banks, would ultimately be provided by other unregulated sources.”
          Nasir, you seem not to have read precisely what the Positive Money proposals are. Under PM, the “fundamental demand for credit” would be taken care of by the Monetary Policy Committee ensuring that all new money was created and gifted to the government to spend into existence free of debt and interest, at a rate just sufficient to keep inflation at a long-term average of zero. The demand for credit would have to be satisfied from the re-lending by banks or other financial institutions of the savings of the people and businesses that had been deposited with them as term deposits. The market would set interest rates such that demand would equal supply. Banks would no longer have the power to create money out of nothing, which allows them to claim the resulting seigniorage as their own, giving them huge wealth at our expense and distorting the whole economy. Hopefully, there would be no such thing as a banking licence, leading to free competition to improve efficiency.

          • Nasir Zubairi

            Hello Peter, sorry, I Missed your comment before responding to Peter below. I think I hsometimes to some of your points there. One other factor to mention – how the full reserve you propose would be achieved. banks are having immense difficulty meeting the higher capital reserve requirements under Basel III by end 2012. Due to current risk weighting, they are having to offload something akin to €7 trillion in assets to meet a tier 1 ratio of 9%. The huge transaction cost that would be incurred is also not beneficial to anyone within the conic system and it will be borne by consumers. I also re-iterate my previous point – would you, the public, be willing to pay for your money to be looked after?

            Debating this in small print (particulalrly given I am abroad and using IPad) is not an ideal medium. As I say, i believe in an alternative future, in alternative banking, but I am far from convinced by anything I have read on this site so far. If my antagonism helps to spur better solutions – great!

  • Mike Riddell


    You’re right about the incentives. Money incentivises the mindless consumption of the earth’s resources, and isn’t fit for the purpose of spreading peace, love and understanding.

    A digital community currency that is issued locally for activites that contribute to the health and wellbeing of community would provide local liquidity and incentivise teaching, giving and learning.

    Wrapped up in a member owned cooperative where every member is equal (businesses and individuals) such a system would create shared value which would be distributed to members according to contribution.

    Being able to record contribution to community (measured by time and administered by the third sector) makes it possible to reward contribution to community. No-one is forced to join the co-op, it is entirely voluntary, and gives people real choice as to how they wish to participate locally.

    Members prepared to connect, share and trade at the level of the community will add value and values, such that costs will be driven out of the system the more that members participate.

  • Nasir Zubairi

    Film flam? Oh dear Mr. Kellow.
    You want to change banks to full reserve. A banks capital comes from deposits. If it has to pay back a 3 month term deposit, the bank must have the capital to do so. If they have Lent it out for longer, they do not have it!
    Regardless, borrowing needs will always be high, because we demand more money than we have, no matter how much we have. Especially business. Incentives Mr. Kellow, focus on incentives. Banks won’t have any under your argument – in all fairness, full reserve Banknig is better argued in other places than the general points you are putting forward. Speak to an economist who knows what he is talking about, then maybe you can put together a better argument. I can recommend a few,concluding my professors, or maybe I could put you in touch with Charlie Bean at the BofE?

    • Nasir Zubairi

      Ah – A computer to type on!
      Bypassing the banks – GREAT IDEA! couldn’t agree more. Letting entrepreneurs deliver solutions that meet needs of consumers, initially in terms of lending then ultimatately deposits, will change the world of financial services, credit and debit, for the better. entrepreneurs will solve the problems of the economy, not the government and not regulators. These agencies need to create the frameworks, institutions and environment for entrepreneurs to flourish and bring innovation to market. the fact that nearly 10% of consumer lending in the UK is now conducted through P2P networks shows that cocnsumers are helpnig to make the change, and it is happening faster than could be imagined. There may be an argument, as there is for most things, for Full reservce banking; Mr. Kellow has not presented it conclusively, not even to the standards of others on this website. People will always demand credit. Look at countries where personal wealth is substantial due to low income tax – singapore, UAE – people still desire to borrow. If banks are not provided with the right incentives, i.e. return on capital, to want to do so, they will avoid lending. This is a key issue in the banking system today. They will not take deposits and manage our money for free if they can’t leverage it to generate a profit – which would be extremely difficult in a full reserve system.

    • Peter J. Morgan

      Nasir wrote: “Speak to an economist who knows what he is talking about, then maybe you can put together a better argument. I can recommend a few, concluding (sic — surely you meant “including”?) my professors, or maybe I could put you in touch with Charlie Bean at the BofE?”
      Please, Nasir, don’t try the “arguing from authority” trick on this forum. Just stick to arguing from logic — the “authority” nonsense won’t wash. After all, it was “authority” that got us into this GFC mess!
      Merry Christmas.

    • Peter Kellow

      So after all that it comes down to Charlie Bean, the deputy governor of the BoE, who said in September 2010: “I think it needs to be said that savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

      That idiot is on a different planet to the rest of us. Right now the news is full of Europocalyse. His recommendation: Spend your savings. Mr Bean should be locked up!

      • Nasir Zubairi

        Merry Xmas Mr. Kellow!

        The spell check on my IPad does do silly things – yes it was meant to be “including my Professors” thanks for correcting me!

