"[T]he burden of government is not measured by how much it taxes, but by how much it spends." ~ Milton Friedman
Bankers on Trial
Column by Jim Davies.
Exclusive to STR
Several of my friends insert the two letters "st" in the middle of the word, to express the view that bankers make up a large, organized criminal class. Here, I'll follow the principle that people are innocent until proven guilty, and check some of the evidence, but meanwhile leave those letters out.
At root, a bank means a safe place to keep cash. All who are engaged in trade, including the many who sell their labor by the month, have to manage a cash flow; chunks of it come in, other chunks go out, and there has to be some way to manage it all while keeping a "float." (And yes, also while keeping afloat.) Cash management differs from investing or saving; if one can set a little aside for rainy days as people did before government sold the fiction that the Nanny State would take care of all that, such money is often not touched from one quarter to the next; it sits there doing useful work as capital for productive enterprises, while yielding interest and growing into a nice nest egg for retirement. That was how things worked, before government ruined it all; it's how the American economy grew so strong.
Cash can be kept under the mattress, but then (a) any burglar knows where to look first and (b) how does one pay creditors who are distant? Those are the kinds of problem to which bankers brought solutions.
Those solutions ought not to be undervalued. First came the bank draft and letter of credit, then came the check. The deal is simple: leave your cash float with us, and you can order transfer to any payee you wish, anywhere, and it will be done within (usually) two days. And it's done free! Think about it, that's a pretty amazing service--yet we've taken it for granted for a century or so. The cash is safe, yet moves very easily upon command. It's as safe, at least, as the bank where it's deposited; if that should be robbed or mismanaged, there's a potential problem, but that's what insurance is for.
Then later, in the 1960s I recall, came the credit card and later yet, the debit card. There were a few missteps when the former was invented; some banks were so eager to get them used that they mailed out thousands of them, to anyone with a bank account and a pulse. That widespread invitation to dishonesty has not been repeated. There were a few pious protests from pulpits; one Methodist I remember thundered that civilization would crumble when people lived on such ubiquitous credit; he was about right, but half a century too early and inaccurate in his target. The credit card per se did not produce the current meltdown; government printing presses were needed for that, and pulpits seldom shake to the sound of anti-government preaching. It can undermine one's 501(c)(3) status.
On the contrary, the credit card restored some balance to the community. Previously, everyone working in a job expended his labor (for a week, two weeks or a month) without pay, and then got paid in arrears. In effect, he was lending value to his employer. By using a credit card, however, he could spend the money he was earning (but had not yet been paid) at once, instead; employers could still enjoy the loan of the value of his labor, but he no longer needed to be the one lending. He was restored rather closely to a daily cash basis, being neither a lender nor a borrower, because for one month (or 25 days, depending on the card's terms) he could spend his money, using the card, free of interest! When we think about it, that's really some trick, an amazing deal.
Bankers deliver many other goodies, at low or zero charge. Those plastic cards can be used anywhere, worldwide! - another amazing feat. Then there are travelers' checks, without which it's said to be unwise to leave home; sign one upon purchase, then sign it again anywhere in the world upon cashing it and the money is there, in any form locally preferred. The risk of loss is even borne by the banker. These are all very valuable conveniences. It would be feasible to carry enough gold in a money belt to fund a foreign tour, yes; but suppose some malefactor nicks the belt while one swims off the Costa del Sol? Suppose one runs short; how does one pay for that last, romantic restaurant meal? Suppose one succumbs to an impulse to buy a Lamborghini and ship it home from Italy? - few belts are that thick. Yet your friendly local banker, perhaps after a phone call or two, can arrange the needed credit. All he asks is that you keep your cash in his safe--and that if you want a loan, prove that you don't really need it.
So far, I'd say, pretty good; and we've not even considered the value of bankers to business, moving much larger sums across the world at a button's touch and converting one government fiat currency to another at the market rate that instant. So let's allow that bankers are useful, enabling the wheels of commerce and consumption to spin.
