I’d somehow forgotten that the Green Party Conference was due to debate full-reserve banking – although I knew that many people within the Party were enthusiasts for the Postive Money approach. It had never occurred to me that, before the conference was out, the Party that had prided itself on being the only voice in British politics opposing austerity would adopt a policy that is not only pro-austerity but actually is close to Friedmanite monetarism. But that is what they have done today.
The attraction of full-reserve banking – under which banks would not be allowed to lend more than the deposits they have at their disposal (not current accounts), or what they can raise on the stockmarket, or in loans from the bank of England – is that it is seen as an answer to the fundamental instability of fractional-reserve lending; the problem of speculative lending leading to credit bubbles like the one that burst so disastrously in 2007-8. In that they obviously have a point – speculation around property has been the cause of every economic crisis since 1973 and such crises, in an increasingly deregulated international financial system, have been getting deeper and more frequent. It’s a problem that needs to be addressed, and addressed globally, if we are to achieve a stable and sustainable economic system.
Where the Positive Money enthusiasts go badly wrong is in their analysis of what is to be done. As Chris Dillow points out here, the likely effect would be to reduce bank lending in times of recession – in other words, precisely the opposite of what is needed to stimulate recovery. He further indicates that such a policy, enforced by a National Monetary Authority, could have precisely the opposite of the intended effect; the conventional wisdom remains that mortgage lending, even at inflationary levels, is seen as “safe”. And as Tim Worstall points out here, there is a crucial intellectual error at the heart of the Positive Money agenda – that banks create money at all; as he rightly points out, if that’s what bank lending did Northern Rock would not have gone under. And as Worstall additionally points out, full reserve banking is in essence, the purest monetarism; Milton Friedman would be proud. Frances Coppola, herself a former banker, describes in some detail that Positive Money is based on a straightforward ignorance of what banks actually do.
So, next time Caroline Lucas is on Question Time calling for a Green New Deal, the informed viewer will be entitled to respond: but your party, at its recent conference, voted for the creation of a National Monetary Authority whose job would be to restrict the sort of lending to the private sector that would be needed to stimulate recovery (I’m trying not to use the word “growth” in a Green Party context, but if they don’t think the Green New Deal is about growth than they’re …. the sort of party that accidentally votes for deflationary monetary policy at a time of recession).
There is no doubt that it is essential to curb speculative lending, especially in the property market. Chris Dillow, in the piece I’ve referenced above, points out that there are other, more proven ways of achieving this. Proper, international regulation of the banking system – a return to the system that gave us thirty years of post-war prosperity – is obviously top of this list.
For me, as an ex-Green Party member who believes that the most urgent task in Britain’s politics is to develop an alternative to austerity, I don’t know which is sadder; that the Green Party has voted for monetarism, or that they appear not to have noticed that they have done it. I suppose they mean well. But their days of claiming that they are the only party in Britain opposed to austerity are clearly over.
Notes from a Broken Society 
Hi Neil,
I’m concerned at your conflation of Full-Reserve Banking with Monetarism a la Milton Friedman and would like to set the record straight if I may.
Firstly, I would like to emphasise that I have absolutely no truck with Friedman and the monetarists “Quantity Theory of Money”. It was a sorely misdirected policy that, as you rightly point out, can be blamed for much (but not ALL) of what went wrong in the UK and elsewhere in the 80’s and 90’s. In fairness to your claim however, it is perhaps important to set out why people might misunderstand our proposals and perceive a similarity between the principles of Full-Reserve Banking and Friedman-style monetarism, and so I’ll start with an explanation of what Monetarism, as I understand it, IS:
In essence, Friedman, and other monetarists, simply claimed that a steady annual increase in the money supply was the best means of controlling a) inflation and b) unemployment. They based this on a rather spurious interpretation of one aspect of the “equation of exchange”. This formula, as I understand it, is broadly accepted by Keynesians, Monetarists and all other economists as valid, and goes like this;
M × V = P × T
Here, ‘M’ is the Money Supply , ‘V’ is the velocity of ‘M’ (or the average number of times that the money supply ‘turns over’ in a given year on the purchase of final goods and services), ‘P’ is the price level, and ‘T’ is the volume of transactions.