        I do argue from authority and from logic. No tricks needed! You expose the gaps in your argument too easily. Mr. Bean is a well respected economist. His quote, given current circumstances makes absolute sense – with real interests rates being negative due to inflation, it is perfectly logical to spend a larger proportion of my savings then leave it in the bank where it is losing value.
        As I have said, there is a lot to be gained for all in evolving financial systems. Reducing Currently excessive levels of credit is a good thing, as is a reduction of volatility. Both can be achieved through a full reserve system, but it is a little too heavy handed in how it cuts off supply – credit ultimately boosts output. The powers that be are trying hard to eradicate the bad elements while keeping the good. Without question, they could look at more radical solutions, but, as I have stated several times, you, Mr. Kellow, are very far from presenting a feasible solution. Others on this site may be able to.

        As with countries, focus on your comparitive advantage – let people that really understand economics argue the vision they may share with you.

        • Nasir Zubairi

          Oops! sorry, my thanks should have gone to Mr. Morgan for the correction. Merry Xmas to you too!

        • Peter J. Morgan

          Nasir wrote:
          “Both can be achieved through a full reserve system, but it is a little too heavy handed in how it cuts off supply – credit ultimately boosts output.”
          The supply of credit would be restricted under a PM full reserve monetary system, to that rate of new credit creation just sufficient to keep inflation = deflation = zero. It is my contention that under such a system the long-term growth in the economy would exceed that of the current, ridiculous, boom, bust, slow recovery for ‘x’ years, boom, bust system, which has been proven to shift wealth upwards, leaving the poor and middle classes worse off by far than they would have been under a PM full reserve monetary system.
          With respect, Nasir, I suggest that you buy the book “Where Does Money Come From?” and read it. When you have read it, and not until then, please make another submission to this blog.
          let us not forget what the ‘authorities’ did to Galileo. “Authority” gave similar treatment to the man who first came up with the theory of plate tectonics. There have been whole books written, detailing similar examples. Surely I need say no more!
          Merry Christmas!

          • Nasir Zubairi

            Phew! A brief respite from over excited children! And look! Another stocking present for me here on this blog! :)

            With respect Peter, one book does not maketh the right answer, and is obviously portraying and skewing argument to support the author’s hypothesis. And I thought it was you that stated, only a few short days ago, not to pull the “argue with authority triick?” ;)

            The simple fact is this: every country in the world has adopted fractional reserve banking. Not saying that is right, but I must sway towards those that are undoubtedly smarter than myself to know what they are doing. Nobody, Not one single brain, is, as far as I know, seriously considering changing to full reserve banking.

            As for restricting access to credit; firstly, that sounds like communism; credit is demanded and people and biz should have a way to access it. As for actually controlling it; well, we live in a time with international capital markets – access will be provided from abroad, and those that are in a better position to access it, large biz and domiciled foreign investors, will obtain an unfair advantage over Joe Public. I don’t think that is a good thing do you? Unless of course we shut up shop as a country – you are not suggesting that are you?

            Even if we could still manage to balance foreign credit with the domestic economy, we expose ourselves to an even more pronounced boom bust cycle then we experience today. Should, for any number of a plethora of reasons, foreign creditors pull their capital, we collapse – look at analoges of markets were domestic supply of credit could not satisfy demand – Mexico (1994), Malaysia, Korea and other Asian countries in 1998. I don’t really want to be in there shoes!

            The authority bashing here is a paradox – anyone/group that implements a full reserve system will be an authority figure! Just because you support one over another does not mean you can dismiss the experience, knowledge and success of the others. I, myself, have not dismissed full reserve banking, I have simply put to you the flaws in the arguments that hae been presented herein. It is a legitimate theory, one that the majority, including myself, do not feel is a legitimate solution as there are too many holes.

            Have a great Xmas day to all!

          • Peter J. Morgan

            With respect, Nasir, I did not suggest that you read “Where Does Money Come From?” as an appeal to authority, but because it contains powerful logic. Only when you have pointed out any flaws in its logic are you entitled to dismiss its logical conclusions, and before you can even begin to dismiss its logical conclusions, you must first READ THE BOOK. In so doing, you will discover for yourself just what the logical steps are. And by the way, there are many more books with similar logic.
            Nasir, you also wrote “Not saying that is right, but I must sway towards those that are undoubtedly smarter than myself to know what they are doing.” That is an example of ‘groupthink”.
            Nasir, you also wrote “Nobody, Not one single brain, is, as far as I know, seriously considering changing to full reserve banking.” That is absolutely NOT TRUE, and a perusal of the literature will quickly attest to this!
            Apart from logical argument, at the end of the day, it comes down to whether you believe that seigniorage should belong to the people through their elected government, or private banks.
            And please, spare us the bullsh– that countries have “adopted” fractional reserve banking. It would be more accurate to say that they have had it foisted upon them, whilst being ignorant not only of the fact but also of the inevitable repercussions. I maintain that given an educated choice, people everywhere would overwhelmingly choose to have seigniorage belong to the people through their elected governments.
            It is not a left-right choice, but an up-down one!

        • Ben Dyson (Positive Money)

          “credit ultimately boosts output.” – Possibly, IF that credit was going to productive activities. The reality in the UK at least is only 8% of all bank lending actually goes to productive businesses, while the rest is used for buying existing property and speculating.

