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Doug Casey on Banking with the Fed

• Casey Research - Doug Casey

Justin's note: Abolish the Federal Reserve.

Regular readers have heard Doug Casey make this suggestion many times. He's been arguing in favor of this for years.

But not everyone thinks getting rid of the Fed would solve America's money problems. In fact, one Bloomberg writer thinks the Fed should have even more power. Specifically, he thinks that everyday people—not just commercial banks—should bank with the Fed. You can read his entire essay here.

After reading this, I got on the phone with Doug… who I knew would have something to say…

Justin: Doug, what do you make of this idea?

Doug: It's a silly idea, a stupid idea, a disastrous idea. The person who suggested this is glib, but clearly lacks a basic understanding of money, both its nature and its history. Nor does he understand how banking works.

Commercial banking, version 2018, has only a limited relationship with sound classical banking. Most people today are unaware what that is, or how it works. [You may want to read this brief description.]

Historically, private banks had two types of bank accounts, demand deposits and time deposits, or what most people know as checking and savings accounts. These are two separate, and very different businesses.

Demand accounts used to be a safe way to store your money. You paid the bank a fee for storing it, and writing checks against it.End The FedRon PaulBest Price: $1.85Buy New $9.10(as of 02:00 EDT - Details)

Savings accounts, or time deposits, are quite different in nature. These accounts might pay around 3% in interest per year. Banks lend out this money, perhaps charging borrowers 6%. The difference, or 3%, is the bank's profit. Your money was tied up for the length of the loan.

Again, banks have historically provided two banking services—the storage of money and the brokerage of money. Money was a commodity, not just an accounting fiction, a floating abstraction. The distinction has already been lost, with checking accounts that pay interest, and "fractional reserve" policies with currency created from nothing. But we'd truly be in fantasyland if the Fed became everyone's bank. Commercial banks could hardly make loans if everyone parked their money at the Fed. The Fed would be totally in charge of interest rates and all lending policies.

Justin: So this would be even worse than the current system?

Doug: Yes. The current banking system is very dysfunctional. It's politicized and distorted, and I despise today's "too big to fail" institutions, which are already practically arms of the State. Horrible things, paying their managements megamillions, while socializing their losses. But this would be much, much worse. You'd have bureaucrats making loans. It would be like banking with the Gosbank of the old USSR.

Still, I can see how someone might think this would be more efficient… or even safer than the current model. I mean the author's right, in a perverse way. The Fed can't go bust like private banks. It can just create new dollars whenever it wants.

I'm flummoxed that somebody came up with such a cockamamie idea. But maybe I shouldn't be. The whole world is becoming so politicized. Governments have become involved in every aspect of existence, reaching into areas of people's lives that they wouldn't have dared to tread before. To say it's like an octopus, with its tentacles insinuating everywhere, is now an inadequate metaphor. Government has become like a fungus, or a bacterial disease, infecting every part of the body politic. Anything appears possible.

Justin: Doug, you've issued a lot of warnings recently about government-controlled digital currencies. Do you think arguments like this will be used to lay the foundation for FedCoin?

Doug: Yes. Digital currencies are coming. Every major government in the world is trying to eliminate cash, starting with the big bills. The 500 euro note, the $100 bill, and even the $50 bill will all be dead ducks soon. There are parts of China now where cash isn't even accepted; you have to use a smartphone to buy a coffee at a corner convenience store.

Soon all transactions will be done digitally. It's wonderful—for the State. They'll know every source of your income, who's paying you, and for what. And every allocation of your assets—what you're buying, what you're reading and watching, what you own, and where it is. A digital money will make it easy for them to do this. Almost everybody already has a smartphone—even me, although I despise being tethered to the damn thing, and only use it when absolutely necessary.

But, perversely, having one and using it is becoming necessary. The next step will be a set of chips implanted in your body, serving most of the functions of a smartphone. People will love it, thinking of the convenience—you won't be able to lose your wallet with the cash and ID it contains.

Justin: But it comes at a huge cost.

Doug: Right. You'll have no privacy.

I mainly see the dangers—the State can track you absolutely everywhere, at all times. The government, or one of its agents, could decide to lock you out of your bank account. They could cut you off from your own money. And completely cut off your ability to buy, sell, travel, or do anything, should you be viewed as politically unreliable. I suspect that once you're on a list, getting off will be much harder than getting off the TSA's "no fly" list—which is nearly impossible.

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