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The FT: Iceland showing others a way forward, by axing fractional reserve

April 10, 2015

icelandic money

Yesterday there was an article by an un-named writer in FT View: ‘Iceland’s daring raid on fractional reserve banks: Reykjavik considers wresting money creation from financial sector’

He/she [Martin Wolf?] gave an overview of recent history; following the deregulation of its banks in 2001, the country turned itself into a ‘highly leveraged financial centre’ and Icelandic banks “harvested deposits from around the world, to deploy on amassing a trove of foreign assets”. Then all three of the country’s major privately owned commercial banks collapsed following difficulties in refinancing short-term debt and a run on deposits in the Netherlands and the United Kingdom.

As reported in a well-read post on this site six days ago, the government in Reykjavik is now considering a ban on its banks creating krona when they issue new loans. Growth in the money supply would become a matter of government policy alone.

The official report exploring an alternative finds that only “sovereign money” can prevent a recurrence of further damaging banking adventures.

“Money created “out of thin air” – the devilish secret at the heart of fractional reserve banking – becomes a relic of the past”

At the end of a seminar held by James Robertson at Cholsey in 1998, after various approaches to monetary reform had been presented, John Coleman, the late publisher and editor of ‘The New European’, reminded those present that improved structures could also be sabotaged by human ingenuity and greed. The FT author, in similar vein, comments that this proposal may give Reykjavik more reliable monetary tools, but provides it with no guarantee that they will be well used.

After comparing the recent record of Scandinavian central bankers with that of Viking raiding parties, the article concludes, remarkably:

“As well as showing other countries a potential way forward, by bringing the axe down on fractional reserve banking the Icelanders might just regain some control over their economic destiny”.

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