The Perfect Banking System

August 13, 2014 – The perfect banking system, like the perfect monetary system, is one which serves the needs of consumers and savers, and not the needs of the government. It is a system in which entrants are free to enter and leave the market with a minimum of restrictions, and in which no banks are bailed out.
Almost since their creation, banks have been involved in a symbiotic relationship with government. Governments often found themselves short of money needed to engage in war. Banks, due to their deposit base, were a ready source of funds but needed assurances that their loans to the government would be paid back. They received this in the form of government protection of their business which developed into a system under which only those with a charter from the government would be permitted to engage in banking.
By the time of the Founders, banking was a highly privileged business. Banking charters came with a whole raft of requirements, quite often including requirements89696633_f87655b9b5_z to purchase state government bonds in order for banks to issue banknotes. That ensured ready buyers for government debt and meant that state governments lacked fiscal discipline.
The federal government’s response to the weakness of the state bank system was to create a national banking system. This was introduced only in 1863, alongside the introduction of unbacked paper money, in an attempt to fund and win the Civil War. Ever since that time, this national banking system has had a whole raft of additional legislation patched onto it, yet the underlying system is still based on that 1863 model and does not address the systemic weaknesses built into the system.
Banks today are universally fractional reserve banks, meaning that they do not keep on hand the entire amount of money deposited with them. They loan most of it out and only keep enough on hand to clear checks written on their accounts and to provide cash to depositors withdrawing funds. At many banks, if even 10 percent of their deposits were to be withdrawn then the bank would collapse, as they wouldn’t have enough money on hand to continue functioning.
The FDIC (Federal Deposit Insurance Corporation) claims that depositors at banks will be made whole in the event of bank failure, yet the deposit insurance fund has only $49 billion on hand to cover more than $6 trillion in insured deposits, a ratio of less than 1/120. In the event of a catastrophic system of bank failures, either depositors are out 99 percent of their money or the federal government is going to hyperinflate the currency to make people whole, neither one of which is a good solution.
Banks also act as an arm of the government, enforcing anti-terrorism, anti-money laundering, and sanctions laws at the government’s behest. Withdraw $10,000 in cash from your account? Your bank will report that to the government. Deposit $3,000 on three consecutive days? That’s getting reported. And not only are you not allowed to find out that the bank is reporting you to the government, you also can’t sue the banks for reporting you. How dare they do that to you for dealing with your own money? Only, it’s not really your money. As the courts have ruled repeatedly, your bank deposit is a loan to the bank, not money held in trust. You’re just an unsecured creditor with no leverage in the system at all.
The banking system that exists in this country enriches both bankers and the government. Banks get the first use of the Fed’s newly-created money, and in exchange act as ready customers for the federal government’s trillions of dollars of new debt. It’s a win-win for banks and the federal government, and a lose-lose for the American people.
The solution is to get rid of the system of government privileges that allows Wall Street banks to make billions of dollars on the backs of the American people. Get rid of the barriers to entry that keep competitors from offering real competition to entrenched large banks. And get rid of the Federal Reserve System that has turned the banking industry into one big cartel.
A truly free banking system will offer a multitude of banking options to serve both people seeking to deposit money and those seeking to borrow. As the example of Bitcoin has demonstrated, amazing things happen when markets can work without government interference.