100% reserve banking

The Unity Trust Bank seems better, but it has close links with the Co-op Bank which provided the initial capital and still has a 26.66% share in it. We used to bank with the old Girobank, as a state as opposed to a private bank, but this got privatised in 1989 and is now owned by Santander. Maybe the new Post Office Bank to be set up next year  (it's only Royal Mail not the Post Office that has been privatised), which is a sort of attempt to revive the Girobank, could also be suitable.

Another item, from today's Times, to file under "Banks can't lend more than they have":

Those who think banks create the money they lend out of thin air are invited to do the maths and/or to ponder on why this bank didn't do this.

I don't understand. If you agree that a single bank cannot create credit "out of nothing" (as some claim) why do you rush to their defence? Why not join me (and us) in condemning such currency cranks for spouting nonsense?There has long existed a textbook model which shows how the banking system (as opposed to a single bank on its own) can use a sum of money deposited in one bank to lend out many more times than this (through most of this sum being redeposited again and again in other banks). But this is still not "creating money out of nothing" since if a bank doesn't receive one of these re-deposits it can't lend more. In fact, the expanding bank loans depend on deposits expanding. Both expand together. So, in this model total loans are not, and cannot be, greater than total deposits.The system you describe involves the central bank (in this country the Bank of England) and  wouldn't work without it. Also, it concerns all payments in and all payments out and not all payments out are loans. But nobody denies that a central bank can create money by a keyboard stroke. But this doesn't increase the amount of wealth in existence, merely more claims on that wealth. The danger here is that if too many such claims are created then this will lead to inflation (depreciation of the currency's purchasing power).In any event, it takes two to make a bank loan and at the moment, with the capitalist economy in the middle of a slump, there isn't so much demand for bank loans as before, no matter how much money banks might have or be able to obtain from the money market or the Bank of England.In passing, I don't think Mervyn King would agree with your interpretation of what "quantitive easing" is or its purpose. But there's a separate thread on this here:http://www.worldsocialism.org/spgb/forum/general-discussion/why-hasnt-quantitative-easing-caused-inflation

I’m a bit confused…money supply of MO is by the Bank of England following government policy, not commercial banks, isn’t it? But that aside… i think the case is that banks cannot lend out money it does not have and of course that is not always provided by actual deposits from grannies.  “Banks have come to rely much less on deposits as a source of funds and more on short-term wholesale funding (brokered CDs, asset-backed commercial paper (ABCP), interbank repurchase agreements, etc.).. .Second, it has become common for corporations to turn to markets rather than banks for short-term funding. In particular, before the crisis firms were regularly tapping commercial paper markets for funds. These corporations still had lines of credit set up with banks, but they used them more as a source of insurance. After the near collapse of the commercial paper market, however, firms took advantage of this insurance and banks had no choice but to provide the liquidity. Thus, firms’ use of credit lines during the crisis increased illiquidity risks for banks. Lastly, banks’ off-balance sheet programs (SIVs for example) relied on short-term ABCP to operate; when this market dried up, banks in some cases had to take the assets from these vehicles onto their balance sheets. All of these factors made liquidity risk management especially challenging during this time. In the past, checkable deposits were US banks’ most important source of funds; in 1960, checkable deposits comprised more than 60 percent of banks’ total liabilities. Over time, however, the composition of banks’ balance sheets has changed significantly. In lieu of customer deposits, banks have increasingly turned to short-term liabilities such as commercial paper (CP), certificates of deposit(CDs), repurchase agreements (repos), swapped foreign exchange liabilities, and brokered deposits.” http://en.wikipedia.org/wiki/Interbank_lending_market The importance of deposits still remains with the Loan-deposit ratio, also known as the LTD ratio, is a ratio between the banks total loans and total deposits.If the ratio is lower than 1, the bank relied on its own deposits to make loans to its customers, without any outside borrowing. If, on the other hand, the ratio is greater than 1, the bank borrowed money which it reloaned at higher rates, rather than relying entirely on its own deposits. Banks may not be earning an optimal return if the ratio is too low. If the ratio is too high, the banks might not have enough liquidity to cover any unforeseen funding requirements or economic crises. It is a commonly used statistic  for assessing a bank’s liquidity. In 2012 Deposits at U.S. banks exceeded loans by an unprecedented $2 trillion. Deposits have surged 29 percent from $7.1 trillion in September 2008. The banking industry was lending 78 cents for every $1 it holds in deposits, below the mid-90 percent range cited as “optimal. Wells Fargo tries to run the company with $1 of deposits funding $1 of loans. The bank was at about 80 cents for every dollar. http://www.bloomberg.com/news/2012-12-18/bank-deposits-surge-2-trillion-more-than-loans-credit-markets.html This website, Monetary Realism, tries to present the complex real world of banking has this to say “Some interpretations of the ‘loans create deposits’ meme overreach in their desired meaning. The contention arises occasionally that ‘loans create deposits’ means banks don’t need deposits to fund loans. This is entirely false. There is no inconsistency between the idea that ‘loans create deposits’ and the idea that banks need deposits to fund loans. Bank balance sheet management must respond to both growth dynamics and steady state conditions in the dimension of nominal balance sheet size. A bank in theory can temporarily be at rest in terms of balance sheet growth, and still be experiencing continuous shifting in the mix of asset and liability types – including shifting of deposits. Part of this deposit shifting is inherent in a private sector banking system that fosters competition for deposit funding…In summary, the original connection by which deposits are created by loans typically disappears at some point following deposit creation – at the micro bank level and/or the macro system level. The original demand deposits associated with specific loan creation become commingled as they move back and forth between different banks. And they not only move between banks, but they can change in form within any bank. They can be converted into term deposits or other funding forms such as bank debt or common and preferred stock. The task of dealing with this compositional flux falls under the joint coordination of bank asset-liability management and reserve management. The overarching point of observation is that both system growth and system competition for existing balance sheet composition are in constant operation. ‘Loans create deposits’ only describes the marginal growth dynamic at the inception of deposit creation. ‘Deposits fund loans’ is the more apt description that applies to a good portion of what constitutes ongoing balance sheet management in competitive banking.” [my emhasis] http://monetaryrealism.com/loans-create-deposits-in-context/

