A sound banking system would have two types of bank. Each one would
provide a specific type of bank account.
- Transaction Facilitation
- Loan brokerage
1. Transaction Banks
Transactions banks would offer a true warehouse service for people
wanting an account to manage their daily financial transactions. These
banks would record valid money claims and execute transactions between
clients. Some might use paper records while others would use computers.
It would not matter how transactions are recorded, as long as all money
claims and transactions are recorded accurately.
When a person deposits twenty dollars in a bank, the bank would
increase the value of that personís account by twenty dollars. If the
person withdraws five dollars, the bank would reduce that personís
account by five dollars.
If someone instructs the bank to pay ten dollars to another person,
the bank would reduce that personís account by ten dollars, and
increase the recipients account by ten dollars.
If the person being paid records his money transactions at another
bank, the first bank would instruct that personís bank to increase the
recipientís account by ten dollars. The second bank would be willing
to do this, provided the first bank confirms that it has already reduced
the account of the person making the payment by ten dollars.
The banks do not need to exchange anything, as they are simply
recording the fact that one person has ten dollars more than they had
before, and the other has ten dollars less than they had before. It does
not matter which banks record these changes, provided that every time
one personís account is increased, another personís account is
decreased by the same amount.
To sustain their business, transaction banks would have to prove to
their customers that their records were accurate. They would do this by
opening their records up to anyone who wanted to check. Auditors would
be able to look at what the bank is doing and confirm that they are not
cheating those who trust them. All banks would watch each other
carefully. If one could expose cheating by another, it could eliminate a
competitor and increase its market share.
The important principle underlining a sound banking system is that
the money in a bank does not belong to the bank. A transaction bank is
storing the property of someone else, in the same way as warehouse. A
warehouse owner keeps an inventory of everything that is stored in his
warehouse. He records the identity and contact details of the owner of
each item. He can even transfer the ownership of an item to another
person, if instructed to do so by the original owner. However, the
recording of assets in his care is kept separate from his own asset
register. He can treat the warehouse as his asset, but he must not
record the furniture given into his care as his property.
Transaction banks would operate in the same way. They would keep an
inventory of all the money being stored and the identity of its owners.
These records must be separate from the bankís own financial accounts.
Money stored must not creep onto the bankís asset register.
The money deposited in a transaction bank is owned by the person who
deposited it, not by the bank. This is a biblical principle.
If a man gives his neighbor silver or goods for safekeeping and they
are stolen from the neighbor's house, the thief, if he is caught, must
pay back double. But if the thief is not found, the owner of the house
must appear before the judges to determine whether he has laid his hands
on the other man's propertyÖ. The one whom the judges declare guilty
must pay back double to his neighbor (Ex 22:7-9).
When the goods entrusted to person another for safekeeping go
missing, that person is accountable for the loss. If the thief is found,
the thief must make restitution, but if not, the person caring for the
property must make restitution to the owner. In Godís eyes, neglect of
property given for safekeeping is the same as theft.
The Bible describes the valuables presented for safekeeping as the
ďpropertyĒ of the depositor, even when they are in the house of the
other person. This confirms the principle that the ownership of property
does not transfer to person who takes it for safekeeping. The owners of
property retain their ownership, until they sell the goods. This
biblical principle applies to banking. When a bank treats money
deposited with it for safekeeping as its own asset, it has
misappropriated something that belongs to another. It has ďlaid its
hands on the other manís propertyĒ.
Banks that are operating according to this principle would not be
able to lend out money, because they do not own it. This means that they
would not be able to pay interest on money deposited with them. To cover
the costs of providing their services, transaction banks would need to
charge a service fee. Depositors would look for banks that provide the
best security and service for the most reasonable fee. Banks that
provide better security and a wider range of transactions would be able
to charge more. However, bank fees would be quite small. People would be
willing to pay the price for a secure and reliable banking system.
Depositing money on call would become less attractive option, because
deposits would face bank charges, but no interest. To avoid this
problem, people would only deposit money on call, if they expect to use
it immediately. If they do not want to use the money immediately, they
would be better to deposit it at loan bank for a fixed term (even if
only a few days) so it can be lent out and to earn interest.
2. Loan Brokerage Banks
The second type of bank provides a loan brokerage service. These
banks would match the savings of depositors who want to lend with people
who want to borrow. Each loan would be matched with a deposit or group
of deposits for the same term. Every deposit received and every loan
made would have a timestamp. The Loan Brokerage Bank would have to match
every loan for a particular term with equivalent deposits for the same
Interest rates for the various terms would adjust until the supply of
deposits matched the demand for loans for each possible term. The bank
would charges either a fee or a margin on the interest rate to cover the
cost of providing this service. Sometimes the bank will combine a number
of deposits together to make up a large loan. This would be part of the
Loan brokerage banks would usually take responsibility for assessing
the credit-worthiness of potential borrowers and the viability of the
projects for which they are borrowing. If the bank agrees to take
responsibility for any bad debts or fraud that may occur, the cost of
this service would be built into the bank's charges. Different banks
would offer different options with different levels of service.
Brokerage Banks would provide a re-financing service for people who
have placed money in a bank for a fixed term. The bank would have been
lent the money out to another person for the same term. If the depositorís
situation changes and they need the money, they may want to withdraw the
deposit early. This would be possible, but there may be a cost. The bank
would have to be able to replace the money with a deposit for the same
term from a new lender, but it would have to charge a fee to cover the
work involved in organising a replacement lender. If the market interest
rate had fallen, the first lender may have to cover the interest
differential for the rest of the term. This cost should be relatively
small, as in a sound financial system interest rates would tend to be
No Inflation and No Bank Crashes
This banking system can operate without any need for government
regulation or political interference. There is no role for governments
in a sound banking system.
Inflation would disappear because political powers would no longer
control and manipulate the currency in circulation. Banks would not be
able to manipulate their reserves, because people would refuse to
deposit money with banks that moved depositorsí money onto their
balance sheets. Once this ability is gone, monetary inflation is not
possible, so price inflation would disappear. Instead, prices should
decline slowly over time, as technological advances make producers more
productive. Falling prices make all consumers in the economy better off.
Banks would not able to expand lending to fund asset
investment bubbles are constrained, the bank crashes that usually follow