The Flip Side
There is one, first because bankers are not philanthropists but businessmen, motivated by profit, and nobody here should question that. Consider the credit card. Pay within the 25-day "grace period" and the user is not charged interest, true; but the retailer is charged a fee. That fee may be worth it, to him, because by making a purchase easier he can expect more purchases to be made; but once almost everyone uses such cards, equilibrium is restored and the level of trade is the same, other things being equal, so who gains and loses? - the banker gains his 2% or 3%, the retailer passes on that extra expense to the customer as higher prices, so all that happened, net, is that we are all paying a little more for what we buy, in exchange for the convenience of buying it with plastic; and some of that increase is going to the banker in profits, for providing it. Is that a good bargain? Maybe. Put that way (and it's accurate) it's less obvious. Above, I said that the monthly-paid employee was being enabled to spend sooner than if he had to wait for pay-day--but now we see that it wasn't free, after all.
Then there's the matter of those who don't pay off their credit-card balances before the grace period ends. They get charged a horribly high interest rate; it's all advertised up-front, albeit in small print, but this rather easily entraps those many products of government schools who are neither literate nor numerate. Today, this is a major component of the formidable "debt problem." That Methodist preacher wasn't wholly mistaken.
There's a flip side, also, to the pre-1960 era of plain-vanilla checking accounts. Two, actually, and both of them severe.
The first is the bankers' claim that one's money is "safe"--which is the primary reason for placing cash in their care. They have impressive vaults, they carry insurance, they have procedures to prevent fraud, they allow nobody to access somebody else's account, to take money or even to see how much there is. All this is good, and is usually spelled out in printed form. But there is one exception, and it's huge. They don't advertise it at all; in fact, in my experience, ordinary bank employees don't even know it's there. It may be hidden under some bland clause like "the parties agree that the Bank shall operate under the laws of the State of Confusion and the United States of America" but what they do is to freeze your account and then surrender its contents to the IRS, upon demand. Not after a court so orders, but upon demand--which is, itself, entirely fraudulent since it's backed by a law that applies only to federal employees who are liable for a tax.
Anyone can get into disputes with the IRS, we know that. One doesn't have to be an illegal-tax protester; the Service deals with 130 million of us and is bound to make a mistake here and there, nobody's infallible. But when they do, they order one's banker to freeze one's account (so all checks in transit are dishonored, and no new ones can take effect) for 21 days and then, if the dispute hasn't been resolved, to hand over the money. This is an extortionist's dream--and it makes utter nonsense of the claim that a bank account is a safe harbor for cash.
Accordingly, every US bank is an un-advertised collection agent for the IRS. Get used to it.
That's quite a flip side, but there's more. So far, I've referred to "cash" without defining what it is; the banker's services would apply as above whatever its form. In fact, as we know, the only form allowed is the Federal Reserve Note, which I prefer to call the Legal Tender Note or LTN, for that's what it is, on its face; it's a form of money that must, by law, be accepted in trade. Try approaching the New Accounts clerk in your friendly Main Street bank and saying "Hi, I'd like to open a silver account, please." Oops! - call Security, phone the asylum.
LTNs might not be too bad, if they were backed by something of value; but they aren't. There are two aspects to this: they can be (and are) printed up in any quantity that the Feds think fit, in partnership with the bankers' trade association called the Federal Reserve, and so have no fixed or intrinsic value. A little of the value of each is in fact clipped off every year, to help government pay its debts, and that has been going on since 1913 and the average rate has been just under 4% a year so the cumulative effect has been to gut the dollar of 98% of its purchasing power. So even if the banker pays interest on deposits (@ 2%, say) depositors still lose--by a net 2%. Then we lose again, because we get taxed on the whole 4% at 30% and so the net interest on our deposited cash will be negative; we are paying the banker to borrow our money. You could follow all that math, I'm sure; but can the average graduate of a government school? - so do bankers help make the poor, poorer.
