“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. This system of money and banking has fuelled greater economic growth and prosperity than previous banking systems.

Current unjust practices

Unfortunately, the new money created in this system has been kept by banks and governments rather than being distributed to the depositors, the people who worked for and saved the money from which loans were issued. The second problem is that central banks have printed money for loans to governments. Central banks should only function as clearing houses for local banks and not themselves act as lenders. Furthermore, no bank should lend money for a non-productive purpose; that should be done through philanthropy or taxation, not the printing of money. This is was causes fiat money to lose its value.

Furthermore, banks and governments take the “new money” that should go to the depositors who worked for it and saved it. When a loan of $1 million dollars is repaid from a reserve of $100 thousand dollars held by a bank, $900 thousand in new money is added to the economy. And this new money represents real economic expansion through the addition of new assets and goods or services to the economy. Since 1696, banks and governments have colluded to keep this new money, making the bankers rich at the expense of workers and giving governments money to launder to fund wars and cronies and to keep themselves in power. Eventually, these practices can lead to hyperinflation and economic collapse.

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.
• An honest central bank must be forbidden to loan money or make purchases with new money. It must exist solely on the fees it charges to local banks for 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 does 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 charged based on market-driven interest rates. This way, banks will compete for their business by offering quality for value like every other company and will earn a living wage without expropriating the new money that goes to depositors.
• This system should generate 30% to 100% interest on savings accounts, enabling anyone who works and saves to share in capital ownership and have plenty of money for retirement.

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 provide everyone to share in the benefits of the economic expansion of the economy and a way to save for retirement.
• It will limit the expansion of the money supply to the expansion of the real assets in the economy.
• 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 what we traditionally call “inflation” is the result of new money entering the economy for a non-productive purpose.
• The size of the government will be greatly reduced because the culture this ethical banking system would support would be of citizens caring for themselves. The government could return to its appropriate role of acting as a referee rather than the provider of rationed services to “serfs”.