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Mervyn King Says "Stop Fractional Reserve Banking"

Mervyn King Letter re 1844 Bank Charter ActThe picture to the right is a letter from Mervyn King, Governor (big chief) of the Bank of England, to one of our supporters. (Click on it to see the full size letter.)

The second paragraph is hugely significant.  Read it in full, and then we’ll explain what it means in plain English:

“Second, you suggest that banks should be forced to conform to the underlying purpose of the 1844 Bank Reform Act. You might be aware that I have said publicly that I think ideas in this spirit – such as those advocated by John Kay – certainly merit serious consideration in the debate as to how we reform our financial system. I remain sympathetic to these views. But as I said in my previous letter, I do not want to prejudice the outcome of the Banking commission’s deliberations. Now the Commission has been set up, I think we all should wait to see its conclusions.”

The 1844 Bank Charter Act (‘Reform’ is a typo) was a piece of legislation that prohibited commercial banks from printing paper notes (£1, £5, £10 and so on). Before this law was passed, banks were permitted to print as many paper notes as they wanted, up to the point where they printed too many and went bankrupt (as everyone cashed in their paper notes at once).

That situation should sound very similar to the situation that we have today – we currently allow commercial banks to ‘print’ money in the form of digital bank deposits (the numbers in your bank account). In the years up to 2007, the banks ‘printed’ far too much of this digital money, to the extent that they – and the economy – started to collapse.

The ‘underlying purpose’ of the 1844 Bank Charter Act was to prevent the commercial banks creating money and to restore that privilege to the state. It had become obvious to the government of the day that if banks were allowed to create money, they would keep creating money up until the point where it destabilized the economy, so they could not be trusted with this responsibility.

So, in plain English, Mervyn King appears to be saying:

“I agree that banks should probably be stopped from creating money, and recommend John Kay (or Laurence Kotlikoff’s) proposals. But it’s not for me to say – let’s leave it to the Banking Commission.”

It’s very reassuring to know that the top guy at the Bank of England understands the root of the issue and is promoting solutions that would go a long way to addressing it. Both John Kay and Laurence Kotlikoff’s proposals would prevent commercial banks from creating money (or ‘issuing credit’) for their own benefit at the expense of the wider economy and the public.

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  • Pingback: MOVE TO STOP BANKSTERS CREATING MONEY BY “CON” PUTER « Anti Oligarch

  • David Chester

    Restricting the amount of printed money is a first step but it is clearly insufficient. Restricting the amount of promissory credits (money) is a second step, but it would be very hard to enact since every time we use our credit cards or write a cheque we are creating money too. Its not just when the banks give out a loan. I accept the fact that the banks have been very free in providing loans, but from a macroeconomics perspective I doubt if money control by itself will solve our problems.

    Suppose that the amount of credit could be reduced and not completely stopped. This will slow-down the rate of exchange of promises for goods and everyone will have to find “cash-on-the-barrel-head” for all of their purchases. Then the amount of trade will drop and this means less business, less demand for commercial goods, services and durable capital goods. The progress of the economy will slow down and what is already a recession will become a full blown slump. So much as I agree on a need for less loans to people who cannot afford them or the interest on them, it seems to me that to stop lending money from the banks is likely to be more adverse then beneficial.

    If all promissary credit was backed by co-lateral that was not likely to loose value (unlike real estate, which does just before each crash in “the market”), then far fewer houses would be built and speculators in land devcelopment would have to turn elsewhere. The implication is that the problem and cause of the economic crisis was not due to easy money but more basically due to land-value speculation. A government which cuts out land speculation and allows all the land (which is currently being held out of use for speculation) to be properly used, will drive down its value and create more jobs due to the greater working opportunities so caused. Lower rents means lower production and living costs, greater demand for goods, more employment to make them and real prosperity.

    TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!

    • Graham Hodgson

      David Chester is not quite correct in equating cheque and credit card payments with money advanced by a bank. The issue is – does the money transferred come out of a pre-existing account? When I write a cheque, the money already exists in my account and the cheque is simply an instruction to the bank to transfer it to the payee’s account. When I use a credit card, the credit card company pays the retailer but the money already exists in the credit card company’s account – it was put there initially by the banks who own and set up the company, and is continually replenished by card users’ debt repayments. With a bank advance, however (mortgage, loan, overdraft, finance lease etc), the money that appears in the borrower’s account comes from nowhere: no other account is depleted to provide it. Furthermore, unlike credit card debt, when a bank advance is repaid the money disappears back where it came from, nowhere. It is not available to be respent.
      Land taxation is powerful concept. It taxes value due solely to the actions of other people or of government on behalf of the people. When governments licence banks and permit them to create money and charge for its use they hand the banks an extremely profitable chunk of financial real estate.

