Euro Africa Economic and Investment Forum 2021

Discussion forum for issues and topics relating to bankers and everyone involved in banks and banking: customers, regulators, others.
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Asia-Africa
Junior
 

October 7th, 2020, 10:03 am

BANKING


Banking is an industry that handles cash, credit, and other financial transactions. Banks provide a safe place to store extra cash and credit. They offer savings accounts, certificates of deposit, and checking accounts. Banks use these deposits to make loans. These loans include home mortgages, business loans, and car loans.

Banking is one of the key drivers of the U.S. economy. It provides the liquidity needed for families and businesses to invest in the future. Bank loans and credit mean families don't have to save up before going to college or buying a house. Companies use loans to start hiring immediately to build for future demand and expansion.

HOW IT WORKS

Banks are a safe place to deposit excess cash. The Federal Deposit Insurance Corporation (FDIC) insures them.1 Banks also pay savers a small percent of the deposited amount based on an interest rate.

Banks are currently not required to keep any percentage of each deposit on hand, though the Federal Reserve can change this. That regulation is called the reserve requirement. They make money by charging higher interest rates on their loans than they pay for deposits.2

TYPES OF BANKS

Banks can be placed into certain categories based on the type of business they conduct. Commercial banks provide services to private individuals and businesses. Retail banking provides credit, deposit, and money management to individuals and families.

Community banks are smaller than commercial banks. They concentrate on the local market. They provide more personalized service and build relationships with their customers.

Internet banking provides these services via the world wide web. The sector is also called E-banking, online banking, and net banking. Most other banks now offer online services. There are many online-only banks. Since they have no branches, they can pass cost savings onto the consumer.

Savings and loans are specialized banking entities, created to promote affordable home ownership. Often these banks will offer a higher interest rate to depositors as they raise money to lend for mortgages.

Customers own their credit unions. This ownership structure allows them to provide low-cost and more personalized services. You must be a member of their field of membership to join. That could be employees of companies or schools or residents of a geographic region.

Investment banking finds funding for corporations through initial public stock offerings or bonds. They also facilitate mergers and acquisitions. The largest U.S. investment banks include Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, and Morgan Stanley.3

After Lehman Brothers failed in September 2008, signaling the beginning of the global financial crisis of the late-2000s, investment banks became commercial banks.4 5 That allowed them to receive government bailout funds. In return, they must now adhere to the Dodd-Frank Wall Street Reform and Consumer Protection Act regulations.6

Merchant banking provides similar services for small businesses. They provide mezzanine financing, bridge financing, and corporate credit products.7

Sharia banking conforms to the Islamic prohibition against interest rates.8 Also, Islamic banks don’t lend to alcohol and gambling businesses.9 Borrowers profit-share with the lender instead of paying interest. Because of this, Islamic banks avoided the risky asset classes responsible for the 2008 financial crisis.10

CENTRAL BANKS ARE A SPECIAL TYPE OF BANK

Banking wouldn't be able to supply liquidity without central banks. In the United States, that's the Federal Reserve, but most countries have a version of a central bank as well. In the U.S., the Fed manages the money supply banks are allowed to lend. The Fed has four primary tools:

Open market operations occur when the Fed buys or sells securities from its member banks. When it buys securities, it adds to the money supply.11

The reserve requirement lets a bank lend up to the entire amount of its deposits.2

The Fed funds rate sets a target for banks' prime interest rate. That's the rate banks charge their best customers.12

The discount window is a way for banks to borrow funds to support liquidity and stability.13

In recent years, banking has become very complicated. Banks have ventured into sophisticated investment and insurance products. This level of sophistication led to the banking credit crisis of 2007.

HOW BANKING HAS CHANGED

Banking underwent a period of deregulation. Congress repealed the Glass-Steagall Act in 1999. That law had prevented commercial banks from using ultra-safe deposits for risky investments. After its repeal, the lines between investment banks and commercial banks blurred. Some commercial banks began investing in derivatives, such as mortgage-backed securities. When they failed, depositors panicked.14

Another deregulation change came from the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The Act repealed constraints on interstate banking. This repeal allowed large regional banks to become national. The large banks gobbled up smaller ones as they competed with one another to gain the market share.15

By the 2008 financial crisis, a small number of large banks controlled most of the banking industry's assets in America.16 That consolidation meant many banks became too big to fail. The federal government was forced to bail them out. If it hadn't, the banks' failures would have threatened the U.S. economy itself.
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Asia-Africa
Junior
 

October 7th, 2020, 10:16 am

Money

Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.

Money originated as commodity money, but nearly all contemporary money systems are based on fiat money.

The Origin of Money[ii]

There are three major theories regarding the origin of money:-

1 Money was created for trading purposes;
2 Money was created for social purposes;
3 Money was created for religious purposes.


