Bank reform demands monetary reform

Abstract

The complex and technical subject of bank reform has scarcely been more popular. Events in Cyprus have demonstrated banks are a way of investing money for a return, with all the risk that entails. Van and minibus entrepreneur Dave Fishwick has created a documentary —Bank of Dave— which shows banking can be a simple entrepreneurial function providing a safe return to savers at the entrepreneur’s risk. It’s award-winning and a soar-away popular success.

Of course, thanks to regulators, it’s not actually a bank: it’s a savings and loans firm. Whereas these route savings to borrowers, a bank creates credit. That is, banks lend money into existence. It is that distinction, together with other features of the financial system, which has led the world into crisis. It is both one of the least well-understood economic phenomena of our time and the most central to our present difficulties.

Yet, astonishingly, Dave Fishwick has struck on a model of ban-king close to a theoretical ideal: he carries his own commercial risks and, even if he could take deposits, he wouldn’t provide cre-dit in excess of savings.

It is towards this model the world should move.