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L. Neil Smith's
Number 606, February 6, 2011

"The gradual encroachments of reason"

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Banks and Bankers
by L. Neil Smith

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Special to The Libertarian Enterprise

This is a new chapter just added to the "Where We Stand" website at

Banks are the means by which European aristocracy regained control of America once again following what we thought had been our Revolution.
—L. Neil Smith

I have been saying for years that, exactly like like lawyers and literary agents, bankers somehow seem to have forgotten who's the boss.

I'm not an economist (a fact I could wake up every morning and thank the gods for, if I were religious, which I'm decidedly not), but I've been dealing with banks since I was a little kid in the 1950s, and I have never liked the "cut of their jib" or the way they do business.

As I say, I'm not an economist and although I am, in nearly every sense of the expression, a "student of Ayn Rand", my interest in the subject is pretty severely limited. I have never bothered to learn the ins and outs of formal economics, of "M-1", "M-2", "M-23", and so forth, nor do I care to do it now. Money is money is money, or—in the case of the worthless slips of paper issued by governments—it's not.

I am, however, sufficiently educated in physics to understand perfectly well that you can't make something out of nothing. It's too damned bad that most politicians and voters seem to lack that simple understanding. Money today literally isn't worth the paper it's been printed on because it's been spoiled by smearing all that ink all over it.

In any case, economics is not nearly as complicated a discipline as many—especially academics and politicians—would prefer you to believe. At the dawn of modern civilization, back when individuals like Galileo Galilei began peering upward through their newly- invented telescopes, they discovered that the mechanics of the sky were not exactly as they had been described by the authorities of the day.

Instead of every visible celestial body circling around the Earth, they found that the Earth—along with several other planets—were circling around the sun. One of those planets, Jupiter, had four small worlds circling around it the way the Moon circles around us. And the stars were so remote that they didn't seem to be circling anything at all.

We learned better later.

Supporters of the old theory, including the Church, fought back, threatening the life, liberty, and physical wellbeing of supporters of the new theory. As for those they couldn't reach, they argued that the old theory needed revising slightly. The Sun, Moon, and planets didn't circle directly around the Earth, but around a line around the Earth, "explaining" why Mars appeared to travel backwards from time to time.

They called these extra circles "epicycles", and each time some modern astronomer shot their theory down, they added another layer of epicycles to the one that had preceded it, until the planets were doing circles around the circles around the circles, and so on, each iteration postponing the eventual, inevitable collapse of their position. Much more importantly, however, the contrived complexity discouraged ordinary individuals from studying the situation and seeing through the smoke and past the mirrors to a simpler and grander truth.

Economics today is in much the same state as astromomy was in the Renaissance, its complicated vocabulary and complex theorizing meant mostly to keep non-economists from seeing certain simple truths about it.

Take banks, for instance.

People seem always to have had trouble, one way or another, with banks. And, one way or another, banks seem always to have had trouble with people. It's always been an uneasy relationship which bankers and their symbiotes, the politicians, have never hesitated to exploit to the hilt. The first bank records appear to have been written on clay tablets in cuneiform. In their primeval beginning, banks were little more than fortified warehouses in which, for a reasonable fee, you could store your valuable assets—usually consisting of gold, silver, jewelry, and grain—a bit more securely than you could at home.

After a while, somebody realized—maybe it was the bankers, maybe it was their customers, tired of paying that "reasonable fee" which slowly ate away at their savings—that nobody was getting any richer with all that wealth just sitting there in the warehouse. There ought to be some way to put it to work, preferably making even more wealth.

Bankers began lending their customers' wealth, for which borrowers paid a "reasonable fee" (now we call it "interest") which the bankers split with their customers. When cultural and religious taboos didn't interfere with the process, everybody made out, and capitalism was born.

