Putting money to work
In addition to storage and transfer services, a basic bank may offer an opportunity to its customers to put their excess funds to work. If customers know they will not need money for a period of time, they can choose to put it into an investment account at the bank.
This is different legally and as an accounting matter from a deposit or transaction account. An investment account is a loan to the bank. The depositor’s ownership of the money is transferred to the bank in exchange for an IOU from the bank, called a certificate of deposit, or a savings certificate. The money moves out of a deposit-trust account and into an investment account at the bank. When the money moves out of the deposit account it will cease to be available on demand, because the customer loaned it to the bank.
The customer is loaning money to the bank with the expectation that the bank will loan it to someone else at interest and give the lender a share on this investment. The loan to the bank is an agreement between the bank and the customer specifying the length of time on the loan, the return to the customer-lender, the level of risk and the percentage of principle guaranteed. All loans are risky, so unlike 100% deposit banking, both banker and customer-lender must agree on how much of the risk each party will bear. In other words, if the invested money is lost, who gets stuck with the loss?
In a competitive marketplace, banks may find their savings-lender customers like to choose the values that determine the loans made by the bank. As a customer-lender to the bank, you could choose to have your money loaned out based on your values. Perhaps you want your money loaned to small business in the local community for capital investment. In a 100% money banking system, the bank is dependent on people with savings to make its investments, and so bank customers would have some leverage about how they want their funds invested.
When you transfer your money from a deposit account into a savings or investment account, you move into the realm of risk. If the bank does a lousy job vetting potential borrowers of your money, you could lose all or part of your money. But, in a basic 100% banking system, the loss of your invested savings would have no impact on the money in your deposit account, nor on the money in the deposit accounts of anyone else; deposit accounts are trust accounts and the bank cannot touch their contents without the depositor’s instructions.
A piece of our system
Again, a 100% bank is not the bank system we currently have. However, our banks do provide savings and loan intermediary services in the same way a 100% bank would.
In summary, basic banking provides financial services – safe storage, transfer and accounting services, saver-borrower intermediary. These services are distinct from monetary functions – the creation, distribution or destruction of money.
Keep in mind this difference between financial service banking and money creation.