By Paul Goodman
…And he presented a Ten Minute Rule bill yesterday to stop them doing so. It was sandwiched between other chunks of Parliamentary business, but raises questions so compelling as to deserve a wider audience than much of what happens in the Chamber.
Carswell introduced his Financial Services (Regulation of Deposits and Lending) Bill by asking: "Who owns the money in your bank account?" –
"That small question has
profound implications. According to a survey by Ipsos MORI, more than
70% of people in the UK believe that when they deposit money with the
bank, it is theirs-but it is not. Money deposited in a bank account is,
as established under case law going back more than 200 years, legally
the property of the bank, rather than the account holder. Were any hon.
Members to deposit £100 at their bank this afternoon or, rather
improbably, if the Independent Parliamentary Standards Authority was to
manage to do so on any Member's behalf, the bank would then be free to
lend on approximately £97 of it. Even under the new capital ratio
requirements, the bank could lend on more than 90% of what one
deposited. Indeed, bank A could then lend on £97 of the initial £100
deposit to another bank-bank B-which could then lend on 97% of the
value. The lending would go round and round until, as we saw at the
height of the credit boom, for every £1 deposited banks would have piled
up more than £40-worth of accumulated credit of one form or another."
He went on to explain that –
Banks enjoy a form of legal privilege extended to no other area of
business that I am aware of-it is a form of legal privilege. I am sure
that some hon. Members, in full compliance with IPSA rules, may have
rented a flat, and they do not need me, or indeed IPSA, to explain that
having done so they are, in general, not allowed to sub-let it to
someone else. Anyone who tried to do that would find that their landlord
would most likely eject them. So why are banks allowed to sub-let
people's money many times over without their consent?
– And proceeded to set out the purpose of his bill –
My Bill would give account holders legal ownership of their deposits,
unless they indicated otherwise when opening the account. In other
words, there would henceforth be two categories of bank account:
deposit-taking accounts for investment purposes, and deposit-taking
accounts for storage purposes. Banks would remain at liberty to lend on
money deposited in the investment accounts, but not on money deposited
in the storage accounts. As such, the idea is not a million miles away
from the idea of 100% gilt-backed storage accounts proposed by other
hon. Members and the Governor of the Bank of England.
Bill is not just a consumer-protection measure; it also aims to remove a
curious legal exemption for banks that has profound implications on the
whole economy. Precisely because they are able to treat one's deposit
as an investment in a giant credit pyramid, banks are able to conjure up
credit. In most industries, when demand rises businesses produce more
in response. The legal privilege extended to banks prevents that basic
market mechanism from working, with disastrous consequences.
He argued that ending the present system of fractional reserve banking would have beneficial results –
As I shall explain, if the market mechanism worked as it should, once
demand for credit started to increase in an economy, banks would raise
the price of credit-interest rates-in order to encourage more savings. More folk would save
as a result, as rates rose. That would allow banks to extend credit in
proportion to savings. Were banks like any other business, they would
find that when demand for what they supply lets rip, they would be
constrained in their ability to supply credit by the pricing mechanism.
Carswell acknowledged that Keynesian and monetarist economists alike will "recoil with horror" from his proposal "because their orthodoxy holds that without these legal privileges for
banks, there would be insufficient credit". However, he argued that "credit would still exist but it would be credit backed by savings…It
would be, to use the cliché of our day, sustainable" and preferable in his view to the "crony capitalism" of the present financial system, which produces "great candyfloss piles" of unsustainable credit.
Carswell's got a clear-cut case on paper. But I'd like to know more about what the effects of such change would be in practice (especially if applied in one country only): they look highly deflationary to me, to put it mildly.
The bill was unopposed – but in the absence of Government support has no prospect of finding its way on to the statute book. Carswell was supported by my first-rate successor in Wycombe, Steve Baker, another eloquent supporter of change to the financial system.