1 Money was created for trading purposes

Most economists assume that money developed for trading purposes, because it was more flexible than bartering. This meant that money was a valuable commodity in itself, such as cattle in ancient civilisations, later gold and silver by weight, and finally coinage – gold and silver coins.

This all seems reasonable enough until you realise that it is an attempt to justify the origin of metallic money, otherwise where do cattle fit into this metallic money idea? They don’t. Furthermore metallic money would assume a high level of development: It would assume recognition of private property as opposed to tribal property: It would assume recognition of contracts and a legal system to enforce them. Whereas cattle as money is much easier to accept, because it is easy to value for a primitive society, with no legal system to arbitrarily enforce a value.

2 Money was created for social purposes

The second theory is that money was created for social purposes, such as establishing the price of a bride or as blood-money for somebody killed or injured by another tribe.

3 Money was created for religious purposes

The third theory is that money was developed for religious purposes. Bernard Laum in his book Heiliges Geld (Holy Money) states that money’s origin was in the Eastern temples as the prescribed sacrifice to the gods and payment to the priests.

Gold would have been the easiest metal for ancient man to mine from rocks in river beds, with copper the next easiest and silver requiring the most developed technology to mine. This goes against all our instinctive ideas that gold is valuable because it is so difficult to obtain. Rather gold became valuable precisely because it was relatively easy to obtain, and looked nice. Gold and silver were presented to the temples in the East as dues to the priests and offerings for the gods, as well as other commodities such as barley and wheat. Over time the temples would have acquired a large proportion of the existing gold and silver. This theory is supported by the vast amounts of gold and silver seized by Alexander the Great from Eastern temples in 330 BC.[iii]

The monetisation of gold

Between 1500 BC and 1000 BC, the medium of exchange shifted from a cattle standard to a gold by weight standard.[iv] The temples played a major role in transforming gold into money.

Over the centuries gold and silver accumulated in the temples. Only so much was required for decorative purposes. The fact that the temples were accumulating so much gold would have been a major factor behind the decision to transform it into money, or monetise it.

The theory is that the priests must have decided to use up some of this surplus gold by monetising it: They could have for example determined that 130 grams of gold was worth 1 cow. Overtime the priests would have charged for their services, such as advice on when to plant crops, and would have come up with a standard charge for these services.

The theory that the priests determined the value of gold by arbitrary decision, contradicts the trading origin of money, which assumes that the value of gold was determined by the effort involved in mining it and shaping it into a standard unit of money.

Money is a creature of the law

Applying logic to these three theories one can understand how a cow was a standard unit of currency in ancient Ireland and Greece with one slave-girl worth 3-4 cows in both these two ancient civilisations.[v] It is easy to value a cow; how old the cow is; how many calves the cow is likely to have; how much milk the cow is likely to produce; the value of its hide and meat, its fertiliser, its pedigree…

But how do you value say 130 grains of gold, which seems to have been the standard weight of a gold monetary unit in ancient times? The priests had the authority among the general public; they had an abundant supply of gold; they determined the price for their services; and when they decided to monetise gold, they could determine its value in relation to the price of the standard unit of account of money then in existence, which was a cow.

The theory of the origin of money in modern civilisation that makes most sense is that money was created for religious purposes. Money was assigned a value by decree by the priests in the temples. Therefore money, in the form of gold or silver by weight, was the first fiat currency. It had a value both as a means of payment and also as a commodity.

Therefore gold by weight money is a creature of the law, and has nothing to do with the supply and demand of gold, the perceived difficulty of mining gold, and the trading theory of the origin of money.

The Value of Money

Does money obtain value because banks issue 97% of it in the form of credit? Does money obtain value because it is issued by banks as debt and must be repaid back along with interest? What gives money its value?

Money only has value because of all the citizens in the country working together in a supportive social and legal framework. Money only has value because it is accepted as a medium of exchange for the entire country, and is accepted by Government for the payment of taxes. If we can accept that this is what makes money valuable, then money should be regarded as a public resource, to be issued for the common good. If this is




what makes money valuable, it should not be issued by private banks for their own benefit.

Characteristics of Money

Money has three characteristics according to the economists:-

1 Means of Payment;
2 Unit of Account;
3 Store of Value.
Money – The Definition

Of the three characteristics of money – Means of Payment is by far and away the most important. If money is accepted by the general population as an unconditional means of payment, then it is valuable to society. Money enables citizens to work together for the common good.

There are many possible definitions of money:-

1 Money is a creature of the law.
2 Money is not tangible wealth in itself but a power to obtain wealth.
3 Money is a token, worthless of itself but symbolising wealth.
4 Money is an abstract social power based in law.
5 Money is whatever Government accepts in taxes.
6 Money is a medium of exchange, which is legally enforced by Government.
7 Money is a medium of exchange that is accepted by the People.
8 Money only has value as a medium of exchange because it is accepted by the People and is legally enforced by Government acting on behalf of the People.