          • Nasir Zubairi

            Hi Ben. Credit does boost output, even if handed to unproductive firms. Productivity and the availability of credit are two separate issues that would continue to exist under a full reserve system. Productivity is an agency issue of firms, though debt has been shown to be more productively employed then free cash flow due to the external stakeholder accountability and psychology of debt.

          • Ben Dyson (Positive Money)

            That 92% isn’t handed to ‘unproductive firms’ – it isn’t handed to firms at all. It’s used to buy existing assets (not boosting output, simply causing asset price inflation).

          • Nasir Zubairi


            That sounds like interesting research that I would like to read! Could you point me in the right direction? Does it account for the impact of rising asset prices in providing incentives for manufacturing, production, and investment? Likewise, does it look at the recycling of assets in the investment process?

          • Ben Dyson (Positive Money)

            Nasir – it’s Bank of England figures for bank lending to various sectors; it doesn’t make a judgement on whether asset price inflation will boost the real economy. Are you suggesting that house price bubbles will do more good than harm to the real economy?

          • Nasir Zubairi

            Ben, that is cheeky, trying to put words in my mouth! ;)
            House price rises and access to a liquid, but reasonable, mortgage market, incentivises real estate development and construction sectors. I read somewhere recently that net mortgage borrowing has crashed from £113billion in 2007-08 to £3billion in 2010 – 11. In all, sectors that depend heavily on borrowing, be it that asset price rises within them may drive the market and investment therein, account for 60% of UK output.

          • Ben Dyson (Positive Money)

            Nasir – is asset price inflation the only way we could stimulate production? Do we need to rely on borrowing ever greater amounts from banks to stimulate the economy? What if there was a way of putting money into the economy, without a corresponding increase in debt, and in a way that would get that money to ordinary people?

            Would it stimulate production if people had more disposable income? And do higher housing costs mean that people have more or less disposable income?

            I’d suggest that over-inflated house prices lead to higher mortgage costs, meaning that people have less money to spend in the real economy, and more money being diverted from the real economy to the financial sector. It seems pretty unimaginative to think that the best way of stimulating the economy is to rely on people going further into debt to fuel asset price inflation.

          • Nasir Zubairi


            Rhetorical questions?

            Of course debt is not the only way to fuel an economy, though the balance between borrowing and saving as you well know has a huge impact.
            Look again at the fugures I quote above on Net borrowing. House prices are still high and rising in areas of the UK. As I have said repreatedly, we live in an international capital market. Credit will flow from outside. The substitution of disposable income (shall we call it retained profit?) will in no way compensate for the scale of leverage required for certain investments. Likewise for business. Regardless, it is a fact that, both at personal and business level, free cash flow, generated internally, is invested with less rigour than external debt finance. I.e. productivity would decline without access to liquid debt markets.
            As I say, I would rather the banks be taken out of the process completely, and better more value retaining intermediation being delivered through new business models being introduced by entrepreneurs.

  • Peter J. Morgan

    Nasir, methinks we need a mediator or moderator, as I am totally unaware that I have been attacking your person and your intelligence. However, I am aware that you have just made an ad hominem attack on me, and I should hope that a moderator would soon ask that you cease such ungentlemanly behaviour forthwith.
    Nasir wrote “However, as I have stated several times before, I believe in capitalism, I believe in entrepreneurs and allowing value to accrue to those who take risks and work hard to deliver innovation and build business. They would not be successful if consumers did not agree with the value they deliver.”
    Hooray, Nasir, we agree on something!
    However, I believe that under a Positive Money system, more value would accrue to those who take risks and work hard to deliver innovation and build business, and less to the banks, for they would be reduced to being mere intermediaries who broker existing money between those who have saved it and are willing to lend it and those who are willing to borrow it. All of the new money our economy would need as our entrepreneurs expand our economy would be created out of thin air (this is the seigniorage of which I spoke previously) by the Bank of England at the direction of the independent Monetary Policy Committee and gifted to the government free of debt and free of interest, to be spent by the government in the normal course of government expenditure. The sum of taxes and government borrowing would be reduced by the total of new money so created each year. No bank would have a government guarantee on its deposits, and no bank would ever get a government bailout. And hopefully, nobody would need a licence to start a new bank, this ensuring real competition to keep the margin between interest paid and interest charged as low as possible. Banks would have to operate much as building societies do now.
    “Conventional wisdom”, otherwise known as “authority”, has always maintained that new ways of doing things, indeed new inventions, won’t work. At the time that Thomas Edison was demonstrating his new-fangled electric lights in New York, the conventional wisdom in California was that it wasn’t happening, because it was “impossible”.

    • Nasir Zubairi

      Mr. Morgan – I re-read my post to you very carefully prior to submitting – where there is any sort of direct insult to your person baffles me. I have maintained a jovial and light hearted character to all my submissions, acknowledging your comments and good advice throughout, while conveying my thoughts and issues.

      Mr. Morgan, I am curious as to whether you have read my post in totalility. My response to Ben above may also add further insight. the banks are far too inefficient to deliver the intermediation you speak of without leakage. The entrepreneurs I speak to specifically are those that are delivering the innovation in financial services, such as P2P, that are based on streamline operating models to ensure value maximisation to consumers – both depositors and lenders. They, as I mention above, act as a proxy to full reserve banking, because that is the way their ventures are set up to operate on the get go. Aside from leaking value, the cost to change operations to implement full reserve, would be astronomically high for the banks – whether they would alternatively decide to exit the market rather than face these crippling costs is their decision as a private enterprise, and my guess is, as they are doing even now under fractional reserve banking, they would probably decide that it is not worth their while participating. Even if they do continue to participate ‘tax’ to the public would simply be transferred into the fees they would pay for banking services.
      I guess I am not surprised that the key elements of my concern are still not addressed.

