Modern Innovations May Render Banking Obsolete
In December 2009, the FDIC issued its first National Survey of Unbanked and Underbanked Households. As the FDIC mentions, it was under statutory obligation requiring it make an ongoing survey of the "problem" even though the problem is never clearly defined. It is simply assumed that households that make payment intermediation with other means than a traditional banking account is somehow a victim; that "access" to banking amounts in some way to a societal and systemic transgression.
The justification for this is, again, an assumption that, overall, using alternate means are more costly than winding payment needs through the banking apparatus. That December survey found 7.7% of all American households, or 9 million people, are completely unbanked and that minorities are disproportionately represented in that group. Further, almost 18% of households, or 21 million people, are "underbanked." For their purposes, the FDIC defines underbanked as households that have access to a traditional account but also use "alternate" payment services.
The latest 2013 survey finds these figures mostly unchanged. There are still 7.7% of households without a bank account, a figure that was 8.2% in the 2011 survey, and that now 20% are underbanked. It is that last slight increase that I think has caught more attention, as it lays the foundation for what is sure to be a battle about the future of banking and money in the US.
The FDIC is clearly trying to make this a poverty issue, as they refer to that "fact" (as if a survey and stochastic calculation would count in that direction) that in 2013 34% of unbanked respondents report a job or significant income loss as contributing to their status as unbanked. Further, 19.4% said that a job or income gain led them back to the land of banking. Those figures sound impressive but for the opposite reasons as they are couched under the FDIC banner; two-thirds of people that are unbanked are doing so for reasons not related, primarily, to jobs or income.
While the trend is still small at this moment, presenting this opportunity and what seems to me a window of urgency on the part of bureaucrats, it is the underbanked that are largely being targeted for the manner in which they secure and access, voluntarily in most cases, these "alternate" forms of payment mechanics. We are not just talking about payday loans, but also and especially prepaid debit cards. These pieces of plastic function in almost every manner like a bank account or debit card without the necessity of ever setting foot inside a bank. They are linked through the major electronic networks, such as VISA and MC, and even feature automatic payroll "deposit", so there really is total functional equivalence.
And that seems to be the problem. Under the guise of "protecting the poor", the government is out to assail these providers under the legion of the Dodd-Frank monstrosity, the aptly named (for 21st century Orwell-ianism) Consumer Financial Protection Bureau (CFPB). The prepaid card industry sprang out in the regulatory black space where banks don't roam, and now there will be a battle for banking regulations to correct that freedom.
The CFPB proposed a new rule, published in the Federal Register, on December 23, 2014, that required a litany of disclosures about "prepaid financial products." Those are largely benign and, while a hassle, probably on their own don't amount to much more than that. But toward the end of the proposal, the CFPB makes plain the battlespace:
Finally, the proposal would also contain amendments to Regulations Z and E to regulate prepaid accounts with overdraft services or credit features. Among other things, prepaid cards that access overdraft services or credit features for a fee would generally be credit cards subject to Regulation Z and its credit card rules.
The issue of overdraft is somewhat of a Trojan Horse, as in the fine print they are alleging that when prepaid service providers make payments on behalf of overdrawn accounts they essentially become, if nowhere else, a financial institution. In other words, if you overdraw your card and Green Dot pays the bill anyway, even though they give you just one day to rectify, they have extended you a loan and that makes them a bank. What was once operating outside that realm will be brought inside, and once that legal distinction is eroded for all time (only slight hyperbole) the ground will be laid for all payment systems to come; including those that offer the greatest opportunity to move beyond banks in total.
In terms of payment technology, the prepaid system and the newer innovations that are just now becoming active make banking in the monetary sense obsolete - banks are expensive distractions. Banking, properly defined, is a matter of finance and there is no good reason to combine the two except as a means of power and influence. A monetary system that is defined independently of its financial system will always keep the balance of power shifted toward the people in decentralized form (even where the "wealthy" hold much of the money). Where finance has come to dominate money, the way is opened for the cartels and "too big to fail" especially as the interweaving of payments and money with finance is used as justification for all that centralization in the first place - "we" can't let banks fail because money would fail, and thus we must submit to central planning for our own good.
That was the true thorn of the actual gold standard pre-1914, as it represented the actual alternative to withdraw from finance totally and completely; power to the owners of real money. Thus, you can begin to appreciate why regulators might be somewhat nervous, if only conditionally in 2015, over the technological ability to revisit some of the best features of the gold standard if still devoid of gold. It may be a span of a century, but we are as close to that possibility as ever before; innovation that finally represents the 21st century impulse back toward proper decentralizing.
