Dear Prof. Murphy,I have been watching a great number of your videos on YouTube to clear up my understanding of economics, how it functions, and what can be done.One thing I thought would be very interesting to hear a bit about, would be what you think about playing with the required reserves of banks. I am aware that most don't have any reserve requirements at present. I read that Switzerland had a ballot measure that got about a quarter of the vote, for enforcing full reserve banking.I imagine this could be a way of limiting the power of finance over the rest of economy, but there must be some tradeoffs to this. If you could make a video talking a bit about why or why not that is a good idea, I'd be very grateful.Again, thank you for all the educational material you put out, it has allowed me to make quite a bit more sense of the world around me than before happening upon your channel.
Full reserve banking
Full reserve banking is the proposal that banks should be required to hold reserves equal to 100 per cent of their customers' demand deposits, preventing them from creating money through lending. Deposits would be fully backed by central bank-created money, and banks would only be able to lend money that already exists.
In a modern fiat monetary system, this proposal is not coherent.
The reasons are structural rather than technical.
First, it misunderstands how money is created in a fiat economy.
In a fiat system, money is created by the state through spending and by banks through lending, within a framework set by the central bank and regulators. Bank lending does not “use up” deposits; it creates new deposits. Requiring full reserves against deposits, therefore, does not control lending in the way proponents imagine, because reserves are supplied elastically by the central bank. What it might do is transfer credit risk to the state.
Second, reserves are not a funding constraint.
Banks do not lend out reserves, and reserves are not the scarce resource that limits lending. Capital adequacy, creditworthiness and profitability matter. A full reserve requirement would simply force the central bank to supply whatever reserves are required, turning the rule into an accounting exercise rather than a real constraint.
Third, it confuses payment safety with credit control.
Safe payment systems can be achieved through deposit guarantees, central bank settlement and regulation without dismantling credit creation. Full reserve banking treats money safety as a balance-sheet ratio problem rather than as an institutional design issue.
Fourth, it would require permanent state intervention to function at all.
If banks cannot create money, the state must continuously inject new money or credit to prevent contraction. The system would therefore depend on discretionary public money creation and credit allocation on a scale far larger than its advocates currently acknowledge. The state might not want to take on the micro decision-making involved, leaving a shortage of credit availability in the economy and creating the sort of crises seen in the gold standard era, e.g., the 1930s.
Fifth, it offers false certainty.
Financial instability arises from asset bubbles, leverage, poor regulation and speculative behaviour, not from fractional reserve accounting. Full reserve banking targets a bookkeeping identity rather than the real drivers of crisis.
From a Funding the Future perspective, full reserve banking is a relic of commodity-money thinking applied to a fiat system where it no longer fits. It promises control and stability, but only by ignoring how modern money actually works.
The real task is not to abolish bank money creation, but to govern it: through strong regulation, public banking options, capital controls where necessary, active fiscal policy and democratic oversight of credit allocation.
In a fiat economy, money creation is already a public function. The question is not whether it should exist, but in whose interests it is exercised. Good governance and not rules that deny the nature of fiat money are required to address this issue.
Reserve requirements
Reserve requirements are rules that require banks to hold a specified proportion of their customer deposits as reserves, typically at the central bank, before or alongside lending.
In the UK, there are no formal reserve requirements of this kind.
1 . The UK does not operate a reserve-ratio system
UK banks are not required to hold a fixed percentage of deposits as reserves at the Bank of England in order to make loans. The idea that banks must “have the money first” before lending is a legacy of outdated textbook models and does not describe how modern UK banking works.
2 . Lending creates deposits, not the other way round
When a UK bank makes a loan, it simultaneously:
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records a loan asset on its balance sheet, and
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creates a matching deposit in the borrower's account.
This process creates new money. Reserves are not checked or “drawn down” in advance. Any reserves required for interbank settlement are obtained after lending has occurred.
3 . Reserves are supplied elastically by the Bank of England
Reserve balances on central bank reserve accounts held at the Bank of England exist to ensure the smooth functioning of the payments system and to support monetary policy implementation. The Bank of England will supply reserves on demand to maintain its policy interest rate and does not allow shortages of reserves to constrain lending.
Since the financial crisis, UK reserve balances have been:
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voluntary (at least technically) rather than mandatory,
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remunerated (interest-bearing), and
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unrelated to lending volumes.
4 . What actually constrains bank lending in the UK
Instead of reserve requirements, UK banks face three binding constraints:
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Capital requirements, which limit lending relative to shareholders' equity.