  • Dr Adford

    “every time we use our credit cards or write a cheque we are creating money too”

    No, we’re not. We can’t write cheques for money which we don’t have in our accounts, unlike the banks, who DO create money out of thin air, using your promise to repay the loan, i.e. DEBT, as an ASSET, to balance their (fraudulent) accounts…

    Read up on Colonial Scrip or Tally Sticks.

    • http://goodworld.lightnet.co.uk Janos Abel

      Dr Adford Said:
      “We can’t write cheques for money which we don’t have in our accounts”.
      Yes we can if we have arranged an overdraft with the bank. When we use it we create money.

      However,if we withdraw the overdraft as cash the effect is quite different—we do not create new money. Somewhere, a fixed amount of cash is reduced by a small amount. This is quite interesting.

  • Pingback: More on fractional reserves | The Court Jester

  • http://wheatonomics.blogspot.com Chris Rimmer

    I don’t think you’re right that creating bank credit benefits banks at the expense of the wider economy and the public. Don’t get me wrong – I’m not supporting what the banks have done, and I think the bailouts were an outrage (which is one reason that I’m not going to take Mervyn King’s views without a big pinch of salt).

    Allowing private banks to create credit simply allows them to increase their gearing (or leverage if you’re American). Let’s say a bank is allowed 10:1 gearing i.e. it can keep a reserve of just 10%. If it has 1 million pounds in capital, it is allowed to lend up to 10 million pounds. If it lends at 5%, it will get 500,000 pounds per year in gross profit. But if just 5% of the 10 million pounds of loans is not repaid – either through bad luck or bad underwriting by the bank, the profit is completely wiped out even though all the other loans are paid back with interest. If 15% of the loans is not repaid, the bank collapses and the shareholders lose all their equity. Any more losses than that and the bondholders start to lose money. This is why it is essential that the regulators make sure that losses never exceed capital.

    I’m convinced by Karl Denninger’s view of this one – let the banks lend /secured/ as much as they want using fractional reserve banking (at some sensible level of gearing), but unsecured lending must be backed by an equal amount of capital.

    • Conrad Jones

      “If it has 1 million pounds in capital, it is allowed to lend up to 10 million pounds.”

      You are broadly correct.

      If 1 million pounds is deposited into an account I believe the Banking System (as a whole) can then loan out 9 million pounds giving a total of 10 million pounds when adding the original 1 million pounds to the newly created 9 million pounds.

      It cannot lend out 10 million pounds as the original 1 million pounds will be less than the required 10% in reserve.

      1/11 * 100 = 9.09%

  • Pingback: Mervyn King – the governor of the Bank of England – has proposed abolishing fractional reserve banking. « InvestmentWatch