It was at this point, however, somewhere around the Middle Ages, that everybody made a couple of really tragic mistakes. The first one occurred because people are basically lazy. Most of the time, this is a wonderful thing, the primary source of all human progress. The great Thomas Edison, for example, invented the electric light bulb because, as a kid, he'd detested cleaning kerosene lamp chimneys for his mother.

Apparently people got tired of carrying all those heavy gold and silver coins around in the little leather bags you see in paintings of the times and in the movies (although a little gold and silver went a long way back then, and the real bags couldn't have been all that big and heavy). There was also considerable physical risk involved: Sam Colt wouldn't come along to make men equal for another five or six hundred years. And women, although they often carried little daggers themselves—and really intimidating pairs of scissors—unless they were accompanied by a competent bodyguard, were at the mercy of the first thug who ran across them, especially if he happened to have a sword.

Instead of lugging all those big, nasty, heavy coins around, folks took up pen and parchment instead, and started writing instructions, of a kind. If they happened to owe their local apothecary a silver florin for his sovereign remedy against tansy or gleet (which don't seem to be quite the problem today that they apparently were in times past), they would dash off a short note to their bank, saying "Please give this apothecary guy one of the silver florins from my personal hoard, [signed] Luigiano the Fairly Resplendant, Gonfaloniere of Podunchio."

History would come to call it a "bank draft" or "check".

Later on, the bank began to write such letters for their lazy customers to carry around instead of all those nasty old heavy coins. (Observe that this innovation left bodyguards fully employed.) These were called "bank notes" and they represented real wealth, for which they could be exchanged whenever someone who had them wanted coins. They were the first paper money, and later would lead to nothing but trouble.

The invention of paper money made inflation possible. The tragic, life-destroying process of inflation is often dealt with by the media—as well as by government officials—as something natural and unpredictable, like the weather, but nothing could be further from the truth.

Inflation happens whenever the amount of stuff—printed paper, for example—people use instead of real money increases, without an increase in the real money—gold, silver, etc.—it claims to represent.

One of the fundamental laws of economics (okay, so I have studied it a little bit) and of human psychology as well, observes that the more there is of anything, the less any single bit of it is worth. If there's a trillion paper dollars in circulation, and the government suddenly prints another trillion, then the paper money we've saved up is halved in value—although if the government and their pet banks spend it quickly, they can enjoy the full benefit of it before that effect gets noticed. By the time it gets to us, however, it takes twice as much money to obtain the things we need or want. In effect, half our savings have been taken away by what amounts to an invisible tax.

Interestingly, the first inflating wasn't done with paper money. I have handled a good many ancient Roman coins that were polygonal in shape instead of round, because, whenever they passed through the hands of an unscrupulous banker or merchant, their edges were clipped off, to be added to a horde of such clippings which could then be melted down to make more coins. (That's why coins today have "milled" or decorated edges, to prevent such a practice.) The coins left dishonest hands at face value, although they were actually smaller, lighter, and worth less. Thus was the Roman money supply "watered down".

The great libertarian teacher Robert LeFevre told the story of England's King Henry VIII, who loved fighting foreign wars more than anything else, and was always looking for money to pay for them. All the historic fuss over his divorce, his various wives, and the Church of England was a smokescreen, according to LeFevre. What he really wanted to do—and did—was loot the holdings of the Roman Catholic Church.

Even that money soon ran out, however, and to pay for his men and horses and golden armor, he finally instructed the treasury to make coins out of junk metal (just as we do today), give them a gold or silver wash, and get them out into the marketplace. Henry's advisors were aghast, and fearful that such a fraud would cause rioting and revolution.

Yet when the advisers checked the marketplace, after a little while, they noticed two things: first, that the phony coins were being exchanged quite briskly, even when the coating had worn off and the dull gray of their base metal could be seen clearly; and second, that there were no real gold or silver coins in sight. These were being hoarded, not circulated. Hence the observation, which came to be known as "Gresham's Law" that "bad money drives out the good" from the marketplace.

