The Conundrum of Banking

A thoughtful person should probably have a nuanced view of banking, just as they should have a nuanced view of fertilizers and pesticides: technologies that at once feed us and poison us.

The essence of banking is that the bank accepts something of real world value from the customer, and acknowledges by document that it owes the customer a sum of money, payable in agreed-upon ways or for an agreed-upon purpose.

A mortgage, for example, includes not just a recurring and timely promise to pay, but the bank’s contingent ownership of the mortgagor’s property. A car note entails the contingent right to repossess the customer’s car.

The bank stands ready to discharge its liabilities in a manner of the customer’s choosing, the options varying with the type of account. For good reasons soon to be described, most of us would rather be owed money by a bank than hold government currency in any appreciable quantity. Money’s liquidity, its very moneyness, is a service that banks provide, even when the low-tech medium of exchange is a bearer asset issued by government.

When the time comes to discharge some of the bank’s debt to the customer, most often the customer will instruct the bank to clear a payment drafted to the order of someone else. The bank will act as the customer’s agent in doing so.

If the payee deposits her draft in the same bank as our theoretical bank customer, the bank can merely reapportion its debt to the customer in favor of the payee.

But more likely the payee will deposit the check in another bank, whereupon the payee’s bank sets forth as agent to collect against the draft. If the document is in order and funds are sufficient, the payer’s bank will be obliged to convey an asset from its own portfolio to the payee’s bank to compensate the latter for augmenting the payee’s deposit.

Which assets can the payer’s bank convey to the payee’s bank? Reserve balances serve as the net settlement mechanism these days. These electronically recorded liabilities of the Reserve Banks — institutions created only in the last century — can be converted to Federal Reserve Notes, paper currency that any creditor is obliged to accept. But the real world securities that the bank owns are collateral for reserve balances, and are routinely conveyed to others as well. The payer’s bank can convey her mortgage or car note to another bank, for example. The money in our accounts is ultimately backed by real property, fully or partially owned by banks.

Deposit Deflation thus views banking, and the money creation and indebtedness that is the product of banking, as decimalized capital barter. You and I don’t trade among ourselves in lumpy securities, difficult to ascertain and collect upon. We prefer to let the banks trade among themselves in these securities, differentiating among them by the pledger’s credit rating, the quality of the collateral, and the various encumbrances upon the pledged capital. We at retail rely instead on the banks’ own liquidity services, their ever more digitally convenient methods for effecting transfers, their time-proven networks and procedures for ascertainment and settlement.

A bank would rather determine how valuable our house is than how valuable our gold is. An efficient society does not depend for the assignment of value upon a scarce material extracted from the earth. If we make an improvement to our property persuasive enough to the assessor, the bank will lend — will in fact create — more money against it. We can procure a package of almonds by swiping a bank debit card, and all the labor, expertise and investment that have harmoniously converged to fill and deliver it to us depend in the end on our bank’s ability to convey some security, liquid or illiquid, to our convenience store’s bank.

Governments in a capitalist system can create a crude and limited hand-to-hand currency by stamping a piece of metal and assigning it a value. But evaluating and assigning credit is beyond the remit of most governments, and we’d ponder carefully before allowing a government official to become our banker, effecting each transaction and determining what we own and whom we owe without favoritism.

Banking was through most of its history a labor-intensive profession, requiring bankers’ hours and tedious clerical entries. Today banking is technology and capital intensive, with proprietary clearance and discounting mechanisms that governments under our system can’t begin to match.

These governments, some of them supposedly monetarily sovereign, have always been abjectly dependent upon the money of accounts, and the property rights that underpin them, for their daily business operations. Governments cannot project power — cannot load a musket, cannot mint a coin — without the ability to settle accounts with those at their service. Insofar as such governments do not own banks, they are obliged to surrender illiquid, interest-bearing securities to private banks in exchange for the liquidity each bank provides: the agreement that, upon settlement, the bank, not the payer, will owe the payee the amount the payer paid, and will service that liability accordingly. Governments, including the US Government, collect bank IOUs, not their own IOUs, in taxation. They augment their own accounts by redeeming these IOUs to the issuing banks. They then draw down their bank accounts in expenditure.

Money in hand is easily taken from us. Bank money is secured by identity checks, encryption, recurring statements, surveillance, passwords, vaults, titles, card freezes, the digital “paper trail,” and, of course, FDIC insurance.

Bank statements make our ownership accountable, supporting lawful claims on property. A government coin doesn’t come with an ownership chain. Bank currency facilitates taxation, and — quelling the chaos and retribution that would otherwise obtain — enables us to prove that we paid the folks we claim we paid, and that we own the things we believe we own.

As you may have discerned by now, Deposit Deflation sings the praises of regulated banking. It’s an extraordinarily powerful and socially useful mechanism.

But can banking have an exploitative aspect? Please allow for some understatement and underdevelopment in this introductory piece, as we’ll address redlining, TBTF, signature fraud and the capitalization of human enslavement in time. Banks take real world ownership of the products of human labor, capital, engineering and the natural gifts of the earth, and pay in digital promises. Interests and fees expand autonomically; the money of account is destroyed in the process of repayment, and banking can slip the bonds of regulation, rendering individuals, institutions and governments, in Frederick Soddy’s biblical invocation, hewers of wood and carriers of water for the financial interests.

That is the basis for the historic and tribal injunctions against usury, at the heart of the conflicts among the major religions. Compound interest — autonomic indebtedness — engenders blood-and-soil nativism, the scapegoating of tribes, repudiation, banishment, revolution and murder.

Reckoning with it is key to understanding the world in which we live.