This article might be viewed with a bit of skepticism considering the audience, and the fact that I myself am a banker. The reason I write is to defend the concept of banking, not necessarily the government sanctioned banking cartel that exists today.
Let me begin with what is indefensible:
- FDIC insurance: The blanket guarantee of bank deposits by the federal government removes consumer discretion when it comes to selecting a warehouse for their wealth. Each warehouse is equally risky, so what difference does it make? Credit officers do not think about risk to their depositors when making loans, only to their own capital. The net effect is to increase the amount of risk bankers are willing to take with money entrusted to them — a government induced phenomenon.
- Government enforced fractional reserve lending: Much can be said about the fraudulent practice of lending funds and allowing simultaneous withdrawals of the same monies — it inflates the money supply, dilutes the currency in circulation, gives an advantage to the initial borrowers of the new funds; let alone the dishonesty of the practice in and of itself. However, fractional reserve lending in a free market (ie. without government sanction) would be a warning sign to depositors that the participating financial institution is an untrustworthy one, as there would be no way to guarantee a return of deposits. The net effect of the government enforcement of this practice is to negate market discipline on the risk of having too many obligations without the ability to meet them (ie. being over leveraged).
- Central banking: Whether private or public, or some combination thereof, the central banks of today effectively control the entire wealth of those who use their currencies. At any given time, the ability to inflate means that the purchasing power, the savings, the accumulated wealth of an entire nation is at the disposal of these parasites. Aside from outright inflation, the manipulation of interest rates through the purchase and sale of securities with banks creates a mismatch between the lending capacity of the country and the appetite for loans. The difference is made up for in inflated money, and also contributes to overextension on the part of consumers and businesses who borrow too much at artificial rates, creating the business cycle and economic waste.
There are many other egregious practices utilized by banks and allowed by a complicit government. In a free market, however, banks serve a tremendously important role, and still do so today. Banks serve the public in various ways, acting as a warehouse of savings, as a provider of loans and capital, as an intermediary to assist in money transfers, trade finance, raising capital for investors, advising corporations on acquisitions and balance sheet management.
Banks as financial intermediaries serve perhaps their most crucial role in an economy. A manufacturer in California, looking to build a new plant and in need of funds to do so, is greatly benefited by an efficient and liquid capital market. Whether equity or debt, banks source funds from investors or from other banks in the wholesale market to provide to their customer, the manufacturer. Due to the interconnectedness of our financial markets, and the fungibility of funds, the capital that our firm in California uses might be deposits from locals nearby, banks across the country, investors overseas or some combination thereof. Without this ability, our manufacturer would be required to accumulate capital through profits over a longer period of time to embark on their expansion. Banks essentially shorten the timeline of borrower's expansion plans, and the cost to the company is either losing ownership through equity or interest through debt. Without the coordination of the capital markets, other sectors of the economy would be hard pressed for capital, and investors and savers would find it much more difficult to earn a return on their money.
Banks provide treasury management services to many corporations with large cash flow needs. At the risk of sounding like an advertisement, banks facilitate the wiring of funds, clearing of cheques, sweep accounts to improve cash efficiency, provide overnight investments to clients, foreign exchange services to importers/exporters, asset liability management to mitigate borrower's exposure to floating rates, and so forth.
The auto worker who builds sedans and vans serves society, even though the company he works for may also build tanks and war machines that serve the criminal class. Perhaps I'm writing due to the constant vilification of my industry, by both libertarians and progressive alike. Granted, there is much truth to the criticism. However, constant attacks on "banksters" and the illegitimate relationship with the state make it difficult to recognize the very legitimate function of banks, which would still exist if we lived in the free society we are working towards.
Perhaps I'm also writing because I remember, as a five year old sitting at a train station, I was awakened to the wonders of the world by observing the outbound train chug along its metal path, an airplane flying crossways overhead, and the skyscrapers and magnificent real estate of whatever city I happened to be in at the time. I noticed also at the time the mountainous backdrop, but I realized even then that the mountains were made by God, while everything else was built by man. I was in awe. I remember wondering "who are the men that build these things, how do they know how to make it all connect together? Do any of these men understand the whole world?" What I wondered at as a child was another way of asking "how does an economy run?" Well, I don't believe that I understand the whole world, but being a banker, I believe that I understand a good bit of what makes an economy run, and I'm proud to contribute in my own productive, non-violent way.
Steve Nelson [send him mail] works for a regional U.S bank and lives in Richmond, VA