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 Deposits that can be withdrawn anytime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.
