Report: Economists consider the merits of "banning" the banks

There is little serious debate that the modern banking industry bears little resemblance to its historical origins. Although the popular conception of banks is that they hold customer funds and issue loans from those deposits, the reality is that modern banks are in a very different business. Today’s banks are mostly in the business of creating money in the form of loans, acting as an intermediary for the Federal Reserve. The amount of physical currency in their vaults is virtually irrelevant to their overall business model.

As Business Insider‘s Joe Weisenthal notes, this situation has prompted many economists to consider a version of the financial system where banks simply aren’t needed.

Economists have begun seriously discussing the idea of banning banks. That seems ridiculous and far-fetched, but the idea might not be as crazy as it sounds. … Essentially, modern banking represents the outsourcing of money creation from the federal government to the banking system. Of course, there are limits on how much money banks can create (some of the limits stem from regulation, some stem from monetary policy, and some stem from the market itself). But still, most money creation comes from banks. … The new talk is that banks should be banned from creating money, and that the government would take it over.

In effect, banks would be banned from everything other than their traditional roles as depository and payment institutions.

Weisenthal cites 1939 proposal by economist Irving Fisher suggesting that banks be completely prohibited from creating money due to their role in the Great Depression. With the housing bubble and credit crisis largely created by bank actions unrelated to their traditional roles as payment institutions, it’s only natural that the discussion would once again surface.

But what does it all have to do with bitcoin?

Bitcoin was designed specifically to able to serve many of the functions of a modern bank in a decentralized manner. The whole point of the currency was to update digital payments without relying a third-party service, and to completely remove central banks from the equation. The goal of bitcoin, as originally conceived, was to create an alternative to the inflation-prone, credit-based, central bank-dependent banking system. In a very real way, the long-term goal of bitcoin is to “ban” banks from currency completely by introducing a better alternative.

Although ongoing instability in price makes bitcoin a risky way to store value at the moment, should the price actually stabilize at any value, from $3 to $3 million, a simple bitcoin wallet could provide most of the same services as a traditional bank. In a hypothetical future where banks were “banned” from acting as anything other than as providers of depository and payment services, and where bitcoin was as widely accepted at ATM/debit cards, a simple phone-based app could provide comparable services to even the largest banks.

Economists are now starting to discuss the same fundamental concepts that resulted in the creation of bitcoin in the first place. At the moment, the world needs banks. But will we still need them, or even want them due to their inherent risks, in a world where trustless digital currency transactions can happen instantly?

Then again, don’t count that shift happening any time soon. As economist and bitcoin skeptic Paul Krugman points out in his piece “Is A Banking Ban The Answer?,” a ban on traditional banking would cause plenty of new problems just as big as the current ones. One of those is problems would be a rise in so-called “shadow banking,” a market which already includes bitcoin.

Krugman also scoffs at the notion that “we can easily set things up so that the manager of your index fund sells a tiny piece of your stock portfolio every time you use a debit card at 7-11. Is this right?” Given that this is exactly how bitcoin transactions are slated to work through the new Xapo debit card, a bankless future might not be so implausible after all.