Where monetarists diverge on the interpretation of the above formula though is that they make the (false) assumption that the velocity is always stable in the short run. However, clearly the velocity of circulation (and consequently the volume of transactions) depends on the fickleness of consumer and business spending impulses, which cannot be constant (I always HATED mainstream economists presumption of having ‘perfect knowledge’).
In any event, by this simple expedient, they transform the “Equation of Exchange” into the “Quantity Theory of Money”, upon which the entire monetarist argument is based.
Because monetarists believe that the money supply is the primary determinant of nominal GDP in the short run, and of the price level in the long run, they believe that control of the money supply should not be left to the discretion of central banks. Instead, monetarists believe in a set of “rules” that the Central Bank must follow. In particular, that the Central Bank should be required to target the growth rate of money such that it equals the growth rate of real GDP, leaving the price level unchanged. In attempting to thus control inflation, they have consigned millions of people to unemployment (As a side-note, it is my personal opinion that a little inflation is not necessarily a bad thing, as it prevents the hoarding of cash, but that’s by-the-by).
In contrast, Full-Reserve banking advocates a DISCRETIONARY increase in the money supply. That is to say, the central bank creates, and government spends whatever amount is thought appropriate taking into account inflation, unemployment, etc. In some years, NO MONEY would be created and spent: indeed, a CONTRACTION in the money supply might even be in order. The distinction might appear to be only slightly nuanced, but it makes a huge difference, and indeed for the above reasons Full-Reserve Banking has everything in common with Keynesian (and socialist) principles, and nothing in common with Neoliberal ones.
There is thus a significant FISCAL element to the way in which Positive Money style money supply increase would take place. And that fiscal element will have a stimulatory effect even if the money supply increase itself does not have a big effect. Under Positive Money’s proposal, the additional paper assets created in the above way are widely distributed within society, and not just concentrated in the hands of the rich, i.e. the additional assets are put into the hands of people likely to raise their spending as a result. The government gets to spend extra money on health, education and the usual assortment of public spending items, and boost employment. I believe that this would be entirely consistent with Green Party principles in enabling state investment in renewable / sustainable infrastructure projects and financing of a Green New Deal.
What we are effectively proposing is nationalisation and socialisation of the Money Supply.
Fractional reserve banking has been a catastrophic failure for UK (indeed Global) society. It provided the basis of the credit crunch, generated millions of unemployed, home repossessions, privatised the profits of the banks whilst socialising the losses and so on. The power of banks to create money through the issuance of loans has granted them an overwhelming power to dictate the spending priorities of our economy (it is after all they who get to decide who gets a loan and for what purpose), and hence the priorities of our very society.
It is also noteworthy that under fractional reserve banking, the amount of money that the banks create through loan issuance is not actively determined by regulation, reserve ratios, the government OR the Bank of England, but largely by the confidence of the banks at any given time: When banks are confident, they create new money loans and bank deposits for borrowers, when they (or the population!) are fearful, lending is reduced and hence the creation of new money is limited. In these circumstances, when perhaps more loans are being repaid than are being issued, the money supply shrinks, and you have what we have in the UK now – recession. (This issue of money destruction really is a critical issue, and this is why the Bank of England started the Quantative Easing program – to slow down the shrinkage of our money supply)
This effectively means that private banks are both controlling the VOLUME of the UK money supply, and as previously mentioned, in being the ones who decide WHO gets a loan and for WHAT purpose, broadly deciding what the overall spending priorities of our nation’s economy are.
I fully understand and sympathise with some individuals apprehension about such a radical monetary/economic policy as Full-Reserve Banking, and am also sympathetic to those, like the authors of the (rejected) amendment to the motion, who advocate nationalisation of the banks (this is NOT incompatible with Full-Reserve Banking by the way), but such nationalisation of the banks would STILL permit fractional reserve banking, and I’m afraid that I simply cannot go along with that for the above reasons.
Respectfully yours,
–Mark
Thanks for the very full comment. I take the points you make about monetarism – the MV=PT equation is really no more than a truism, and doesn’t tell us anything about what drives the process; and Friedmanites pay far too much attention to one variable. I certainly agree with your analysis of how traditional monetarism is based on a belief that it is changes in M that drive economic activity. But it seems to me that full-reserve banking does not really bring us any closer to the question of how economic growth is encouraged.
