What Does a Free Market Banking System Look Like? by Alex Merced

1. No Federal Reserve: The Central Banks fixing of Interest causes malinvestment causing long term projects to be undertaken employing many, but those jobs are lost when those projects are shown not to be in line with the actual savings to complete the project(half way built houses) or to purchase the finished products (empty condo units).

2. NO FDIC/SIPC: There would still be private deposit insurances, and the costs of insuring deposits at a bank that takes on excessive risk will keep prudent investors in safe banks, also since the cost of insurance is spread out among many insurance companies depositors won't have to wait years to make their claims.

3. No Central Regulator: Instead of a government funded regulation monopoly which is subject easily to regulatory capture, consumers would pay for private firms who'd represent their pooled interest and establish rules for banks who want to deal with these firms clients. Since these firms are paid for by the consumer, not the government (political conflicts of interest), not by the industry (industry conflicts of interest), the interest of the clients/investors will be in line with that of the firm/regulator. This also allows for different regulatory frameworks to co-exist so people wanting to take on more risk can go to different regulator allowing more risk and allows alternatives if one regulator becomes corrupted by regulatory capture. These firms would require banks to meet their requirements, they'd rate securities, and other services which the investors might want.

4. A return to Sound/Constitutional money: Gold and Silver would be money once more and banks would be able to create their own money substitutes (redeemable pieces of paper), and can only participate in fractional reserve banking with depositor consent eliminating the fraud concerns.



Although in this environment we still have one issue: While even with private deposit insurance and private regulation a bank can conceivably go bust and frightened remove deposits from all banks, to prevent this government can use it's enumerated power to set standards...

The Government would establish standard units (ex. $1 = 1/40 ounce of gold) and standard reserves terminology, so consumers, businesses can determine the quality of the bank that issued the note/dollar...

Class 1 Banks: Reserves of 75% -  100%
Class 2 Banks: Reserves of 50% - 75%
Class 3 Banks: Reserves of 25% - 50%
Class 4 Banks: Reserves of 0% -25%

So if a Class 4 bank were to go bust people won't rush to pull money out of higher class banks. Also, Gresham's Law (bad money will crowd out good money) will kick into place...

Good Money - Class 1 Banks - People will put their savings in the Class 1 banks since to keep such high reserves a bank would have restrict withdrawal but the extra safety would be great for long term savings such as retirement. Lower yields, but higher purchasing power.

Bad Money - Class 4 Banks - In order for these banks to survive they need liquidity, so these banks would work like the banks of today issuing credit cards, checking accounts, way to get money instantly and quickly. Higher Yields but lower purchasing power.


While there'd be no rules that these banks would fall into these roles, it'd be logical that they would over time. Also businesses can ask for different quality of money, a store that only accepts class 1 money would have lower prices than that accepts all the way to class 4 money yet people who don't want to be subject to all the inflationary pressures of class 4 can have the option to only bank with class 1 banks and use the money at stores that only accept class 1 dollars.

Overall, a monetary/banking system like this is transparent, the only role of government is to set some standards and maybe a reporting system to have a database which private companies can develop systems to check class status of banks and notes, yet no government rules on how these standards should dictate behavior, that would be left to the people and private regulators.

This, is a free market system, transparent, versatile, and flexible