My letter to National Review Magazine re: Not Quite at the Source of the Banking Problem

Dear Sirs:

I read with great interest Ms. Diana Furchtgott-Roth's glowing review of Fragile by Design: The Political Origins of Banking Crises and Scarce Credit.  I decided not to buy the book, because, unlike the reviewer, I do not believe that the authors have quite yet arrived at the heart of the banking problem.  Banks deal with money yet modern banking practice violates the essence of sound money as a commodity which society has chosen as the most marketable and, therefore, as its preferred medium of exchange.  Money--that is, real money--cannot be manufactured out of thin air either by a central bank or a commercial bank.  It is part of the market economy, which is ruled by scarcity and uncertainty.  The authors' claim that the US banking industry has been made more stable by bank mergers and the ability to branch anywhere in the nation and their further claim that proper regulation is needed does not dig nearly deep enough.  Banking needs to be subject to normal commercial and criminal law, which would eliminate banks' ability to engage in fractional reserve banking.  Demand deposits should be backed one hundred percent by real reserves, probably gold, and banking should be separated into deposit banking and loan banking.  Loan banks would be funded by depositors' decisions to transfer ownership of part of their demand deposits to the Loan Banker for a designated period of time.  If the Deposit Banker or the Loan Banker failed to return the depositor's money either upon demand, as in the case of the Deposit Banker, or at maturity, as in the case of Loan Banker, the bank would be declared insolvent, closed, and liquidated.  In the case of the Deposit Banker, he might face criminal charges if he issued un-backed script.  None of this requires banking regulation, only government enforcement of normal, commercial law.  Some claim that ordinary people would not understand this dual banking system sufficiently to protect their assets.  In this article I make the opposite claim; that is, that modern banking been made unnecessarily complex and that even children understand real money.