I also share your frustration when economists talk about perfect knowledge. One of my formative intellectual experiences was arriving at University, all ready to learn all sorts of profound truths about how economics worked, and finding that really so much of the edifice rested on empirically-questionable assumptions about human behaviour; what I had hoped would be profound all too often seemed trivial. We were offered all sorts of elaborate, closed theories that seemed to regard the real world as something of a nuisance. Studying undergraduate economics in the early Thatcher years, it was obvious that there was a real disjunction between the harmonious theory and the ghastly mess being enacted in places where the dreaming spires of my University were invisible.
But there are a number of issues in your reply I would take issue with.
First, I’d disagree that Fractional reserve banking was the cause of the crisis of 2007-8 – although I have no doubt that it played a role in facilitating the crisis. There were other factors too – in particular the creation of financial instruments (derivatives) that allowed the selling and reinsuring of debt. Organisations like AIG took the hit because they had effectively underwritten the bonds that they had themselves bought at inflated prices, turning a collapse into a catastrophe. The question really is, how would a system of full-reserve banking in the formal financial sector inhibit the creation of these kinds of off-book transactions that allow financial speculators to generate the appearance of wealth, built entirely on confidence? There’s an argument that a rigidly-enforced system of full-reserve banking would encourage the growth of an informal, non-regulated financial sector; we need to bring the beast within the orbit of regulation, not to drive it out.
Second, I worry that, despite your mention of the basis for fiscal expansion, the theory of full-reserve banking appears to focus entirely on the supply side. In that sense it betrays a common ancestry with monetarism and ignores macroeconomic issues. And if you build in the flexibility for the central bank to inject cash, it’s not really full-reserve banking (because the lender of last resort has to find the cash from somewhere, although I’m familiar with the arguments of modern monetary theory that it is actually government spending that produces money). And, with central bank intervention on this kind of scale, I wonder whether you fall into the danger of doing something than can be done more efficiently and democratically (see below) by other forms of regulation, without the bureaucracy and deflationary risk inherent in full-reserve banking?
Moreover, I think it is much more helpful to see banks as creating liquidity rather than money (which was part of my point in quoting Worstall – I know he’s the neoliberal’s neoliberal but even a broken clock is right twice a day and this was one of those occasions). Ordinary businesses need liquidity, often in the form of loans, to continue working. How does full-reserve banking deal with the constant demand for working capital?
I am also puzzled by the role of a National Monetary Authority, which seems to me to create a deeply conservative bureaucratic brake on wider economic policy. I just don’t see the evidence that such a body could make the sort of rigorous predictions that would allow a progressive economic policy to be conducted. Economists are notoriously bad at forecasting, Civil Servants are probably worse, and it is difficult to see how a body made up of both would manage issues like discounting and prediction. We know that the OBR has been caught out, both by adhering to Reinhart-Rogoff (now wholly discredited) and to multiplier numbers based on an outlying paper that has now largely been disproved by the empirical evidence – taken together these two have wholly undermined the intellectual basis (such as it was) for the coalition’s strategy. Discounting is crucial, becaue the further out you are forecasting the greater the uncertainties; but because Greens claim to speak for the long term, problems of discounting must be absolutely at the heart of Green economics. There really isn’t any evidence that a body of experts is any better at making decisions about discounting than elected politicians – and surely the point of Green economics is that discounting has to be a political decision. One of the reasons why I am a Keynsian – in the short-to-medium term anyway – is that Keynes realised that economic and political decisions are messy, in contrast to much of the rhetoric about stable markets that informs the classical view of economics. I think evidence supports Keynes and, like him, am deeply suspicious of catch-all systems
And politics remain a huge problem for me when contemplating full-reserve banking. Overall, it’s the product of the Right – of the sound money lobby, whose argument is that money produced by fractional-reserve banking is somehow not “real”. But ultimately isn’t that true of all money? The difficulty is surely that if you take this argument to its logical conclusion you’re facing the kind of gold-standard straitjacket that crucified the British economy in the 1920s. But as soon as you allow the Central Bank to act as a money-creator to avoid deflation you’re in exactly the position that Chris Dillow describes – you’re using a complex and unproven method, designed fundamentally for a different purpose, to achieve something that can be better achieved through other, tried-and-tested means. And the fundamental problem – that full-reserve banking is the product of a philosophy that sees deflation rather than growth as the aim of economic policy, and ultimately believes that the state has no economic role.
