Monetary Solutions: Negative Interest Rates or 100 Percent Reserves?

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Central Banks increasingly favor hyper Keynesianism: the quest to stimulate real growth by increasing monetary growth, first by low, then by zero, and now by negative interest rates. Why hasn’t it worked? Because real growth is constrained by real resource shortages, while hyper Keynesianism assumes unemployed resources. There is unemployed labor to be sure, but not unemployed natural resources, which have become the limiting factor in the full world. As growth converts more of nature into economy we see that these newly appropriated natural resources were not unemployed at all, but were providing ecological services that often were more valuable than the extra production resulting from their appropriation. Growth has become uneconomic—a condition unrecognized by economists, but which ironically is logically implied by their absurd goal of a negative interest rate!


Better than a policy of hyper Keynesianism and quantitative easing is the policy of 100 percent reserves on demand deposits, first advocated by British Nobel chemist and underground economist Frederick Soddy and then by the leading American economists of the 1920s, Irving Fisher and Frank Knight, among others. It dropped out of discussion with the Great Depression and Keynesian panacea of growth, because it was correctly considered a constraint on growth. But now growth is uneconomic and needs to be constrained, so it is time to reconsider 100 percent reserves.


What are the advantages?


  • The private banking system could no longer live the alchemist’s dream of creating fiat money out of nothing, pocketing the seigniorage, and lending the created money at interest. These enormous privileges would be transferred to the public treasury. Money would be a public utility—a medium of exchange, a unit of account, a store of value.


  • Every dollar borrowed would be a dollar saved and unavailable to the saver for the life of the loan. This restores the classical balance between saving and investment. Banks are intermediaries, charging interest to borrowers and paying interest to savers. The interest rate exists as a price between savers and borrowers, but not as a price paid to the banks for their unnecessary “service” of creating money.


  • In the absence of fractional reserves, there would be no possibility of bank failure due to a run on the bank by depositors, and consequently no need for deposit insurance and its consequent moral hazard. The entire debt pyramid would no longer collapse with the failure of a few big banks.


  • No longer would the money supply expand during a boom and contract during a slump, reinforcing the cyclical tendency of the economy. And the reserve ratio could be raised gradually.


  • Money would be issued by the Treasury, and spent into existence for public goods and services. The amount of money issued would be limited by the amount of money that people are voluntarily willing to hold instead of exchanging it for real wealth. If the Treasury issues more than that amount people will spend it on real goods, driving up the price level. That is the signal to the treasury to print less money and/or raise taxes. The Treasury’s policy target is a constant price index, not the interest rate, which is left to market forces, and would thus never be negative. The internal value of the currency is determined by maintaining a constant price index. The external value of the currency would be determined by freely fluctuating exchange rates.


This is too big a policy issue to decide in 600 words. But I hope at least to raise the suspicion in reasonable minds that a 100 percent reserve requirement makes far more sense than a policy of negative interest rates.