The Future of Banking

submitted by jwithrow.
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Journal of a Wayward Philosopher
The Future of Banking

September 23, 2017
Hot Springs, VA

“The biggest disruption of Bitcoin is that banks are no longer needed. Every major financial institution has made this technology its focus… but they say Bitcoin is a fraud. It’s the blockchain, they proclaim. They can utilize the technology ‘behind Bitcoin’ to make themselves smarter, better, faster, bigger. But Bitcoin’s fundamental use-case is to remove the banking function entirely from the equation. When banks come to terms with this, they will contact their congressmen and spend millions… maybe billions to slander Bitcoin.”Erik Voorhees

The S&P closed yesterday’s trading session at $2,502. Gold closed at $1,300 per ounce. Crude Oil closed at $50.66 per barrel. The 10-year Treasury rate closed at 2.26%. Bitcoin is trading around $3,780 per BTC today.

Dear Journal,

I have ventured back down to south Florida to see what Irma left behind… and maybe do a little more work in the publishing arena.

I have been flying back-and-forth between Florida and Virginia for several months now, but I do have a vehicle in Delray to get me around town… which I had left parked conveniently beside the largest palm tree I have ever seen.

I am happy to report that palm trees are quite hardy – which was a surprise to me. But the palm branches… not so much. So, my vehicle survived the hurricane. But you will find many naked and deformed palm trees hanging around south Florida now.

Hurricane Torn Palm Tree

Speaking of naked and deformed, I spent the flight down thinking about Bitcoin, banking, and the nature of disruptive technology.

As you recall, the CEO of JP Morgan called Bitcoin a fraud last week… and we had a little fun at his expense.

In reality, the banking sector is where the fraud is. Money laundering… rigging LIBOR… robo-stamping foreclosures… ripping off “muppets”… fraud has run rampant in the banking sector for more than a decade now.

That is why Bitcoin has been so successful. It is a timely solution.

But Bitcoin is not a new idea. The Cypherpunks were working on cryptocurrencies all the way back in the 80s.

It took thirty years for the idea to stick because the world was not ready for them. People didn’t know they needed independent money yet. They still trusted the System.

Bitcoin Will Change the World

But remember, Bitcoin is not just a solution to the banking problem.

Bitcoin is a disruptive technology. Disruptive technologies change everything. There will be no going back.

Agriculture was the disruptive technology 15,000 years ago. Agriculture made us farmers. We didn’t go back to being hunter/gatherers.

Capital markets were the disruptive technology 500 years ago. Markets made us an industrial society. We didn’t go back to feudalism.

The automobile was the disruptive technology 100 years ago. The world became smaller as transportation improved. And we didn’t go back to horse and buggies.

The internet was the disruptive technology 20 years ago. The world became connected… and we didn’t go back to paper records and post offices.

And Bitcoin is the disruptive technology today. Bitcoin makes all of us custodians of our own money. We won’t go back to banking.

Jamie Dimon may not know this yet… but some banks do.

The Future of Banking

Capital One just opened a new bank branch here in Delray Beach – right on Atlantic Avenue.

“That’s just stupid,” I thought to myself. “Their rent is at least $20,000 a month… but physical bank branches are completely obsolete. Why open a new one? Their best chance of surviving the next decade is to leverage mobile banking as far as it will take them.”

It turns out they aren’t as dumb as I thought. A friend filled me in a few days after the new branch opened:

“The new Capital One is awesome… it’s the best bank I have ever been in! You walk in and they have catchy music playing. And it looks like an upscale lounge… nice décor… comfortable furniture.

You look around and there are no bankers in sight. Instead, the one guy working there is selling expensive hipster coffee. And he will give you a tablet to open a Capital One account online if you want.

He told me that they are catering to the local business community. Businesses can rent the place out for meetings… or lunches… or parties… whatever they want. And the bank will sell them all the hipster coffee they can drink!”

So, there you have it – the future of banking!

Little Maddie will never have a bank account. She will never have to wait for her check to “clear”. Or wait 2 or 3 business days for her deposit to post.

Instead, she will handle all of her financial affairs herself, within the crypto economy.

But if she’s lucky, there will still be a local bank nearby to sell her all the hipster coffee she wants…

More to come,





Joe Withrow
Wayward Philosopher

P.S. My new Bitcoin course teaches you everything you need to know to buy, trade, and store bitcoins securely. So far, the course boasts a 4.9 rating from active users. You can get it here.

