The Role of Banks - Money Records

A legal method of recording claims is essential for the functioning of the economy. The most efficient monetary system is for those claims to be recorded by an organisation like a bank. A major function of banks will be to record money valid claims and to execute transactions between clients. It will not really matter whether this is done by paper records or computer records, as long as they are recorded correctly.

Bank accounts are records of those claims. Provided bank records are accepted as legitimate proof of these claims by everyone in society, then records on bank ledgers are a satisfactory way of recording them. Provided they have good back-up systems in place, computer records will be as secure as written records. As they make transactions between people easier and cheaper they are probably better than paper money.

In the modern world most money is a bookkeeping entry in the ledger of a bank. Mostly that ledger entry is a digital record on a computer file. When I am paid my wages, my account is credited and my employers account is debited. When I buy groceries on EFTPOS my account is debited and the supermarket’s account is credited. All these are electronic transactions. A cheque is an instruction to the bank to debit my account and to credit another person’s account. When the cheque is lodged with my bank, it issues an electronic instruction to debit my account. Most money that I hold at any point of time is just an electronic record in a banks computer. This is quite acceptable to me provided it can be used for the purposes which I need money.

The only risk with this electronic bank money is the bank is dishonest: making transactions that are not legitimate or have not been authorised by the owner of the funds. However, this will be largely self-policing. If a bank starts making illegitimate transactions, its accounts will become less acceptable for settling debts or buying goods and services. People will very quickly transfer their money to another bank, and the dishonest bank will go out of business. Dishonest banks will disappear, as they will lose their clients.

Banks will have to remain honest to maintain their business. They will need to subject their accounts and accounting systems to the scrutiny of gatekeeping individuals or organisations to demonstrate that they are honest. The more they can demonstrate their reliability, the more their business is likely to grow.

The money represented by bank records would all be on call (unless otherwise specified), so it would not be possible for it to earn interest. The money is a legal entitlement to goods or services. The banks cannot lend these claims, because they do not own them. They simply record them in the same way that a share registry records the ownership of shares. Therefore banks would need to charge a fee for this service. This is not a problem; they are providing a service so it is reasonable to charge for it.

The banks bookkeeping charges would be based on the length of time that money was in the bank. This would encourage depositors to put money that was not being used into savings accounts where it would earn interest and not be subject to charge.