A Work-Standard Critique of the “Fractional-Reserve vs. Full-Reserve Banking Dialectic”

Various proposals were offered in the 1930s to counteract the negative effects of the Great Depression. From monetary reforms and nationalization of privatized firms to the popularization of Keynesianism and Soviet-Type Economic Planning, the decade was a period of economic experimentation and innovation. Whether any or all of them offer promising results is beyond the focus of this Blog post. What can be said is that there have been questions over whether the current model of “Fractional-Reserve Banking” should be replaced by “Full-Reserve Banking.” Such questions persisted long after the Great Depression and the Second World War, especially as Kapital asserted greater influence over all economic life within the Western world.

In Fractional-Reserve Banking, the commercial banks are required by law to only keep a portion of any Kapital that their customers deposit at any of their local branches. Any excess Kapital is permitted to be freely lent to potential borrowers. The whole purpose, including its rationale, depends on the Incentives of Supply and Demand. By conducting themselves along those parameters, commercial banks ‘stimulate’ the so-called “Money Supply” by investing the Kapital as “Credits” which Borrowers then accept as loans. Those loans are then spent on the production of goods and services, thereby contributing economic growth within the framework of a Market/Mixed Economy.

The trick with Fractional-Reserve Banking is how there is no expropriation involved. The Kapital which somebody deposited into their account is still recorded on the financial ledgers of their commercial bank. The commercial bank is limited by the Central Bank of their nation-state to keep a “Reserve Requirement” of Kapital on their own accounts with the Central Bank. That deters those commercial banks from not having any Kapital available in case of, for instance, bank runs. All of this seems sound until one realizes where are the commercial banks getting the additional Kapital to offer loans if deposits are left unaffected?

Seen in this context, it becomes natural to expect Kapital to be ‘created out of thin air’ by the commercial banks in order to drive economic growth. But since Kapital is ‘created out of thin air’, what is ultimately backing Kapital? The simplest answer is Schuld–Kapital is essentially pegged to Debts that materialize whenever Borrowers accept loans from the Lender. The Schuld that emerged from the transaction become an “Incentive” in its own right, forcing the Borrower to earn more Kapital than what they had originally borrowed in order to pay off the Schuld. This becomes even more problematic if there is an Interest Rate because that can cause economic growth to fall. The trick there is the “Money Multiplier,” which Fractional-Reserve Banking requires in order to expand the Money Supply by commercial banks accepting deposits and lending loans. If economic growth continues from people overworking themselves to earn more Kapital and people are depositing more Kapital to their accounts, the Market/Mixed Economy functions.

But there are limits to this sort of banking practice. Fractional-Reserve Banking cannot tolerate everyone withdrawing their Kapital from the financial system simultaneously. Perceived economic decline can force people to make a run on the banks and withdraw their Savings. Commercial banks are tolerant of certain numbers of people making withdraws; larger numbers of people will cause to become insolvent and eventually collapse from a bank failure. While this sort of behavior occurred during the Great Depression, it has not stopped commercial banks to maintain smaller Reserve Requirements and their Central Banks to sustain lower Interest Rates.

Given the problems of Fractional-Reserve Banking, an alternative was posited in the form of “Full-Reserve Banking.” Full-Reserve Banking basically means that the commercial banks are supposed to maintain full reserves of Kapital in deposited accounts at a times. Since the banks will not be ‘expropriating’ any Kapital from existing deposits, any loans they issue to potential Borrowers are limited to the deposits that they have in reserve. To understand the origins of Full-Reserve Banking is to also understand why the Work-Standard is incompatible with any pure application of Full-Reserve and Fractional-Reserve Banking.

Full-Reserve Banking originated from the details of the “Chicago Plan.” The Chicago Plan was a set of banking reforms proposed by economists from the University of Chicago, the most important of them being Irving Fisher. These Chicago economists advocated for separating the process of creating Kapital from the lending of Credit, but never separate the concept of Currency from Kapital itself to yield the “Geld” of the Work-Standard. What Fisher and those men conceptualized was Full-Reserve Banking and “Narrow Banking.” The latter is even more ‘radical’ (by Liberal Capitalist standards) than the former insofar as commercial banks are restricted to accepting deposits and withdraws of Kapital.  

The crux of Full-Reserve Banking was poorly described Fisher as “‘nationalize’ money, but do not ‘nationalize’ banking.” Put another way, the creation of Kapital had placed greater emphasis on the financial powers of the Central Bank. The fact that people have advocated for Full-Reserve Banking to remove Schuld from Kapital is outrageous, regardless of whether one chooses to go by Liberal Capitalist or even Socialist standards. For the Work-Standard, adopting either Fractional-Reserve Banking or even Full-Reserve Banking is insufficient in facilitating the Vocational Civil Service (VCS) Economy’s conversions of Arbeit into Geld.