In Germany, before World War II, and in Hungary, immediately afterward, inflation with paper currency became so extreme that it's said people took their wages home in wheelbarrows, that the money would hardly pay for a loaf of bread, and that workers were paid twice a day and immediately went out and bought food before prices rose even higher.

When I was young, a common thing for kids born in the shadow of World War II, to trade back and forth were fifty million Deutschmark bills their G.I. dads had brought back from Germany. A few years later, a gold Hungarian pengo was worth thirteen trillion paper pengoes.

A possibly apocryphal story holds that the great economist Ludwig von Mises was walking with some officials past a building where the money presses were rumbling day and night. Asked what they could do to stop the terrible storm of inflation that was tearing their country apart, Von Mises simply pointed at the building and said, "Stop that noise".

Today, government and its symbiotic banks don't need printing presses. Thanks to a shady practice called "fractional reserve banking", they can lend out many times the amount of money they actually have, creating what I've called "air credit". During the Carter Administration, and then again during the Clinton Administration, banks were encouraged—even compelled—to lend non-existent money to would-be homeowners who had no way of paying it back.

Eventually, the banks, which had been promised that the government would back them up with regard to these rotten loans, got into serious trouble and had to be bailed out—with trillions more in air credit—which was the beginning of the economic mess we find ourselves in today. When other businesses began to fail—the automobile industry comes to mind—they had to be "rescued", too, with even more funny money.

Today, the dollar is worth only a small fraction of what it was just a few years ago, affecting trade and our relative position in the world.

What can be done?

From the time you are a little child with pennies, they stop at nothing to keep your money out of your hands. First, they make sure that half of it disappears in taxes. Then they convert what remains into paper and make half of that evaporate as inflation. Next, they convert what paper you have left into entries in a ledger. Finally, they convert those ledger entries into electrons, scattered into space.

There's only one way to stop them, with copper, silver, and gold, and platinum, with wealth that can't be counterfeited and that won't evaporate.

Banks and bankers must be put back in their proper place as simple guardians of the wealth of individuals. Exactly like government, they must forever be kept small and weak. There must be no special laws, no special powers or privileges for banks. Government commissions, state oversight committees, and so on soon become packed with former bankers or future bankers working overtime to make sure their businesses enjoy every government advantage possible—always to the detriment of their customers—while preventing the entry of potential marketplace competition.

Whether it's a simple burglary, mugging, rape—or fractional reserve banking—theft is theft, and fraud is fraud. Nor are any special laws required to deal with such crimes when they're committed by banks, which shouldn't be regulated any differently than, say, a filling station or a grocery store, which shouldn't be regulated at all.

Certain common sense reforms are called for.

At present, it costs a bank customer twenty or thirty or forty or fifty dollars whenever he or she bounces a check. (Retailers often add their own fees, as well.) This amounts to kicking an individual when he or she is already down, since the person didn't have enough money to begin with to cover the check. It can end up costing him or her ten or twenty times the amount of the check they bounced, simply to feed the bank's insatiable, greedy maw. Add the factor of hard times, like those we all happen to be going through at present, and these fees become a major profit item. The bank's position as a bottom-feeding scavenger on human misfortune quickly becomes clearer—and more nauseating.

Another dirty banker's trick is what might be termed the "serial overdraft" scam, in which they invariably post charges against your account before they count your deposits, resulting in a cascade of fees.

I have asked several computer-savvy individuals who have worked for banks what the actual cost of processing a draft on insufficient funds amounts to, and in no case has that amount exceeded a couple of dollars. The rest of what they charge is illegitimate, punitive, and paternalistic. It is not now, nor has it ever been, a bank's place in the scheme of things to fine their customers or punish them. They have a choice: they can lecture them or collect a reasonable fee, but not both.

Yet another corrupt practice that needs a closer examination is the way that banks will happily accept a deposit—but then deny you the use of your own money until they have "confirmed" that it's really there.