      • Peter J. Morgan

        Nasir wrote:
        “Even if they (banks) do continue to participate, ‘tax’ to the public would simply be transferred into the fees they (the public) would pay for banking services.”
        In New Zealand’s case, the last good year of our economy was 2007, during which the money supply increased by approximately $11billion, which equates to approximately $10,000 per income tax payer. This is the amount per income tax payer by which government could reduce income tax. It is difficult for me to imagine that the banks would need to charge New Zealanders a total anywhere near $11billion in fees per year to manage their bank accounts. With a Positive Money banking system, free of the need for a banking licence, entrepreneurs would very quickly drive banks out of the business of managing people’s current accounts, should banks try to charge exorbitant fees.
        As I said, the banks would have to operate much as building societies do now, and would face fierce competition. I think Nasir is correct in saying that some banks would not be competitive and would simply give up. I say that that would not be a bad thing. For the life of me, I cannot see how the cost to government and taxpayers to implement a full reserve banking system would be excessive. Surely a few subtle changes to the payments system’s software, at a one-off cost, is all that would be entailed. This is described in detail in the proposed Act on the PM website.
        I’m no socialist, but to me, the payments system is analogous to roads and footpaths, and should be a public utility as it is a natural monopoly, and therefore, just like the roading and footpath systems, should be run by the state and local government in a user-pays, non-profit way.
        Business expansion would tend to be financed more by equity than by debt, with the public having the ability to hold much more equity as a result of paying less of their incomes in tax. This would begin to reduce the inequality in society that has been rapidly increasing over the last little while, culminating in the “Occupy” movement.

  • Robert Searle

    It is probably true that “enough” debt-free, or non-repayable money could be created without fear of serious inflation. This could be done using conventional Indicators. However, if we want to abolish taxation altogether at the end of the day then a more revolutionary approach would probably be needed. With advanced stage Transfinancial Economics it would probably be possible virtually all transactions from barcodes, and other types of ID of products, and services sold in real-time. Such data would not only be useful for businesses but would be sent, or rather transmitted at the point of sale automatically to an Agency which would have programed supercomputers which could instaneously built up a picture of the economy “working” in real-time. Taxation, and interest could ultimately be phased out as indirect means of “controlling” inflation levels, and direct means could be drawn directly as raw data from daily transactions. This all means that inflation as a serious problem becomes largely defunct. Moreover, it gives CONFIDENCE to governments, and economies that a tax-free world is ultimately possible opening up all sorts of remarkable opportunities for humanity.

    • Robert Searle

      Correction line five should read thus..

      With advanced stage Transfinancial Economics it would be be possible TO MONITOR virtually all transactions…………


    • Rudya

      @Robert: One of the last activities we can now do anonymously is to purchase something and pay cash for it. If you pay with credit cards, or your barcode system, there is a record of the transaction.This would lend itself very well to a police state.

      One other factor to consider is once the police state is on place, and all financial transactions depend on the “supercomputer”, who controls that supercomputer? It would be very easy for your “paycheck” to be wiped out because you displeased those in power leaving you totally at their mercy. Your suggestions would end up in an Orwellian society.

  • Josef Davies-Coates

    this may have come up in the comments already (not yet read them, will do so…)

    But re:

    “The key to constructing a dynamic realistic economic model is to understand the working of money creation”

    No. Understanding the workings of money creation is certainly a very important part of constructing a realistic economic model. But any realistic model would also need to build in an understanding of the energy flows that make all economic activity possibly, the laws of thermodynamics, and lots of stuff about complex adaptive systems etc. :)

  • Mike Riddell

    @Josef Davies-Coates I like your style as well as your brevity!

    May I share a thought with you please? I believe that it is possible to create positive energy within local communities simply by providing that community with sufficient incentive to remediate its own problems. I’m told that 80% of taxes are spent on 20% of the population so any positive change in citizen behaviour is likely to generate significant cost-savings within the welfare system that could be used to fund incentives.

    All one needs is (1) a social network (community centres, schools, football clubs etc) to organise and coordinate actions, and distribute savings in the form of rewards when community remediation work has been satisfactorily completed – The third sector might be able to fulfill this role (2) A means of exchange other than money – a community based crypto currency akin to Bitcoin might suffice issued to community workers who carry out the remediation work – using smart media with a unique id to store and exchange value between individual members (3) a marketplace that matches underused resources (like people or redundant buildings) with jobs that need doing (like persuading a problem family to engage with the community, fixing up old buildings or staffing a local library building).

    I’m not suggesting i know anything about thermodynamics or complex adaptive systems but i do believe in positive energy so what’s your take on what I’ve suggested please?