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Liquidity requirements, such as the Liquidity Coverage Ratio and Net Stable Funding Ratio, which ensure resilience under stress, and
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Profitability and risk considerations, including credit risk, funding costs, and regulatory oversight.
These constraints operate continuously, but none require reserves to exist prior to lending.
5 . Why the reserve-requirement myth matters
Belief in reserve requirements:
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obscures the money-creation role of banks,
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misrepresents how monetary policy works,
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encourages false claims that governments are financially constrained in the same way as households, and
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diverts attention from the real regulatory levers that shape credit allocation.
In the UK context, reserve requirements are not a policy tool and not a limit on lending.
In short:
UK banks do not lend out reserves. They create money by lending, and the central bank ensures the reserves needed to support the payments system are always available.
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“Capital requirements” – I’m assuming that is covered by Basel 3?
Wonder what is the basis of the barmy Green party idea of full reserve banking? Wierd
It covers UK interpretation thereof.
The GP policy is based on Positive Money – a positively dangerous NGO
I see Professor Steve Keen is listed as one of their advisors. How does this stack up with your opinion of this NGO?
Irrelevant.
He can advise they’re wrong and I suspect he does.
and – to reiterate (but without listing all the discussion on two other blog entries and their comment threads) – GPEW economic policy is now changing; and the Positive Money stuff should not be there.
I hope it will, eventually, go
From what I can tell from their website, Positive Money seem to have quietly dropped their advocacy of full reserve banking. There are still some weird policy diversions (money fetishism, basically) there but that howler does seem to be something in the past.
Maybe someone knows more.
I thought so until I heard their CEO speak earlier this year. It’s still there.
Thankyou Richard- I’ve been a member of the GreenPartyofEW for a couple years, I’ve read the current policies on economics and your sentiments reflect my thinking/concern.
I understand that GPEW has 2 deadlines every year for policy suggestions to put forward/ table a motion. The next deadline for spring conference is 3rd January for the Spring conference which itself is online 28th March.
It is the economic policy that will unlock the GPEW potentials when we have a united policy based on MMT. The CURRENT first point in the policy basically implies that taxation is used to generate revenue for government spending.. crikey – that needs re-editing/ deleting!
I’m actively seeking the correct routes to help get involved with the tabled motions of economic policies to align with a MMT Murphy/Keen/Kelton train of thought – if anyone wants to say hello, that’d be fab.
Regarding the small number of bad faith actors trying (failing) to infiltrate Green circles – the bad faith misrepresentation of MMT by the likes of MEADWAY is actually becoming entertaining to watch unravel, specially in the recent “Bold Politics..” in which MEADWAY acts as though he believes that his advice can control the narrative of the Green Party of England and Wales away from MMT and keep us all locked into the neo-classical fallacies of balancing-the-books and treating government like a household from blah-blah land.. but thank goodness Green Party has one-member-one vote democracy. Joy!
Richard, I am so very grateful for your incredible work – this is my first post here – YouTube first introduced me to your work a year or so ago after I purchased the Finding The Money film on MMT (incredible investment of £10). I was originally introduced to MMT by Ash Sarkar and her good DownStream on Novara Media interview with Prof Stephanie Kelton, which itself was my first real introduction to MMT, and which has obviously led me here to Funding The Future.
My point here – it is truly great that the microphones are being used to champion MMT along with Green Party thinking by the likes of Zack Polanski and Helena No Justice (co-host on Novara Media and Green Party EW member).
It is great knowing that lots of us MMT proponents in green circles read this blog and follow your work (POLANSKI – big shoutout!)
So much gratitude.
Adey communicate&COLLABORATE
Thanks Andy. Much appreciated.
Questions about Full reserve banking is an example of a senseless question. Banks are not limited by reserves. They create the reserves that they need. Creating a law that requires banks to make money by credit creation equal to a desired ratio (ordained by a politicians) does not limit the banks credit creation activites. If anything, we are perhaps encouraging it rather than preventing it. I am not really sure what problem the policy is trying to fix. I think it comes from a world view acknowledging that there is a problem and seeking to solve it without first identifying the problem.
That’s nonsense – you obviously have no understanding of banking or how reserves work.
Go on then, give us all a laugh and tell us how you think it all works. You have proved you can be rude. Now, display your wisdom for our delight.
Excellent!
Er….a PDF?
Why?
Would that help?
That is the only reason why I would ask. I think the subject matter is worth one. People out here still think that savings produce loans, and that just distorts the reality we so often speak of here.
But…………no rush!
Let me think about this.
All correct, I think.