It seems to me that adopting full-reserve banking is not the answer – for both political and economic reasons -but that the case for greater regulation of banks is overwhelming. There is a big question about whether 1945-73 was an exception to capitalism or its proudest moment, but it was clear that the growth in prosperity across society – almost the only occasion in history when growth has been sustained and society has become more, not less equal as a result of growth – saw a benign combination of fractional-reserve banking operating under a tight regulatory regime.
National Monetary Authority is the usual ‘things would be much better if I ran the show’ argument. It is deeply anti-democratic – more so even than the current arrangement.
MMT basis its banking policy recommendations on Minsky’s work, and my UK interpretation of them is here: http://www.3spoken.co.uk/2013/05/making-banks-work.html
Like you I feel that the ‘full-reserve’ argument throws the baby out with the bathwater.
There are a number of key advantages to the PositiveMoney proposals:
1. Banks would be able to operate in a true market and would have to more actively seek deposits from the Public BEFORE making loans.
2. There would be more money in the System which would reduce the need to take out Bank Loans for starting Businesses.
3. Interest Rates would go up helping Savers.
4. House Prices would become affordable as Banks could not just create unlimited amounts of Money targetted at the Housing Market.
5. Recessions would be less frequent.
6. Inflation would be far less.
7. We could let Banks Fail as Money would simply be transferred to another Bank that is better managed.
8. Property Speculating would reduce as the Housing Market would be stable (Any Market that is stable tends not to be of interest to speculators).
9. Less Tax Payers money would be required for Housing Benefits as more people could afford to buy their own homes or pay the reduced amounts of rent.
10. We could go back to Free Tuition Fees for University Courses (something that your MP may have enjoyed and then voted to increase them once being voted in – i.e. Nick Cleg)
Banks do not like the thought that they could no longer issue loans without having depositers money first. The more Loans a Bank can make ,the more they ultimately recieve in interest payments. As they can create the Money for new loans with little resrestriction there is a huge profit incentive to create as many loans as possible. As Banks create 97% of our money supply (you could also describe notes and coins as liquidity) a huge privelege has been handed over to the Banks with the consequence of a loss of Seigniorage to the Public.
Isn’t it odd that the Government has not even considered going back to a time where 20% of the Money Supply was created by the Government, which would allow a Cash injection into the System and more publicly created money without Debt attached to it.
@NeilW:
Are independent judges anti-democratic? Are independent courts anti-democratic?
Are britisch judges elected?
No?
Ah, but they are chosen by the democratic government, you might replay.
And so are central bankers. And so are members of the proposed National Monetary Authority. (If they are not choosen by government, then by parlament directly or by public vote as judges in many us-states are. )
But as soon as they are in office the NMA-members are independent – much like judges.
It is a matte of separation of powers. Checks an balances aren’t antidemocratic.
I am sorry that you are displeased with the Green Party’s adoption of monetary reform. I would not like to re-open the whole debate here, but I would like to clear up some misconceptions, and challenge some of your witnesses.
The purpose of the reform is to stop banks creating money willy nilly (or not, as the case may be, in present circumstances, when they refuse to part with any of the £200billion of QE money that we have given them), and instead enable the Bank of England to create money for socially useful purposes, with an immediate priority on energy conservation and renewable energy projects, followed on by other socially and environmentally necessary enterprises. The amount of money flowing into the economy would be as before, restrained only by the appearance of any inflationary pressures.
So monetary reform does not mean austerity.
And to connect it with monetarism is just a clang association.
If Tim Worstall is your main man, then there is not much to be discussed. He is a neo-liberal.
Dear Frances Coppola says “Positive Money correctly describe the way bank lending works, but they ignore the impact on savings, and therefore tell only half the story.” At other times she has agreed with basic criticisms of the way banks create money.
As for Stumbling and Mumbling, he has the tired phrase “monetary cranks” in his first line, and I make it a point not to read people who think that anyone who disagrees with them is by definition a crank.
This is a quick response to your post. I have debated this matter within and outside of the Green Party in the past, and I am only too familiar with the many misconceptions that go in to making it into a thoroughly confusing debate. I have no wish to start again.
If anyone doubts that it is confusing, have a look at the debate between Krugman and Prof Steve Keene. They got embroiled in the same confusion. I think the confusion is created by the bankers, who live in mortal dread of people finding out how they really create money.
Re: Tim Worstall. Indeed; this is perplexing.
