Banks should think of themselves as the private sector currency agents of the State. The currency encapsulates the economic, commercial, and social value of a political economy. A State-issued currency ties the State’s citizens to a particular value system while providing a mechanism that accounts for a citizen’s wealth and serves the citizen as a medium of exchange for goods and services, including the payment of taxes to the State.
Banks help distribute State-issued currency primarily through the creation of credit. Banks are a “port of call” for currency; receiving deposits from its customers, capital from its investors, and placing State-issued Treasurys, underwritten by the central bank, into its investment portfolio. Banks issue loans to their customers creating money in the process. This money can be deposited at other banks or used by consumers or businesses for purchases. The fees for financial services provided to consumers and the interest earned from lending to end users and producers provide the banks with income that, along with the income generated by businesses financed by banks, can be taxed by the State.
The fallout from the 2007-2008 financial meltdown has created a narrative that banks are entities separate from the State; private sector “bad boys” whose reckless behavior from creating financial instruments doomed to perform poorly caused people to lose jobs and credit to freeze. The narrative had citizens questioning why these misbehaving banks received bailouts from the U.S. government while ordinary citizens had to bear the brunt of the rippling effects throughout the economy.
The answer is simple. Selling debt instruments and earning fees for placing these instruments into the hands of investors part of the implicit agreement between the State and the banks as currency agents. Even as elected officials such as Senator Elizabeth Warren, Democrat of Massachusetts and Senator Bernie Sanders, Independent of Vermont, argue for increased regulation of America’s larger banks, the truth of the matter is that dismantling the mechanisms of banking would be too costly to the State’s currency distribution system. The State would have to re-write its laws to support an alternative system and for all the noise against the current system, seems to be in no rush to replace it.