In the electronic age we live in, when data flash straight across the country and around the world at the speed of light, the practice of holding a customer's transferred funds for "confirmation" for a week, for a day, for a minute, or even for a nanosecond is nothing more than baldfaced crooked larceny. During the period when you can't enjoy free access to your money, they feel free to lend it out to others, collecting interest on it that they don't share with you. It's a scam called "the float": your money, multiplied times the money of tens of millions of other suckers being worked over the same way, amounts to millions in ill-gotten gain for the bankers every single day.

Billions every year.

And what ever happened to interest-bearing savings accounts?

Lately banks have been finding ways to force employers to deposit their employees' salaries electronically. In some situations, having a bank account has become compulsory, a condition of employment. The banks' highest objective is that you never get to see your own money. Government, of course, loves this idea, because it feeds their sick, perverse obsession with monitoring everything that individuals do, every penny they earn, everything they spend it on, everything they eat.

And every time they go to the bathroom.

At the same time banks gleefully cooperate in violating their customers' natural and Constitutional right to privacy, dignity, and individual sovereignty, fundamental concepts that appear to have disappeared altogether from both the corporate and the governmental universes.

If banks were truly private enterprises, then they would be free to do as they liked in many of these respects. Facing competition, it would pay them well to defend their customers' interests from the predations of the lawless state. Unfortunately, however, they are not private enterprises, but merely another tentacle of government, twice over: the are organized as corporations, and specially chartered as banks.

As long as they remain tentacles of government, banks must be bound, as government is supposed to be, by the Bill of Rights, and regulated within an inch of their corporate lives to prevent the abuses, petty and otherwise, that they regard as doing business as usual.

I have half-jokingly considered advocating that bank officers be compelled to get themselves tonsured, their tellers to wear monkish robes or nuns' habits, if I believed that it would improve their general attitude and encourage some humility. But clearly that would violate the Zero Aggression Principle, and it would probably only make banks and bankers even more self-righteous than they are already. Hats that were once silly in Europe are now the stuff of pomp and circumstance.

Although I invariably favor laissez-faire economic policies, and wouldn't interfere with or limit any genuinely private enterprise, I do remember a time when it seemed much nicer to do business with banks, a time when branch banking was forbidden here in the state of Colorado. The battle for individual freedom against the state must be a battle against its corporate symbiotes—especially banks—as well.

Huge, impersonal, international banking conglomerates must be broken up—within principle—and a business model much more customer-oriented substituted, instead, mostly through the process of open competition, which banks have assiduously avoided for something like 300 years. As institutions of trust, banks must be discouraged from automatically taking government's side against their customers in matters such as private records disclosure and lockbox searches, and encouraged, whenever any doubt arises, to take their customers' side, instead.

The power to create money must be taken from the government backed banking cartel called the Federal Reserve. Lawful money, as mandated by the Constitution—precious metal coins and nothing else—must be substituted for the wastebasket trash that we've become accustomed to.

Putting an end to limited liability—and the pernicious doctrine of the corporation as a person in and of itself—will aid us in this fight. Banks will be smaller, more local, and more respectful of their customers.

That means you and me.

Four-time Prometheus Award-winner L. Neil Smith has been called one of the world's foremost authorities on the ethics of self-defense. He is the author of more than 25 books, including The American Zone, Forge of the Elders, Pallas, The Probability Broach, Hope (with Aaron Zelman), and his collected articles and speeches, Lever Action, all of which may be purchased through his website "The Webley Page" at

Ceres, an exciting sequel to Neil's 1993 Ngu family novel Pallas is currently running as a free weekly serial at

Neil is presently at work on Ares, the middle volume of the epic Ngu Family Cycle, and on Where We Stand: Libertarian Policy in a Time of Crisis with his daughter, Rylla.

See stunning full-color graphic-novelizations of The Probability Broach and Roswell, Texas which feature the art of Scott Bieser at Dead-tree versions may be had through the publisher, or at where you will also find Phoenix Pick editions of some of Neil's earlier novels. Links to Neil's books at are on his website


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