Thank you.

An old time country banker has to understand the mechanics that when he loaned out money, the new money was created when the loan was made.But he could also justify that when the loan was paid off, the money again went away. So it would easily be justifiable in his own mind that the system was just and fair, and on the net as the loans were paid off it did not creation of the money supply (only when credit is expanding is the money supply increased). Never mind that his cost of goods was zero and he only had to worry about operating costs. But it is a competitive business, competing with other banks, making the cost of loans to customers come down through the competition. Fractional reserve banking definitely reduces the cost of borrowed money. No doubt about that. That is the problem. It is too easy for the money supply to be expanded and malinvestments created through cheap money.

So I do not see a regular deposit banker that makes conventional loans and holds the loans on his own books and risks his own capital if the loan fails as being sinister, dishonest or any thing like that. They very well probably feel like they provide a valuable services to their community, and they would be right. They operate within the laws (rules of the game) they are provided with, and are for the most part hard working, family people. They just happen to be in one of the industries that by government edict they are favored by the rules of fractional reserve lending being a very lucrative business. Particularly in times of expanding credit. If I was a banker I would do no different than them. I also doubt that I would go to any trouble to try and explain to my customers that I get to create their new loan money with the stroke of a pen. It might create resentment of the privilege. Much like I don't go around telling people how much money I get in farm payments that by government action provides my business an advantage that many other business don't get. It causes resentment and serves no good purpose for me. I play by the rules given me by my government. A banker plays by the rules given him by his government. He is no more honest or dishonest in his endeavors than I am. But some cans of worms are better left unopened and a banker explaining to customers that their loan money was created from nothing at the stroke of his pen would be a can of worms. He would then have to try and explain himself that other banks had the same advantage, it was a competitive business, and the customer is the beneficiary of lower interest than otherwise would be because of this competition and easily created new money. And he would be right. But does he really want to have to explain all that to every customer. Do we as farmers want to explain that our subsidies benefit them in lower prices for what they eat. So I do not begrudge a banker for not explaining how fractional reserve banking really works. All bank owners or managers should understand it though, just because of the mechanics they do to make the loans and deposits. I seriously doubt if a lot of loan officers or tellers understand it though. The CFO would.

My gripe is not with home town bankers. They, like we farmers, just play by the rules given us. In fact they as a group have been badly damaged in some situations by the TBTF banks and their shenanigans. In that respect they are victims like the rest of us citizens. They just happen to be in a lucrative business, a business open to anyone wanting to buy in or put up the money to start a bank and take the risks, just like anyone is allowed to become a farmer if the with. If people think banking is so great, just become one. Or invest in a local one if any are available to invest in privately.

My problem is:

1. with the system. Fractional reserve lending exaggerates the business boom/bust cycles by over supplying credit (new money creation expanding the money supply) in boom times and the bottom dropping out when credit contracts or defaults (crashing the money supply and deflating the economy it artificially inflated). This is not the local bankers fault the system design is flawed, although bankers are humans and follow the same mental machinations their borrowers have. They become over confident and lend too easily when times are good and pull in too much when times are bad. GOOD bankers don't do it purposely, but they are human like the rest of us and suffer just like the rest of us when times get bad. Banks make obscene amounts of money when times are good and credit is expanding, and risk loosing their entire grubstake when the bust comes if they are not very careful. Banking is the ultimate leverage play. We farmers (or our banks) worry if our debt ratios get up to 40%. Banks operate routinely at 90%. That is why they HAVE TO BE so conservative in their loans and make sure they don't default. But just like a farmer that uses big leverage during good times makes more money than those that don't, a banks leverage works on steroids on the downside when loans start going bad.

I'm not against bankers or banking. We need them. I want banks to go back to the boring job of taking in deposits and loaning out money. Like most country banks do. Not like the Casino TBTF banks that leverage on speculative derivative hedge fund style bets and use the taxpayers to bail them out when the fail. Split up deposit banking and investment banking again, with investment banking going bust when they make bad bets.

Fractional reserve banking will work. It is flawed but can be made work. It has been used for centuries. It has inherent problems of adding to the boom/bust cycles. But it is not likely to go away any time soon. So we have to learn to live with it until or unless we start using a better system. And the way to live with it is use it in an extremely restricted fashion. Make the bank that makes the loan be responsible for the loan if it goes bad so there is accountability. Have severe limitations on how leveraged a bank can get. It worked decently fair till the repeal of Glass-Steagall. Not great - we had credit boom bust cycles. But at least fair. Then all hell was turned loose with "banking innovations" (read high flying schemes for the banks to leverage up on other peoples money and make obscene amounts of money. Banks and investment banks could merge. The big banks become leveraged bet casinos. And now we have hundreds of trillions of derivative bets that there is no way they can cover when it all blows up.

Creating all of our money via debt is a bad thing and will eventually catch up with us. Something has to eventually change.

There is about zero chance of getting rid of fractional reserve banking that creates our money supply out of nothing anytime soon. But when it blows up, we need to understand it enough to not want it again. We need to understand that slow steady growth based on loans against real capital instead of capital created at the stroke of a pen and the boom/bust cycles it promotes is undesirable. Otherwise when it all blows up (and it will some day), the same powers that be will saddle us with the very same system and the process starts all over again. A rich nation can survive the system for a long time. Once a nation is robbed of its riches and it is in the hands of the oligarchs, the cycles become shorter and shorter. Witness Venezuela, Greece, etc.

I've rambled too much.

John