Banks have been around in one form or another for hundreds of years. Early banks were usually individual merchants who needed people with surplus products that they wanted to sell, and other people with other surplus products that they would be willing trade through the merchant for foreign goods. Still other groups of people would borrow surplus goods from the merchant on credit, paying back more than they borrowed from future harvests or labor. The merchant profited from the margin created by charging more than he paid for any commodity. In a community or in a nation, this is the foundation of banking. Banks are the chief outlets for us to store, exchange, and borrow that universal labor receipt we call money.
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Who is the largest borrower in the U.S.? The government appears to win hands down, but it is not the largest borrower. The banking system is the largest borrower by far. We think of banks as lenders and as a place to store our surplus money. But like government, banks do not create money; their greatest source of money to lend, is borrowed money. Banks make their profit by charging more for the use of the money that they lend, than they pay to borrow it. So where do the banks get their loans? From people and businesses that put money in savings accounts and checking accounts. Laborers and businesses are the biggest and primary lenders in our economy, because they are the only source of money via productive labor. Banks are only secondary lenders, because they are borrowing from the surplus of our productive labors, which we deposit in them to be loaned to others. When a bank pays interest for our cash and check deposits, it is borrowing those deposits from those who have a surplus over and above their current needs. Without this type of surplus, banks would go out of business immediately. And banks do go out of business during recessions and depressions when there is no surplus labor-money for them to borrow.
A bank must loan as much of the labor-money that it has borrowed as the banking regulations will allow, in order to maximize the amount of interest income it will receive, to pay expenses and make a profit. Bank regulations require that some money be kept in reserve to give back to depositors wishing to withdraw their deposits. Competition between banks forces them to offer higher returns to depositors when they need to borrow more, and to offer lower loan rates of interest to their customers when they have extra deposits to loan. The correct relationship of a bank to its community is that when you deposit money in a savings or checking account you are the lender (the banker) and the bank is your customer (the borrower), paying you for the use of your surplus money. When a bank makes a loan, it becomes the lender; and the borrower is their customer, paying them for the use of the money that is actually borrowed from you and I. Banks want us to feel that they are giving us a service when we loan them our surplus labor-money, and then want us to feel that they are also giving us something when we take out a loan. In neither case is the bank giving anyone anything; they are doing business, earning a profit by renting-out surplus labor at a higher price than they pay to borrow it. The banker is just a middleman in the commerce of laborers bartering with other laborers to use our surplus productivity. However, the bankers have gotten the politicians and especially the Federal Reserve to create laws and regulations that protect banks from failure at public expense. This places the Federal Reserve and bankers in control of commerce and economic opportunity. They are the choke point of all of our economic enterprises because they control the movement of our surplus and stored labor-money.
The current competition among banks and their past relationship to their communities is changing drastically. We used to have two types of banks in the United States (besides the twelve privately owned Federal Reserve Banks). Small community banks received their deposits from their local community and only made loans in their local community. The other type were larger state and national banks, which received funds from big business and taxes taken in by government, and which made loans to big business and to governments. The small banks are disappearing. The regulation, deregulation, and re-regulation of banks have caused our current banking industry to focus on mergers and buyouts to the point where very few community banks remain independently owned. Today most deposits go into large pools of money held by large banking corporations. Those deposits seldom remain in the community. So if you need a loan you are competing with all other borrowers in the nation (and even the world) to get your bank to loan you money.
Loan rates do not reflect the economic conditions in your community like they did in the past. In the past when economic activity was slow and businesses were not borrowing, a bank would lower its loan rates to encourage more borrowing. And they would likewise pay less interest to depositors, which would encourage some to seek to get a larger return by starting a business or expand their current businesses with their own funds. In either case business expansion would occur in the local community. If a community is in recession today, bankers need not try to loan their money at lower interest rates in their community. They will simply transfer that money to other areas of the country where loan rates are higher. This keeps the economically depressed community in recession longer, while the banks use locally deposited money to make a bigger profit, while making areas of strong economic activity even stronger.
Since banks do not create money, but do act as a conduit to move surplus money to areas where it will be consumed, the amount of money in circulation is very important to banks. Several things must occur in an economy for money to reflect the activity of that economy. There must be sufficient dollars to equal the value of the productive labor ongoing in the economy; additional dollars to reflect the savings in the bank or in our pockets, for recent past labor; and still other dollars to reflect the present economic value of stored labor in goods, or factories and farms, infrastructure, etc. Although banks are still a very important component in our economy, they should not be allowed to control the economy, or to conspire with resource owners to abuse labor, from whom they both profit. Government must regulate banks for the benefit of the laborers who create money with their productive labor.
Banks also have a banking system that they deposit some of our money in as well as borrow from. Their banking system is called the Federal Reserve System. Banks are regulated both by federal law and the Federal Reserve System. They must hold certain amounts of our money in reserve, deposited in a Federal Reserve Bank, of which there are twelve. Outside of regulated reserves, banks may lend their depositors' money to individuals, companies, other banks, all levels of government, or even invest it in other markets and other nations. Banks are somewhat subject to economic controls on how they invest or lend our money, because the Federal Reserve can raise or lower interest rates, which banks may receive on deposits or pay on loans that they have in a Federal Reserve Bank. If the bankers in control of the Federal Reserve want to slow down the economy, they increase interest rates on bank deposits in the Federal Reserve System. This encourages banks to keep more of our money on loan to the Federal Reserve and unavailable to loan to businesses and individuals. Less exchange money means less efficient labor exchange, which slows our economic activity. By lowering interest rates paid to banks on their Federal Reserve deposits, the Fed encourages banks to withdraw deposits and offer that money to business and industry at loan rates that will expand our economy by creating jobs to produce more goods and services.
Banks must maintain capital reserves of different amounts on different types of loans they make, against the possible losses the banks would suffer on defaulted loans. At least 8% of the amount a bank lends for industrial and commercial loans must be held in reserve. For Federally insured home loans, just under 2% must be held in reserve. For investment by banks in Treasury Bonds, no reserve is required. So if a bank wants to minimize risk and maximize profits, it puts its money in the market with the least reserve requirements. It sets loan rates for home loans slightly higher to equal the returns available from Government money, considering the reserves that must be held. And in the case of commercial loans, which can generate jobs and surplus labor, the banks may either make no money available or charge such high rates and set such punitive requirements that industry and business are forced to postpone expansion, research and development; while they are encouraged by the marketplace to seek funds overseas. Even to the point of moving manufacturing jobs out of the country to gain foreign investment capital or to compete with other businesses that have already made the move. When bank loans become scarce for business and industry, expect a recession; if mortgage money also becomes scarce, expect a deep recession.
Though we value banks for their willingness to borrow our surplus, and pay us a dividend for the use of our surplus, their existence and continuance stems strictly from the concept of debt. Without private debt, banking would be meaningless and non-existent. In an absolutely free market banks would still profit from our debt structure, but they would not control it. Banks provide leverage to industry and retailers to work against the very laborers whose labor provides 100% of the bank's deposits. And in the last few years they have even taken to profiteering from all large and small transactions going on in our economy; from the writing of a check, to the use of a credit card or a cash machine. All transfers of money for purposes of consumption are now taxed by the banking industry, much of which is foreign owned, to continue raising profits for those owners. The laborer is controlled economically more today than the previous several generations. He or she is working more for less and will have to work longer years to maintain their subsistence, while fees and hidden bank taxes will continue to reduce the laborer's standard of living. Eventually the bankers will get their come-uppance when laborers have nothing left to lend to the banks.
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