System of Finance
System of Finance
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Code of Arms Russian Federation
Macro Economics
Fractional-reserve banking is the practice of a bank taking deposits, making ‘loans’ or investments, and holding reserves that are only a fraction of its deposit liabilities.
Reserves are held at the bank as currency, and as deposits in a bank’s account at its Central Bank (CB). Fractional-reserve-banking or Fractional-Deposit-Lending is practiced in most nations.
First there is "central bank currency" also called "base money." This is the reserve currency, created by the central bank, that is placed into the financial system.
Base ‘money’ is put into circulation by the CB by buying and selling of government and other securities in the open market, thus allowing the entire financial system to decrease or increase ‘loans’ through fractional reserve banking.
Fractional-reserve-banking allows a bank to act as a financial intermediary between ‘borrowers’ and savers, and to provide term ‘loans’ to ‘borrowers’ while providing immediate liquidity to depositors. Problems arise when depositors try to withdraw more than the reserves held by the privately owned bank.
To mitigate these risks or systemic crises (extreme and widespread problems), CB’s of most nations regulate and oversee commercial banks, provide deposit insurance and act as lender of last resort to these banks.
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Amsterdam Exchange Bank (1609)
Because banks hold reserves that are a fraction of their deposit liabilities, fractional-reserve-banking permits the ‘money’ supply to grow beyond the amount of the underlying reserves of base ‘money’ originally created by the CB.
CB’s allow banks to issue CB IOU’s 12-25 times the value of a bank’s currency held in reserve by the CB.
However, rather than directly controlling the ‘money’ supply, CB’s usually pursue an interest rate target to control inflation and impose reserve requirements and capital adequacy ratios on the banks that facilitate credit creation.
This will limit the amount of ‘money’ creation that occurs in the banking system, and helps to ensure that banks are solvent and have enough funds to meet all the withdrawals.
Thus, a bank is a means of exchange (currency) intermediary and a credit facilitator (not a credit issuer), that ‘funnels money’ to ‘borrowers’ by exchanging their CB’s IOU’s for an IOU of a legally registered name (.gov-created at birth) that is signed by its legally identified fiduciary (a human being).
After signing the Federal Reserve Act,
President Woodrow Wilson said:
That ‘private’ IOU is held in the books of the bank as an asset, fully offsetting their fractional reserve CB IOU held as a liability. Thus, the books are balanced.
If the original private IOU is not given back to the fiduciary, then all the ‘loan money’ paid to the bank by the fiduciary is thus additional income, which could be properly called ‘profit’.
History
Goldsmiths, like the Rothschilds, exchanged IOU’s for precious metals from their clients, held in their vaults on their account for a fee. Because most clients left their assets for many years, the goldsmiths realized they could issue IOU’s of a much higher total value than the total value of the precious metals stored, without getting in trouble.
In most nation’s economies, direct finance is a more important part of the facilitation of investment than is banking. Direct finance is where an individual wants to lend money to a major corporation either through buying stock or buying bonds and that corporation puts those funds to use to expand, to grow, and to pay a rate of return.
However, a significant share of investment is funded through banking. Why do we need these financial intermediaries on top of direct finance?
The difference is called "asymmetric information." If you want to lend somebody money, how do you know for sure that they will pay you back in full?
Financial intermediaries specialize in possessing information that enables them to distinguish between potentially safe and risky loans. Then, they specialize in monitoring the behavior of the borrower so as to reduce the risk of not getting their funds back. A difficult undertaking that most of us can’t do. Thus banks offer to do this work for a fee.
But, banks do not always sufficiently update their information about particular borrowers and whether they are using the money as effectively as they might have done in the past. Especially if these ‘loans’ are bundled and sold off to others and thus not appear anymore on the bank’s balance sheet.
Global Debt by 12-12-2021 is
$300 Trillion = 360% of Global GDP
The Alternative: Full Reserve Banking
A system of actual tokens with sufficient intrinsic value that circulates forever is called full reserve banking.
In our current system, only 3% of the total currency supply is indeed made up of tokens that circulate forever, but the vast majority ≈ 97% is made up of temporary money, this is continuously being created and discreated. It gets created when banks make ‘loans’ and discreated when those so called ‘loans are repaid in full’.
Thus the total amount of currency circulating in the economy is always fluctuating, like the amount of water in a bath, removing the plug to let water out, and letting water flowing in. The water flowing out corresponds to money discreation and letting in corresponds to new ‘loans’ being made.
The problem comes when there are large changes in the amount of exchanging CB IOU’s for private IOU’s and the amount of ‘repayment’ for CB IOU’s received. A decreasing CB IOU supply is agonizing for an economy, because there is not enough desire to ‘borrow’ to invest.
So a CB can reduce interest rates on CB IOU’s and buy more bonds. All these things are very harmful to an economy, especially the near-zero interest rates.
It puts retired people into poverty because they are attempting to live on the interest from their savings. People who had been saving all their lives for a decent retirement, suddenly find their pensions shrink to almost nothing.
Now imagine that all of the currency in the system was converted to everlasting tokens. Under this system there is simply no such thing as a collapsing money supply!
If we switched to this system, then virtually overnight we could have normalized rates of interest, we could scrap the hair-brained mortgage schemes and the government could do less borrowing. The advantages are simply enormous.
What coherent professional arguments could be made against full reserve banking and an asset backed economy, where the people (their skills/time) are the assets and primary shareholders of these assets?
See also: http://www.fullreservebanking.com
Micro Economics
Blockchain ledger in digital commerce
A blockchain is a decentralized distributed ledger-data-base & data-driven technology that maintains a continuously-growing list of transaction records, called blocks, stored on thousands of computers globally. Each block contains a time-stamp and a link to a previous block. This prevents multiple-spending of the same digital currency.
It allows for:
- better feedback loops,
- greater accountability,
- decreased transaction costs.
This way blockchains are inherently resistant to modification of the data, once recorded. Now in use with crypto currency transactions, royalty collection, and management of copyrights around the world, etc.
In this “Internet of finance”, blockchain provides the digital ledger that enables transfer of crypted assets more quickly, reliably and securely, using certain algorithms.
Blockchain elevates security through cryptography and a tamper-resistant design, while eliminating the risk of a single point of failure. If a breach does occur, its location can be determined and isolated, precisely and quickly.
Blockchain security methods include the use of public-key (a long, randomly-generated string of numbers) cryptography which is an address on the blockchain.
Crypto currencies sent across the network are recorded as belonging to that address. A private-key is like a password that gives its owner access to their digital assets and interact with the various capabilities that blockchains now support.
Data stored on the blockchain is considered incorruptible.
Marketable, valuable assets backed crypto currencies may become the safest means of exchange in the future. Digital coins issued by those assets backed enterprises or groups of enterprises may become some of the most secure currencies. Their intrinsic value is then directly related to the publicly traded stock value of those enterprises.
5 transformations for a prosperous world !
Another issue is the freezing of Central Bank funds of one Nation by other Nations, like Russia’s CB by the "West", and the trap Russia has set to collect twice as much in the end:
Is the UNIT the answer the Free World has been waiting for?