    Maybe we could chat on Twitter – @mikeriddell62


    There are no simple solutions only intelligent choices. I think we can ll agree on the problem. But the proposed solutions of “We have to move to the new economic model whereby it is the government (the state) that creates the money. This new money will be interest free and so will avoid the accumulation of massive amounts of debt in the economy” shows the author has no real understanding of ” the working of money creation.” Money is no more than a tool used as a medium of exchange. In order for it to have value, their has be goods and services that people want need and desire created to support that money. This also the error of those that advocate the gold standard. No matter if the medium of exchange is gold, or sea shells, it is only as valuable as what goods and services it can be exchanged for. If the supply of wealth goes down in relation to the supply of money, then the amount of the money goes down. If the supply of wealth goes up in relation to the amount of money then the value of money goes down. The bottom line is that the supply of money doesn’t control the amount of wealth. Having governments being able to create money whenever the want, changes the purchasing power of the money that is already out there.

  • Peter J. Morgan

    “Money is no more than a tool used as a medium of exchange.”
    No, when money is created out of thin air by private companies called banks, who are able to legally do so only because our government has granted them a banking licence, it’s far more than just a “medium of exchange”. It gives them power over us that they should never have, and brings them wealth that they have done nothing to deserve.
    Personally, I’d prefer to live in a society in which the producers of real wealth got to keep a much greater share of it, and bankers were reduced to the status they deserve, as merely money brokers, acting as the intermediaries between savers and borrowers — no more, and no less — for which they would receive a commission set by a free market in which there was no such thing as a banking licence.

  • Joao Granchinho

    JTDUPREE you’re missing the point on the Gov’t debt free money. A gov’t no longer has debts, because it can finance itself, and pay for public services (which are being cut down at the moment), and pay for improved infrastructure such as roads, mass/fast transportation such as TGV, new schools, hospitals, etc (which are not being built), and last but not least a reduction in the tax on businesses and individuals, who would be less burdened and more able to consume. Do you see the difference between a bank’s allocation of new money, and the Gov’t’s? Gov’ts are held democratically liable and are democratically punished, whereas banks will invest in non-productive (more speculative) areas which are more profitable for them, and they’re not subject to any kind of penalty if they “misbehave”, in fact we are collectively bailing them out.

  • Nasir Zubairi

    Final final point: things do have to change, but the right path needs tobe followed.first, viable alternatives for banking need to become mainstream and secure – P2P and other alternatives like EuroTRX are leading the charge, but I am also a believer that controls and, potentially, some regulation needs to be in place for these solutions to have longevity. Once consumers realise start switching to these new models, which are more akin to full reserve banking (cash in, cash out), then we can address the larger systemic issues with banking.

  • Peter Kellow

    You are right that under monetary reform, we have to allow that the function of providing loans that banks currently perform is still provided by someone or something. P2P I think is far too limited to have wide application. Correct me if I am wrong, but as I understand it EuroTRX is simply providing a service to companies to sell their invoices at discount and the benefit they receive is that the question of when or if they will be paid by the original debtor is removed. In this it is rather like a futures contract for it is removed uncertainty for a fee. This is a valuable service to small businesses but not a solution to raising capital to finance development unless the discount it very attractive which, in view of the risk, I doubt is the case

    There are some that argue that we should have state banks to provide credit but I am against this on any scale for the following reason. Without the presence of market checks on the availability of credit it is likely to expand exponentially in the aggregate and this would feed into creating the curse of the system we have – asset price uplift and bubbles.

    The creation of money by the state should find its way into the economy by combination of state expenditure and cutting taxes. In addition there will be grants and subsidies broadly along the lines we have now. Private banks should perform the lending to businesses for development but only on 100% reserve. You may say this will hobble the economy by reducing the credit available but you have to bear in mind the shear magnitude of the change that will occur when money creation does not depend on debt. Taxes will fall dramatically and so household budgets will be in a different world. Asset prices will not rise sucking the available credit into a wasteful unsustainable Ponzi effect as they do now. Savings will increase and profits for businesses will increase. Both of these will reduce the demand for credit, allowing the 100% reserve to function and undistorted market forces to operate on business lending

  • Nasir Zubairi

    I appreciate and agree with your vision for a better future. However, your proposal falls short of economic principles and is not remotely feasible.
    1) At the moment, EuroTRX provides business with working capital, by allowing them to sell their outstanding invoices and receive cash today as opposed to waiting 60 days+ for debtors to make payment. It is not at all like a futures contract. Working capital/operating capital is the primary driver for SME borrowing over the past 4 years. Growth is complicit to better cash management at the first hurdle.
    2) banks would completely exit the business of lending money under your proposal. As you state, they are private entities. as with any private entity, they will look to employ capital as effectively as possible. The opportunity cost of capital, already high today, would be even higher.. A bank has a multitude of better alternatives for using the capital. Even under today’s model, I forecast banks exiting the SME lending space within 8 to 10 years.
    3) you generalise taxation cuts too much. I believe in alternative models for fiscal management – privatisation and income based subsidisation of NHS and education, lowering of income tax, raising of VAT on luxury goods such as cars as well as on alcohol. Again, I can show that UK PLC books will balance, and ultimately reduce our deficit and dependence on borrowing in a structured way. Supply side economics and the laffer curve. There are also implications on the control of money supply, whereby the BofE would take a much more proactive approach to managing total money in circulation based on substitution value.
    3) Your point on asset prices is illogical given the point I made in my earlier comment – we cannot control what other countries do, and they demand those same assets. We would need to close up shop – create massive trade and investment barriers that would ultimately be disastorous to our economy – to prevent foreign investment in UK assets.