This link shows some notable people who think that banks create money. http://www.positivemoney.org/how-money-works/proof-that-banks-create-money/ I am less concerned that loans come before deposits, or the other way around, more that private banks have the ability to create money and debt through the act of lending. The money supply tripled in 10 years in the UK from 1997, mainly through banks increasing lending, and one third of this new money went on commercial and private property. Bank were able to lend more in this period because the reserve requirement was very low, interest rates were too low for too long, and banks were going out of their way to lend more, much of it to unsuitable borrowers including my friend on benefits. The expansion of the money supply must have been caused by lending increasing first, and if it increased at a rate of 10% a year for 10 years, this would enable the money supply to triple in that period. The banks increased their lending, and in doing so they could seek extra reserves as well, because more money had been created. This is explained in the book "Where does money come from ?" by the New economics Foundation.All new money should be created by the central bank, free from debt and interest, and free from political influence, to be spent into the economy. The present system is manic depressive, more lending encouraging a boom, a bust occurring when banks lend less and people try to pay down debt because there is less money.M0 is a very small part of the money supply, M4 is much the biggest component.

The Money Multiplier FableThe money multiplier story – a fable really – claims that banks expand loans and deposits on the basis of a central bank function that gradually feeds reserves to banks, allowing them to expand their balance sheets with new loans and reservable deposits – according to reserve ratios that bind the pace of that expansion according to the reserves supplied. This is entirely wrong, of course. In fact, bank balance sheet expansion occurs largely through the endogenous process whereby loans create deposits. And central banks that impose reserve requirements provide the required reserve levels as a matter of automatic operational response – after the loan and deposit expansion that generates the requirement has occurred. The multiplier fable describes a central bank with direct exogenous control over bank expansion, based on a reserve supply function – which is a fiction. The facts of endogenous money creation have been demonstrated by empirical studies going back decades. Moreover, the facts are obvious to anybody who has actually been involved with or closely studied the actual reserve management operations of either a commercial bank or a central bank. In truth, no empirical ‘study’ is required – the banking world operates this way on a daily basis – and it is absurd that so many economics textbooks make up stories to the contrary. The truth of the ‘loans creates deposits’ meme is pretty well understood now – at least by those who take the time to learn the facts about it.This illustrates what I said earlier abuout the money multiplier, and is taken from this  http://monetaryrealism.com/loans-create-deposits-in-context/ which Alan JJohnstone used as a reference in his post above. The authors are actually saying here that loans come before deposits, which I have highlighted in bold, and the same things are said in the book "Where does money come from ?" by NEF

