Cryptocurrency: BANK RUN PANIC Spreads Around Globe, Crypto and Gold Demand Skyrockets, FDIC Coverup

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https://internationalman.com/articles/unsound-banking-why-most-of-the-worlds-banks-are-headed-for-collapse/

Unsound Banking: Why Most Of The World's Banks Are Headed For Collapse



You’re likely thinking that a discussion of “sound banking” will be a
bit boring. Well, banking should be boring. And we’re sure officials
at central banks all over the world today—many of whom have trouble
sleeping—wish it were.

This brief article will explain why the world’s banking system is
unsound, and what differentiates a sound from an unsound bank. I
suspect not one person in 1,000 actually understands the difference.
As a result, the world’s economy is now based upon unsound banks
dealing in unsound currencies. Both have degenerated considerably from
their origins.

Modern banking emerged from the goldsmithing trade of the Middle Ages.
Being a goldsmith required a working inventory of precious metal, and
managing that inventory profitably required expertise in buying and
selling metal and storing it securely. Those capacities segued easily
into the business of lending and borrowing gold, which is to say the
business of lending and borrowing money.

Most people today are only dimly aware that until the early 1930s,
gold coins were used in everyday commerce by the general public. In
addition, gold backed most national currencies at a fixed rate of
convertibility. Banks were just another business—nothing special. They
were distinguished from other enterprises only by the fact they
stored, lent, and borrowed gold coins, not as a sideline but as a
primary business. Bankers had become goldsmiths without the hammers.

Bank deposits, until quite recently, fell strictly into two classes,
depending on the preference of the depositor and the terms offered by
banks: time deposits, and demand deposits. Although the distinction
between them has been lost in recent years, respecting the difference
is a critical element of sound banking practice.

Time Deposits. With a time deposit—a savings account, in essence—a
customer contracts to leave his money with the banker for a specified
period. In return, he receives a specified fee (interest) for his
risk, for his inconvenience, and as consideration for allowing the
banker the use of the depositor’s money. The banker, secure in knowing
he has a specific amount of gold for a specific amount of time, is
able to lend it; he’ll do so at an interest rate high enough to cover
expenses (including the interest promised to the depositor), fund a
loan-loss reserve, and if all goes according to plan, make a profit.

A time deposit entails a commitment by both parties. The depositor is
locked in until the due date. How could a sound banker promise to give
a time depositor his money back on demand and without penalty when
he’s planning to lend it out?

In the business of accepting time deposits, a banker is a dealer in
credit, acting as an intermediary between lenders and borrowers. To
avoid loss, bankers customarily preferred to lend on productive
assets, whose earnings offered assurance that the borrower could cover
the interest as it came due. And they were willing to lend only a
fraction of the value of a pledged asset, to ensure a margin of safety
for the principal. And only for a limited time—such as against the
harvest of a crop or the sale of an inventory. And finally, only to
people of known good character—the first line of defense against
fraud. Long-term loans were the province of bond syndicators.

That’s time deposits. Demand deposits were a completely different matter.

Demand Deposits. Demand deposits were so called because, unlike time
deposits, they were payable to the customer on demand. These are the
basis of checking accounts. The banker doesn’t pay interest on the
money, because he supposedly never has the use of it; to the contrary,
he necessarily charged the depositor a fee for:

    Assuming the responsibility of keeping the money safe, available
for immediate withdrawal, and

    Administering the transfer of the money if the depositor so
chooses by either writing a check or passing along a warehouse receipt
that represents the gold on deposit.

An honest banker should no more lend out demand deposit money than
Allied Van and Storage should lend out the furniture you’ve paid it to
store. The warehouse receipts for gold were called banknotes. When a
government issued them, they were called currency. Gold bullion, gold
coinage, banknotes, and currency together constituted the society’s
supply of transaction media. But its amount was strictly limited by
the amount of gold actually available to people.

Sound principles of banking are identical to sound principles of
warehousing any kind of merchandise, whether it’s autos, potatoes, or
books. Or money. There’s nothing mysterious about sound banking. But
banking all over the world has been fundamentally unsound since
government-sponsored central banks came to dominate the financial
system.

