The Requirement for the Government in Banking

Executive Summary

• Banks have a problem existing without government involvement.
• This is something banks try to hide from the public.

Introduction

The money creation function is a core capability of governments. Governments provide insurance to banks and deputized banks to engage in money creation by allowing them to have a banking charter.

This is explained in the following quotation.

One of the most important and oft-forgotten truths about any banking system is that it simply cannot exist without the government. Lending and borrowing have taken place for as long as recorded history. Before the nation-state, borrowing and lending were connected to religious temples, the nucleus of each society. But the banking system we know today, which allows for the development of modern economies by issuing bank notes, lending, and accepting deposits, started with an original transaction between a government and private bankers. The Bank of England was formed in 1694 because King William III needed a loan of 1.2 million pounds to finance a war against France. Forty London merchants joined forces to issue the loan. In return, the crown gave them a monopoly on issuing bank notes—the genesis of state-sponsored paper money. The notes were, in fact, the king’s promise to pay back the loan. He never paid it back and those notes and their successors have been circulating and multiplying ever since. The Bank of England and the network of banks it created became the model for the world’s current banking system—a model where the bank initially existed to meet the needs of the state. Italy, Spain, and France, too, created the first banks to help the monarchy fund a war. The United States came late to the game, but it, too, formed a banking system whose existence depended on the state.2

Source: How the Other Half Banks

https://www.amazon.com/How-Other-Half-Banks-Exploitation/dp/0674286065