“The great trouble is that money wasn’t allowed to develop. After two or three hundred years of the use of coins, governments stopped any further developments. We were not allowed to experiment on it, so money hasn’t been improved, it has rather become worse in the course of time. … Money was frozen in its most primitive form. What we have had since was mostly government abuses of money.

—F.A. Hayek, Interview by James U. Blanchard III, May 1, 1984.

Sound market-driven money

The banking system is the primary source of economic disparity and corruption in modern societies. Many people blame fiat currency or fractional reserve banking as the cause. While they are used to fund government money laundering schemes and to create a wealthy elite class, fiat currency and fractional reserve banking can be useful tools for creating economic justice and a large, prosperous middle class. They are money and banking tools that can overcome the limitations of a gold-backed currency and the lending of old money. They are tools that can be used for the market-based expansion of the economy and provide a level playing field for the ownership of capital.

Gold is traditionally exchanged because it has intrinsic value. But, the expansion of an economy is limited to the rate of expansion that gold is found. This prevents economic expansion when people want to borrow money to build houses or create businesses because gold has to be mined first. However, fiat currency and fractional reserve banking can enable the economy to expand because the banks can loan “new money” for homes and businesses. This new money can be printed by a central bank and provided to a local bank that has secured the loan with assets used as collateral. The practice of fractional reserve banking can be secured by requiring the bank to hold a percentage of reserves in deposit and have the deposits insured with a program like the Federal Deposit Insurance Corporation (FDIC). Through this system, anyone can purchase a house or start a when they are ready. An economic system with a central bank and fractional-reserve banking has fuelled greater economic growth and prosperity than previous banking systems.

Current unjust practices

Unfortunately, most of the new money created in current systems goes to governments and financial industries, rather than being distributed to the bank depositors and borrowers. These are the people who work and save, producing assets, goods, and services from issued loans. This is because central banks have been players rather than referees. Instead of serving only as clearing houses and issuing money for productive loans, they lend money to governments and purchase securities taking wealth from citizens through inflation. And they charge interest on money that enters the economy through governments, causing large amounts of money to be based on debts rather than assets. These activities are methods used by social institutions to exploit rather than serve individuals. Wealth gradually shifts from the middle classes to elites that control the corrupt system. Central banks should only issue new money to other banks for a service fee, and not profit from interest themselves.

An ethical banking system

The solution is not to end fiat currency or fractional reserve banking but to hold banks and governments accountable through reform of banking processes and practices:

• A central bank should be limited to the role of acting as a clearing house for local banks and the printing of new money only for new collateralized local bank loans and replace damaged bills.
• An honest central bank must be forbidden to loan money or make purchases with new money. It must exist only on the fees it charges to local banks for check clearances, the issuance of new money, or for fees assessed in foreign exchange.
• A local bank must not sell any loan in secondary markets but must hold it for the duration of the loan. The loan should not belong to the bank but to its depositors, and the bank should issue it for a fee on the depositors’ behalf.
• Bank fees should be market-driven. This way, banks will compete for their business by offering quality for value like competitive businesses.

This type of economic system will create sound market-based money:

• It will reward everyone for hard work and savings and give everyone an opportunity for upward economic mobility.
• It will prevent the shifting of wealth from the middle classes to corrupt elites that abuse the economic system.
• It will limit the expansion of the money supply to the expansion of the real assets in the economy, curbing inflation naturally.
• It will eliminate a source of money for laundering and corruption by preventing the government and central banks from printing money for themselves.
• The purchasing power of money will be stable as new money is converted into new assets.
• The size of the government will be checked by forcing the government to live within a balanced budget.