Since we agree that the claim that a single bank can create the money it lends out of thin air is nonsense and also that the textbook model of multiple loans is unrealistic (see this article from 1971), this is the crux of the matter, as Alan has just pointed out. Does the state of the economy depend on bank lending or does bank lending depend on the state of the economy?Your theory offers a purely monetary explanation for the boom/slump cycle — and a purely monetary way of avoiding it. No attention is paid to what happens in the "real economy" where wealth is actually produced, for profit. No notice is taken of the competitive struggle for profits leading to overproduction.A boom is a situation in which markets are expanding. Businesses assume that this will go on for ever and plan to expand their productive capacity to meet this. They are eager to get finance to do this and turn to the banks to borrow money to invest in increasing production. Bank lending increases. The demand for finance drives up the rate of interest. This is one of the factors bringing the boom to an end, but the main one is overproduction (in relation to the market) in a key sector which results when all the planned-for increased productive capacity comes on stream.In the ensuing slump, the demand for bank loans falls off and interest rates fall. As long as it remains unprofitable to invest as much as before, the government can encourage banks to make loans as much as it likes but this won't have any effect. Nor is there any way that the banks can force businesses to take out loans they don't want. The initiative for a recovery has to come from profitability being restored by events in the real economy (such as the clearance of unsold stocks, the decline in real wages due to increased unemployment, the weeding-out of unprofitable firms which their assets passing cheaply to their rivals).We are seeing this right now. The government has offered all sorts of incentives for the banks to lend, but they are not doing so. The fact is that the government can no more force banks to lend in a slump than it can stop them lending in a boom. How much banks lend depends on the state of the economy, on whether it is in the boom or the slump stage of the business cycle.There is no monetary policy or monetary or banking reform way of avoiding the boom/slump cycle. This cycle is built-in to capitalism and is caused by events in the real production-for-profit economy. The only way to avoid it is to end capitalism by converting the means of production into common ownership under democratic contro,l so that they can be used to produce to satisfy people's needs instead of for sale on a market with a view to profit. Then there will be no need for money or banks.

To ALB and Alan Johnstone. I agree that monetary reform is only one part of reforming the system. Land value tax for example may have a part to play. I also agree that there are many flaws with Capitalism, and that it needs constant intervention by regulators in many cases, so consumers don't get a raw deal. The trend is always towards more wealth being concentrated in fewer hands, whether it is banking, supermarkets, or energy companies.ALB wrote"In the ensuing slump, the demand for bank loans falls off and interest rates fall. As long as it remains unprofitable to invest as much as before, the government can encourage banks to make loans as much as it likes but this won't have any effect. Nor is there any way that the banks can force businesses to take out loans they don't want. The initiative for a recovery has to come from profitability being restored by events in the real economy (such as the clearance of unsold stocks, the decline in real wages due to increased unemployment, the weeding-out of unprofitable firms which their assets passing cheaply to their rivals)." I don't disagree with this ALB, however easy credit in the boom years magnified the boom with banks being over confident, and the reverse is true today.If we move entirely away from a market orientated, profit motive economy, how do we ensure that the correct goods and services are supplied to meet the needs of society, and that technological progress is made ? We cannot have a situation as existed in Soviet Russia where there is a shortage of bread production for example, but an over production of refrigerators. Not everything about Soviet Russia was bad, for example the Moscow metro was superb. The Soviet Union had to devote a large part of it's resources and energy to it's armed forces during the "Cold War", when the society there could have been so much better if this had not been the case. I remember in the late 1970s when BT only supplied 3 types of phone, and they would take 4 weeks or more to install a phone line. British Road Services were the only show in town for getting a parcel delivered, and both BT and BRS were expensive, slow and inefficient. I accept that the Capitalist economy does the same in being wasteful, in that there is no shortage of places to buy a car, eat out, or buy almost any product or service. Items are not made to last because there is usually no profit in it. The other problem with Capitalism is that it undervalues useful activities like nursing or social care, and overvalues frivolous activities like playing football. Like you, I have devoted much time in recent years thinking how we move to something better beyond Capitalism (In fact we now have Corporatism where most markets are dominated by a few very large businesses and cartels and they have the politicians in their pockets). Technical advance, and the infrastructure built up by our ancestors should mean we all have to work very much less. Instead society is becoming more unequal, with more wealth than ever concentrated in fewer hands, and computing and technical progress have accelerated this problem as fewer workers are required to be employed in the business, and the owners can cut costs and increase profits. However, I am not entirely convinced that a committee can best decide which products and services are needed to serve the needs of society, unless producers are incentivised in some way. I imagine that Tescos for example, if it was publically owned, could still use the marketing data it uses now to provide the wide range of items in the required quantities,and on time.