Sunday, 4 May 2014

Does a switch to full reserve banking equate to “banning banks”?

Ever since Martin Wolf came out in favour of full reserve banking, there have been several follow-up articles (1,2,3) in which the authors describe a move to full reserves as “banning banks”. I take issue with this...

When Dave Fishwick, made famous by the television series Bank of Dave, wanted to start his own bank, he was surprised to discover that his proposed business of taking people’s savings and lending that money to people that wanted to borrow it, was not allowed to be called a “bank”. I can sympathise with Dave because by almost any definition of the word bank you may find in a dictionary, his institution was most definitely a bank. It’s just that the financial regulators have an unreasonably pedantic definition of the word. Its as if the word “car” had been defined as a Volkswagen Golf, and any “vehicle” that wasn’t a VW Golf was barred from calling itself a car, and had to be advertised as a “motorised people transportation device”.

There are many precedents for dictionary definitions of words being different from that which pedantic lawyers would insist upon. For example, take Champagne and Velcro. Champagne is simply sparkling white wine, but woe betide you if you make some white sparkling wine outside the Champagne region of France and label your drink Champagne. Similarly with Velcro. If your “hook and loop material” was not made by Velcro Corp. and you describe it in your sales material as velcro, you will have a letter from their lawyers soon after.

So if you are a pedantic lawyer type, then yes, full reserve banking is indeed banning banks. But if you are a normal human being, armed with a normal dictionary, then full reserve banking does not involve banning banks. It's merely switching to a different model of bank, like a different model of car.

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