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A World Without Fractional Reserve Banks and Central Planning

Excerpted From The Money Bubble: What To Do Before It Pops by James Turk and John Rubino:

In a very real sense, it is fractional reserve banking and not money itself that is the root of so many of today’s evils. Whenever fractional reserves are permitted, the banking system – including the one that exists today throughout the world – comes to resemble a classic Ponzi scheme which can only function as long as most people don’t try to get at their money.

A Better System
Now, is this critique of the current monetary system just impotent ideological whining over something that, like the weather, can’t be changed? Or could fractional reserve banking and the resulting need for economic central planning actually be replaced by something better? Specifically, how could a banking system without fractional reserve lending accommodate depositors’ demand that their money be there when they want it and borrowers’ desire for 30-year mortgages which would tie up those deposits for decades? And could this market operate without the need for government oversight and management?

The answer to that last question is yes. A better financial system is possible, and here’s how it would work:

First, today’s commercial banks would split into two types. “Banks of commerce” would take deposits and keep them safe for a fee, like the goldsmiths of old. “Banks of credit” would pay interest on deposits and lend out depositor money, but would have to match the duration of deposits with the duration of loans. Deposits that can be withdrawn anytime (a checking account for instance) could only be used to fund a loan which the bank can “call” on demand, while longer-term deposits (say a 5-year CD) would be matched to longer-term loans like a business term loan or 5-year mortgage. Really long-term loans like 30-year mortgages would be funded with deposits for which the bank would have to pay up in order to convince a depositor to part with his or her money for such a long time.

The resulting mortgage would carry a high enough rate to provide the bank with a small profit, which would make 30-year mortgages both expensive and hard to get. But the case can be made that they should be hard to get. Buying a house – or anything else that requires capital for extremely long periods – should require a hefty down payment, other liquid assets as collateral and a solid income stream. This coverage would give the bank the ability to foreclose and realize more than the value of the loan, which would protect its ability to repay its depositors, thus making depositors more willing to tie up their money for long periods.

Such a society would be a lot less prone to excessive debt accumulation and inflation, bank runs would be far less frequent and government deposit insurance would be much less necessary. It would, in short, be a saner world in which individuals managed their own finances, saved with confidence and borrowed only for highly-productive uses, while two sharply-differentiated types of banks facilitated wealth protection and real wealth creation rather than paper trading.

Today’s investment banks and hedge funds, meanwhile, would be set free to speculate with their investors’ money to their hearts’ content, making fortunes when they succeed and collapsing when they fail, with no public stake in either outcome. They would be seen as high risk/high reward propositions and their customers and investors would participate with eyes wide open. No entity would be “too big to fail” because the banking system would be insulated from the vicissitudes of more volatile investment markets.

Central banks in such a 100-percent reserve world would either be completely unnecessary or serve a sharply-defined, very limited function of issuing paper currency 100-percent backed by gold/silver reserves and standing ready to exchange one for the other upon request. No need to be a lender of last resort because the banking system is sound and stable. No need to intervene in currency markets to fool citizens into treating valueless paper as a savings vehicle because paper, as a warehouse receipt for real assets, will have intrinsic value. Booms and busts would be fewer and less devastating, reducing the need for government programs in response. Debt levels would be miniscule by today’s standards, and therefore easily serviced from profitable activities. This hypothetical world, in short, is more modest and far more sustainable. All in all, it’s an attractive, completely feasible vision.

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30 thoughts on "A World Without Fractional Reserve Banks and Central Planning"

  1. Some day in 2017 President Donald J Trump is going to be perplexed as to what to do about a dollar collapse until he decides to consult the wisest Being humanity knows little of. Trump will ask Jesus Christ for advise. Trump will receive guidance to declare a JUBILEE. The 20 trillion dollar debt will be reneged upon, may be other debts as well will be also cancelled. JUBILEE

    YES! The US Congress with Trump’s approval will create a law that the US Treasury will NOT do business with the FED any more. Then destroy the IRS. Elizabeth II, will go ballistic.