Central banks are a linchpin of today’s world financial system. By
purchasing government debt, banks can allow the state—for a while—to
finance its activities without taxation. On the surface, this appears
to be a “free lunch.” But it’s actually quite pernicious and is the
engine of currency debasement.

Central banks may seem like a permanent part of the cosmic landscape,
but in fact they are a recent invention. The US Federal Reserve, for
instance, didn’t exist before 1913.
Unsound Banking

Fraud can creep into any business. A banker, seeing other people’s
gold sitting idle in his vault, might think, “What is the point of
taking gold out of the ground from a mine, only to put it back into
the ground in a vault?” People are writing checks against it and using
his banknotes. But the gold itself seldom moves. A restless banker
might conclude that, even though it might be a fraud on depositors
(depending on exactly what the bank has promised them), he could
easily create lots more banknotes and lend them out, and keep 100% of
the interest for himself.

Left solely to their own devices, some bankers would try that. But
most would be careful not to go too far, since the game would end
abruptly if any doubt emerged about the bank’s ability to hand over
gold on demand. The arrival of central banks eased that fear by
introducing a lender of last resort. Because the central bank is
always standing by with credit, bankers are free to make promises they
know they might not be able to keep on their own.
How Banking Works Today

In the past, when a bank created too much currency out of nothing,
people eventually would notice, and a “bank run” would materialize.
But when a central bank authorizes all banks to do the same thing,
that’s less likely—unless it becomes known that an individual bank has
made some really foolish loans.

Central banks were originally justified—especially the creation of the
Federal Reserve in the US—as a device for economic stability. The
occasional chastisement of imprudent bankers and their foolish
customers was an excuse to get government into the banking business.
As has happened in so many cases, an occasional and local problem was
“solved” by making it systemic and housing it in a national
institution. It’s loosely analogous to the way the government handles
the problem of forest fires: extinguishing them quickly provides an
immediate and visible benefit. But the delayed and forgotten
consequence of doing so is that it allows decades of deadwood to
accumulate. Now when a fire starts, it can be a once-in-a-century
conflagration.

Banking all over the world now operates on a “fractional reserve”
system. In our earlier example, our sound banker kept a 100% reserve
against demand deposits: he held one ounce of gold in his vault for
every one-ounce banknote he issued. And he could only lend the
proceeds of time deposits, not demand deposits. A “fractional reserve”
system can’t work in a free market; it has to be legislated. And it
can’t work where banknotes are redeemable in a commodity, such as
gold; the banknotes have to be “legal tender” or strictly paper money
that can be created by fiat.

The fractional reserve system is why banking is more profitable than
normal businesses. In any industry, rich average returns attract
competition, which reduces returns. A banker can lend out a dollar,
which a businessman might use to buy a widget. When that seller of the
widget re-deposits the dollar, a banker can lend it out at interest
again. The good news for the banker is that his earnings are
compounded several times over. The bad news is that, because of the
pyramided leverage, a default can cascade. In each country, the
central bank periodically changes the percentage reserve
(theoretically, from 100% down to 0% of deposits) that banks must keep
with it, according to how the bureaucrats in charge perceive the state
of the economy.

In any event, in the US (and actually most everywhere in the world),
protection against runs on banks isn’t provided by sound practices,
but by laws. In 1934, to restore confidence in commercial banks, the
US government instituted the Federal Deposit Insurance Corporation
(FDIC) deposit insurance in the amount of $2,500 per depositor per
bank, eventually raising coverage to today’s $250,000. In Europe,
€100,000 is the amount guaranteed by the state.

FDIC insurance covers about $9.8 trillion of deposits, but the
institution has assets of only $126 billion. That’s about one cent on
the dollar. I’ll be surprised if the FDIC doesn’t go bust and need to
be recapitalized by the government. That money—many billions—will
likely be created out of thin air by selling Treasury debt to the Fed.

The fractional reserve banking system, with all of its unfortunate
attributes, is critical to the world’s financial system as it is
currently structured. You can plan your life around the fact the
world’s governments and central banks will do everything they can to
maintain confidence in the financial system. To do so, they must
prevent a deflation at all costs. And to do that, they will continue
printing up more dollars, pounds, euros, yen, and what-have-you.