Better than "100% backed" for interest, better than instant access for banks...
COME THE Revolution, in a free banking world, where there is at least no lender of last resort, commodity backed money with no possibility of over issuing above that commodity in reserve and no deposit insurance, it would be possible for safe deposit accounts and savings accounts where money is lent to borrowers to exist, writes Toby Baxendale at the Cobden Centre.
Both 100% Reserve-Free Bankers and Fractional Reserve-Free Bankers would be happy thus far. If an instant access demand deposit is offered that is fractional in nature, we get heated debate within the free banking community; the arguments will be familiar to readers of this site. So I am going to throw in a left field ball and see what comes out in debate about what I see as a potential solution to this.
The Third Type of Account is not yet named, and we'll not use 100% or Fractional in the title due to fear of the verbal abuse that will come forth! But consider that a depositor goes into his bank, and he is offered a safe-deposit account that is safe, but gives no interest. His time preference is such that he wants to earn some interest. The bank worker shows him to his colleague who offers him a savings account. Our depositor loves the rate of interest offered, but notes that he has to put his money away for at least a month, or three...six...nine or X number of years to get a proceedingly better rate of interest.
This does not satisfy our depositor as he wants to have instant access and interest. He wants to have his cake and eat it. He gets taken to see the Third Type of Account Manager. This manager says his account can be a timed deposit account in nature (i.e. your money is locked away for at least a month, or three, or whatever), but the bank will allow instant access, by exception for the liquidity that it keeps in reserve all the time.
Should there be too much call on liquidity, the bank reserves the right to point out that you the depositor are actually a de jure timed depositor (i.e. creditor to the bank) for at least a month, three months or X number of years, and so you are going to he held to the time period you freely signed up to.
This third type of account always allows the bank to be reliant on no legal privilege and no accounting standard that is different to those rules applying to any other commercial organizations. It must keep its current and long-term creditors whole at all points in time, as the creditor in question is in fact a timed depositor who has instant liquidity by exception and not by demand. The reality is this liquidity would be there at almost all times, bar the period of bank runs. In fact, dare I say it (I can feel the avalanche of invective building up already) that this is a robust 100% reserve type account from an accounting an legal point of view, with all the benefits of a fractional reserve account of instant access, with none of the inflationary business cycle inducing consequences hotly alleged by the 100% Reserve Bankers.
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