Ban All The Banks: Here's The Wild Idea That
People Are Starting To Take Seriously
Apr. 27, 2014
Economists have begun seriously discussing the idea of banning banks. That seems ridiculous and
far-fetched, but the idea might not be as crazy as it sounds.
But before we get to the idea, there's something important that needs to be addressed, which is that
people tend to have a gross misconception about what a bank does.
The typical person probably thinks about a bank the way it's depicted in the movie "It's A Wonderful
In the scene below, George Bailey's savings and loan is being caught up in a run on the banks. Bailey is
forced to explain to the depositors their money isn't in the vaults because it's been loaned out. He then
points to some people in the crowd who have taken out mortgages from the bank, explaining how that's
where people's deposits have gone.
But actually that's not how banks work.
How Do Banks Work?
The reality is that banks don't make loans out of existing deposits. When a bank gives you a mortgage
(or any other loan) it doesn't go into its vaults to see if there's cash available that someone else has
deposited. Instead, the bank digitally (almost like magic) credits your account with the amount you
need to pay for the home.
The Bank of England recently published a fantastic paper titled Money Creation In The Modern
Economy (.pdf) that explains that banks — rather than serving as an intermediary between depositors
and borrowers — are in the business of creating money. Here's the basic summary of how it works:
Bank Of England
Essentially, modern banking represents the outsourcing of money creation from the federal government
to the banking system.
Of course, there are limits on how much money banks can create (some of the limits stem from
regulation, some stem from monetary policy, and some stem from the market itself). But still, most
money creation comes from banks.
The new talk is that banks should be banned from creating money, and that the government would take
Why change the current system?
Ever since the crisis, there's been on ongoing discussion about how to make the financial system safer.
The recent debate really kicked off when FT columnist Marin Wolf called for stripping banks of their
right to create money. His argument was that allowing banks to create money ex-nihilo is what is
responsible for destabilizing credit bubbles and busts. People expect that their money is safe, and so
when banks make too many risky loans, the government is forced to step in and backstop everything. If
the government is going to have to end up backstopping everything as it is, why not have the
government be the source of money creation?
Wolf wants banks to just be depository and payment institutions. Just straight up utilities without the
ability to create money.
As Amin Mian and Amir Sufi note on their blog House of Debt, the same idea (roughly) was recently
advanced by Chicago economist John Cochrane (.pdf).
That being said, the idea is extremely old.
Mian and Sufi link to a 1939 proposal — spearheaded by the famous economist Irving Fisher — which
sought to recreate a more stable banking system in the wake of the Great Depression. That paper spoke
extensively about the need to prevent banks from creating money.
From that paper comes a stern warning about how the modern banking system is a "loose screw" in the
American banking system, and that banks had too much power to create money.
Amir & Sufi
That paper explained banks would still be able to act as lending intermediaries. For example, deposit
accounts such as CDs (where the depositor was limited in how quickly they could get their money
back) would be a legitimate source of loanable funds.
In his paper on getting banks out of the creation of money, John Cochrane argues that banks could still
be in the business of originating mortgages and loans, but that they could be financed by other
authorities. Or there could be lending institutions that are 100% financed by equity and debt (not by
deposits) thus insuring that those institutions not need a bailout.
Will this happen?
In his piece on the subject, Martin Wolf says it will probably take another crisis before something like
this is discussed:
Our financial system is so unstable because the state first allowed it to create almost all the money in
the economy and was then forced to insure it when performing that function. This is a giant hole at the
heart of our market economies. It could be closed by separating the provision of money, rightly a
function of the state, from the provision of finance, a function of the private sector. This will not
happen now. But remember the possibility. When the next crisis comes – and it surely will – we
need to be ready.
There are also some big objections to the idea.
In a blog post titled Is A Banking Ban The Answer? Paul Krugman points out one big problem with
Wolf''s piece, which is that what might happen is simply more financial activity happening outside the
banking system, into the less regulated shadow banking system. Krugman also raises questions of
complexity, and whether the problem runs even deeper than financial stability (given that financial
stability was restored in fairly short order once the government decided to make that a priority).
The IMF did a report in 2012 on the 1939 Chicago Plan, which is useful background reading. Matthew
Klein also wrote a great piece for Bloomberg View last year on killing banking as we know it by
imposing 100% capital requirements (ending fractional reserve banking).
Again, this isn't going to happen, but it's useful when thinking about the nature of money to realize that
money creation is something that's been outsourced to the banks, and that to have the government be
the prime creator of money would be radical departure from the current system.
Public Sees That Bankers Create Money And Wars VIDEO BELOW
Everybody Should Read This Explanation Of
Where Money Really Comes From
Apr. 27, 2014
More and more people are calling for a "ban on banking," but that's not as crazy as it sounds.
Under a new regime, there would still be entities called "banks." But they'd have a radically scaled
back function. They would primarily serve as places that process payments and hold deposits, but they
would be stripped of their most pivotal function, which is creating money.
