Plamen Ivanov's Ecobate 2016 paper (University of Southampton) David Ricardo and Modern Monetary Reform Propositions: A critical Analysis reveals what one of the founders of modern economics thought about banking and banking sytems. Ricardo writing in 1824 understood that banks create the money supply, but until very recently this has not been at all widely acknowledged in academia. Imagine that such a fact, fundamental to all things economic has been hidden in plain sight for nearly 200 years! In the UK it was only in 2015 that the Bank of England acknowledged this openly in its May 2015 Working Paper No. 529: Banks are not intermediaries of loanablefunds — and why this matters Authors: Zoltan Jakab and Michael Kumhof .
Up to that point the function of banks has been overwhelming assumed by the ordinary person (and by many who should have been financially more knowledgeable?) that bank lending was merely the passing on of previously deposited money. The function of the creation of money by ordinary banks has not been given its due recognition in economics textbooks. Ivanov cited Werner (Dec 2014): Can banks individually create money out of nothing? - The theories and the empirical evidence, who set out to show in real time how a bank branch created a loan of €200,000 for him in 2013 which, to prove it was real money, he deposited in another bank He also proved that a fractional reserve amount representing his loan at the central bank, was not involved (thus showing fractional reserve banking is obsolete, or at least only a half-truth) and that no already existing money at the bank was involved in making up the loan amount.
Ricardo wanted a National Bank to be set up by the government to be run by 5 salaried Commissioners. The then existing Bank of England charter would expire and its premises might be purchased and staff transferred to the Commissioners. The Commissioners were to be independent of the government; they should create the money needed to redeem government debt to the Bank of England; they would create the money needed by the national financial system but should not create it for the government to borrow. Government needs were to be met by taxation or borrowing from privately owned banks. Ricardo wanted a full reserve system of banking, as championed by Positive Money . See also Martin Wolf.
Ivanov thinks we have moved beyond the safeguards which Ricardo expected of full reserve banking. People would find ways to game the system and perform money creation outside the official constraints, and how do you handle new phenomenon such as digital currency e.g. bitcoins? Full reserve banking is likely to be costly and impractical, and it might cause the economy to contract. But we do need a safeguard to keep the economic system safe and Ivanov adopts Ricardo's idea of a nation's banking system divided into districts, where stability arises from many small independent parts rather than a few large players. With many small banks the failure of one or two, through unwise money creation for their lending, will not wreck the whole system as was the danger in the 2007/8 crisis in the UK, when a very few large banks dominated. But our economic system is still in thrall to its top-heavy banks. However local independent banks of the German Sparkassen type with distinct areas of operation are a practical and realistic safeguard. Plamen Ivanov is involved in the establishment of a local community bank of that type. His paper was a ready made answer to Prof David Llewellyn's Ecobate keynote speech 'Are banks over-regulated today?' with its theme that more types of banking model are needed for safety.
From the Ecobate 2016 Conference and with additional information. Posted by Charles Bazlinton Director of Local First CIC which is promoting local banks.
Up to that point the function of banks has been overwhelming assumed by the ordinary person (and by many who should have been financially more knowledgeable?) that bank lending was merely the passing on of previously deposited money. The function of the creation of money by ordinary banks has not been given its due recognition in economics textbooks. Ivanov cited Werner (Dec 2014): Can banks individually create money out of nothing? - The theories and the empirical evidence, who set out to show in real time how a bank branch created a loan of €200,000 for him in 2013 which, to prove it was real money, he deposited in another bank He also proved that a fractional reserve amount representing his loan at the central bank, was not involved (thus showing fractional reserve banking is obsolete, or at least only a half-truth) and that no already existing money at the bank was involved in making up the loan amount.
Ricardo wanted a National Bank to be set up by the government to be run by 5 salaried Commissioners. The then existing Bank of England charter would expire and its premises might be purchased and staff transferred to the Commissioners. The Commissioners were to be independent of the government; they should create the money needed to redeem government debt to the Bank of England; they would create the money needed by the national financial system but should not create it for the government to borrow. Government needs were to be met by taxation or borrowing from privately owned banks. Ricardo wanted a full reserve system of banking, as championed by Positive Money . See also Martin Wolf.
Ivanov thinks we have moved beyond the safeguards which Ricardo expected of full reserve banking. People would find ways to game the system and perform money creation outside the official constraints, and how do you handle new phenomenon such as digital currency e.g. bitcoins? Full reserve banking is likely to be costly and impractical, and it might cause the economy to contract. But we do need a safeguard to keep the economic system safe and Ivanov adopts Ricardo's idea of a nation's banking system divided into districts, where stability arises from many small independent parts rather than a few large players. With many small banks the failure of one or two, through unwise money creation for their lending, will not wreck the whole system as was the danger in the 2007/8 crisis in the UK, when a very few large banks dominated. But our economic system is still in thrall to its top-heavy banks. However local independent banks of the German Sparkassen type with distinct areas of operation are a practical and realistic safeguard. Plamen Ivanov is involved in the establishment of a local community bank of that type. His paper was a ready made answer to Prof David Llewellyn's Ecobate keynote speech 'Are banks over-regulated today?' with its theme that more types of banking model are needed for safety.
From the Ecobate 2016 Conference and with additional information. Posted by Charles Bazlinton Director of Local First CIC which is promoting local banks.
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