100% reserve banking

http://www.bbc.co.uk/news/business-22932330

Robert Peston notes:

Although, the point is, that the bank has always focused on making a profit, that's what co-ops do: it's just a question of who gets the profit.  The capital is in the hands of the capitalists, and the bank needs capital to keep going.

Replying to Gnome and ALB – We are involved in a circular argument here – You say deposits come before loans, so a bank cannot create money. I say the banks increase their lending togther (or they did between 1997 and 2007, making new loans faster than debt repayments), which increases deposits, money and eventually their reserve accounts at the Bank of England. All the banks need to increase their lending together, to increase the money supply, so one or two don't fall behind and get into problems, and hopefully receive corresponding loan repayments and deposits.. Northern Rock were desperate to get new depositors like me  by offering high interest rates because they knew they had expanded their loan book too fast, as well as borrowing short from other banks.This meant it's reserve account at the B of E was in danger of running out.  The system has to collapse eventually anyway, because the real economy cannot service the increased interest and debt repayment. This is what causes the boom and bust cycle, and why politicians are now so keen to get the banks to supply credit/money to business to get the economy going and increase the debt burden again.  It is a chicken and egg situation.   Positive Money do say that banks do not need funds to make loans (in the sense that a bank can make a loan without reducing someone's deposit account) but they show that a bank like Northern Rock can get into trouble if it does as I have described. They are really saying the same as me, that all the banks increase their lending in concert, so new deposits and money are created, although they do not make this clear until you work your way through the process. It is hard for the man in the street to understand the money creation process until they have looked at it in some detail, and Positive Money are trying to apeal to broad group of people, as well as banking and economist geeks. This money did not come from the central bank, apart from that which it has recently created (£375 billion) by buying gilts on the secondary market, and 3% physical cash.The banking 101 videos on the Positve Money site show how a bank can have problems when it lends faster than receiving repayments and deposits (or when there is a run on the bank), and it is all to do with their reserve accounts at the B of E. I accept that it is a simplification  to say that a bank does not have to have deposits (or be receiving loan repayments) before it can make a loan, because it has to keep an eye on it's reserve account. A credit union cannot behave in the same way as one of the big banks, because it cannot lend beyond it's deposits. The main thing to realise is that if all the banks increase their lending together (doubling the money supply in 10 years from 1997), new deposits will naturally flow back to them and the money supply will increase. I have not studied the recent situation with the Coop bank in detail, so I am not sure why they have had problems. Where do you think all the money came from between 1997 and 2007, when the money supply doubled ? It did not come from the central bank, or at least very little of it.

Only because people like Positive Money and presumably yourself think that the problems which capitalism faces can be solved by tinkering around with the banking system.  We don't and instead advocate a society where banks and money have become redundant because the means and instruments of wealth production are now the common property and under the democratic control of everyone.End of story.

@ALB – I mean the system collapses when we go from boom to bust, and central banks resort to schemes like quantitive easing to keep the show on the road. The greatest economic crisis in the UK, USA and Europe since the 1930s is somewhat of a collapse, with 30% unemployment in some places and huge cuts in public spending, not to mention public and private debts totalling more than 5 times UK GDP. However it is business as usual for the large corporations and banks. I don't think your socialist utopia is going to arrive anytime soon either because of these powerful vested interests, although I agree with you that we desperately need a better way of organising the economy and society. I have a friend who votes Conservative, and one who votes Labour. I tell both of them that there is little difference between between the main political parties, but like so many people they are scared of the "other lot", so don't intend to change.

In socialism where everything is owned in common exchange of commodities will not exist and therefore money becomes redundant as it would serve no useful purpose.