Thanks
Answers a question in our Green Party discussion (actually a social), though most present were on board with MMT. A lot of dissing MMT, you, Keen, Kelton etc going on now online, though unable to articulate what is wrong with MMT. Bad actors have arrived in Green circles.
The trolls are in….
Richard,
I must express strong protest at your statement…
“full reserve banking (which is currently technically Green Party economic policy)”
As you will know, from the email I copied to you yesterday, I expressed some reservations myself on whether Sovereign Money (100 reserve banking) has really been dropped by the Green Party(GPEW).
Nevertheless, there was no mention of Sovereign Money in the GP Manifesto 2024 and that should be the reference for what is and is not GP policy.
There is a reference to SM in the GP Voting Paper but that may have been an oversight and the Voting Paper – which was referred back at this year’s conference and did not therefore become GP party policy – has now been superseded by a New Economy Chapter in which SM is explicitly rejected. (Of course, the NEC has also not been voted on so that does not currently represent formal party policy either.)
The real problem about the GP’s economic policy is that there are several lacunae and a few naïve policies, as previously noted on this blog.
On banking specifically, now that Sovereign Money has been rejected, the problem is that no substantive policy has replaced it. This omission is in process of being made good. A little patience is in order and we must not rush to judgement.
My reference was to formal policy – as far as I can see it is still there
You are correct. This remains policy until conference agrees to change it. Hence why we are refining the new chapter and doing outreach to get broad agreement – to ensure it passes at Autumn 2026 (otherwise we remain stuck with the current policy that almost no one wishes to defend any more).
Thanks
Ian, if only the last GE manifesto represents GP policy, why do they bother with the incredibly lengthy and detailed ‘Manifesto for a Sustainable Society’? Isn’t the GE Manifesto just a distillation of the MFSS?
Our Policies for a Sustainable Society (PSS) represent our full policy set. The manifesto is just a small subset chosen for a particular moment in time. The further out from the manifesto we are (ie now about 18 months), the less relevant it becomes – even more so for the Green Party as our standing has changed beyond all recognition since Zack became leader.
Ian,
Party election manifestos normally contain those policies that a Party would bring in during the course of the next parliament if they have an overall majority in the House of Commons. This is because under the Salisbury Convention the Lords will not block a manifesto commitment. It is quite normal for Parties to have other policies that are not in a General Election manifesto, so the absence of Full Reserve Banking from the 2024 manifesto merely means that the Green Party at that time did not consider it a priority were they to achieve an overall majority.
Not sure I can really get my head around “Full Reserve Banking”. It seems to imply no credit provision by banks which would imply only peer to peer lending and no maturity transformation.
I may have got the wrong end of the stick….. but if not, this is bonkers.
It is totally bonkers
And they have got millions in grants from lefty charities to promote it
Even more bonkers
This has cleared up this matter for me with much to think over, inc the comments section. I have been asked, by the Green Party, for my opinion on Positive Money’s view on such matters and referred them to your blog posts and said I did not believe they should follow Positive Money.
Just a thought.
A lot of YouTube creators move to Nebula which is a subscription service and doesn’t have an algorithm.
Why would I do that when YouTube is working?
Way over my head, but fascinating nonetheless, which I felt it was worth saying because it’s still important and I can ask AI to explain it to me as if I’m a 12-year old 😉 (this will be interesting!)
Post it here….
*Raw AI Output*
Think of a bank like a giant lemonade stand. People give their money to the bank for safekeeping, just like giving lemons to a stand. The bank promises you can have your money (lemons) back whenever you want.
Some people think banks are like piggy banks, they just keep your money safe until you ask for it back. But that’s not how real banks work! Banks actually use your money to make loans to other people, like if someone wants to buy a bike or a house, the bank gives them money now and they pay it back slowly (with a bit extra). When the bank gives someone a loan, it doesn’t need to have that person’s savings first, the bank just says, “Here’s the money!” and adds numbers on a computer.
What’s ‘Full Reserve Banking’?
Some people believe banks should only lend money if they have the same amount stored safely, so for every dollar someone can take out, there has to be a dollar in the bank. That’s called ‘full reserve banking.’
Richard explains that this idea doesn’t really work anymore, because:
Modern Money Is ‘Created’ By Banks
When banks make loans, they create new money, just by typing digits into accounts. They don’t need to get money from somewhere else first.
Instead of counting how much cash they store, banks must follow rules to make sure they’re safe, like not lending too much, and keeping some extra savings for emergencies.
If we made banks only lend money they already have, it would mess up how people and businesses get loans, and could make the economy worse, not safer!
