Citizen
Founder's Club Member
SNIP I wonder what happens to John Q. Public when they go under?[/QUOTE]
There was a congressional commission on gold in the early 1980s. The minority report from the commission goes into the history of banking in this country.
FDIC and such really don't help the public. Their main purpose is to support the banking industry. Such agencies allow banks to get themselves into trouble by creating a bailout for the banks' depositors. This is not a stand-alone action. It is part of an integrated system of unfair-to-the-public crutches supporting the banking system. One effect is that the public has more confidence in the banking system than the system even comes close to deserving. Another is that if there was no FDIC, the public would be a lot more cautious about which banks they opened accounts or kept accounts, meaning people would inspect the health of the bank before buying CDs, opening checking accounts, and so forth. Poorly run (read financially shaky) banks would lose business or business would stay away, while very sound banks would have more customers.
It all starts a long time ago shortly after this republic was born. There was no national banking system. Just local banks and maybe a few statewide banks with several branches. Say early 1800s. This was back in the day when gold and silver were real money, and individual banks issued "notes" or bank currency redeemable in real money--gold and silver coin--on demand. Lots of different banks, lots of different paper bank notes/paper currency. Now, people were saavier back then. The public knew the banks issued more paper notes than the banks had on deposit. The further the notes went distance-wise from the bank's physical location, the less the notes were worth. Issuing notes beyond the deposits on hand is called fractional reserve banking (only a fraction of what is owed is kept on hand) aka inflating the supply of money aka fraud because the promise that the deposits can all be redeemed is a lie. So, some banks issued so much paper note quantity that people became nervous and started cashing in their notes for gold and silver as promised by the bank. This is called a bank run.
Now, the bank has issued a note saying it would pay gold or silver on demand to the bearer. This is a contractual obligation. For the moment, nevermind the fraud of issuing more notes than gold or silver on hand at the bank. It is fraud, but I want to focus your attention on the contractual obligation for the moment. Because, in a bank run, the bank breaks its contractual obligation to each note holder who demands gold or silver but does not receive any. It is the government's duty to enforce contracts. The bank should go out of business, its physical assets liquidated and its shareholders and officers held liable for the contract obligations--meaning they pay the depositors and note bearers. The government's duty to enforce contracts requires this. And, in a few cases of bank failures that is what was done. However, in other cases, the state governments allowed the banks to close temporarily, or worse, suspend paying gold and silver to depositors on demand. Meaning, the state governments not only refused to enforce the contract obligations, but actively authorized evasion of the contract obligations by the banks.
It goes deeper. Remember I mentioned the notes lost value the further they migrated from the bank? Well, back then there arose businessmen who would buy up the below-value notes far from the banks, carry the notes back to the banks, and redeem them for gold and silver. Their profit was the difference between what the notes were valued far from the bank and the value at the bank. Minus travel costs and so forth. Totally legitimate business. Save people lots of traveling just to redeem notes, especially if they had only a few such that it wasn't worth the journey back to the bank. Totally legit business. Well, along comes the state governments to outlaw that service. Protected the banks, you see. Those unredeemed notes meant more profit for the bank.
One more piece of the puzzle. Lets say you and I pool $50K each to start a bank, total of $100K gold and silver on hand. Now, through the magical fraud of fractional-reserve banking, you and I print paper notes out of thin air, or, even better, write numbers into accounts without actually printing the notes, to the tune of $900K. All out of thin air. This is how fractional reserve banking works--create "money" out of thin air. Then we loan out that $900K in various loans. A new buggy here. A new feed store there. Some rolling stock for the local short railroad. OK, well and good. Until something happens. The people we made those loans to? They're going to write checks to the buggy dealership, and the lumber yard to buy the lumber to build the feed store, and boxcar manufacturer. That buggy dealership and everybody else is going to come presenting those checks for payment to you and me at our bank. Now, we've only got $100K gold and silver on hand. But, we've got $900K worth of checks being presented to us. Uh-oh. We're out of business. Just like that.
The whole point of a state banking system back then, and the Federal Reserve national banking system today, is to shore up the banks who get stuck in that problem. And, to allow all the banks to create money out of thin air more evenly. All carefully sanctioned, approved, and authorized by the governments.
So, you see, when the hazard of going out of business is removed by government, and when the hazard of losing all your money as an officer of the bank or a shareholder is removed by government, the banks have much less reason to play carefully.
Now, when there are big losses, instead of the bank going out of business and being liquidated and officers and shareholders being forced to honor contractual obligations, the losses are spread to John Q. Public. Whereas banks would be lots, lots more careful if the crutches were not there to shore up their very bad decisions with bailouts and so forth.
And, FDIC and such are just a part of that overall system designed to let the banks play their games for their own benefit.
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