The argument against that is based entirely upon a continued misreading of that period, most of which is selective and even intentional. As I said last week, modern, orthodox economic history begins with the Wall Street crash in October 1929 as if nothing important came before it. The age of fiat that began in the 1960's, finally codified in August 1971, was not the first world-wide experimentation with activist central banking and centralized payments (intertwined within finance). The moment industrial armies began to mobilize in the summer of 1914 all over Europe meant not just the end of the monarchies that began the war, but of the traditional monetary separation that went along with the grand (and good) industrialization to begin with.
Each warring European nation left the gold standard as a "war necessity", leaving but the US to maintain it and give it massive financial strength as a result. Gold flowed inordinately toward the US, for reasons of war but also fiat. The rest of the world at the end of WWI, especially Europe with its massive carnage and destruction, was in difficulty in how to reconcile the "unequal" distribution of gold. The major Allied powers, especially Britain, were almost adamant that the job of the Federal Reserve, as almost an agent of the Bank of England, was to foster that redistribution. And in many ways, that is what the Fed did (especially before and during the Depression of 1920, where total US gold stock fell by $400 million between May 1919 and May 1920 but overall bank credit + gold actually increased by about $650 million). That did little to alleviate especially Germany and Austria's monetary predicament.
There was the Treaty of Versailles to contend with, but even with that there remain so many misconceptions. The Allies did not demand German gold in reparations but rather goldmarks. That was a distinction that came about only after the war, as German currency from 1871 onward was just the mark; the "papiermark" was a post-war peculiarity of fiat which the Allies wanted no part of allowing Germany to "print" themselves reparations. While originally in conversion from the veriensthaler, which was a silver-based currency, the Imperial mark was fixed at 2790 to 1 kilogram of gold.
That left Germany short of both gold and hard currency, leaving only papiermarks to be financialized by an aggressive central bank under serious political influence. But even after the hyperinflation implosion, the solution was never fully monetary, instead becoming and pioneering what was highly representative of what the 1920's were. There were attempts made to treat this as purely a monetary deficiency as it really was, and echoing, really, some of the undercurrents that we experience at this very moment. Among the more ambitious and widely circulated was something called ter Meulen:
The idea of ter Meulen was to essentially create a new global currency, though inferior to gold and still linked to it, through a supranational technocracy. Under the aegis of the League of Nations, an international commission drawn from the International Chamber of Commerce, the British and American Bankers Associations and others would "value" the various functions of national governments, and do so in terms of gold. The idea was to place a common worth on identified and consistent streams of revenue in each country so that they could act as collateral on issued bonds.
While it still represented a control issue, as in a government or supra-national agency control of currency, it was at least consistently free of the debt and financial entanglements. And ultimately it was scrapped under that effort in favor of what became the Dawes Plan - that the US and Wall Street would lend Germany currency and money instead.
Again, the mistaken impression that seems to remain is that US lending was limited to reparations. And while that did amount to a good proportion of the "flow", it was not the full extent of it by a long shot. Whereas the ter Meulen plan would have meant a system of pure currency exchange in payment processing of hoped-for global trade rebalancing, the Dawes Plan and lending activities meant the entire global economy would come under the branch of finance. To many, that is at most a minor distinction, even one of pure expedience - finance always seems the easiest, at first. But there are enormous implications between the two.
Not the least of which has been our own experience under the eurodollar standard that replaced Bretton Woods. Almost immediately, South American nations went bananas (pardon the pun) over being freed from a hard money payment system, indebting themselves to Wall Street banks in loans denominated in "dollars" but really nothing of and by the actual dollar. The same thing happened in the 1920's especially with Germany, as the German economy became over-indebted in almost every imaginable manner and amount.
In 1925, for example, Weimar Germany, now under the Reichsmark but equivalent to a goldmark, ran up a current account deficit of 3.04 billion RM's (4.2 RM's to $1), of which 2.4 billion was a merchandise deficit and 1.06 billion was reparations under Versailles. That was balanced on the capital account of positive inflows of 1.1 billion long-term loans and bond flotations and 1.7 billion of "indefinable" lending sources. Under a true gold standard, Germany could not run such a massive deficit for long as it would have had, by the "rules of the game", to make internal adjustments in order to facilitate a monetary inflow. Instead, like some banana republic, Germany became increasingly indebted with each successive year without ever being forced to adjust ill-mannered economic trends; gold and hard money transactions self-extinguish upon completion while financial transactions linger until the worst possible moment.
