Douglas Carswell's Blog

Banking Reform Bill published

A couple of weeks after listening to the great Jesus Huerta de Soto lecturing at the London School of Economics, the House of Commons today publishes my Bill on banking reform. 

Read it here.

Banks today enjoy a legal privilege that extends to no other area of business.  Money that you deposit with banks is legally theirs - not yours.  As a consequence, banks can lend on your deposits many times over.  This is what is called "fractional reserve banking".

As defenders of fractional reserve banking are quick to point out, it means that lots of credit is available.  Indeed.  So much so that we tend to get great candy floss piles of the stuff. 

But just as ponzi pyramids don't really create more wealth, piles of candy floss credit don't actually help the economy.  All it does is lead to sugar rush growth.   

The credit created is not based on someone else's deferred consumption - ie savings.    Nor is it created by raising the price of credit.  Fractional reserve banking means that the price mechanism doesn't regulate the supply of credit.  In fact, we end up with politicians doing it instead.  

Inevitably, the sugar rush credit boom, is followed by credit crunch. 

Worse, you and I then have to pay higher taxes to prop up the whole rotten edifice.

My proposal means that each time you open a bank account, you get to choose if you or the bank own the deposits.  Risky?  Hardly.  But it might allow long term organic change.  And having two tier accounts within banks is a lot less risky than Vince Cable's suggestion that we break up the banks into two tier institutions. 

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