    I am enjoying the debate. My articles appear fairly regularly in the media discussing the subject of the economy, lending, banking…. I am regular contributor to please do take a look. I also tweet – @naszub

    Merry Xmas and a happy new year to you all.

  • Nasir Zubairi

    Quite a temper Mr. Morgan! No need to get so heated! I will take your insults to my intelligence, logic, reasoning and knowledge of economics and finance with a smile as you don’t know me. ;)

    I love your style of responding to my posts – quoting lines I write and, rather than addressing the point I am making, attacking me or my intelligence. You sound like a Journalist! Or are you Mr. Morgan from the Asia Development Bank Institute? is your real name Mr. Morgan?

    Anyway. I have read plenty of books in my time and have many more to go, I will add the one you suggest to my reading list. I actually did hunt around for it yesterday on my bookshelves as the name rings a bell!

    Seigniorage accrues to Joe Public in a different way under the fractional reserve system. Through better rates on savings and lower rates on lending as a result of competition. A proportion is then retained by the banks as profit.

    Now, without question, the lack of competition within the UK banking sector is counterproductive to this and too much is accrued by banks as profits. However, as I have stated several times before, I believe in capitalism, I believe in entrepreneurs and allowing value to accrue to those who take risks and work hard to deliver innovation and build business. They would not be successful if consumers did not agree with the value they deliver. Again, as I stated earlier, P2P lending, even in its current infancy, is accounting for nearly 10% of lending in the UK, providing greater competition to banks, who, if they want to remain in the industry, will, over the course of the next few years, need to make drastic cuts to their lending rates to remain competitive thus delivering more of the value analogous to seigniorage back to the public, while continuing to supply free banking services, also as the public demands. This transformation is all at zero cost to the public. Ignoring all the other arguments I have presented or asked for response to (which I have not received), the fundamental cost to taxpayers of changing from a fractional reserve system to Full reserve system will be extortionate. Yes, you may argue that the long term IRR is worth the investment of our government budget, but when you do now bring in the other issues that are unanswered;
    1) impact of access to international credit markets,
    2) introduction of banking charges,
    3) increased and more unscrupulous domestic shadow credit market,
    4) restricted monetary control and a potentially inelastic currency,
    5) further centralisation of government power,
    6) potential disastrous restrictions to output and economic growth;
    I can see why more people favour the fractional reserve system to the full reserve system.

    Pray also do tell, in response to your quoted criticism of my last post, which countries are close to implementing Full Reserve Banking, and what % of countries do you seriously think will have made this shift in the next 10 years?

    My overarching premise, in summary and again, is simply this: let entrepreneurs resolve the issues not government. The problems we are exposed to at this time due to a legacy banking system are all being tackled as opportunities somewhere, somehow, by private individuals. As such, the public can vote by choosing to use these new services or not, rather than being dictated to by government policy and bearing extortionate costs for change that may or may not deliver the right solution; aside from the theory potentially failing, the implementation and operational risks are unknown and substantial. Let entrepreneurs shoulder these risks and minimize the costs to the public.

    Good night (or good day, which ever is more appropriate!), and I hope you enjoy the rest of the holiday season!

  • Peter Kellow

    This has been a very worthwhile discussion but there will be no meeting Nasir’s arguments unless he can see how very different the world after monetary reform will be. He does not appreciate that the implications of monetary reform for the whole economy and society are very radical. For this reason I won’t answer any of his particular points but just point briefly to how the economy in the new world of monetary reform will operate.

    I repeat the quote from Ellen Brown in my original article: “According to Margrit Kennedy, a German researcher who has studied this issue extensively, interest now composes 40% of the cost of everything we buy. We don’t see it on the sales slips, but interest is exacted at every stage of production.”

    If this is only halfway right it makes clear the great burden (or as economists call it “rent”) that interest bearing money creation imposes on the economy. It is a massive drag on every conceivable piece of economic activity that individual, businesses or governments engage in.

    Once created money is interest free every economically active entity will be richer – a lot richer. This will mean that individual savings and business profits will soar. Both will benefit from the double whammy of low borrowing and low taxation – not to mention cheaper and better public services.

    In spite of the profusion of savings, interest rates will be higher – yes, higher – than at present because the savings will be in greater demand for investment. Under fractional reserve lending, as at present, the banks effectively defraud savers by flooding the market for loans with their own created money cheating savers out of their just returns that a true free, market would give them.

    There will be 100% reserve requirement and this will entirely viable under the new system. Although the private banks will lose their money creation activities, they will there to manage the huge savings that will exist and these they will have to match up to businesses demanding investments. Interest rates for savings will be higher and so will interest rates on loans. This in turn will make bank commissions higher making them viable businesses

    If we look at this from the current perspective it might sound horrific, but that is a function of continually seeing everyone, individuals, productive businesses and governments, drowning in debt as they are now. The amount of debt in the economy once the reforms have really taken hold will by tiny in comparison. The high interest rates will not matter for borrowers will have low debts.

    High interest rates will make money valued and respected as it should be – not something to conjure up on a balance sheet willy-nilly by those who just happen to be in a position to do this. The other side of the coin of respecting money will be a greater respect for work, giving more empowerment to those in the productive economy. If that sounds rather Puritan, that is because it is. Respect for money encourages good morality.

