Reserve Bank and the payments system
- Making loans
- Ensuring stability in banking
- Overdrafts and general liquidity in the system
- Clearing the national debt
To stop banks being able to create money when they make loans, we make a few small changes to the computer systems at the Reserve Bank, plus a few small accounting changes. Once these changes have been made, banks will make loans by borrowing money from a saver and on-lending, rather than effectively creating new money (as they do at the moment).
More detail is contained in Solution - Detailed - Reserve bank and the payments system
Making loans under full-reserve banking is very simple and mechanical - the bank simply takes money out of its Investment Pool and moves it into the borrower's Transaction Account.
More detail is contained in Solution - Detailed - Making loans
Ensuring stability in banking
The banking system under the modernised system would be significantly more stable than the current one, by reducing the sources of instability, and making the inflows and outflows of money from the bank’s lending business much more predictable.
More detail is contained in Solution - Detailed - Ensuring stability in banking.
Overdrafts and general liquidity in the system
Our economy is currently addicted to debt, simply because all money is created as debt. Full-reserve banking will provide a lower, more appropriate level of credit/lending to the economy, but first we have to make a smooth transition between our current high-debt economy and the new low-debt economy.
This transition can be made smoothly with additional loan finance provided during the years after the system is modernised. Switching to full-reserve banking will not create another 'credit crunch'.
More detail is contained in Solution - Detailed - Overdrafts and general liquidity in the system
Clearing the national debt
The modernised full-reserve banking system will make it possible to start paying down the national debt. However, the national debt needs to be reduced slowly and steadily in order to avoid causing any instability in the financial markets (which would hurt pensioners more than anyone else).
Paying off the national debt will mean that the pension funds and insurance companies which currently buy government bonds will need to find other investment opportunities, meaning that more money should be funneled towards real businesses and entrepreneurs, thus growing the economy.
More detail is contained in Solution - Detailed - Clearing the national debt