Friday, June 08, 2012

Sound Banking System (1)

A sound banking system would have two types of bank. Each one would provide a specific type of bank account.

  • Transaction Facilitation
  • Loan brokerage
I will describe these two types of bank in the next few posts.

1. Transaction Banks
Transactions banks would offer a true warehouse service for people wanting an account to manage their daily financial transactions. These banks would record valid money claims and execute transactions between clients. Some might use paper records while others would use computers. It would not matter how transactions are recorded, as long as all money claims and transactions are recorded accurately.

When a person deposits twenty dollars in a bank, the bank would increase the value of that person’s account by twenty dollars. If the person withdraws five dollars, the bank would reduce that person’s account by five dollars.

If someone instructs the bank to pay ten dollars to another person, the bank would reduce that person’s account by ten dollars, and increase the recipients account by ten dollars.

If the person being paid records his money transactions at another bank, the first bank would instruct that person’s bank to increase the recipient’s account by ten dollars. The second bank would be willing to do this, provided the first bank confirms that it has already reduced the account of the person making the payment by ten dollars.

The banks do not need to exchange anything, as they are simply recording the fact that one person has ten dollars more than they had before, and the other has ten dollars less than they had before. It does not matter which banks record these changes, provided that every time one person’s account is increased, another person’s account is decreased by the same amount.

To sustain their business, transaction banks would have to prove to their customers that their records were accurate. They would do this by opening their records up to anyone who wanted to check. Auditors would be able to look at what the bank is doing and confirm that they are not cheating those who trust them. All banks would watch each other carefully. If one could expose cheating by another, it could eliminate a competitor and increase its market share.

The full series can be found at Sound Banking System.

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