The second aspect of value-free, fiat "money" is that having received a deposit, a banker can lend most of it out again, at interest. Not only that (which is quite bad enough on its own; it means your money is no safer than the party to whom he loaned it!), he can do it again when that loan gets deposited by whomever he loaned it to; and again and again, Lo! unto the hundredth cycle. The net effect is that he can lend out ten times what you placed in his care, and earn interest. If he charges a modest 5%, he's really earning 50% on your money while paying you 2%. No profit should be called "obscene" if made in the course of honest trade, but this sneaky process is a lot less than honest and so that adjective does apply. Furthermore, this "fractional reserve" lending process, while equipping the banker with his Mercedes, is the major part of the engine of inflation which reduces the purchasing power of your money and mine--and was the cause, of course, of the current financial mess, which began with a housing bubble; so much money had been printed, and so liberally did banks lend it, that house "values" were rising faster than the cost of servicing the mortgages paying for them--so their prices rose faster yet. Until the bubble burst.
So far, therefore, the preponderance of evidence seems to tip heavily against the banker. Perhaps "bankster" is not inappropriate. But still, let the counsel for defense have...
The Final Word
"Ladies and gentlemen of the jury, you've heard it alleged that my clients are like gangsters, engaged in a Mafia-like criminal conspiracy of almost unimaginable scope. Now, it is a fundamental principle of American fairness that an act is criminal only if it violates a law. It may be that my clients have acted unethically; but they are not charged with unethical conduct, they are charged with illegal conduct. Yet the prosecution has failed to identify one single law that they have broken!
"It is said that bankers engage in fractional reserve banking, and so they do: but the fraction is set by their trade club the Federal Reserve, with the full knowledge and approval of the Federal Government. They are breaking no law.
"It is said that my clients deal only in fiat or paper money that has been declared ‘legal tender’ by the government. That also is true. But in so doing, ladies and gentlemen, they are not breaking any law, they are obeying it! And after all, nobody has to use these LTNs or, if he does, to deposit them with my clients; anyone can barter with any commodity or service he wishes. My clients merely offer to help those who wish to trade with the convenience of government-approved money.
"It is said that by irresponsibly lending to home-buyers with poor credit ratings, my clients caused the 2005 housing bubble and the resulting financial crisis that continues to bring so much hardship. This is simply not true. Bankers would never have loaned money to borrowers on a 'no-docs' basis--in effect, a blind gamble without a page of evidence that the borrower was capable of repaying the loan--without being pressured to do so by government. Indeed, our President himself was active, when younger, in urging people in the slums of South Chicago to accept mortgage offers they could never possibly afford to pay back, and my clients had to cooperate. Far from breaking laws, they abandoned the prudence of generations of bankers because the lawmakers and their unprincipled evangelists gave them no alternative!
"It is said that bankers act as collection agents for the government's revenuers-- and so they do. But ladies and gentlemen, in your capacities as voters--and I know you are voters, for you wouldn't be here if you hadn't registered to vote--you elected representatives to determine how the government, which you have said you want, should be funded; so you believe that tax is the price we all pay for a civilized society. My clients are merely doing what your representatives wanted them to do, to help collect those needed taxes at the lowest possible cost--and in doing so they are risking the loss of business and good will! Would that all of us were so very public-spirited! Once again, they have broken no law.
"Lastly, it's said that by providing credit cards, my clients add no value yet raise prices and make indecent profits. That this is untrue is plain from the fact that millions upon millions of us choose to use credit cards without any shred of compulsion to do so. If the price were unreasonable, that could not happen; for as you all know, the old Latin principle of caveat emptor must apply in any free society; let the buyer beware. More importantly, here: once again, all laws were scrupulously observed.
"So if you, members of the jury, feel that there is something rotten in the banking industry, please find no fault with my clients; they have merely done what the law allows and compels. The government is not on trial here (that's impossible, since this is a government court)--but when you return your 'Not Guilty' verdict, nothing prevents you stating that it should be."