Demand Deposits aren't what they claim to be. Some simple solutions to bring them within the confines of United States laws and provide the service they are meant to provide. by Gene DeNardo
(libertarian)
Wednesday, January 14, 2009
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
Thomas Jefferson, (Attributed) 3rd president of US (1743 - 1826)
The recent drastic economic downturn has reinforced the mistrust that many people have with the banking system and the financial sector of our Society. Even though they may not understand the rudimentary workings of the system, still they feel it just doesn’t do the job it is meant to do. The Neo-Liberal camp calls out for massive reforms and regulations while the Neo-Conservatives insist it must only be guided by the current rules and regulations of the marketplace {unless of course, some corporate financial giant needs ten or twenty billion taxpayer dollars}. Truth be told, rules and regulations are unnecessary, what is needed is enforcement of the preexisting laws of our nation and the world. Sad to say, this would indeed be a massive reform and drastic change from the current status quo.
In the first article, Banking Part One: Origins and Purpose , it was noted that "storage" of the surplus that the economy produces was the basis of banking. These days it is no longer grain that is stored but good old American greenbacks. And the most common form of this storage is known as the "demand deposit" account.
As the title implies, the customer or depositor transfers his currency from himself to an account within a bank where he is suppose to be able to "demand" or withdraw any or all of his funds any time the bank doors are open. This is a half truth at best. Our first suspicion should be that it is relatively easy for the depositor to actually obtain some interest on the deposit. We are being paid to store our property on someone else’s property. In most business situations, storage on other’s property would incur a fee, unless of course, that storage somehow advantaged the party entrusted with storage.
Of course, it does. As soon as you open that demand account and deposit your money, the bank violates private property rights and uses your property, money, anyway they see fit to earn profit. At the very least, this is outright deception, as your money is not available upon demand.
The bank is holding at most, ten percent reserves. In reality, ten percent of your money is available. If you demand your money, you will receive ten percent of your money and an assorted collection of other people’s money. If we all demand our money at once, the government would step in and conjure up trillions of dollars, in effect, converting the greenback to worthless paper.
Nowhere in the standard "deposit account agreement and disclosure" is there a clause begging permission to use and profit on the depositor’s funds, personal private property, while the bank has possession of them. Since the bank is acting as a "trustee", this would certainly be a violation of that entitlement.
What happens to the depositor’s funds could be considered "reverse usury". The depositor is paid an almost non existent interest rate because the FDIC guarantees that every dollar the bank "holds" for you is 100% safe. Bank deposits, because of FDIC classification, are considered extremely low risk.
While this is a nice though, the depositor’s money, like all invested money in the economy, is placed in a relatively higher risk investment in order for the bank to collect the resultant higher interest rate on their {your} investment! Your money earns the higher rate along with the greater risk while they pay you the lower rate, guaranteeing lower risk through federal {taxpayer} insurance and they keep the difference without investing a dime of their own!
Without this faux federal insurance policy, the FDIC, this dishonesty would be impossible. FDIC insurance is provided by the federal government by backing your funds with your {taxpayer} dollars. The Fed promises to pay, no matter how badly the bank malinvests your money. The FDIC is a successful collusive effort to gain the banks large profits with negligible investment of their own, backed and made possible by the taxpayer.
When one bank fails, this insurance system does work in some sense. Within hours of the doors closing they are reopened and funds are available to replace your funds that the bank lost. These immediate funds come from actual premiums that the FDIC collects from member banks. This reserve is virtually bankrupt at the present time. The FDIC has pushed premium collection to 2012 to help compensate for the recent string of bank failures. Even when the reserve amount is healthy, it is never capable of funding more than a couple percent of all deposits in the country.
Like Jefferson alluded to centuries ago, every bank is a corporation. Every corporation possesses the advantage of "limited liability". Now you have a business practicing fraudulent accounting methods with your money and if they do exceed the bounds of the proportionally little they have invested in comparison to the great bulk provided by the depositors, because of "limited liability" there is nothing but "thin air" and the taxpayer to back them up and restore your "guaranteed safe" deposit. What a perfect system for a banker!
To summarize, what do we have? We have a "demand deposit" that is callable on demand unless many of us decide to do this at once, in which case the money will be there but will be close to worthless. It is referred to as a "deposit" but the moment it is deposited it is transferred elsewhere to earn a higher rate of return for the bank. The government backs this up but the actual money, financed by the taxpayer, isn’t really there either. The bank is a corporation which by legal fiction isn’t liable if anything major goes awry. And absolutely none of this is contained in the standard contract that exists between you and the bank. If all this seems peachy keen to you, you needn’t stick around for the finale. You will probably be more interested in reruns of "Buffy the Vampire Slayer".
The solution is extremely simple, banks should be held accountable to the existing laws that the rest of us must follow or face the same remedies that we would: indictment, trial, sentencing and imprisonment. The legal guidelines concerning Theft, Fraud, Deception, Usury and Contract Law have been in place seemingly forever and only need to be enforced.
