Wednesday, September 3, 2008

Semi Victory for Scottish Banks

Krause Publications' World Coin News reported that the Treasury of the United Kingdom recently attempted to alter the conditions upon which the Royal Bank of Scotland and the Clydesdale Bank of Scotland are permitted to issue bank notes. ("Happy end for Scotland bank notes," World Coin News, September 2008, 16) In an arrangement in effect for more than a century and a half (since Sir Robert Peel's Bank Charter Act of 1844), the Scots banks may issue bank notes up to the amount of funds they deposit with the Treasury three days per week. The proposed change was to require that the funds be on deposit with the Treasury seven days per week. Interest is not paid on the funds.

British government bonds back the funds deposited with the Treasury. The effect, then, is a simple substitution of Scottish bank obligations for those of the State. It thus makes sense that interest is not paid on the funds deposited with the Treasury, for otherwise the Scottish banks would be charging twice for lending the same money. The requirement that the funds only be on deposit three days a week instead of seven is effectively a form of fractional reserve banking.

A more positive change would have been to allow the Scottish banks — all banks in the United Kingdom, as a matter of fact — to issue as many notes and create as much in demand deposits as required by the commercial needs of their customers. The note "paper" (the loans made for qualified industrial, commercial, and agricultural projects) could then be sold to the Bank of England (the central bank of the U.K.), which would create demand deposits with which to purchase the loans, using the assets themselves as collateral. These demand deposits would furnish 100% reserves against the demand deposits and bank notes issued by the Scottish banks. This would replace the requirement to deposit funds with the Treasury with hard assets, thereby creating an asset-backed currency. To make certain that the currency was as sound as possible, the banks would take out insurance policies ("capital credit insurance") that would pay off in the event a borrower defaulted and the collateral became worthless.

A further requirement would ensure that the financial capital created in this manner would benefit everyone in the country. That would be to divide the projected additional new capital formation needs on a per capita basis, giving each citizen the right to borrow up to that amount in order to finance the acquisition of capital. Credit would not be extended nor money created, however, until the individual locates a financially feasible investment and has it vetted by the loan officer of a commercial bank.

Obvious benefits of such a system include 1) elimination of any need for foreign investment capital, 2) a growing ownership base among people previously without property 3) an increasing tax base, 4) increases in effective consumer demand without tax credits, subsidies, or welfare, 5) decreased need for social services as people generated increasing amounts of income from capital, 6) an asset-backed currency, and 7) an improved balance of trade.

Capital Homesteading for Every Citizen is designed, in part, to produce these benefits and many more. It should be studied for implementation at the earliest possible date, regardless which country is canny enough to be the first.

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