Stephen Zarlenga’s definition of money is:-

Money’s essence (apart from whatever is used to signify it) is an abstract social power embodied in law, as an unconditional means of payment.[vi]

My definition of money is:-

Money is an unconditional means of payment, a token for wealth, worthless of itself, but symbolising wealth because it is enshrined in law; and administered by Government as a public resource, for and on behalf of the People.

Metal Money

The store of value characteristic that commodity money has interferes with the most important characteristic of money as an unconditional means of payment.

In the US, there are a significant number of people who recognise the problem but their solution to monetise gold or silver would make the current bad situation with fractional reserve banking an awful lot worse. To them money is a commodity. This contradicts the historical case for money, which is that it is a creature of the law, and therefore should be a token for wealth, symbolising wealth, but not wealth itself.

Gold and silver coins may be hoarded by wealthy people, in the expectation that they will be worth more in the future. This would reduce the amount of money in circulation, interfering with the primary function of money, which is that it is a medium of exchange.

Observe well these rules: It is a very common mistake to say that money is a commodity… Bullion is valued by its weight …. money is valued by its stamp.[vii]

John Locke, English Physician and Philosopher (1632 – 1704)

Silver and gold…(are) of no permanent value…We must distinguish between money as it is bullion, which is merchandise, and as by being coined it is made a currency, for its value as merchandise, and its value as a currency are two different things…[viii]

Benjamin Franklin, Founding Father of the US, Polymath (1706 – 1790)

There is not enough silver or gold in the world to act as a properly functioning currency. If one defines money to be a commodity such as gold or silver, it would give those wealthy people that control most of the gold and silver world-wide even more wealth, and more control over the nation’s and the world’s destiny.

Fractional reserve banking could only have been created by the goldsmith-bankers, because of the existence of metal money. This gave rise to promissory notes, and eventually credit, and our current banking system. Given an understanding of the history of money, one should discard the idea of metal money as a solution to our monetary problems.

The Nature of Money

Money is a common resource, which should be should be created by Government for the benefit of the People.

Money exists not by nature but by law[ix]

Aristotle, Greek Philosopher (384 BC – 322 BC)

Clearly in the 4th century BC, almost 2,500 years ago, Aristotle understood the nature of money. Money is not a commodity that is to be mined like gold or silver. Money is not a commodity to be farmed like wheat or barley. Money is not an animal like a cow or a goat. The nature of money is that it is a legal invention. Money is a creature of the law. The Greek name for money is ‘nomisma’, which is derived from ‘nomos’ meaning law or binding custom. Aristotle defined money as an abstract legal power, publicly controlled for the common good.

The Fourth Branch of Government

Political scientists refer to three branches of government: the Executive; the Legislature; and the Judiciary.

Stephen Zarlenga in ‘The Lost Science of Money’ argues persuasively and cogently that there is a fourth branch of government, (whether we realise it or not), called The Money Power. The Money Power is the power to issue money in any given country. Martin Van Buren (8th US President, 1782 – 1862) coined this phrase, and it will remain capitalised in this book in honour of this truly great insight into the nature and ownership of the money-creation process.

This ability to create a country’s money supply should be the most important function of Government. Because private banks now create over 97% of the money supply, they are in control of the most important branch of Government – The Money Power – which has effectively usurped the system of checks and balances enshrined in these other three branches of Government in our Western democracies.

Stephen Zarlenga has made the greatest contribution to monetary reform in explicitly stating that The Money Power is by far the greatest of all the branches of Government. The fact that this is not so currently recognised, has led to a marked distortion and corruption of society.

The constitutional imperative to define Money

The Money Power is so important that it should be officially recognised in law. Once society gains control of the issue of money, it cannot let the bankers issue money ever again.

Interestingly the US constitution states in Article 1, Section 8, Clause 5 that congress has the power to “coin Money, regulate the Value thereof”.

One could interpret this as being the constitutional mandate for Congress to issue money and spend it into circulation. One could argue that Congress has the power to reclaim the right to issue the nation’s money from the privately owned Federal Reserve System.

However what Clause 5 in Article 1, Section 8 says in full is: –

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

One could interpret from this clause that only Congress has the authority to coin money, that is, to produce just the coins used in the United States. Coins are produced by the US Mint, a bureau of the US Treasury, and form about 1/1000 of the US money supply. Coins form the only part of the US money supply, which directly benefits the Government and People.

Given the importance of money to our society, I believe a clear definition should be inserted into every constitution, (or otherwise enshrined in law), defining money, and stating its supreme importance in the running of society.

Money – servant not master

The entire money supply should be created by Government for and on behalf of the People. Money should become Man’s servant rather than his master
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Location: Yola
 

October 7th, 2020, 12:46 pm

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