Instead of strange new rules, Richard says the key is making sure banks are well run and watched carefully.
In Short:
Banks don’t just store cash; they also create money by lending.
The rules we use now focus on safety, not just storing money.
Changing to “full reserve banking” sounds simple but could cause problems.
The best way to keep banks safe is with good rules and watching what they do!
So, in everyday language: banks make new money when they lend, not just when people put money in. Richard thinks ideas like “full reserve banking” are old-fashioned and won’t help. Instead, we should have good rules to keep banks safe.
That’s pretty confused.
It proves AI needs a lot of training.
Yeah, that version wasn’t great. I did use a basic prompt. With further testing in other models and improved prompting it got much better, but just too long to post a copy of here. Gemini 3 turned out to be much better than ChatGPT 5.2. I have done this on some of your other posts where I felt I needed to understand something better, and for research and more factual info and referencing I use Perplexity.
I have not tried Gemini. Perpleoxty seems quite good at summarising.
The platform of the Green Party US is similarly burdened by misguided notions about money creation:
https://www.gp.org/economic_justice_and_sustainability#monetary-reform
… and about the nature of federal government deficit spending and the national debt:
https://www.gp.org/economic_justice_and_sustainability/#ejNationalDebt
My impression is that back around 2016 their platform-creation process was captured by the “monetary reform” crowd around the “Alliance for Just Money.”
Why did the deposits with the central bank become interest bearing at the financial crisis? Had they been non interest bearing and mandatory before? Should we continue to pay interest on them or revert to a mandatory system?
This change is often misunderstood, so it is worth setting it out clearly.
Before the financial crisis, central bank reserves were scarce, tightly managed, and in many countries either non-interest-bearing or paid interest only at a penalty rate. Banks held just enough reserves to meet settlement needs, and the central bank controlled short-term interest rates by managing that scarcity. Reserve holding was not really a choice.
The financial crisis changed this completely. Central banks injected vast quantities of reserves to stabilise the banking system and later through quantitative easing. Once reserves became abundant, the old scarcity-based method of interest-rate control no longer worked. To stop the policy rate collapsing to zero, central banks began paying interest on reserves. That interest payment became the new “floor” under market rates.
So paying interest on reserves was not about rewarding banks. It was a technical fix to preserve interest-rate control in a world of excess reserves.
The problem is that this temporary fix has become normalised. Paying interest on reserves now represents a large fiscal transfer from the state to banks and asset holders, with little macroeconomic justification. It is one of the main reasons government debt-interest costs have risen so sharply.
Should we revert? There are alternatives. Reserves could again be non-interest-bearing, or tiered so only a limited amount earns interest, or combined with other tools to control rates. None of this threatens financial stability if done deliberately.
The key point is this: interest on reserves is a policy choice, not a necessity. Continuing it at scale reflects institutional preference and political caution, not economic inevitability.
So what is in it for the banks to even offer saving deposit accounts if all this is true?
Yoru avings are their capital – and the cheapest available. You give them money they could lose. That’s why peiople need state guartantees to save money with banks.
“Your savings are their capital”
I thought savings were a bank’s liability.
Both are credits on the balance sheet. All can be lost.
Being of the naïve Green generation that helped build a herb garden in ruins in Covent Garden and remembers Porritt’s ecological advocacy, my direct experiences of how under the covers folks were ever lurking and predating at any event that might prove politically effective, a note of cynical caution.
Could this new Green party’s mediated public emergence and its radical monetary policies be yet another iteration of using a small political party to split and control the FPTP voting blocs. With the added benefit of smoking out younger environmentalists for control and/or blacklisting by our global fossil fuel owned governance ?
A rôle the Liberal Democrats have played in order to move the Overton Window.
But are my savings a significant proportion of their capital
Ye.
That is why, I suspect, you are relying on a government guarantee of their safe return.
Indeed,
We already have restraints on bank lending through liquidity ratios and other such targets/statistics.
All you need is a regulatory body that does what it is supposed to and then the need for full reserve banking evaporates.
Wow, this is clearing up a lot of things. Thank you for taking the time to answer!
I did wonder if one of the intentions behind that proposal was specifically to change what a
bank fundamentally is. I guess, basically abolishing them, or turning them into wealth management funds.
If one was to introduce a public GiroBank as you suggested in one of your videos, would it then be problematic
to remove the function of private credit creators entirely? Forcing any banking activity that was done privately
to actually use its own assets if it was to grant a loan.
Anyway, I’ll keeping working my way through the catalogue until I grasp this, thanks!