In Part 31, I used a couple examples to explain how the true number of Wealth Units in the world did not increase when President liberated all the gold from its reserve status and then sold it off. I also explained how the Avarians won’t bear the cost of him taking those gold coins from them until (or, if ever) they decide to get back to commodity money/100%-backed receipt money. I will soon show why that may be a worthwhile effort, but first there are some other changes to process now that gold isn’t in the picture anymore.
First, do we still need this two-layer pyramided structure of reserves, where the reserve credits at First Bank act as the reserves for some lending and the First Bank Notes stored in commercial banks’ vaults act as the reserves for even more lending?
That seems unnecessarily confusing. (Although, it is banking we’re talking about here.)
Really, it doesn’t matter either way whether reserve credits and First Bank Note reserves are all combined into one reserve pool. If President wants to do away with reserve credits altogether, he simply has to zero out each bank’s reserve credits by figuring out how many First Bank Notes to print and send to each bank and then set the new unified reserve ratio.
So, from then on, to calculate what their reserve ratio is at the end of each day, banks would simply compare the total value of all customers’ deposits to the total value of money in their vault. And if they’re low, they would still look to other banks for an overnight interbank loan. And if no banks have enough excess reserves to lend, then they would go to the “lender of last resort” (First Bank) and borrow some reserves from the “discount window.” This could all work automatically and instantly if everything is electronic and there is a centralized system where all the banks send their information each night. The charging of interest for borrowing reserves could also be automatic, and a physical transfer of money would rarely (if ever) be needed.
Strange that banks originally got their reserve credits by sending tons of gold to First Bank, and eventually they get those reserve credits back in the form of stacks of paper. But they don’t mind–they are still making lots of money off of loans, so the gold no longer matters to the commercial banks.
Don’t forget, though, that if a commercial bank ever makes some really bad investments or loans and loses a ton of money, they are still at risk of a currency drain and subsequent bank run. The modern version of this, however, would not involve lines at teller windows. Instead, it would probably involve a viral news story about how a bank is going under, which would then lead all of the bank’s customers to log into their accounts and transfer their money elsewhere. This would drive a bank into bankruptcy within minutes or hours because there would be no way for the bank to pay the interest on the reserves it would have to borrow. That is, of course, assuming the government doesn’t choose to intervene, which we’ll talk about in a future post.
A mass withdrawal like this could happen, but it’s exceedingly unlikely, so bankers feel like they have entered a new era of banking system security.
Part 33 here.
Clear Thinking on Healthcare 