The justification for the Work-Standard to realize a distinct banking practice is three-fold:

-There needs to be somebody besides the economic planners to register the contributions of Arbeit to the Life-Energy Reserve on behalf of the Central Bank. The economic planners cannot oversee this task because they need to focus on the Solidarity of the national economy. At the same time, the economic planners’ accountants cannot do it since their attention is focused on the Quality of Arbeit across various professions, enterprises and economic sectors;

-There needs to be somebody to help the Central Bank facilitate the conversions of Arbeit into Geld based on the overall Quality of Arbeit and the Quality of Geld. The Central Bank can readily convert Arbeit into Geld, but they are counting on somebody else keeping track of the financial ledgers provided by the accountants and economic planners;

-And there needs to be somebody to help the State distribute Revenues intended for Expenses and Paygrades. Additionally, that same somebody needs to facilitate the wiring of Geld to different accounts, can issue Geld as loans in exchange for Arbeit. They must act as the immediate between the State and Central Bank, the State Commissariats and Kontore, economic planners and accountants, and the enterprises and professions that govern various Vocations.

In essence, the banks are needed as “National-Socialized Banks” that are subordinate to the State and its Central Bank but beholden to the national interests of the Totality. The new-old purposes of those institutions will change to facilitate the financial transactions of the Work-Standard.      

When the economic planners record the Work-Productivity (WP) and Work-Intensity (WI) of their enterprises, they and their fellow accountants calculate the numerical values in accordance with the Total Economic Potential (TEP) and by extension the Real Total Economic Potential (RTEP). The accountants send their calculations to these National-Socialized Banks for them to register them in their accounts at the Central Bank. Included in their registrations are the numerical values for Quality of Arbeit (QW) and the Quality of Geld (QM).   

With the calculations in the Quality of Arbeit and the Quality of Geld, the Central Bank is finally able to oversee the conversions of Arbeit into Geld. Geld is then given to the State as Revenues. Some of that Revenue will be spent on Expenses and Paygrades, the rest allocated to the State Budget. It is up to the State to decide how much the Central Bank should be allowed to give to the banks for potential loans. But unlike the loans under Liberal Capitalism, these loans are drawn from the Solidarity of the nation insofar as they operate within the framework of Arbeit and Geld. This Solidarity intended for the banks is called the “Earmark Requisition” and the banks can only issue loans based on the amount of Geld allowed by the Central Bank.

Borrowing a loan under the Work-Standard is going to be different from borrowing a loan under Liberal Capitalism. Those who decide to borrow loans will not be charged Interest, but they will be charged a special “Service Fee” because they had chosen to rely on the services of the banks. This Service Fee is to be set by the Central Bank and it is applicable to all National-Socialized Financial Instruments (NSFIs) under the Work-Standard. It is to be paid up front as part of most financial transactions. The banks contribute half of their Arbeit through maintaining deposits and lending; the other half comes from their clients borrowing and withdrawing Geld as part of pursuing a new Vocation or establishing their own State-Owned Enterprise. This deters Usury and the Schuld Bondage which plague banking establishments under Liberal Capitalism.

Loans issued by National-Socialized Banks are known as “Work-Tenures.” Despite their similarities to the Four-Year or Five-Year Work-Plans issued by the Kontore, Work-Tenures are tied to the Intents of the Borrower. The Borrower states that they needed a fixed amount of Geld to create their own Vocation or found their own State-Owned Enterprise. The Lender issues them the Geld under the condition that the Borrower will assume command responsibility of living economic life at their own initiative. The Borrower must pay back the Geld by contributing the equivalent amount in Arbeit. If the Borrower fail to pay back the Geld, then the bank is legally bound to charge any remaining amount as Schuld. The Borrower will then be asked to reconsider their personal pursuits, the State intervening to return them to their original Vocation.

In retrospect, the type of banking practice under the Work-Standard is entirely different from what is to be expected from Narrow-Reserve, Fractional-Reserve, and Full-Reserve Banking. Although an appropriate analysis of this form of banking requires its own SMP Compendium, but it is tenable to conclude that banks are meant to be intermediaries of economic and financial activities, a key factor in the conversions of Arbeit into Geld and Geld into Arbeit.



Categories: Blog Post, Economic History

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