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A Politician’s Guide to Fixing the Banking System
A guest post by R.F. Morrison
The confrontation between top bankers and public opinion escalated with the resignation of Bob Diamond from Barclays Bank. He follows Fred Goodwin of RBS into the cosy retirement home for millionaire sacrificial goats. This time, however, the public is demanding more – a fundamental change to the culture of banking. This phrase is, of course, coined by the media. It smacks of obfuscation, though, because culture has so many meanings, from the benign ‘cultured society’ to the less attractive biological definition of nasty, anti-social viruses grown in the rarefied isolation of a laboratory. This latter description appears more appropriate to the parallel existence of banking outside the normal world of commerce and industry.
It is also appropriate because such cultures can prosper only in a controlled environment, an artificial but consistent system dedicated exclusively to the nurture and welfare of the organism; upset the system and the creature dies. Banking has become the reality of a science-fiction creature which has grown to take over not just the laboratory but also the world beyond. It has assumed a malign life of its own which cannot be ended with a few sacrificial goats – only by withdrawing its life support system.
Fractional Reserve Banking
That system is Fractional Reserve Banking, whereby depositors place a unit of real money into their bank’s account. The system then grows or multiplies it ten or twelve times and lends the resultant ‘culture’ to borrowing customers as debt.
This system has dominated banking during the 20th Century – certainly since 1913 when the US Federal Reserve was created. But it was contained within the laboratory until the end of World War II, when the West agreed to designate the US dollar as the world’s reserve currency. Even then, it was not until 1986 – when the regulations were removed by the UK government – that the Fractional Reserve System really began to mutate and rape the economy.
Its first target was the Full Reserve Banking System. The Building Societies and Savings Banks had been protected by law up until 1986. These long-established and stable institutions had financed virtually the entire UK house mortgage business for 150 years yet, within ten years, they had virtually disappeared, acquired by Fractional Reserve Banks.
The analogy of an alien culture destroying the native one holds good here. How was it done? Full Reserve meant just that – these institutions could not lend more than their depositors had lodged in their accounts – there was no multiplier. As banks, however, they did not need the savers’ deposits so they returned the money to the members who enjoyed a short spending spree. The real harm came later as the real money of savers was replaced by the notional money of the banks, and that is when systemic inflation really started to take off. The remaining rump of the Building Societies is mainly the Nationwide (53%) but it is no longer a full reserve institution.
We need a political hero
The remarkably effective defence mechanism of the banking culture is global complexity which, so far, has defied any serious challenge. The only hope is that a political hero will emerge and, in true science fiction tradition, reveal the aliens’ Achilles heel – its fractional reserve life support system. When a fractional reserve bank loses even 3% of its loans it is in trouble; if it loses 10% it is insolvent and all its loans would collapse. That in turn would force the collapse of all the other fractional reserve banks. That is why governments feel forced to step in and bail banks out with taxpayers’ money. This guarantee of being bailed out is their life support system. With a full reserve bank such a loss is unpleasant and upsets the equilibrium, but it does not start a chain reaction and is soon absorbed.
It is this same culture which has infiltrated the Euro currency, because the banks lend such huge sums to governments. When doubt arises over the ability of a sovereign State to service its debts, the same threat of collapse and chain reaction is present, hence the concerns within all countries of the eurozone and beyond.
The virus is now pandemic and there is only one solution for a State seeking the vaccine – nationalise all their chartered banks and reconstruct them as Full Reserve. That implies a political willingness to act unilaterally within the sovereign borders of a currency regime and introduce foreign exchange and capital flow controls administered by the Central Bank. The investment banking arms would be sold off – albeit they will become worthless overnight when denied access to depositors’ money and State guarantees.
The conclusion is that removing the fractional reserve system is the only cure. The outcome will be stable banks, a capping of National Debt and a return to accumulating genuine wealth by returning money to its proper function – that of facilitating the exchange of useful goods and services.
Ron Morrison is an accountant, company director and author of ‘There’s No Independence Without Financial Independence’ – an online booklet which describes in much greater detail the banking options for Scotland if it chooses independence. These are the views of the author and not necessarily those of Save Our Savers.