Trevor Dobbs, Staff Writer
Our monetary system is simply broken. As a result of our system of fractional reserve banking and the ability to print an endless amount of money, consumers have had to live with the idea of inflation for several decades. Because inflation is a decrease in the purchasing power of consumers, an increase in the money supply acts as a redistribution tool for those that have the privilege of spending that money first. If you have savings, this means that your savings are effectively reduced in value every year by the rate of inflation.
To fix this system, we need a system that places limitations on the creation and borrowing of money. To create such an economy rid of inflation and to help facilitate the creation of an economy of savers who leverage assets versus borrowers who leverage debt, I think the best course of action is to completely change the way that money is created and managed in the economy.
I believe that the evidence points to the International Monetary Fund’s “Chicago Plan” of switching to 100 percent reserve banking as being the best route to fix our monetary policy. Under the current system of fractional reserve banking, banks are only required to keep a certain percentage, around 10 percent, in the bank for you to withdraw it; the bank loans out the other 90 percent. When this money interacts with several other banks, it creates what is called “the money multiplier effect” and money is actually created. For instance, if I put $100 in the bank, the bank keeps $10 in reserve and loans out $90, if the person that took out that $90 loan deposits that money in the same bank, the bank can then loan out $81 and keep $9 in reserves.
Through this system, banks have a legally given mandate from the government to increase the money supply. Under a system that requires banks to operate at 100 percent reserves, there will no longer be sustained increases of the money supply through open market operations via the Federal Open Market Committee at the Federal Reserve, nor will there be massive floods of quantitative easing across equity markets such as housing and stocks. Instead, money will have to be moved around via voluntarily transactions rather than by means of bank wealth distribution from asset price rises that come as a result of increasing money supply.
Moving away from fractional reserve banking into a system of full reserve would make unsustainable amounts of debt a thing of the past, because the money loaned in the economy would be backed by reserves and would not be subject to the multiplying factor of loaning out more than is actually in current existence. Banks would be restrained on how much they could loan, and people would be restrained, as well as governments, on how much they were able to borrow. The effect that this would have on prices is that asset prices would reach levels that are actually realistic enough for people to save for, unlike the current system where many people have no choice but to finance ever increasing asset prices.
I believe that if we are to have a system that rewards people for saving, we will not only prevent banking crises such as bank runs and other associated credit risk, but we will create a resilient population that is ready for inevitable financial uncertainty.