Monetary Intermediation Cost Background
The European Central Bank (ECB) controls the money stock of the seventeen nation Eurozone (€) and supplies liquidity to a group of banks based on a fractional reserve deposit banking system. This site has analyzed the ECB and determined that its monetary intermediation cost is 99% inefficient (1 - deposit reserve requirement) and is on the order of 2¾% of Eurozone GDP per year that could be more efficiently handled by a full reserve credit banking system, development of depositor owned institutions to exclusively hold demand deposits and direct issuance of new money creation, known as Seigniorage, to Eurozone citizens based on a GDP index monetary standard.

The analysis below will show that the fractional reserve deposit banking system currently in use has been confounded with true credit intermediation resulting in unearned wealth transfer to the fractional reserve lending source and that there would be no monetary or credit intermediation loss with conversion to a full reserve system, reducing and/or eliminating the current wealth transfer disparity caused by the fractional reserve system.

It is believed that with the discovery of the Modigliani-Miller Financial Theorem in 1958 of the irrelevance of capital structure that proof of the superiority of the full reserve monetary system has existed because of its lower monetary intermediation cost.

CHART 1 DATA SOURCE: Fractional Reserve Monetary Intermediation Cost Impact Chart. The chart above shows the impact of fractional reserve monetary intermediation unearned wealth transfer.

CHART 2 DATA SOURCE: Chart data extrapolated from sample loan using ECB 1% reserve requirement to 100% full reserve requirement. Increasing return to fractional reserve credit intermediation as reserve requirement reduced comes from Capital (Tractor) and Labor (Farmer) since it is known from M&M Theorem that leverage does not change system value the increased financial intermediary return as reserve requirement reduced must come from other parts of the system to keep the same value.

CHART 3 DATA SOURCE: Business Cycle with Leverage and Intermediation Added using Excel Sine Wave Graph. The chart above shows the impact of fractional reserve leverage, which adds risk to the system in the form of increased variability of returns but does not change returns to the system, shown above as increased amplitudes of the business cycle. The compounding intermediation cost of the ESCB/ECB System is also shown gradually increasing in size that is actually a reduction to system returns.

CHART 4 DATA SOURCE: Business cycle with compounding monetary intermediation cost added using Excel Sine wave on negative parabola graph. The chart above shows the impact of the compounding monetary debt intermediation cost, which mis-allocates system resources to the money creation source and reduces economic growth at a progressively faster rate as the monetary debt compounds.

A banking business model based on full reserve financial intermediation, time matched funding spread lending, is not a new concept. It has had historical support from at least five previous Nobel Prize winners, Milton Friedman, 1976, James Tobin, 1981, Maurice Allais, 1988, Merton Miller, 1990 and Frederick Soddy, 1921, a former Secretary of Agriculture and Vice President of the United States, Henry Wallace, at least one prominent European central banker, Mervyn King, retiring governor of the Bank of England and numerous distinguished economists and financial writers including Irving Fisher, one of the foremost economists of the first half of the 20th Century.

European Central Bank Summary/Abstract
The attached European Central Bank Monetary Intermediation Cost paper puts forth the proposition that the monetary intermediation cost of the ECB is at least 99% inefficient (1 - deposit reserve requirement) and is on the order of 2¾% of Eurozone GDP per year, compounded to 30% since the introduction of the Euro in 1999, that could be more efficiently handled by a full reserve credit banking system, development of depositor owned institutions to exclusively hold demand deposits and direct issuance of new money creation , known as Seigniorage, to Eurozone citizens based on a GDP index monetary standard. Conversion to a full reserve monetary system is expected to improve the seventeen nation Eurozone economy by the approximate amount of the reduced monetary intermediation cost, on the order of 2¾% of Eurozone GDP per year, improve the balance sheet of the Eurozone governments on the order of €13.9 trillion as of fiscal year 2011 and restore on the order of ten to twelve million jobs as shown below. Also listed by European Union country in the Eurozone and non-eurozone.

CHART 5 DATA SOURCE: ECB Annual Monetary Intermediation Cost to Economy 1999 to 2011, Attachment 6. The chart above shows the annual monetary intermediation cost of the ECB to the Eurozone economy that could be saved by replacing the ECB fractional reserve system with a full reserve system.

CHART 6 DATA SOURCE: Direct Issuance and First Use (Seigniorage) Money Supply, Attachment 12. The chart above shows the impact of the ECB creating debt based money for its first use and control faster than economic growth, transferring wealth from the other sectors of the economy to the banking/financial sector by virtue of its first use and control of the new money.

CHART 7 DATA SOURCE: Direct Issuance and First Use (Seigniorage) Money Supply, Attachment 12. The chart above shows the impact of the ECB creating debt based money for its first use and control as a percentage of the M1 Money Stock faster than economic growth, transferring wealth from the other sectors of the economy to the banking/financial sector by virtue of its first use and control of the new money.

CHART 8 DATA SOURCE: ECB/NCB Annual & Compound Intermediation Cost to Economy 2005 to 2011, Supplement 1(a). The chart above shows the expected improvement in EU member state annual GDP growth rates from monetary intermediation cost savings of replacing the ESCB/ECB fractional reserve system with a full reserve system.

TABLE 1 DATA SOURCE: European Central Bank Monetary Intermediation Cost Impact on Economy and Jobs. The table above shows the expected impact of conversion to a direct issue full reserve monetary system for the Eurozone economy.

The complete PDF paper can be viewed and/or downloaded from the link below:
European Central Bank Monetary Intermediation Cost. The version posted was last modified December 27, 2012.
(Adobe Acrobat Required)

About the Author William Haugen
I have a Masters degree in Finance from Carnegie Mellon University, Pittsburgh, PA in 1983 and a Bachelors degree in Business from the University of Washington, Seattle, WA in 1981. I live in Dallas, Texas. If you have comments or suggestions, please email me at whaugen@flash.net.