  2. Mortgage is an evil. The entire capitalist system is an evil. Ur proposed solutions r just more joo-shit materialism shoved down the worlds throat.

  3. Pingback: The Küle Library
  4. Most anything would beat what we have today. I would like to add: All mortgages should be market based variable rate mortgages. Fixed rate mortgages are like, NO LONGER A GOOD IDEA. Any for of EQUITY LENDING is a bod idea. Equity should never be a consideration in making a loan; unless its value is discounted by 50%. The quality of a loan should always be based upon the future value of the INCOME STREAM. Otherwise, I think this may a good idea. The public should never be subjected to Hedge Fund and Brokerage house SWAPS, SECONDARY MARKET TRANSACTIONS. They should be regulated totally separate from retail banks.

  5. While this idea is obviously novel today, it was widely debated after the 1929 Crash (Fisher’s 100 Percent Money proposal) and, in fact a few hundred years ago in the ‘currency school’ versus ‘banking school’ discussions.
    It lost out not because the FED would lose power, but because the BANKS would lose the power to create money, and, as Durbin famously reported, The Banks Run This Town.
    Today’s most advanced discussions are on the sovereignmoney.eu website of German Sociological Economist Dr. Joseph Huber, with an even more advanced discussion than that for 100 Percent reserves…… Real Money.

    And, as to whether such a system can bring about full economic growth potential versus choking up the ‘credit’ system, have a read of the work of Japanese monetary economist Dr. Kaoru Yamaguchi, who has used a “System Dynamics” macro-economic model to determine these outcomes.

    Dr. Kaoru finds that public money administration is no obstruction to achieving full GDP-potential without inflation or deflation, and …….isn’t that what a money system is supposed to do?

    Public Money.
    It’s about to take off like a Prairie Fire.

  6. That should last five minutes. The problem with this idea is, they already did that. People were against central banking in this country for hundreds of years. They took any opportunity to impose it, and in 1913 it stuck. As long as the profit motive and competition is a thing, people will figure out how to cheat and game the system. A lasting solution requires a paradigm change, not just more conservative versions of current institutions.

  7. Here’s another piece of resistance you could meet: Ostensibly the reason for creating the Federal Reserve was to prevent the depression (“Panics”) that happened every generation, very often sparked by the kinds of speculation you describe the banks being free to do again. Even those who might not be a fan of the Fed might bring this up.

  8. The system has worked the way it has in the past not by some error.It has worked the way it was set up to work! If the public,in the past, had been robbed by the Fed. it was not because of some mistake.The public was robbed by the Central Bankers in a planned fashion!
    In my opinion Keynes was a mediocre economist who shilled for the Bankers,some one we would call a ringer!
    His theories were gobbledegook nonsense that tried to justify the Reserve Banking System & the Fed’s. place in the scheme of things.Powerful interests saw to it that his ideas were jammed down the throat of the public!
    It will take many years for the wreckage of this this banking system to make all of the needed corrections,perhaps a generation. I would suggest two stopgap band-aid solutions for the immediate future.
    1) End the Fed.& move the operation into the Treasury Dep’t.with a lot of oversight to the department’s dealings.Perhaps the GAO?.Save billions of dollars of interest paid to the Fed.!
    2)Replace the I.R.S,with a new agency,& get rid of the Federal Income Tax.Institute a flat tax in it’s place.
    Once these steps are taken we can begin to rebuild our financial system & gradually do away with the Reserve Banking System & the Central Banks!
    PS: unfortunately to do these things we would need a revolution!

  9. I like this concept, it’s along the lines of what I think would be the best system.

    To Dwain, I don’t think it would cost “Jobs” per se… corporations would just need to be careful to match their borrowing needs to the duration they really need to get a rate that works for them. However, industries that rely on cheap consumer credit (Housing and automobiles, etc.) will face a correction… and that may cost “jobs.” Jobs that would be replaced by a more honest system that allows small businesses to thrive.

    Of course, this concept would be met with near universal disapproval, the people at the top won’t be able to fleece everyone, and the people at the bottom will feel “discriminated against” when they can’t magically qualify for any low interest loan they want.