This is a point that's presumably missed by most of the population. You look at money and you think
it's something created by the government or the Fed. In fact, money is for the most part created by
In March, the Bank of England published an excellent, very clear paper titled Money Creation In The
It explains how, contrary to what people might think, a bank doesn't make loans, by taking the deposits
of a client and then lending those deposits out. Instead, the bank creates money out of thin air. If you
want to get a mortgage for a house, and the bank deems you to be credit-worthy, it puts the amount of
money you need into an account. That money in your account becomes a liability for the bank. And the
mortgage it now owns is an asset of the bank.
These two images from the Bank of England report spell out nicely how it works.
The first shows how money is created from a bank's perspective.
Bank of England
Prior to your taking out the loan, the bank has a certain amount of reserves, and a small amount of
currency as assets, and its liabilities are its customer deposits.
After you take out your own, the bank doesn't dip into its assets to give you money. Instead it creates a
brand new asset (the loan it gives you) and a new liability, the brand new money you have as a deposit,
which the bank just gave you.
Now here's the same transaction from the customer's perspective.
Bank of England
Your assets consist of some deposits and currency prior to the loan. Then after the loan, you have way
more deposits than you had more (remember, when you get a loan, it's not like the bank sends you out
with a basket of cash. When you get a loan you have more money in your bank account than you had
before). That loan is also a liability, since you have to pay it back.
This might seem basic, except this is where money is created these days, not from some other outside
Along with their paper, the Bank of England made a nice video explaining money creation. It's worth a
And read the full paper here >
Money creation in the modern economy - Quarterly Bulletin article VIDEO BELOW
The Bank Run VIDEO BELOW
Stunning Facts About How the Banking System
Really Works … And How It Is Destroying
March 27, 2013
Paintings by Anthony Freda: www.AnthonyFreda.com.
Reclaiming the Founding Fathers’ Vision of Prosperity
To understand the core problem in America today, we have to look back to the very founding of our
The Founding Fathers fought for liberty and justice. But they also fought for a sound economy and
freedom from the tyranny of big banks:
“[It was] the poverty caused by the bad influence of the English bankers on the Parliament which has
caused in the colonies hatred of the English and . . . the Revolutionary War.”
- Benjamin Franklin
“There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.”
- John Adams
“All the perplexities, confusion and distress in America arise, not from defects in their Constitution or
Confederation, not from want of honor or virtue, so much as from the downright ignorance of the
nature of coin, credit and circulation.”
- John Adams
“If the American people ever allow the banks to control issuance of their currency, first by inflation and
then by deflation, the banks and corporations that grow up around them will deprive the people of all
property until their children will wake up homeless on the continent their fathers occupied”.
— Thomas Jefferson
“I believe that banking institutions are more dangerous to our liberties than standing armies…The
issuing power should be taken from the banks and restored to the Government, to whom it properly
- Thomas Jefferson
“The Founding Fathers of this great land had no difficulty whatsoever understanding the agenda of
bankers, and they frequently referred to them and their kind as, quote, ‘friends of paper money. They
hated the Bank of England, in particular, and felt that even were we successful in winning our
independence from England and King George, we could never truly be a nation of freemen, unless we
had an honest money system. ”
-Peter Kershaw, author of the 1994 booklet “Economic Solutions”
Indeed, everyone knows that the American colonists revolted largely because of taxation without
representation and related forms of oppression by the British. See this and this. But – according to
Benjamin Franklin and others in the thick of the action – a little-known factor was actually the main
reason for the revolution.
To give some background on the issue, when Benjamin Franklin went to London in 1764, this is what
When he arrived, he was surprised to find rampant unemployment and poverty among the
British working classes… Franklin was then asked how the American colonies managed to
collect enough money to support their poor houses. He reportedly replied:
“We have no poor houses in the Colonies; and if we had some, there would be nobody to
put in them, since there is, in the Colonies, not a single unemployed person, neither beggars
In 1764, the Bank of England used its influence on Parliament to get a Currency Act passed
that made it illegal for any of the colonies to print their own money. The colonists were
forced to pay all future taxes to Britain in silver or gold. Anyone lacking in those precious
metals had to borrow them at interest from the banks.
Only a year later, Franklin said, the streets of the colonies were filled with unemployed beggars,
just as they were in England. The money supply had suddenly been reduced by half, leaving
insufficient funds to pay for the goods and services these workers could have provided. He
maintained that it was “the poverty caused by the bad influence of the English bankers on the
Parliament which has caused in the colonies hatred of the English and . . . the Revolutionary
War.” This, he said, was the real reason for the Revolution: “the colonies would gladly have
borne the little tax on tea and other matters had it not been that England took away from the
colonies their money, which created unemployment and dissatisfaction.”
(for more on the Currency Act, see this.)
Alexander Hamilton echoed similar sentiments:
Alexander Hamilton, the nation’s first treasury secretary, said that paper money had
composed three-fourths of the total money supply before the American Revolution. When
the colonists could not issue their own currency, the money supply had suddenly shrunk,
leaving widespread unemployment, hunger and poverty in its wake. Unlike the Great
Depression of the 1930s, people in the 1770s were keenly aware of who was responsible for
As historian Alexander Del Mar wrote in 1895:
[T]he creation and circulation of bills of credit by revolutionary assemblies…coming as
they did upon the heels of the strenuous efforts made by the Crown to suppress paper
money in America [were] acts of defiance so contemptuous and insulting to the Crown that
forgiveness was thereafter impossible . . . [T]here was but one course for the crown to
pursue and that was to suppress and punish these acts of rebellion…Thus the Bills of Credit
of this era, which ignorance and prejudice have attempted to belittle into the mere
instruments of a reckless financial policy were really the standards of the Revolution. they
were more than this: they were the Revolution itself!
