THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, May 15, 2013

Binary Banking Theory, I: Types of Banks

We were planning on starting a brief series on the Just Third Way philosophy of taxation.  We believe that a single rate personal income tax levied on all income above a meaningful exemption level and set at a rate sufficient to cover government expenditures and pay down the debt is the most equitable and efficient way to cover the cost of government.  We oppose proposals for a heavily regressive consumption or sales tax that robs from the poor to give to the rich.

In light of recent events in which it was revealed that the IRS has been used to harass conservative organizations, and apparently conservative organizations, groups who mention the Constitution, etc., etc., etc., however, it just seemed like a really, really bad time, for some reason, to be defending the income tax.  That being the case, we thought we’d recover our popularity by championing . . . central banking and the commercial banking system!  After all, no matter how much you hate taxes, everybody loves the Federal Reserve!

Seriously though, most people’s understanding of banking does not appear to be consistent with the theory of commercial or central banking in general, or of binary banking theory in particular.  This confusion may be the result of misunderstanding the dual character of virtually all commercial banking today, which combines aspects of both deposit and issue banking.

Confusing issue banking and deposit banking has contributed to, or in some cases been the cause of, every financial panic since the Mississippi Bubble of the early 18th century.  It was the primary cause of the Panic of 1825, generally considered to be the start of the modern “business cycle.”

Specifically, speculation in government securities triggered the Panic of 1825.  The new republics of Central and South America issued the securities to meet State expenditures and back their currencies once they were no longer backed up by the faith and credit of the Spanish government.  Interestingly, one of these, “the Republic of Poyais,” did not even exist! (David Sinclair, The Land that Never Was: Sir Gregor MacGregor and the Most Audacious Fraud in History.  Cambridge, UK: Da Capo Press, 2003.)

The “business cycle” (which binary economics would eliminate) is caused by an imbalance between supply and demand.  This, in turn, is caused by over- or under-issue of bills of credit, that is, money creation by governments for public sector spending or “appropriations.”  Government money creation fuels speculation in secondary or outstanding private sector securities, as well as direct speculation in the government securities.

Commercial banks do, in fact, make pure credit loans (issue promissory notes) based on future savings by accepting bills of exchange.  This is “issue banking.”  Other banking services, such as student loans, state treasury services, and banking services, are based on past savings.  “Banking services” includes clearinghouse operations and a limited offering of retail banking services to depositors.  This is “deposit banking.”

To explain, a bank of deposit is defined as a financial institution that takes deposits and makes loans.  A bank of deposit’s capitalization and deposits, less any reserve requirement, limit the amount of loans it can make.  A bank of deposit cannot create money.  It can only accept already-existing money.  The most common types of banks of deposit are credit unions, savings and loans, and investment banks.

A bank of issue is defined as a financial institution that takes deposits, makes loans, and issues promissory notes, typically for investment in private sector capital assets.  A bank of issue can, of course, operate as a bank of deposit and make loans out of its capitalization and deposits.  A bank of issue can also accept bills of exchange, purchasing them by issuing promissory notes.  The most common types of banks of issue are commercial and mercantile banks, and central banks.