An old Christian saying warns us not to make money our
god, for it will plague us like the devil. Based on this maxim, a few
economists admonish us not to place politicians in charge of our money,
for they will plague us worse than the devil.
Most Americans take heed of the first warning, but few
pay attention to the latter. Unaware of the dire consequences of
political control over money, they appointed "monetary authorities" and
authorized them to issue and regulate their money. The Federal Reserve
Act of 1913 established a central bank with seven governors who in time
were to become the regulators and overseers of the monetary system. In
1933, the federal government expropriated the people's gold coins and
replaced them with Federal Reserve notes. In the same year it organized
the Federal Deposit Insurance Corporation (FDIC) which was followed by
the Federal Savings and Loan Insurance Corporation (FSLIC). The
directors of both government agencies assumed responsibility for and
control over the people's bank deposits,
Since then a myriad of special laws has tightened the
political grip on the banking industry. There are the laws regulating
Truth in Lending, Truth in Savings, Fair Housing, the Community
Reinvestment Act, the Real Estate Settlement Procedures Act, the
Expedited Funds Availability Act, the Electronic Funds Transfer Act, the
Financial Institution Reform, Recovery, and Enforcement Acts, the Equal
Credit Opportunity Act, the Flood Disaster Protection Act, the Home
Mortgage Disclosure Act, and various environmental acts.
The "war on drugs" gave occasion to the Bank Secrecy
Act which forces bankers to reveal all major deposits and withdrawals to
the banking authorities and call their attention to suspicious
transactions. Failure to comply is called "structuring" and is
punishable with fines and imprisonment. In other words, failure to
snitch on their depositors is a serious crime. A number of bank tellers
and supervisors are lingering in federal penitentiaries paying for their
crimes. There is no bank secrecy in the sense of customer privacy; bank
secrecy now means the very opposite: secret reporting to the
authorities.
The authorities scrutinize every aspect of the lending
process. Bankers are forced to observe the prescribed procedures in all
details. Phone calls from customers about home loans must be logged, the
marital status recorded; loan limits and waiting periods must be
observed. What used to be a half-page application form has grown to a
multi-page form designed to meet government edicts.
Banking regulations are crushing the banking industry.
Last year (1994) a small-town ban6r received 2,945 pages of new
regulations, amendments, and proposed regulations. For six long weeks
five regulators conducted "compliance examinations," busily comparing
books and records with more than ten thousand pages of regulations and
searching for violations. The "compliance examinations" followed the
major annual "safety-and-soundness" examinations.
The Community Reinvestment Act forces bankers to give
special consideration to individuals who belong to minority groups. It
compels bankers to grant loans on the basis of race, gender, and
national origin rather than credit worthiness. The U.S. Department of
Justice always stands ready to lend support to the regulators who may
mete out stupendous fines. Their threat alone is enough to make all
bankers quite subservient.
Bankers live in constant fear of criminal prosecution
for violations of banking regulations. Minor infractions such as
overdrafts on an executive's checking account call for draconian
penalties. Minor deviations from a regulator's interpretation of a
regulation may be penalized severely. Facing their regulators, most
bankers stand at attention, stammering "Yes, Sir," or "No. Sir," "I am
truly sorry, Sir," "We will follow your instructions immediately, Sir."
Under such conditions it is not difficult to reflect on
the future of American banking. In the coming years, the number of banks
(now about 11,000) is likely to shrink through mergers, syndications,
cartelization, and other combinations. It takes large law and regulation
departments to specialize in the intricacies of banking law and engage
with the regulators and their prosecutors. Million-dollar fines per day
are likely to crush most banks except for the giants such as Citicorp
with $213 billion in assets or Bank of America with $180 billion. The
regulators themselves undoubtedly will applaud the concentration
movement as it simplifies and reinforces their control over the
industry.
The trait and type of banking personnel is likely to
change. Men of character, integrity, and independent judgment will give
way to two types which thrive in all kinds of command systems: the
servants and bondsmen who obey all orders and the villains who corrupt
all orders. The number of banking scandals is bound to multiply in the
coming years.
While banking itself is bound to linger and wane,
related industries offering deposit and loan services will grow and fill
the void - provided they escape the banking regiment. The "money market"
offering treasury bills, commercial paper, certificates of deposit, and
other instruments beckons for deposits; mutual funds and brokerage funds
offer special checking account advantages. Yet, all this banking ersatz
will not take the place of old-fashioned banks; the regulators who sit
in judgment of what every sector of the capital market may do will not
allow it. Political control over money tends to be comprehensive.
Harassed by regulators and prosecutors, some bank
customers may seek refuge abroad. Since the disintegration of the Soviet
system emerging markets all over the world are begging for funds,
offering many attractions and high returns for capital fleeing from U.S.
regulators.
The greatest difference between rich countries and poor
countries is not so much the quality and effort of labor nor the
abundance of natural resources, but the size and vitality of the capital
market in which private banks play a pivotal role. U.S. banking laws and
regulations are straining to create the very conditions so
characteristic of poor countries.
Hans E Sennholz
Reprinted with permission from the
Freeman a publication of the Foundation for Economic Education, Inc.,
May 1995, Vol. 45, No. 5.
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