    With the current model, both money and work have been devalued contributing massively to our intellectual, financial, emotional and moral impoverishment.

  • Nasir Zubairi

    A few contradictions in your response:
    At one point you state borrowing costs will be low, then, further down, state interest on Loans will be high?
    High interest rates = high saving = low investment = low expenditure = low revenues for business. All contradicted in your writing above.
    You had previously stated that, under full reserve banking, only fixed deposits could be used for lending. Maturities will need to be matched. term deposits beyond 3 months currently account for less than 1% of all deposits. There is no way a bank would make money. They would stop lending and charge for all banking activities. Would joe public be happy to pay?
    Grandiose visions are fuel for the future Mr. Kellow, but they need to backed by some substance.
    What I think you are forgetting is that economics is not a study of finance, it is a study of incentives and how people act in a system. Show me the logic and incentives that drive your utopia to exist and work, and you will convert me and, perhaps, others who can help bring about change.

  • Peter Kellow

    “At one point you state borrowing costs will be low, then, further down, state interest on Loans will be high?” – borrowing costs will be low because borrowing AMOUNTS will be very low, offsetting the high interest rates. That is clear if you read the whole piece. Borrowing will be low with no rentier banks

    “High interest rates = high saving = low investment = low expenditure = low revenues for business. All contradicted in your writing above.” – don’t understand any of that, unless you mean: high NET saving = low investment, which is not what I said. Clearly I was talking about GROSS savings

    “Maturities will need to be matched. Term deposits beyond 3 months currently account for less than 1% of all deposits.” – sorry, that is rubbish. The whole point of the intermediary function of a bank is that maturities do NOT need to be matched. They borrow short,lend long. The dangers inherent in that have to be covered by adequate liquidity. That is just what banks do – at least traditionally. Economics course, week 1, year 1. Whoever told you maturities have to be matched?

    The rest of what you say is flim-flam, with no arguments

  • Nasir Zubairi

    ….. and please do check the definition of “groupthink” and re-read what I wrote. I believe you may be somewhat incorrect in your use of the term. It does make me a laugh – it is the last thing any one that knows me would ever accuse me of! ;) I bend and challenge the norm – always have, always will.

  • Ben Dyson (Positive Money)

    Nasir – regarding letting entrepreneurs resolve the issues, the market for banking is completely distorted by the barriers to entry put up by an incompetent regular and by the fact that the government is committed to rescuing banks that have been run into the ground by incompetent management. There’s no way that an entrepreneur can come in and compete with that. To run a full-reserve bank, the sales pitch would be that the bank would keep your money safe rather putting it at risk. Yet the existing PLC government-guaranteed banks can say “We’ll take your money, put it at risk, and if we lose it all, the government will give you everything back”. There’s no market-driven solution in such a distorted and unfree market.

    Full-reserve banking would actually re-instate free markets in banking and ensure that banks can fail when they screw up.

  • Nasir Zubairi

    Hello Ben,

    Thank you for your well articulated and reasoned input. I do somewhat disagree. Banks suffer diseconomies of scale – poor and inefficient infrastructure, diversification across too broad spectrum of capabilities, tremendous bureaucracy and agency issues…..the list goes on.
    The cost for them to deliver services to consumers are, therefore, high, even before including capital charges. Entrepreneurs, by focusing on particular aspects of the financial value chain, are able to intermediate between depositors and borrowers more cost effectively, with greater returns for depositors and lower cost to borrowers. P2P essentially provides a proxy for full reserve banking.
    I with others have also been in discussions with government, the treasury select committee to reduce red-tape under a special scheme to allow easier set up of community/regional “savings and loans” firms., injecting more competition into the sector.

  • Ben Dyson (Positive Money)

    Nasir – I think you might be missing the point of what we’re trying to do. We’re all in favour of having more competition in banking, more peer-to-peer lending, more alternative banks and fewer Too-Big-Too-Fail banks.

    What we have an issue with is a system that allows a few large banks to issue the nation’s money supply (as bank deposits / bank credit), to direct where all this credit goes (with little accountability to either the public, customers or shareholders), and to collect a tidy sum year after year from being able to lend the entire money supply.

    It doesn’t really matter how much competition we have unless we address that core issue.

  • Nasir Zubairi


    These past few posts are your best thus far. I like your arguments. Unfortunately, I must ask for your pardon as I still do not feel that the holes in the proposal have been addressed in a satisfactory manner.

    As I have stated previously, I have no issue with the premise of full reserve banking itself, but do contest the outcome, the process of implementation and its impact to our economy.

    The utopia you paint is idyllic, but, I believe, is impossible to achieve.

    I have worked in and around banking infrastructure for all of my career. Changes to implement full reserve banking may appear simple but will undoubtedly involve a hefty planning and implementation cost. The legacy systems utilized by the banks are creaking and require considerable expenditure and resources to enhance.

    Then there is the ongoing cost of regulation/monitoring of the system; far in excess of today’s model. All money creation activities by the banking and now the shadow banking sector would need to be continuously scrutinized. Again, these costs can be completely removed by letting consumers vote with their feet and choosing services, such as P2P, that resemble full reserve and where the operational and implementation cost is borne by the entrepreneur/business, not by the public, can be proven to work and, due to operating models explicitly tailored to delivery of such intermediation, ensure participants, both depositors and lenders, extract maximum value.

