100% reserve banking

China has said it will cut the limit on the amount of cash the country’s banks have to hold in reserve, a move designed to encourage more lending. China’s central bank said it would reduce the reserve limit from its record high of 21.5% to 21% on 5 December. The bank had been increasing the rate to reduce lending by banks in order to dampen demand and tackle rising prices.http://www.bbc.co.uk/news/business-15962630 Some commentators also suggested the move could be part of a wider effort by Chinese authorities to combat underground lending. China Banking Regulatory Commission said it was looking to curb the rise of shadow banking and private lending in the country. Some estimates put private loans, where rich individuals and businesses rather than banks lend money, at 4 trillion yuan ($627bn; £402bn). The loans often come with exorbitant interest rates of up to 70%.

Banking reformism seems to be rampant at the moment. Here’s what was proposed in yesterday’s Mourning Star (handed out for free at the trade union rallies) by Jerry Jones, their economic expert (and also that of the Communist Party of Britain). He’s talking about how to re-impose the sort of credit controls that existed in the 1950s and 1960s:

This amounts to calling for banks to maintain a cash reserve of 20 percent of deposits. Not quite as economically illiterate as calling for them to hold a cash reserve of 100 percent. But just as irrelevant.

I’m not sure I agree. It seems to be putting the cart before the horse. Surely it is not the need to pay interest that drives the capitalist economy, but the need to make profits.Banks make loans to capitalist businesses only if they judge that that the business will make a profit of which they can obtain a share as interest (and businesses will only take out a loan if they judge they can make a profit larger than the amount of interest they will have to pay). If banks don’t consider this to be the case then they won’t make a loan even if they have the money. Which is what is happening now. Profit is the problem and not interest as such.The imperative to grow that you mention and which is indeed built-in to capitalism results from capitalist firms competing for profits and having to invest in more and more productive machinery and methods, ie accumulate capital, to remain competitive and stay in the race for profits. What causes unemployment and austerity to increase from time to time is when this competition leads to overproduction (in relation to the market) and a fall in profits. When this happens banks (who had expected to get interest out of future profits, which have now not materialised) and governments (who had expected more tax revenues from the same future profits) find themselves with a “debt problem” but this has been caused not by the need to pay interest but by the fact that profits out of which to pay it have not materialised.But, as you say, whatever causes booms and slumps, the need is to get rid of the profit system and replace it by production for use which is only possible on the basis of the world’s natural and industrial resources becoming the common heritage of all under democratic control.

I agree with you on everything except the bold part which has been proven wrong : Okishio’s theorem is a mathematical theorem formulated by Japanese economist Nobuo Okishio. It has had a major impact on debates about Marx’s theory of value. Intuitively, it can be understood as saying that if one capitalist raises his profits by introducing a new technique that cuts his costs, the collective or general rate of profit in society – for all capitalists – goes up.Okishio [1961] establishes this theorem under the assumption that the real wage – the price of the commodity basket which workers consume – remains constant. Thus, the theorem isolates the effect of ‘pure’ innovation from any consequent changes in the wage.

A lot more labour will be replaced because those companies who do not will not profit as much as those who do, so they will copy the methods or go bust.the state will have to take on more loans because of their decreasing rate of profit and will depend more on the capitalist class just so it can still provide some basic services especially services that benefit the capitalists like police and roadsthe new unemployed class will have to become more and more self-reliant for their basic needs in local communities whilst the capitalist class will become even richer but increasingly provide goods and services for the capitalists (thats where the money is). Yachts, Space travels, luxury cars, extravagant jewelry, decadent parties, etcThe capitalists will invest more in protection of property and keeping the poor at bay as they become more desperate, ultimately replacing police with robots and turning the production facilities into fortresses.That’s how I see things evolving. The vast majority living in self-sustaining local communities a lot of which will struggle to get by as water scarcity increases, whilst the privileged rape the planet at an increasing rate and come up with new products to advertise to the richest. 

 thanks for the links and you were right on me assuming that.It seems i was too fast to judge looking back at the wiki article as their seems to be quite some criticism:The problem with these examples is that they are based on comparative statics. The comparison is between different economies each on an equilibrium growth path. Models of dis-equilibrium lead to other results. If capitalists raise the technical composition of capital because thereby the rate of profit is raised, this might lead to an ongoing process in which the economy has not enough time to reach a new equlilibrium growth path. There is a continuing process of increasing the technical composition of capital to the detriment of job creation resulting at least on the labour market in stagnation. The law of the tendency of the rate of profit to fall nowadays usually is interpreted in terms of disequilibrium analysis, not the least in reaction to the Okishio critique. It does seem a lot more sane to assume that there are many factors at play on whether the rate of profit will rise or fall, especially in a global interconnected economy with stock markets and financial products.

Every week brings refutation of the view that banks can create money out of thin air and confirmation that they can only lend money they have got (whether from savers or what they have themselves borrowed). We may as well record them here as anywhere. So, here’s a BBC report on Halifax’s decision to raise the rate of interest on their loans to housebuyers:

The report said other banks were doing the same and for the same reason:

Banks are essentially financial intermediaries whose main income comes from borrowing money at one rate of interest and lending it at a higher rate. They can’t simply conjure money up out of thin air and then charge interest on it, as numerous currency cranks claim.