    A problem we face in society is we’re all delusional. Take the parable of Jack and the beanstalk… that’s SUPPOSED to be a story about vetting your trades so you don’t get burned… except that jack got ACTUAL magic beans that really worked. What is this teaching kids?

  10. Bruce ,
    Your points are artfully presented, providing something complimentary the author’s and J.Turk’s proposal of a strict separation of banks into to broad categories,
    and allowing the concentrated wealth to continue enjoying the leverage they have today, sans bailouts for any reason.
    Where the article sees perhaps a reduced role for a central bank you see a system functioning without a central bank. All of you may share common ground of what central bank powers are to be eliminated, or capped in some way. On this subject, some argue moving responsibility back to the Dept. of the Treasury would not prevent abuse. Hmmmm

    It was your point Bruce regarding as you called it the” pragmatism”. It
    seems far more pervasive now, and is ingrained and tolerated by the population at large. It expect it will continue, awaiting a new generation to contain it from the system.

  11. Currency must BE gold and silver or contain gold and silver – not be exchangeable for gold and silver. Else citizens are always vulnerable to the same scams of inflating away purchasing power through altering the paper/gold exchange rate. Precious metal currency = Freedom.

  12. I like your ideas JR, but I think, ironically, the main resistance to it will be, as it has been in the past, that it doesn’t allow much wealth to be borrowed from the future.

    The fiat “money”, fractional reserve, central banking systems we have now allow virtually unlimited amounts of money to be borrowed at any given time. Unlike a sound system like you’re proposing, a central bank’s ability to control interest rates and create money out of nothing distorts the price signals that would limit such money creation. In fact, that system was probably adopted (i.e., The Federal Reserve Act) precisely for that reason, to allow politicians and “globalist elites” to fund wars, fund a military, build an empire, control governments, indenture other countries, steal wealth from the populace through inflation, cultivate a culture of corruption, destroy the middle class, create perverse incentives throughout society, create price distortions by controlling interest rates, and many other generally undesireable things for the vast majority wanting to live in a sane society.

    Now, obviously (or hopefully) if such a criminal system were suggested as I presented it, most people would reject it. However, it can be sold in a very devious way that appeals to the greedy and parasitic minded, which is to admit that though an unbacked monetary system is unsustainable and may last only about 3 or 4 generations, it works fabulously for the first two.

    That sort of pragmatism is what must be resisted, and I think it will once again (The Fed is the 3rd central bank of the United States. The first two were dismantled.)

    1. As the previous person stated, I do not believe the Fed Gov will ever agree to your proposal. It would take their massive power away. Being able to borrow fantastic sums from the Fed Res and/or the world enables them to have huge welfare programs, a very large and powerful administrative bureaucracy, and a massive military. They wield all of them on a regular basis. A side effect of your proposal would be to end that and the Fed Gov would have to live pretty much within its means. This would mean a substantial reduction in government. They would not be able to do many of the things they do today. This would not bring happiness to Washington DC (or the class of dependency) and the current crop of politicians that exist there. In addition, sound money and money management would result in less profits for the finance industry. No joy there, and they do much of the financing of the campaigns of the politicians that exist in Washington DC. So, without writing a book here that nobody wants to read, I do believe your proposal will not be accepted.

    2. “” it doesn’t allow much wealth to be borrowed from the future.””
      Actually, a little true, but that is not the function of a national money system;
      it should be made available to exchange CURRENT goods and services……which, today it is not.
      At some point, people are going to wake up to this massively flawed fraud of a money system that is ‘borrowed’ into existence, and only lasts as long as the debt that provided the loan.
      I think the main obstacle to a positive and workable money and banking reform is, simply, ignorance.
      Yes, it can be done, and this list of advantages is woefully short of the mark.
      True economic democracy is available if we really understand the role of money.

      Nobelist Fredrick Soddy’s study of the money system offers the foundational understandings for all of the full-reserve and ‘sovereign-money’ proposals that have since been advanced.
      For the Money System Common.

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