Federal Insurance of demand deposits needs to be completely eliminated. It is unnecessary and the Government should not be a partner, whether in crime or legit, of the banks or any business. Risk is a reality. It can be moved around, but it never goes away.
Demand deposits should be just that. As the customer’s personal property, the entirety of the deposit should be left in the vault, as is, until the depositor decides what he would like to do, if anything, with his funds. This is a basic right of private property. The funds should sit and sit if that is what is desired, with no intermingling or investment that is not the direction of the depositor. It’s likely this method would incur a small fee for the service. This would be a small price to pay for justice and would help let the "market" and the individual use freedom of choice to decide what to do with his funds. If the depositor decides to let the bank channel his money elsewhere, then it is no longer in a "demand deposit" and other laws would apply, which we can look at in the final article.
Would this be 100% reserves? The question is unrelated to the situation. It is impossible to "reserve" someone else’s property. This is simply a case of private property rights and contract law.
Would this might harm the so called economy, remove valuable working capital from the markets? Nothing is further from the truth. The "capital" is already working, doing exactly what its owner wants it to do, whether that is nothing or being held for future expenditures or investment.
A good analogy might be, would we exercise "public domain" on a landlord’s duplex because we believe he should be charging a higher rent, or because he left it unoccupied for two weeks? Perhaps a corporate manager with the help of the State could put that duplex to a better use and we should allow him control over the property and a large percentage of the income? In exchange, we could guarantee to rebuild the duplex, with taxpayer funds, if a fire destroyed it. After all, wouldn’t this be better for the overall economy?
On the contrary, this proper intended use of demand deposits would benefit the economy. The current accepted fraudulent practice is also highly inflationary. Minus the small reserves, every dollar deposited is doubled, which can only spur inflation. The "false interest" that the banks earn at present would be channeled to whoever was taking the actual risk, as it should be. This would "downsize" the banking industry, which can only help bolster the productive economy. The flow of capital would become more efficient as it would be directed in a timely manner to where it is needed with fewer middlemen along the way.
And of course, this empowers the individual depositor, whether laborer or capitalist, who would regain control over his property. The resulting realistic risk and interest would educate him on where his money should be. It would restore honesty to the industry and that can only foster better investment and return by means of efficient flow of capital.
Will this or a similar reform that would bring justice to the system occur? Don’t count on it. Money can be made two ways: economically or politically. While the former requires actual work, the latter only power and influence, something the financially industry specializes in. Best not to give them our money in the first place, at least that portion of it we are allowed to control.
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Posted By: Jake, the champion of the constitution
Date: 2009-01-14 18:07:15
dear gene -Â
fantastic insight here gene!  I think some people might have argued with you 2 years ago that the banks are simply places where you receive interest only because the bank is able to pool large sums together and loan for mortgages etc, but the cover has been well blown off that over the past couple years. It certainly can be a little mindblowing to realize that your money is simply being loaned out at a higher risk.
I think that compartmenting our current banks into "at-risk" accounts and DeNardo demand accounts/Rothbard money warehouses is a good idea and getting rid of FDIC insurance is a great idea. However, I do think there would be massive panics if the gov't tried to pull this off all at once, it would have to be eased into.... so eventually what follows is that the panic will proceed any reorg, but knowing our friendly imperial socialist government, they will just expand and slap on more guarantees and controls when this time comes to "protect" the people once more.
It is also extremely likely that this may lead to Henry Ford's predicted overnight revolution.
i've often wondered why someone just doesnt create an online loan bank (perhaps it already exist, I dunno). The idea is Mr. Jake needs a loan and I see Mr. Gene is offering $1000 at X interest over X months, I can submit an application request to Mr. Gene and also Mrs. Jean for another $2000 at X interest, X months, you both examine my records and intent for the money and decide whether you wish to loan me or not, or resubmit back for different terms.  Higher the amount requested, the higher the interest, the riskier Mr. Jake is, the higher the interest. Of course, the best way to do something like this is to be lending neighbors locally - ie sort of like a credit union.
(Actually I have given this some thought, and my conclusion is the banking industry will stomp it out faster than a cigarette butt on Nanjing Dong Lu in Shanghai - little bit of an inside joke, the street has hordes of people stomping around all day long)Â
one thing - I think that Jefferson quote is false (I note you put attributed there, smart man!) I can say that since I recently read most, perhaps all if the book got everything, of his political writings and never saw it even though I was looking for it. however, a true quote that says pretty much the same thing, just not so poetically is
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."
I agree that the banks operate in a fundamentally dishonest manner. The banks should be just a place where you can store your money safely and maybe write checks on it. But the banks should not be able to loan out your dough and at the same time tell you it can be reclaimed whenever you want. This is probably the reason behind nearly every bank failure in history.
Hi Jake, you know, i think there is an online loan page like you were talking about, but i don't know the whereabouts. i thought that quote i used was a bit suspect as in it Jefferson "foresaw" corporations which barely existed at the time.
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