That moment came, of course, in 1929. Germany had run a surplus in 1926, but massive deficits of around and above 4 billion RM's for 1927 and 1928, and then still 2.5 billion for 1929. That created what Adolf Hitler, in his delusions of persecution, amounted to an international Jewish conspiracy to crush Germany, sending the Nazis on their way to political legitimacy internally. Creed or religion had nothing to do with it, as this very same pattern played out all over the world in 1930 and especially 1931, as Germany was in danger of falling to the level of some poor South American also-ran (which, of course, only heightened German alienation further toward Nazi madness).
It happened again once the Bretton Woods standard was destroyed, in what became of the Latin Debt Crisis of the late 1970's. There is a difference not of a degree but of full character between money and finance, between a monetary system and financial system. When the two become inseparable as a matter of political will, the end result is always trouble as it amounts to a central government usurpation of fundamental economic means of free people's rights.
As it was of the Great Depression, gold was never the problem insofar as it is told by monetarists who convey only the statist impressions of centralized power structures. By 1932, for instance, France had withdrawn enough gold from the New York Fed to repay its entire scheduled war debt through to 1942, yet they defaulted on it anyway. The total stock of world gold had increased enormously from 1929 to 1933, but nobody could make it flow by "normal" conventions because normal conventions had been obliterated under massive financial domination from 1914 onward.
Therein lies the grand secret of the global depression, as nobody could find a better solution to WWI's monetary imbalance and so it was just imposed a financial means to get the whole thing working again until a more "natural" state would somehow arise on its own (this should sound familiar to anyone paying attention to QE and ZIRP). Instead of becoming a solution, it created massive new chokepoints and systemic weaknesses that none of them really understood in a practical way. That seems to be the theoretical weak point, as it still never dawns that money is not debt and debt is not money; they are not perfect substitutes, and in many cases they are not even suitable substitutes. But they are treated that way up to and especially today.
It is very worrisome that perhaps the only major political figure that understood the problem as it was occurring was Adolf Hitler, and he was counting upon its ultimate failure and the severe impoverishment of Germany for it (that the rest of the world shared the same fate didn't phase his purely manic nature). There were some pockets of resistance inside the US and Germany to the immense tide of financial overkill, but they were obviously not convincing. Some German businesses complained about Uberfremdung, which was an uncomfortable (for German businesses not especially open to foreign intrusion) and almost ubiquitous appearance of American stock purchases and ownership transfers. The Agent General of the Reparations Committee, S. Parker Gilbert, often chided German authorities especially of the Beratungsstelle für Auslandskredite (an advisor council on accessing and maintaining foreign loans) to try to encourage some restraint to little avail.
Instead of being restrained by an actual cash basis, German municipalities and government agencies were the primary borrowers of all this American (and British) "cash", accounting for 71% of all syndications. In total, more than a quarter of all German debt by 1931 was foreign-based.
Germany had ended the Great War with a payment problem and attained a far more serious debt problem for it -that led to two existential crises directly and untold carnage and damage further on. Not only was their hyperinflation a matter of this payment deficiency, the indebted nature of the Weimar afterward brought it into worldwide depression. There was a Young flotation (the Dawes Plan only took a five-year turn, and was replaced in 1929 by the Young Plan) in June 1930 for $300 million, syndicated across nine exchanges in the US, a few issues immediately thereafter and then that was it for German "liquidity." The Great crash of American internal payment correspondence entangled within the call money market, of which French gold and "reserves" were an enormous part, brought on the US version of depression and it was the financialism that spread it worldwide; not gold.
Without any means to solve the financial flow of currency, loans essentially became a related secondary problem to actual cash needs. It was the worst of all worst cases.
Yet the modern tale that is still clinging within the orthodox textbook says that finance and money need to be one and the same. It is believed a matter of economic survival, but our own experience in 2008 reveals the prevarication; payment systems were never in danger in 2008, wholesale finance was. That relatively robust performance should argue quite persuasively of setting payment functions free of the wholesale finance tentacles; instead TARP, QE and the rest were really just attempts to weld it all even more tightly, to use money to once more justify financialism, and thus central control.
Freedom is messy and statism is artificial order. The two are not incomprehensible to each other, but the latter absolutely abhors the former to the point of using ultimate judgment to attain its subjugation. It has happened numerous times throughout human history, including the episodes I just described, and the dawn of a different technological age presents us with another choice on the matter. Do we allow government to use banks to use "money" as an excuse to maintain a dominant position? That is a question in its own right, but it is made all the more pertinent as banking itself becomes almost obsolete. There is no legitimate, overriding reason to maintain a payment system, money, within and contained by this centralized, financial-driven whole. Separation and continued innovation would allow restoration of at least some of the power and function lost in 1914.
That would be enough reason of its own accord, as a reinstatement of more and proper political/economic balance, but I have little doubt that the resulting robust economic performance would be just as convincing. Capitalism runs on free money; financialism is not it and has never been.