It is the capitalist system which causes huge costs to society.  In truth, the mere existence of buying and selling always raises the possibility of crisis, but the drive to accumulate capital—the lifeblood of capitalism—ensures that periodically crises become very much a reality, and nothing the politicians do can prevent them.  When capitalism is in boom, enterprises are in a position where their profits are rising, capital is accumulating and the market is hungry for more commodities.  But this position does not last.  Enterprises are in a perpetual struggle for profits—they need profits to be able to accumulate capital and therefore survive against their competitors.  During a boom this inevitably leads some enterprises—typically those which have grown most rapidly—to over-extend their operations for the available market.In capitalism, decisions about investment and production are made by thousands of competing enterprises operating without social control or regulation.  The competitive drive to accumulate capital compels enterprises to expand their productive capabilities as if there was no limit to the available market for the commodities they are producing.Growth is not planned but governed by the anarchy of the market.  The growth of one industry is not linked to the growth of other industries but simply to the expectation of profit, and this gives rise to unbalanced accumulation and growth between the various branches of production.  The over-accumulation of capital in some sectors of the economy soon appears as an overproduction of commodities.  Goods pile up, unable to be sold, and the enterprises that have over-extended their operations have to cut back on production.As commodities lie unsold revenue and profits fall, making further investment at the same time more difficult and less worthwhile.  Accumulation stalls, saving and hoarding increase and the unstable forces of money and credit soon transmit the downturn to other sectors of the economy.  The initially over-expanded enterprises cut back on investment and this leads to a fall in demand for their suppliers products, who in turn are forced to cut back, causing difficulty for their suppliers' suppliers and so on.  Profits fall, debts mount up and the banks push interest rates up and contract their lending in a vicious downward spiral of economic contraction.  In this way, what started as a partial overproduction for particular markets is turned into general overproduction with most sectors of industry affected.Crises and slumps invariably follow this general pattern.  Sometimes the initial overproduction takes place in consumer goods industries, as it did in 1929, and spreads from there.  At other times, like in the mid-1970s the initial over-expansion is in the producer goods sector where enterprises produce new means of production like industrial steel or robotics equipment.  In the slump of the early 1990s a major factor was the over-extension of the commercial property sector and some of the high-tech 'sunrise' industries.  Whatever the cause, the result is always the same—falling production, increased bankruptcies, wage cuts and unemployment, with an attendant growth in poverty.In a slump there is simultaneously a problem of falling market demand alongside declining profits.  Attempting to deal with one problem (say consumer demand) at the expense of the other (profits) as the Keynesians have, will not improve the situation.A number of quite distinct and separate things need to happen before a slump can run its course.  Firstly, capital has to be wiped out if excessive productive capacity is to be tackled with devalued capital being bought cheaply by those enterprises in the best position to survive the slump.  Secondly, destocking needs to take place, with overproduced commodities bought up cheaply or written off entirely.  Investment will not resume if overproduction still exists.  Thirdly, after this has occured there needs to be an increase in the rate of industrial profit helped by both real wage cuts and falling interest rates (which tail off naturally as the demand for more money capital eases off in the slump.)  This will help renew investment and increase accumulation.  Also, if recovery is to be sustained, a large proportion of the debt built up during the boom years will need to be liquidated if it is not to act as a drag on future accumulation.  Through these mechanisms a slump helps build the conditions for future growth, ridding capitalism of inefficient units of production.Continuous CycleWhen these processes have run their course, accumulation and growth can begin once more with capitalism again creating a boom situation which will be inevitably followed by a crisis and slump.  This has been the history of capitalism ever since it first developed.  No reform intervention by governments—however sincere—has prevented or can prevent this cycle from operating.  The supporters of laissez faire and the free market have failed and so have the Keynesian interventionists.  Today, when faced with the trade cycle, supporters of capitalism have nowhere to run anymore other than to suggest reforms of the banking system in a last ditch attempt to salvage a decadent system.Indeed, the trade cycle demonstrates the impotence of reformers and politicians, and is a further indictment of the capitalist system as a whole, bringing misery for millions of workers who lose their jobs, become bankrupt or have their wages reduced and/or their working conditions worsened. And far from being an aberration, this cycle of misery is the natural cycle of capitalism and any suggestion that it can be made to operate differently is wildly utopian.

Gnome, I agree with much of what you say about Capitalism, and I have liked it much less as time has gone on. We were all told how bad communism was inthe 1970s because it was in direct competition with the USA and capitalism but communism done well has much to commend it. The banks facilitate the process with their lending – One third of the money they created (you may disagree with me in saying they did not create the money, we have discussed this at length already) went on commercial and private property loans between 1997 and 2008. This served to push up house prices and rents, and helped cause a huge building boom of apartments in some cities like Leeds and Manchester. Many of these new builds lost half of their value after the boom years. There was a mania for buy to let lending, which helped to get Bradford and Bingley bank into trouble in 2008. There is no shortgage of goods in the shops, or places to eat out, or types of car to buy. It all strikes me as being very wasteful, with a continuing urge to reduce costs and become more efficient, to out do the competition. It is a mad, hamster wheel of a system. What about the majority of us who want to take it easier, especially as we get older and do not want to have to compete wth younger, fitter workers from Eastern Europe, China or India ? Unfortunately we have to play by the existing rules to survive, we all have to be entrepreneurs, to find a way to "make money" in the market place to live, with huge costs to people's health, and family life. I think it is an outrage that so many live in poor housing, and struggle to pay their basic living expenses like food and energy, when there is more than enough for everyone to have a good life. At the same time, they are forced to pay for expensive energy, an essential for existence, to a profit seeking company. It is no different to having to pay taxes to the local Lord of the Manor in times past. This is fine for the elite few who are very wealthy who are shareholders in these businesses, but rotten or at least a struggle for the rest of us.

Falling into the hands of hedge funds and vulture capitalists ! What an undignified end to a bank used by the trade unions, the Labour Party and their branches and which thousands of people switched to in response to the appeals of Move Your Money (I wonder if the FSA will do it for mis-selling?)Bad timing too for a book released a couple of weeks ago by the New Internationalist and the Ethical Consumer:http://newint.org/books/politics/co-operative-alternatives-capitalism/We have got a review copy. The accompanying leaflet explained:

Capitalism has given them the answer: No, except perhaps on the margins catering for a niche market; try to expand further and take on ordinary capitalist enterprises and you'll either become like one of them or being eaten alive by them.It will always be Capital Over People under capitalism. Capitalism and any other "ethic" than maximising profits are incompatible. As we've said all along. Not that that stopped some of us banking with the Co-op. That reminds me. I must rush to join the queue of people at my local branch waiting to withdraw their money.

A number of SPGB branches, Including Kent & Sussex, already have accounts with the Unity Trust bank.