Full-Reserve Banking, the "Right" to Earn Interest, and "Financial Repression"
Nick Rowe replies to Richard Williamson re: full-reserve banking (emphasis mine):
The key reading here (even though it appears to be about a different subject) is Milton Friedman’s “The optimum quantity of money”.
Foregone nominal interest payments is a tax on holding currency…. 100% required reserves mean you impose the same tax on chequing accounts …
My reply, edited and links added:
Nick, just because people (“the market”) want risk-free long-term holdings that pay interest does not in any way imply what seems to be the unstated assumption here: that the government is obligated to provide them, or that failing to provide them is a “tax” — a “taking” of something that they own or deserve by some natural right.
The government could issue dollar bills instead of t-bills without violating anyone’s rights.
This is no different from saying that foregone transfer payments to the poor constitute a “tax” on the poor.
You could call either (as in Carmen Reinhart’s “pity the poh’ bondholders” perorarations) “financial repression” — though the charge seems sadly misplaced in one of the two contexts. (This locution is the most egregious example I’ve seen of economists shilling for creditors. Witness its widespread repetition by said creditors, their congressional toadies, and their money-media water carriers.)
You could certainly say that either of these “foregoings” creates incentives similar (identical?) to those created by taxes. As long as it’s presented as such — which it decidedly is not in Friedman — it can serve as a useful pedagogical conceit. But the implicit, undeniable normative baggage must be ditched and explicitly disclaimed.
As for checking accounts, full-reserve banking might indeed result in account holders paying banks a fee to hold their money for them securely and conveniently.
And banks would be in the surprisingly novel situation of earning a living by providing a service to individuals in return for fees paid by those individuals.
It’s not immediately clear to me how that constitutes a “tax” on checking accounts.
Cross-posted at Asymptosis.
Steve: it’s a question of efficiency, not rights.
Suppose the government could produce widgets at zero Marginal Cost. What would be the optimal/efficient price for the government to set? P=MC=0 would be the standard answer. Replace “widgets” with “real money balances” and you have the gist of Milton Friedman’s argument. Any price above Marginal cost is like a monopoly price, or a tax.
In a world where the government can only impose distorting taxes, it get’s a bit more complicated. But as I read the literature, the tax on money is always more distorting than a sales tax or an income tax (collection costs aside).