The conduct of banks in the 1950s was indeed as responsible as Graham Mathewson describes (Letters, 17 December). They were lending customers’ deposits, and cash in the form of real printed money comprised 55 per cent of all money in circulation.
Now, by the process of fractional reserve lending, the banks no longer need to actually have the money they lend. They just create it as a digital computer entry and can continue to do so, thus expanding the money supply in line with demand for loans.
Cash in circulation is now a miniscule three per cent of the money supply.
This created the property price boom, as the banks also decide to whom they will lend their magic money, and for what purpose.
For as long as they have this power to create the money supply, government action to steer the economy is useless.
We pay the banks about a billion pounds a week as interest on the magic money they have created, which cripples us.
Control of the banking system and reversion to full reserve banking, as in the 1950s, is essential if we are to avoid another banking disaster.
It will, however, force us to live within our means, instead of on a raft of ever-expanding bank credit.