    Fees to banks for services would be implemented – the most tangible tax transference. Then there is the cost to productivity and output that I have discussed earlier. Though you point to greater wealth retention by the public (How I think taxes could be reduced can be found elsewhere on the internet), it is the distribution of this capital that concerns me and the potential waste. Business, even less so the public, would not effectively redistribute additional wealth into value creating activities and investment. Use of “Retained profit” has considerably less rigor than the use of external debt. The money supply created would not be funneled into the right activities to generate growth by funding an asset that, over time, can be used to generate value beyond that of the initial investment. A loan to buy a house can fall under this category, as often the house rises in value and the mortgage payment is simply a substitute for existing rent expenditures. An investment in education can be productive, if the result is higher skills and higher income to pay off the loan. However, monies retained as a result of lower taxation are far more likely to be used to finance a vacation or other such consumption, and particularly on goods that are imported, does not add to our economy.

    Maybe my mind has not fully extracted itself from R&R, but I don’t see how reducing taxes in offset to the additional income generated by printing money, would help reduce government debt. Reducing expenditure and/or increasing income will help reduce our borrowing requirement.

    As for access to foreign capital not expanding money supply; this would need to be accounted for under the rules of full reserve. Banks could hold foreign currency, marked to market, in substitute of domestic currency, thus creating new money when providing FX service. Regardless, the use of foreign credit to finance investment in an economy detracts from the domestic country’s income. Again, hampering growth.

    Credit is not all bad. We have, without question, over extended ourselves and introduced considerable volatility into the economy, but going to the opposite extreme, severely restricting credit due to the need for maturity match on time deposits, will seriously hamper businesses and the competitiveness of an economy. There is no argument you can give to convince me otherwise. Even the use of time deposits as the basis for lending technically goes against the principle of full reserve – you should still be able to call in your time deposit should you require, be it with a penalty for early debit.

    My best wishes for the New Year to you both Peter & Ben.

  • Nasir Zubairi


    I have not entered into this discussion to quarrel the merits of Positivemoney’s objectives. I am addressing specific points made by Mr. Kellow and Mr. Morgan. I disagree with the premise that government should control the supply of credit beyond what it can do today, and also disagree with workability of a government imposed full reserve system and its cost to the economy. I don’t want public coffers used to implement such a drastic change when there are considerable and major questions that are unanswered. I would rather see a gradual and consumer led change occuring, pushed forward by entrepreneurs/business, with little to no cost to the public. Competition in this sense may be a misnomer – it may be more accurate to describe the wave of entreprenuerial effort in financial services as substitute services.

  • Ben Dyson (Positive Money)

    Nasir – thanks for clarifying that. I’m happy for us to agree to disagree on the fundamental premise!

  • Peter J. Morgan

    Nasir wrote: “I am addressing specific points made by Mr. Kellow and Mr. Morgan. I disagree with the premise that government should control the supply of credit beyond what it can do today, and also disagree with workability of a government imposed full reserve system and its cost to the economy. I don’t want public coffers used to implement such a drastic change when there are considerable and major questions that are unanswered.”
    Nasir, let us end the year on a very positive (pun intended!) note. Let us have an exchange of intelligence (otherwise known as a discussion), rather than an exchange of ignorance (otherwise known as an argument!).
    I ask, what if government did not control the supply of credit? By that I mean the new money with which we expand our economic output. What if we the people controlled the supply of new money, by how hard we worked to expand economic output, and charged a Monetary Policy Committee with the responsibility of measuring the results of our efforts, and then instructing the Reserve Bank to increase the money supply at the same rate, by creating new money as a debt-free and interest-free gift to the government to spend into the economy as it saw fit while at the same time reducing the sum of taxation and government borrowing to match? This would leave us free to save more of our incomes and either buy equity in business enterprises or lend to banks on term deposit. banks. of course, would no longer be able to create new money by making loans, but would have to earn their living from acting as financial intermediaries and nothing more, which is what most people think is all that they do now. I do not understand how this would impose any cost on the economy, but I do foresee how economic power would shift from banks to ordinary income earners, and I see that as being a good thing. In my considered opinion, the cost for the writing and implementing of new computer software to make this happen would be insignificantly low.
    I have no doubt that this change would herald a new era of continuous economic growth, free from the booms and busts that have plagued us in the past.
    Another comment that Nasir made concerned how credit would flow in from overseas. My reply to that is that any foreign exchange coming in, as a result of borrowing overseas, would have to be exchanged for local currency before it could be spent in the local economy. This would not increase the local money supply and would not be inflationary. And if a local manufacturer borrowed overseas and purchased capital equipment overseas and imported it for the purposes of increasing local economic production, that would not be inflationary, but would place a kind of lien on a portion of export income in order to pay interest on the loan and to repay the principal — and I don’t see anything untoward in that at all.

  • Peter J. Morgan

    Thanks, Nasir, for your contributions to the debate. I have a question for you. When I read “Then there is the ongoing cost of regulation/monitoring of the system; far in excess of today’s model. All money creation activities by the banking and now the shadow banking sector would need to be continuously scrutinized.” it made me wonder, have you read the draft bill? (URL:
    As I understand it, any digital money creation by private individuals or companies would be classed as counterfeiting, in exactly the same way as it is now with counterfeited money in printed note form, and dealt with by the police as a criminal act and punished accordingly.

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