World Without Banks

Sometimes it helps, if you want to see and understand something more clearly, to imagine the world without it. I just finished a book (“Rethinking Money” by Benard Lietaer and Jacqui Dunne) that was so thoroughly confused—and confusing—about how the U.S. private banking system “creates our money” (but perversely refuses to create enough of it) that I felt an overwhelming need to try to clarify, in my own mind, what the private banking system actually is. That’s when I got the idea of imagining a world without private banks at all—and trying to see at what point, and for what purpose, they become useful or, perhaps, even necessary.

It is certainly possible to imagine a monetary system that, up to a certain point, works very well without private banks: A collective government (sovereign) establishes a treasury which issues—at the direction of the collective government—fiat dollars. The collective government establishes a need for the citizens to earn those fiat dollars by imposing taxes which can only be paid with the fiat dollars themselves. Given this set up, the sovereign can now issue dollars to buy, from the citizens, as many collective goods and services as the citizens have time, materials, energy and technology to produce. The fiat dollars the citizens earn by creating these collective goods and services are then used not only to pay their taxes, but also as a means of exchange amongst themselves for things they privately produce, own or consume. Thus, two markets are created, each using the same currency as a means of exchange: the market for collective goods and services, and a market for private goods and services.

The citizen’s desire to “save” dollars for a rainy day could be facilitated by the collective sovereign directing the treasury to issue interest bearing bonds. The citizens could then exchange their excess fiat dollars for these bonds—with the agreement that they would not convert the bonds back to dollars for a specific period of time. This creates the advantageous situation whereby (a) the citizens can grow their savings against the day they will be unable to earn a living through their labor, and (b) the collective sovereign can reduce the number of dollars in circulation—(as a strategy to maintain price stability.)

Thus far, we have no need of a private banking system. The collective sovereign can issue dollars, collect taxes, and issue bonds. The citizens can earn dollars, and then use those dollars as a means of exchange for private goods and services amongst themselves. They can save for the future by exchanging their excess dollars for the interest bearing bonds, and they can “vote” to pay themselves to produce any and all collective goods and services they have the time, materials, energy and technology to produce. It sounds to me very much like a happy and prosperous society.

We should note, however, that the total dollars in circulation which are available for the private exchange of goods and services is limited to what has been paid to the citizens for the production of collective goods and services—minus taxes collected, minus dollars which have been exchanged for interest bearing bonds, plus interest paid on the bonds. It might well be these are not ENOUGH dollars to satisfy the citizen’s efforts to produce and exchange all the private goods and services they need or want. Private things desired, or even desperately needed—and for which resources are actually available—could fail to be provided simply for lack of enough dollars to facilitate the exchanges necessary to produce and deliver them.

It is possible to imagine, under these circumstances, various ways the collective sovereign could add new fiat dollars to the private market other than, and in addition to, the purchasing of collective goods and services. However, whereas democratic processes (when properly working) can reasonably direct the production of collective goods, it seems evident that these same processes (even if they are properly working) are not well suited to deciding what and how many private goods and services should be created. It is not clear, then, how the collective sovereign could properly know how many new fiat dollars to create, nor how to distribute them so the needs for private goods and services are optimally met.

It might well be that a private banking system could solve this dilemma. The collective sovereign might enable a system of private banks to be formed, each endowed with the legal privilege of leveraging sovereign fiat dollars by issuing “loans” to citizens backed by only a fraction of the sovereign dollars the bank actually has at hand. The business model might unfold something like this:

A private bank is given a legal franchise by the collective sovereign. The private bank then creates an incentive for citizens to deposit their dollars-on-hand with the bank—the incentive being the bank’s promise to pay the citizen some rate of interest, or perhaps providing them with free checking and check-clearing services, relieving them of the worry of having to carry around large amounts of cash. The bank is then authorized by its sovereign franchise to issue “loans” to the citizens, denominated in the sovereign’s currency, in amounts exceeding the dollars the bank has on deposit by a specified percentage. For example, the bank might be authorized to issue nine “loan dollars” for every actual fiat dollar it has on deposit. The bank then makes a profit by collecting interest on the loans.

Importantly, the sovereign ensures these “loan dollars” are just as acceptable in the exchange of private goods and services as the sovereign’s “real” dollars by guaranteeing to convert the “loan dollars” to “sovereign dollars” at any time, on demand. With this infallible promise in place, the “loan dollars” become, for all practical purposes, indistinguishable from the “sovereign dollars.” And the net result is that the quantity of dollars in circulation is dramatically increased, providing a monetary base for a greatly expanded production and exchange of private goods and services.