  • John Gifford

    From what I understand of the banking system, and I’m an IT technician not a banker so don’t shoot me if I have it wrong, is the following:
    I walk into a bank and deposit money into my account, therefore the bank is looking after MY money for me. The bank however, by default, transfer my deposit to THEIR reserves, effectively treating it as THEIR money. They can then make loans based on their reserves so long as they keep within a prescribed limit in the UK it’s not 10% but more like 3.1%, courtesy of the commercial banks applying pressure to the government to relax the limits. But said loans do not affect my deposit or their reserves, as per fractional reserve rules, so they create money out of thin air which of course is utterly worthlless – counterfeiting.
    If I then take out a loan they loan me this “conjured up money” and set an interest rate based on their perception of my ability to repay, higher risk of default = higher interest. But, since they create the cash out of thin air, where is rhe risk to them? And without risk they have no jusrtification for interest! Also if I make regular repayments the those repayments should decrease over time as the amount owed lessens, yet repayments remain the same as the bank increases the interest rate to compensate, am I becoming a higher risk? – Fraud.
    Should I then miss any repayments, letters will start to arrive demanding payment with legal ramifications if I don’t pay- extortion.
    If I do make repayments then I am transferring my cash to them and effectively eradicating the debt piece by piece. So the banks are taking my “real” money in to replace the counterfeit money handed out – money laundering.
    Whilst because of the action of interest I can still end up owing the bank the initial sum as only a tiny fraction of my repayment can affect the principle. Thus the bank has taken money from me effectively for nothing – theft.
    Who says the organised criminals are the mafia? Sounds to me like the real criminals are the ones wearing the expensive suits and offer financial services. Counterfeiting, Fraud, Extortion, Theft and Money Laundering yet which bankers get tried ? No, start investigating a bank officially and we get another 9-11. WTC building 7 was holding records of investigations onto banking fraud by most of the major American banks, so of course it had to go!
    In the middle ages any merchant/banker who made a loan and charged interest could be convicted of the crime of “Usary”, the religious institutions and government regarded interest as plain and simple theft. I believe the culprit faced the stocks or pillory so the public could see the thief. Usary was ended when the merchants persuaded the governments that the risk of defaults on their loans was higher due to increasing trade, they were making bigger loans and felt they needed the parachute!
    Mervyn King, is to be honest, never going to scrap Fractional Reserve Banking as more powerful interests, the Rothchilds; Rockefellers etc. created it, They are the real people who profit. Financial institutions are just conveyor belts transferring the real money from the working or middle class to the rich and the super-rich who have done nothing to deserve it! Whilst fake credit comes in the other direction digging everyone of us deeper into debt, or the perception of debt. And those self same rich believe they are superior and have the RIGHT to rule our future when they are really the criminal class. David Rockefeller actually said that rule by elite bankers was preferable to national government, for him maybe!
    George Carlin said in one of his stage shows: “What is the job of the rich? To take/steal all the money, they are happy just as long as they can keep going to the bank. What is the job of the middle/working class? To pay all the money, taxes and interest on loans etc. What is the job of the poor? To keep the middle class in-line, keep them turning up to their jobs (sla0very) and paying their taxes.”
    What we (the people) need to do is completely remove the “money power” from the hands of the private individuals and corporations. Central banking is a fraud that manipulates the economy to further the private desires of those individuals. When the Fed was setup in 1913 the US Govt paid $200M into it, on the condition that the other $800M came from the private individuals interested in creating it. All those individuals actually did was use fractional reserve rules to loan themselves the $800M after the govt deposited their $200M. Then with their loans they bought the remaining shares. Effectively they stole the Fed and put not one single cent of their own cash into it only the illusion that they owed the money! The banks regard the ‘business cycle’ as normal, and of course unpredictable; boom and bust cannot be predicted. Yet the central banks create that cycle by playing with interest rates, raising us up with booms so they can shear us like sheep in the busts. Meanwhile those same bankers gamble with money that isn’t theirs, how can it be since they invest nothing in it? on the derivatives market and then EXPECT bail-outs when they mess it up! With of course obligatory bonuses as rewards for their incompentance. “But we have to pay bonuses go keep the best people”, these self same incompentant individuals who if asked what derivatives are can’t tell you, yet they happy gamble billions on them. Ask a roulette player why they bet on a particular number you’ll get the same reaction.
    If the government really wants to end the deficit, and that’s unlikely as the banks SELECT our political leaders so that we the masses can have the illusion of democracy.Take the means of producing money from the private banks and let the govt print it’s own interest free money. If the govt can print bonds promising payment why can’t they print money? With said interest free money eradicate the deficit, no hyperinflation because the money is paying off debt and thereby destroying itself. Once the deficit is then gone we close down the central bank, cutting off the money supply to the rich and super-rich who predate on it. If everyone in the UK paid off every debt they have inc the govt there would be no money in the system, our money is created out of and based entirely on debt.
    Anyway like I said I’m an IT technician and most of this has been gleamed of the internet since I started taking an interest. Call me a conspiracy theorist, crackpot, whatever you want but check it out for yourself; don’t take my word for it that’s what the bankers want you to do.

  • ubear

    I’m a retail developer and have done a lot of research on what money is and is not, I think the IT tech is spot on-the-money.

    As I see it, the only personal response to this fraud is to minimise your expenditure and use of banks, reduce your debt and to fully own a sizable cache of Pure Bullion to preserve your savings; then lawful rebellion!

  • Admin

    We have know it is “money made out nothing” since 1694.  Money is merely a labour token – to encourage work participation by as much of the population as possible.  In fact it is an efficient work token.  People who say it should not be fiat oney and backed by something, say like gold, are also deluded – not just because the majority of gold ownership and gold mining compaines are owned by the same famlies which own the majority of the banking system, but gold too is open for the sae criticism.  The real problem is this: we pay INTEREST on the money made out ofnothing – sneding the economy and population into an inextiguishable and dynamic debt rocket.  Further, the families which benefit fro this inetrest paid on money are the same families which own the majority of the gold, the banking sytme, the oil, diaomonds, food, insurance companies and major corporations – effectively, they are the real power of the world – not Prime Ministers and Presidents.

  • http://www.facebook.com/Searle88 Robert Searle

    IF KING HAD THE GUTS TO GO COMPLETELY PUBLIC ABOUT THIS MATTER THEN HE WOULD HAVE DONE SOMETHING REALLY WORTHWHILE IN HIS CAREER. SO, IS HE A MAN, OR A MOUSE!!!???

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