Mervyn King Says "Stop Fractional Reserve Banking"

The picture to the right is a letter from Mervyn King, Governor (big chief) of the Bank of England, to one of our supporters. (Click on it to see the full size letter.)

The second paragraph is hugely significant.  Read it in full, and then we’ll explain what it means in plain English:

“Second, you suggest that banks should be forced to conform to the underlying purpose of the 1844 Bank Reform Act. You might be aware that I have said publicly that I think ideas in this spirit – such as those advocated by John Kay – certainly merit serious consideration in the debate as to how we reform our financial system. I remain sympathetic to these views. But as I said in my previous letter, I do not want to prejudice the outcome of the Banking commission’s deliberations. Now the Commission has been set up, I think we all should wait to see its conclusions.”

The 1844 Bank Charter Act (‘Reform’ is a typo) was a piece of legislation that prohibited commercial banks from printing paper notes (£1, £5, £10 and so on). Before this law was passed, banks were permitted to print as many paper notes as they wanted, up to the point where they printed too many and went bankrupt (as everyone cashed in their paper notes at once).

That situation should sound very similar to the situation that we have today – we currently allow commercial banks to ‘print’ money in the form of digital bank deposits (the numbers in your bank account). In the years up to 2007, the banks ‘printed’ far too much of this digital money, to the extent that they – and the economy – started to collapse.

The ‘underlying purpose’ of the 1844 Bank Charter Act was to prevent the commercial banks creating money and to restore that privilege to the state. It had become obvious to the government of the day that if banks were allowed to create money, they would keep creating money up until the point where it destabilized the economy, so they could not be trusted with this responsibility.

So, in plain English, Mervyn King appears to be saying:

“I agree that banks should probably be stopped from creating money, and recommend John Kay (or Laurence Kotlikoff’s) proposals. But it’s not for me to say – let’s leave it to the Banking Commission.”

It’s very reassuring to know that the top guy at the Bank of England understands the root of the issue and is promoting solutions that would go a long way to addressing it. Both John Kay and Laurence Kotlikoff’s proposals would prevent commercial banks from creating money (or ‘issuing credit’) for their own benefit at the expense of the wider economy and the public.