Very encouraging to see Martin Wolf in the Financial Times talking seriously about full reserve banking. His proposals for are a step in the right direction but are only part of the solution. They highlight a set of additional underlying problems that also need to be addressed.

He takes no account of one of the main features of our culture, namely the desire to capture and hoard as much money as we possibly can. With Martin’s/Positive Money’s proposals most money will end up in risk free transaction accounts regardless of the fact that they won’t pay interest (witness the last few years of interest rates lower than real inflation combined with paltry investment in business activity). 

Our desire to hoard will starve business of investment (as he admits) but more importantly the lack of money available for lending will strangle consumption. There is a net linear flow of money from consumers to hoarders which currently fed by credit. If you cut off the credit feed the buyers soon become strapped for cash, which means business has fewer customers, which further reduces the flow of money to consumers (i.e. fewer wage earners), which leads to permanent recession.

This video gives an idea of how the mechanism currently works and how Martin’s proposals could be part of a sustainable solution:

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