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A free market monetary system December 17, 2020
I am proposing here a new monetary system that will eliminate the Federal Reserve, make huge amounts of money available for loans at low interest rates, and eliminate bank failures.
If you need a loan in the current system, you apply at your local bank. If the bank approves your loan, the money they give you is the money deposited by your neighbors - other peoples' money. Your neighbors may or may not know that the bank is loaning out the money in their checking or savings account, but that is seldom a problem. Chances are slim that the neighbors are going to need their money before you pay off your loan. That is a wager the system is willing to make. As a safety measure, the bank holds back a percentage of deposits as "reserves".
When depositors do demand their money and the bank doesn't have it because it has been loaned out, it is called a bank failure. Bank failures are rare, but they can involve a lot of money. The FDIC insures deposits up to $250,000 and the premiums are paid by participating banks.
I am proposing that instead of making loans with other peoples' money, banks use new money from what we'll call the Central Bank. By new money, I mean fresh off the printing press. These loans of new money must be fully collateralized, which means you are temporarily giving up claim to property equal in value to the loan. That claim on your property is removed when you pay back the loan. The new money issued by the Central Bank always gets paid back, and when it does, it is taken out of circulation. With each loan, the money supply surges, but eventually contracts when the loan is paid off. Thousands of loans being made and paid back across the country smooth the hills and valleys.
There is no need for the FDIC because nobody's bank deposits are being loaned out. Your money will always be there. It won't be earning interest, but it is safe.
The interest rate you pay is enough to pay the local bank's expenses of making the loan and securing the collateral and making some profit, plus the Central Bank's expenses, which include supervising the local banks as well as the losses incurred when a loan does not get paid back (due to the local bank's failure to secure it properly). The interest rate is also influenced by supply and demand: the willingness of people to risk their property as collateral for loans (supply) and the demand for loans. High interest rates will induce some property owners to get loans so they can turn around and loan the money at a higher rate.
The money supply will be controlled by supply and demand in a free market, not by the Federal Reserve.
In previous stories, I've blamed inflation on a suspicion that the Federal Reserve is printing money:
So am I being hypocritical in proposing a system that involves printing money? Maybe, but in my system every new dollar is backed by property of value that is being offered as collateral for loans. It is not being printed to finance the federal deficit or to stimulate the economy.
Send comments, questions, and tips to stevenrharry@gmail.com or call or text me at 517-730-2638. If you'd like to be notified by email when I post a new story, let me know.
A reminder that you can find detailed payroll reports for the City of Lansing, the Board of Water & Light, Capital Area Transportation Authority and Capital Area District Libraries here.
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