Markets Restrain Bank Fraud; Central Banks Enable It

by Frank Shostak – Mises Daily:Bank

Originally, paper money was not regarded as money but merely as a representation of a commodity (namely, gold). Various paper certificates represented claims on gold stored with the banks. Holders of paper certificates could convert them into gold whenever they deemed necessary. Because people found it more convenient to use paper certificates to exchange for goods and services, these certificates came to be regarded as money.

Paper certificates that are accepted as the medium of exchange open the scope for fraudulent practices. Banks could now be tempted to boost their profits by lending certificates that were not covered by gold. In a free-market economy, a bank that overissues paper certificates will quickly find out that the exchange value of its certificates in terms of goods and services will fall. To protect their purchasing power, holders of the over-issued certificates naturally attempt to convert them back to gold. If all of them were to demand gold back at the same time, this would bankrupt the bank. In a free market then, the threat of bankruptcy would restrain banks from issuing paper certificates unbacked by gold. Mises wrote on this in Human Action,

People often refer to the dictum of an anonymous American quoted by Tooke: “Free trade in banking is free trade in swindling.” However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry on October 24, 1865: “I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer.”

This means that in a free-market economy, paper money cannot assume a “life of its own” and become independent of commodity money.

The government can, however, bypass the free-market discipline. It can issue a decree that makes it legal (or effectively legal) for the over-issued bank not to redeem paper certificates into gold. Once banks are not obliged to redeem paper certificates into gold, opportunities for large profits are created that set incentives to pursue an unrestrained expansion of the supply of paper certificates. The uncurbed expansion of paper certificates raises the likelihood of setting off a galloping rise in the prices of goods and services that can lead to the breakdown of the market economy.

Central Banks Protect Private Banks from the Market

To prevent such a breakdown, the supply of the paper money must be managed. The main purpose of managing the supply is to prevent various competing banks from over-issuing paper certificates and from bankrupting each other. This can be achieved by establishing a monopoly bank, i.e., a central bank-that manages the expansion of paper money.

To assert its authority, the central bank introduces its paper certificates, which replace the certificates of various banks. (The central bank’s money purchasing power is established on account of the fact that various paper certificates, which carry purchasing power, are exchanged for the central bank money at a fixed rate. In short, the central bank paper certificates are fully backed by banks’ certificates, which have a historical link to gold.)

The central bank paper money, which is declared as the legal tender, also serves as a reserve asset for banks. This enables the central bank to set a limit on the credit expansion by the banking system. Note that through ongoing monetary management, i.e., monetary pumping, the central bank makes sure that all the banks can engage jointly in the expansion of credit out of “thin air” via the practice of fractional reserve banking. The joint expansion in turn guarantees that checks presented for redemption by banks to each other are netted out, because the redemption of each will cancel the other redemption out. In short, by means of monetary injections, the central bank makes sure that the banking system is “liquid enough” so that banks will not bankrupt each other.

Central Banks Take Over Where Inflationist Private Banks Left Off

It would appear that the central bank can manage and stabilize the monetary system. The truth, however, is the exact opposite. To manage the system, the central bank must constantly create money “out of thin air” to prevent banks from bankrupting each other. This leads to persistent declines in money’s purchasing power, which destabilizes the entire monetary system.

Observe that while, in the free market, people will not accept a commodity as money if its purchasing power is subject to a persistent decline. In the present environment, however, central authorities make it impractical to use any currency other than dollars even if suffering from a steady decline in its purchasing power.

In this environment, the central bank can keep the present paper standard going as long as the pool of real wealth is still expanding. Once the pool begins to stagnate — or, worse, shrinks — then no monetary pumping will be able to prevent the plunge of the system. A better solution is of course to have a true free market and allow commodity money to assert its monetary role.

The Boom-Bust Connection

As opposed to the present monetary system in the framework of a commodity-money standard, money cannot disappear and set in motion the menace of the boom-bust cycles. In fractional reserve banking, when money is repaid and the bank doesn’t renew the loan, money evaporates (leading to a bust). Because the loan has originated out of nothing, it obviously couldn’t have had an owner. In a free market, in contrast, when true commodity money is repaid, it is passed back to the original lender; the money stock stays intact.

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