Discussing banking with several friends on the Internet and by email, there is another part of the Full Reserve, Safety Society that is needed to satisfy the demands for money in an economy. On one side, a healthy bank should only create money for loans for the purchase or production of a real bank-redeemable, bank-repossessible assets, goods, or commodities. On the other side, money can also be created by the Merchantile exchange side and issued for deposited, wearhoused real assets, goods, materials that can be fully redeemed or repurchased by the people. In this way, the Safety Society/Merchantile Exchange Bank separates the Loan-side of business from the Deposit-side of business and there isn't multiple parties making a claim on the same asset as would happen if you issue money and issue a loan based on the same wearhoused asset.
1. Most money in our money supply is created by a bank when a loan is issued.
2. Milton Feidman's monetarism equation shows how money supply, velocity and real output produce unwanted inflation. dM/dt + dV/dt = infl + dRO/dt.
3. The amortized loan drives inflation by collecting interest up front, the home owner does't build significant equity and then charges the next owner a higher price for an older asset. Thus money creation > real output = inflation.
4. Safety Society Bank is full reserve and separates deposits from loans. All deposits are kept 100% at the bank.
5. Loans are only issued for real assets. Never for other currency or stock or bonds (private currency).
6. Loans are simple interest and fee based. Loan origination fee is how local banks earn revenue and monthly service charge and late fees.
7. Borrowers earn equity from month 1.
8 if they miss a payment, it is deducted from equity.Default happens when all equity is lost and not after first missed payment.
9. State or federal government actually creates the money and the standardized credit worthiness criteria but loans are administered by local banks.
10. If default occurs, bank repos a real asset and can operate, rent and sell asset and repay federal or state treasury. Fed or state earns revenue by simple interest which is a voluntary tax/fee on the use of money . The interest rate would control inflation by withdrawing money from the system as needed.
11. There would always be as much money as needed for any individual, corporation, or community to borrow however much they could repay for real assets only.
12. Safety Sociey System is safe, immune from contractions and downturns in economy and from bank runs.
13. Money is no longer artifically scarce. We no longer need to use scarce gold for money because we have technology to produce hard-to-counterfeit paper currency. But we can produce as much paper as is needed for credit worthy assets.
It makes no sense to have gold-redeemable currency, but not protects the banks from fractional reserve lending and borrowing for derivatives and stock that become worthless in a recession and bankrupt the bank. What good is redeeming gold when your banking system just collapsed. Money is created when a loan is issued. So, as long as a bank makes a loan for a "real asset", then the Bank can repossess that insured asset and not lose value if a person defaults on their loan.
With a gold-backed currency, how is value maintained in the system when people default on their loans and there are multiple people making a claim to redeem the same ounce of gold? If enough people fall on hard times, then the Fractional Reserve Bank goes bust and the economic disease spreads like Contagion to the rest of the community. However, for deposits and such (which should be separate from loans in a full-reserve bank), a Bank/Merchantile Exchange could issue script money in exchange for real products, goods, and commodities. For example, An egg farmer would bring his eggs to the Bank/Merchantile Exchange/Safety Society. The Safety Societ/Mechantile would issue script/money based on those goods which could be used to purchase other goods in the Merchantile Exchange. This way the community is injected with money sufficient to re-purchase the commodities at the Store/Bank.
The Safety Society part of the bank would issue loans. Currently Banks issue loans on their reserves, or how much money they have in deposits. When a Bank loses reserved they can't loan or pay out withdrawals and everyone goes bust (like Kirkland). However, if script/money is always issued and backed up by a real asset, then the Bank and the Community is always protected. So the Saftey Society Bank would issue loans based on if the loan was going for the purchase or production of a real "credit worthy" redeemable, repossessabke good, commodity, or asset like real estate.
Loans are not made based on how many eggs are in the wearhouse at the Merchantile Exchange. Money has already been created based on the eggs. The price of the eggs, that they would be sold, would be based on supply and demand and based on retaining value. There would not be much markup on the eggs. The money issued would be almost enough to purchase the eggs back. Loans would be a totally separate mechanism for money creation instead of how the banks do now with fractional reserve lending and create double the money for each egg they have in possession.
Separating the Deposit/Merchantile Exchange-side of banking from the Safety Society/Loan-side of Banking preserves the bank's Full Reserve status and prevents there being multiple money creation on the same asset (egg), and consequently multiple parties making a claim to redeem/repossess the same asset (egg).
It would be best if interest rates and money creation and credit-worthiness criteria were standardized by the US Treasury as the Constitution requires, but the Safety Society/Merchantile Exchange could be totally decentralized and locally regulated.
You don't need to perseverate on the "egg". Substitute it for whatever non-perishable you like. The following statement seems to be the core of your economic ideology: "because when you require that others invest their stored value in some new enterprise, they will be more careful and require compensation"
1. Your system is fractional reserve. Loans are made based upon deposits. Therefore, both the investors and the loaned money holders have claim on the same wearhoused commodity.
2. You claim investment risk is necessary. I say it is not. I would like to see a decrease in the practice of money making money. My whole system is about decreasing the practice of the wealthy making money on money. Venture capital will still be necessary but the laborer will be able have access to safe, appropriately priced credit. Furthermore, The bank makes fees and interest to cover it's overhead. The government makes a Constitutional voluntary tax/fee/interest to control inflation and generate revenue.
3. When you have some kind of economic shock, history demonstrates again and again that your system's loan defaults will exceed the projected risk and your bank will be insolvent, your wearhoused wealth will disappear, and your economy will be in shambles.
4. Your historical system divides the people into classes of wealth-holders and laborers where the wealthy use their un-elected Machiavellian economic power to "carefully decide" to invest in those things that will maintain or advance their power.
5. You have never proven that my system would produce unwanted inflation nor "steel" value from the wealthy.
6. Money is not being created out of nothing. There are real assets that the bank can redeem and repossess if the loan is defaulted on. Neither side needs to lose.
7. Your wealth vs. laborer system is neither honest nor wonderful. Wealth/commodity-holders need not enslave the laborer.
8. We need not excessively put a drag on growth as your system historically does. My system which is not mine and neither is it my invention would use fees, interest, and have standardized rules by elected leaders that contol and properly regulate money creation and economic growth.
9. You are arguing for a historical system based on a local unelected oligarchy, austerity, inequality, and economic slavery. Tyranny is wrong whether it be local or global.
10. Man should earn his bread by the sweat of his brow all the days of his life and not just until he has wearhoused enough to live off the sweat of others.
Thinking about the failings of the "egg" analogy it is clear that the Merchantile Exchange would only deal with non-perishable goods and not perishable items. Therefore there would need to be a separate grocery store.