And British historian John Twells said the same thing:
The British Parliament took away from America its representative money, forbade any
further issue of bills of credit, these bills ceasing to be legal tender, and ordered that all
taxes should be paid in coins … Ruin took place in these once flourishing Colonies . . .
discontent became desperation, and reached a point . . . when human nature rises up and
In fact, the Americans ignored the British ban on American currency, and:
“Succeeded in financing a war against a major power, with virtually no ‘hard’ currency of
their own, without taxing the people.”
Indeed, the first act of the New Continental Congress was to issue its own paper scrip, popularly called
Franklin and Thomas Paine later praised the local currency as a “corner stone” of the Revolution. And
Franklin consistently wrote that the American ability to create its own credit led to prosperity, as it
allowed the creation of ample credit, with low interest rates to borrowers, and no interest to pay to
private or foreign bankers .
Not Ancient History … One of the Most Vital Issues of Today
Is this just ancient history?
The ability for America and the 50 states to create its own credit has largely been lost to private
bankers. The lion’s share of new credit creation is done by private banks, so – instead of being able to
itself create money without owing interest – the government owes unfathomable trillions in interest to
Read this background to understand how money is really created in our crazy current banking system.
And read this and this to learn why we are paying trillions of dollars to the big banks in unnecessary
America may have won the Revolutionary War, but it has since lost one of the main things it fought for:
the freedom to create its own credit instead of having to beg for credit from private banks at a usurious
No More Federal than Federal Express
While many Americans assume that the Federal Reserve is a federal agency, the Fed itself admits that
the 12 Federal Reserve banks are private. See this, this, this and this.
Indeed, the money-center banks in New York control the New York Fed, the most powerful Fed bank.
Until recently, Jamie Dimon – the head of JP Morgan Chase – was a Director of the New York Fed.
Everyone knows that the Fed is riddled with conflicts of interest and corruption.
The long-time Chairman of the House Banking and Currency Committee (Charles McFadden) said on
June 10, 1932:
Some people think that the Federal Reserve Banks are United States Government
institutions. They are private monopolies ….
And congressman Dennis Kucinich said:
The Federal Reserve is no more federal than Federal Express!
The Fed Is Owned By – And Is Enabling – The Worst Behavior of the Big Banks
Most people now realize that the big banks have become little more than criminal enterprises.
No wonder a stunning list of economists, financial experts and bankers are calling for them to be
But the Federal Reserve is enabling the banks. Indeed, the giant banks and the Fed are part of a
malignant, symbiotic relationship.
The corrupt, giant banks would never have gotten so big and powerful on their own. In a
free market, the leaner banks with sounder business models would be growing, while the
giants who made reckless speculative gambles would have gone bust. See this, this and this.
It is the Federal Reserve, Treasury and Congress who have repeatedly bailed out the big
banks, ensured they make money at taxpayer expense, exempted them from standard
accounting practices and the criminal and fraud laws which govern the little guy,
encouraged insane amounts of leverage, and enabled the too big to fail banks – through
“moral hazard” – to become even more reckless.
Indeed, the government made them big in the first place. As I noted in 2009:
As MIT economics professor and former IMF chief economist Simon Johnson
points out today, the official White House position is that:
(1) The government created the mega-giants, and they are not the
product of free market competition
(3) Giant banks are good for the economy
The [corrupt, captured government "regulators"] and the giant banks are part of a single
malignant, symbiotic relationship.
Indeed, the Fed and their big bank owners form a crony capitalist cartel that is destroying the economy
for most Americans. The Fed has been bailing out the giant banks while shafting the little guy.
Fed boss Bernanke falsely stated that the big banks receiving bailout money were healthy, when they
were not. They were insolvent. By choosing the big banks over the little guy, the Fed is dooming both.
No wonder many top economists say that we should end – or strip most of the powers from – the
Even long-time Fed Chairman Alan Greenspan says that we should end the Fed.
A Better Alternative
Conservative and liberal economists both point out that the big banks are already state-sponsored
institutions … so the government should create a little competition through public banking.
State-owned public banks – like North Dakota has – would take the power away from the big banks,
and give it back to the people … as the Founding Fathers intended.
Even a 12-year old sees the wisdom of public banking.
And see this.
Zeitgeist Addendum The Scam of The U.S. Banking System VIDEO BELOW
Fiat Empire: Why The Federal Reserve Violates The U.S.VIDEO BELOW
Constitution VIDEO BELOW
Money, Banking and the Federal Reserve VIDEO BELOW
The Money Masters a History of Money VIDEO BELOW
BECAUSE THERE'S A WAR ON FOR YOUR MIND