According to Mr Worstall –
“As I’ve said before and will continue to say. The only thing worse than being exploited by a multi-national company is not being exploited by a multi-national company.”
http://timworstall.com/2013/03/23/aint-globalisation-and-neoliberalism-great/
Frances Coppolas’ criticism of Positive Money is I think that in practice it would be deflationary even if in theory it might not be. A full reserve system requires the total replacement of the private banking system and its ability to create money ex nihilo. The Government and central bank would need to substitute for the credit creating power of the banking system and assume all the risks involved. It is certainly a radical plan. But may not be necessary to allow more spending on Green infrastructure. Or just more public spending. It is thus more radical than in needed. I agree that there is no technical reason why the existing system with tighter regulation could not work. But that is less satisfying emotionally than a sweeping change.
“A full reserve system requires the total replacement of the private banking system and its ability to create money ex nihilo.”
No it does not. Banks would still operate as before except- behind the scenes, they would have to have money that was first created by the Government and deposited by the Public. Instead of receiving money first – with all the consequential benefits of that (let alone the fact that they create it when making loans) they would have to attract depositors money and become the servants of the Economy and not it’s masters.
“The Government and central bank would need to substitute for the credit creating power of the banking system and assume all the risks involved.”
No it wouldn’t.
The Government (i.e. The Public) would create the Money determined by Economic Indicatorsand then spend that into the Economy. At present, they Borrow Money and then spend that into the Economy through the creation of Treasury Bonds (Government I.O.Us), increasing the National Debt.
The Government would not go into the Lending Money Business – that is what Banks are for. The Problem is that Banks over the last forty years , have moved into the Business of Government by taking a key role of Government – that is the Creation and control of it’s Money Supply.
A transaction account would be full reserve and instant access. If the Bank hasn’t got your money it means they’ve stolen it.
An Investment Account would be a timed deposit account and that money would be available for a Bank to lend out. We want Private Banks operating in a System of Publicly Created Money. Banks would still charge interest and pay interest – the difference is that they would no longer hold the hold the National Currency for ransom when they make wreckless investment decisions forcing Public Bailouts.
Solving Debt with Debt is not the Answer, just like trying to to drink ourselves sober is equally bound to fail and end in death.
Just came across this blog through my interest in the adoption of the policy by the Green Party.
Are you aware that Positive Money have already countered the question of why Northern Bank went bust if they could just print to pay:
http://www.positivemoney.org/2012/07/if-banks-can-create-money-how-come-northern-rock-went-bust/
“And as Tim Worstall points out here, there is a crucial intellectual error at the heart of the Positive Money agenda – that banks create money at all; as he rightly points out, if that’s what bank lending did Northern Rock would not have gone under.”
Here! Here!
Excellent Argument…
But another slant on this argument is, if Banks can just create money whenever they want – why do they bother lending it out at all – why not just create as much as they want and keep it for themselves and spend it?
To understand why Tim Worstall cannot effectively answer his own question, we must invest a smal amount of time ourselves in studying the different forms of Money.
1. Central Bank Money – used between Banks, and only Banks
2. Base Money – created by hte Public (through the Bank of England) as notes and coins
3. Broad Money – Bank created Credit when they lend.
The reason Northern Rock went bust is because the rate of outflow of central bank money was larger than inflow of central bank money, becasue the rate of increase of their lending was larger than other Banks and Building Societies.
Unfortunately, Tim Worstall frustration at not understanding a subject has casued him to resort to name calling of those who do. I would urge him to read “Where does Money come from” as a treatment for his condition. I’m sure that reading that text would make him a far happier and more amiable person.
After reading that book he may indeed come up with a sound reason why PositiveMoney’s proposals would not work, but at present; he has not.
Here, here! Positive Money’s explanation of how Northern Rock went bust is clear, logical and evidence based. Those who continue to believe that “no one could have predicted the crash” are just part of what is a massive problem. Like not understanding simple things like the three distinct and separate monetary systems in the UK.
“But another slant on this argument is, if Banks can just create money whenever they want – why do they bother lending it out at all – why not just create as much as they want and keep it for themselves and spend it?”
Because they need
1. a fractional reserve, because the depositors might want to withdraw money in legal tender, so they need liquidity (in legal tender or central bank deposits they can use to get legal tender at any time)
and
2. they need assets to back up the deposits to be solvent, even if it doesn’t guarantee liquidity at all times in the short run
“But another slant on this argument is, if Banks can just create money whenever they want – why do they bother lending it out at all – why not just create as much as they want and keep it for themselves and spend it?”