One could even imagine a kind of ingenious mechanism in this new set up because, if everything works with the proper incentives, the amount of new “loan dollars” created will be very close to the amount of new dollars actually needed by the private market exchanges, helping to keep prices stable. This is because the “loan dollars” issued by the private banks are for the purposes of either producing or purchasing real goods and services the private citizens actually need or desire—and this fact is continuously verified by the issuing bank’s interest in ensuring the high probability of the loan being repaid. Before a loan is issued, then, the bank does research to confirm that what the newly created dollars will produce is, in fact, something that someone wants to purchase, or that what someone wants to purchase is, in fact, something that can be produced for the proposed purchase price. The bank also establishes, to the best of its ability, that the person proposing to do the producing has, in fact, the skills and resources necessary—or that the person proposing to do the purchasing has the projected income-over-time to repay the loan.

So, by adding a private banking system to our imagined world, we have created a situation where both collective and private goods and services can be produced, exchanged, and consumed AS NEEDED, so long as the real resources necessary for their production—time, labor, materials, energy, and technology—are available. Citizens can save against the day they can no longer earn their living with their labor. Prices can be held relatively stable by the continuous draining of dollars out of the market for private goods and services through tax collections and bond issues. It seems like an almost a perfect set up. We should ask, however: are there things that can now go wrong—things that couldn’t have happened before we inserted private banks into the picture?

One thing that could go wrong is if the citizens began using the new “loan dollars” to do things other than producing and exchanging real goods and services. Before the private banks, all the “new” dollars created (by sovereign fiat) were always spent to create real collective goods. But private-bank “loan dollars” could potentially be put to other uses. For example, citizens could begin using the “loan dollars” to place bets on whether a company’s stock price was going to go up or down. Or they could use the “loan dollars” to buy companies whose sales or products are struggling, and then let-go the company’s employees and sell off its assets for a profit. In each of these examples, the problem is that the new “loan dollars” increase the money supply circulating in the private market without ever producing any goods or services the citizens want or need—or, indeed, can even spend their dollars to buy.

This problem could be exacerbated if the private banks decided it was more profitable to engage in these kinds of “investment strategies” themselves (instead of sticking to their original business model of making loans and collecting interest.) They would certainly be in a uniquely leveraged position for doing exactly that. The Directors of the private banks could create bank-owned subsidiaries, and then issue “loan dollars” to the subsidiaries for the purpose of “investing” in financial bets. If something like this happened and, driven by the greedy side of human nature, grew out of scale and control, one could imagine the strange situation arising where a great excess of new dollars would be created but never spent to produce or buy anything real—nor spent to employ citizens to produce those things. Winners of the financial bets might amass huge sums of dollars—most of which can only be used for the purpose of making further bets—while more and more average citizens struggle to find a job to make ends meet.

A worst case scenario might be if the citizen bet-winners began to use their massive financial clout to to “buy” the democratic process guiding the direction and policies of the collective government. If this occurred, this relatively small group of citizens would be in a position to direct toward themselves the private ownership of virtually all the collective goods and services the society owns—essentially enslaving the rest of the population. The strategy for doing this would likely involve something we touched on earlier, but perhaps didn’t take proper note of. This is the fact that the sovereign’s infallible promise to convert private-bank “loan dollars”, on demand, into real sovereign fiat dollars (thereby enabling the private banking system to become functional) renders the two kinds of dollars, for all practical purposes, indistinguishable. It is this undifferentiated confluence of the two kinds of dollars which enables the power-takers to perpetrate two fundamental myths which enable them to take control:

(1) That the private banks, operating in the private market, are exclusively creating ALL the U.S. dollars that exist; and (2) the only way, therefore, the collective government can get dollars to spend for collective goods and services is by taxing or borrowing from the citizens.

The original (and still very “operational”) process of sovereign fiat dollar creation for the purpose of creating collective goods and services would be suppressed by the power-takers and publicly denigrated as “printing money”—something, by inference, both illegal and unethical. The citizens-to-be-controlled are then persuaded to believe their collective government is building debt faster than it can ever repay it—and the only recourse is to (a) dramatically reduce the dollars spent on collective goods, and (b) pay off government debt by SELLING existing collective goods—such as roads and airports, sewage treatment plants and water systems, national parks and public schools—to the private citizens who have amassed dollars beyond fortune. Once transferred to private ownership, what used to be free or very affordable collective goods, begin to generate tolls and rents further enriching the power-takers—and further impoverishing the average citizens.

It is hard to conceive, however, a rational citizenry ever allowing their sovereign monetary system—which works so beautifully to create the many collective goods and services they depend on, enjoy, and leverage to such great personal benefit—to become as deceitfully sociopathic and destructive as we’ve just imagined. Surely, if a private banking system were introduced—and it seems there are real benefits to be gained from doing so—there could also be established a few simple RULES that would prevent the nightmare scenario we’ve just envisioned from unfolding.

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