The Social Contract Between Banking and Government
Executive Summary
- There is a social contract between the government and banks as part of banking.
- This article explains that contract and how it is routinely violated.
Introduction
Banks originally had a social expectation that they would support the public interest.
The importance of the US Post Office is covered in the following quotation.
A social contract has existed between banks and the government since the early days of the Republic. The government supports the banks through trust-inducing insurance, bailouts, liquidity protection, and a framework that allows the allocation of credit to the entire economy. Banks, in turn, operate as the central machinery of the economy by providing transaction services, a medium for trade, and individual and business loans that spur economic growth. This entanglement between the state and the banking system must surely mean that banks should not exclude a significant portion of the public from the bounty of government support. This is not just a banking market problem but a threat to our society’s democratic principles. When the state becomes so heavily involved in the banking system, that system cannot create or contribute to such a vast inequality.Many policymakers have inferred this obligation on the part of banks and have attempted to force banks to extend credit beyond their preferred customer base. The banking industry has vigorously opposed these efforts, but the democratization of credit is not an issue that should be left to the banks. The supply of credit has always been a public policy issue, with banks functioning as intermediaries. Insofar as the state enables credit markets, all creditworthy Americans deserve equal access to credit, especially because reasonable and safe credit can provide a smoother path both through and out of poverty. If banks are not providing credit to the poor, the state should provide it directly.The existing post office framework represents the most promising path toward effectuating such a public option. American banks long ago deserted their most impoverished communities, but post offices, even two centuries later, have remained—still rooted in an egalitarian mission. There have never been barriers to entry at post offices, and their services have been available to all, regardless of income. And so, it is not unreasonable to suggest that as America’s oldest instrument of democracy in action, the post office can once again level the playing field, and in the process, save itself from imminent demise.
Source: How the Other Half Banks
https://www.amazon.com/How-Other-Half-Banks-Exploitation/dp/0674286065