Wrong. Under the Fractional Reserve System banks create LOANS! A loan should be paid back. Banks make profit out of interest on the loan and banking fees.
The loan the bank create is an IOU. That IOU is used as money. When the borrower pays back the loan the bank created money is taken out of the economy. But the bank retains the profit made from banking fees and interest. Please spend some time in reading the Bank of England’s document explaining this. That can be downloaded from Positive Money’s website.
Loans in the retail market doesn’t provide such big profits but a steady income. Loans to government on infrastructure project or stocking the military, especially when they deplete their stocks in a war, is where the big money lies. And of course, the money is made out of the tax payers who has to cough up for it. And those bankers who appoint the politicians get richer and richer…
I’m sorry, but you demonstrate [along with Tim Worstall and many others] a classic misunderstanding of what banks actually do. This can be shown very simply. You, anonymous blogger, deposit £1000 of your hard earned cash with MadeUp Bank PLC. I am also a customer of MadeUp Bank PLC and I wish to borrow £1000 to buy a clapped out old car. The bank credits my account with £1,000 and I go and buy my old banger. Do you still have £1,000? I would be interested to know where your £1,000 has gone in your model?
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“As Chris Dillow points out here, the likely effect would be to reduce bank lending in times of recession…” Absolutely hilarious. First, I suggest Neil Schofield and Chris Dillow look at the figures for M4 expansion and contraction under the EXISTING SYSTEM. What they’ll find is something that simply confirms a point made by Irving Fisher in the 1930s, namely that during booms, private banks create and lend out money like there’s no tomorrow. Then come the crash, they exacerbate the crash by ceasing to create any new money, or even REDUCING the volume of money. E.g. in 2004,5 & 6, M4 was expanding at about 10% a year: completely unsustainable and an important factor contributing to the housing bubble.
Next you say “And as Tim Worstall points out here, there is a crucial intellectual error at the heart of the Positive Money agenda – that banks create money at all..” Well excuse me, but if someone gets a loan from a commercial bank, they can simply credit the person’s account with money out of thin air. And money is defined in economics dictionaries as something like “anything widely accepted in payment for goods and services”. So if Barclays gives you a loan and debit card, will that card be “accepted in payment for goods” or not? The answer is “yes, it will”. Ergo what Barclays has produced is money. QED.
However, Tim does have SOME SORT OF POINT. That is, there is a difference between central bank money and commercial bank money. He needs to be more accurate on that point.
Next you say “Frances Coppola, herself a former banker, describes in some detail that Positive Money is based on a straightforward ignorance of what banks actually do.” Really? I couldn’t find anything in Coppola’s piece that showed any glaring deficiencies in PM’s understanding “of what banks actually do”. Can you direct me to relevant passages?
However I did like Coppola’s mockery of the idea that the Bank of England should determine the amount of lending. In view of “Funding for Lending” it looks as though the BoE has taken on board that particular proposal of PM’s. (Which is not to say I agree with the idea: I don’t).
So if I understand correctly, when I get a loan from a bank and the money is credited to my account, there is no actual money created, the deposit is just a promise to pay money, like the loan. So how come you pay interest to the bank on non-existent money!? If you are making say a car loan, why can I pledge the car as collateral if I don’t own it yet. Why does the bank not buy the car and loan me it for money?
I have tried to understand the monetary system, and have seen “Money as Debt” videos, but it is still confusing, can somebody explain simply or using an analogy please?
The simple answer is that the banks are not Hertz Rentacar? But, on an academic note, if you wish to understand the accounting trick that banks use to create money out of nothing, I have found no better explanation than this. Forget about the sales pitch for Austrian Economics, follow the worked example and the simple maths therein. http://mises.org/library/fractional-reserve-banking-question
” there is a crucial intellectual error at the heart of the Positive Money agenda – that banks create money at all”
Yes, they create money. The crucial intellectual error is the wrong believe banks gave loans out of reserves (they are only requiered to hold a small reserve by law (in Australia this is even 0%) and as preperation in case someone wants to withdraw his desposits in legal tender).
It is possible to prevent property bubbles using land value taxation, which is already in the Green Party manifesto, so I think this was adopted for other reasons.