Eight forecasts for U.S. banking.
A drastic and comprehensive reformation of the U.S. commercial banking and monetary system is almost inevitable. This system is the accidental result of 200 years of largely uncontrolled competition and unplanned growth. It is a product of a competitive search for profits, not of rational planning for efficient operation in the social or national interest. Now, technological progress has made it possible to achieve desirable monetary reforms that were previously beyond our capacity.
There are eight major reforms that I predict will be largely or entirely completed before the year 2100. These reforms will transform the monetary and banking system far more radically than all earlier reforms since the creation of the system.
Most of these reforms are already being achieved. The order in which they are described below is not meant to indicate the precise chronological order in which they are to be begun or completed. Most of them will occur simultaneously.
Cash Will Be Restricted and Replaced Further by Checks
The use of bank checks and check substitutes to make monetary payments has been growing almost steadily in the United States since 1800. It is estimated that in 1980 about 80% of all legal payments were made by check. This percentage will continue to rise until all payments of over $10, and many for smaller amounts, are made by check or by electronic fund transfer.
The use of checks has been growing, and will long continue to grow, because it is usually much cheaper and more convenient to send a check through the mail, or over a wire, than to send cash by mail or to deliver it in person. If one keeps or carries large sums of cash, they may be lost or stolen. Demand deposits cannot be lost or stolen, and stolen checks are much harder to spend than stolen currency. Moreover, checks can be quickly written for the exact amount required, and they serve as receipts when returned to the payee or entered in his bank account.
Growing restrictions on the use of cash, chiefly paper money, are inevitable as a cheap and effective method of crime prevention and detection. In recent years, several federal laws requiring banks to report large cash receipts have been enacted, and large fines have been imposed on some banks that violated these laws. In the future, these laws will become more and more restrictive, until nearly all nonessential acceptance of cash deposits by banks, and all use of cash to make payments over some small maximum amount, perhaps $10, will be illegal.
One of the first new steps in this direction will be the gradual withdrawal from circulation of large-denomination paper money. By 2050, no paper money with a value (in 1985 values) of more than $10 will remain in circulation. This reform alone will have a significant effect on crime because many illegal payments are made in large-denomination paper money.
After all large-denomination paper money has been withdrawn from circulation or declared invalid, the U.S. government will gradually limit the use of cash to pay rent, buy autos, or make any other payment of more than some increasingly small maximum amount. By 2100, all such use of cash will be prohibited.
Bank Records Will Be Used Far More to Prevent Crime
The use of checks leaves bank records that can be used, and increasingly will be used, by government agencies to enforce payment of taxes and to prevent and detect all crimes involving the theft or payment of money. For instance, restrictions on the use of cash will eventually not only make it almost impossible for dealers in illegal drugs to buy or sell such drugs, but will make it impossible for all criminals to obtain or spend illegal income. Nearly all personal income and spending will require bank-deposit credits and debits, which will be periodically reviewed by police agencies.
The eventual full use of bank records to detect crime will probably reduce crime costs (estimated at more than $200 billion in 1985) by more than 80% and will also radically reduce the costs of crime prevention and detection. The use of bank records to detect crime and convict criminals has long been growing, but it can and will be vastly increased. The computers used to prepare personal bank statements will be programmed to automatically call police attention to all suspicious -- i.e., possibly illegal -- payments by check, and further police investigation will be easy and inexpensive because bank records will immediately reveal the sources of all suspicious income.
To facilitate such police review, the government will require that each person have only one personal checking account and that he receive all income and make all payments through this account. As a result, each person will receive periodic bank statements on standardized statement forms designed to make all unusual or suspicious entries conspicuous to the police. However, nearly all police inspection of such statements will be done by computers, thus minimizing both the costs of police review and police intrusion on personal privacy.
A Demand-Deposit and Check-Handling Monopoly Will Be Created
The third major reform will be the creation of a single national agency for checking accounts. This new agency will not be a commercial bank because it will make no loans.
The function of holding demand deposits and clearing checks (and check substitutes) on such deposits will be taken from all other financial institutions and will be entrusted to the new agency, which will have no function other than debiting and crediting the demand deposits of its millions of depositors. It will not accept savings deposits, create demand deposits, make loans, or perform any function other than holding demand deposits and transferring them from one bank account to another by simple accounting entries. This central clearinghouse will need only one giant computer and will probably employ fewer than 1,000 workers.
The use of bank checks and check substitutes as means of payment has been growing for centuries and has become more common in the United States than in any other country. In 1980, some 80 million Americans and nearly all American business firms held demand deposits and wrote checks on these deposits. The number of checks cashed--i.e., debits to demand accounts--grew from about 10 billion in 1900 to about 100 billion in 1985. It is now growing by 6% a year.
The creation of a check-clearing monopoly would yield a cost reduction of more than 80% chiefly because it would reduce by more than 60% the average number of bookkeeping entries required to transfer bank credit from one demand account to another. Moreover, it would sharply reduce the cost of each such entry because the check-handling agency could use much larger and more-efficient accounting machines and could achieve a much greater division of labor among both machines and workers. Finally, such centralized, one-office check clearing would minimize the time required to clear a check and would eliminate all losses due to bad checks.
At present, a typical American bank check passes through three or four different banks or clearinghouses before the payee receives credit for it. Normally, a check on an out-of-town bank passes through the payee's bank, a regional correspondent of that bank, a New York bank, a clearinghouse, another New York bank, the regional correspondent of the payor's local bank, and the payor's local bank, which may refuse to pay it for lack of funds. At every step, the amount of the check must be debited to one bookkeeping account and credited to another. Moreover, the check is usually carried physically from one bank to another, and this costs money. The creation of a single national check-handling office would reduce the number of agencies through which the average out-of-town check passes from four or five to just one.
The business of handling bank checks is a natural monopoly for the same reason that the local postal or telephone system is a natural monopoly. All checks should pass through a single check-clearing office for the same reason that all local mail or phone calls should pass through the same local post office or telephone exchange. Competition is wasteful and uneconomical in these industries.
A Security-Brokerage Monopoly Will Be Created
Most of the arguments for concentrating all transfers of demand accounts in a single national office can be used to justify a like concentration of all security transfers. It is just as wasteful to spend money on transporting securities from one brokerage office to another as to spend money on transporting checks from one bank to another. Therefore, in time, a single national security-brokerage agency that holds, and transfers titles to, all securities will be created, probably before the year 2100. The prices paid will probably be determined automatically by a computer complex programmed to fix prices that balance supply and demand.
Since every security transfer will involve a compensating transfer of demand deposits, and should not be carried out unless the required demand deposits are available, the national brokerage agency should be very closely associated, both organizationally and geographically, with the national check-clearing agency. Probably these two functions will be performed by the same computer complex in a single building, and both security and demand-deposit holdings and transfers will be reported on the same periodic bank statements.
The creation of this national brokerage monopoly will eliminate all need for local brokerage offices. Orders to buy and sell securities will be mailed or phoned to the national brokerage agency. Ample advice on the purchase or sale of securities will be provided by investment periodicals and books. The elimination of local brokerage offices will save more than $10 billion a year.
The deposit of all securities in the vaults of a single national brokerage agency will not only save the high costs of locating, counting, verifying, and transporting these securities whenever they are transferred from one owner to another, but will also greatly reduce both storage costs and losses from thefts, embezzlement, and fire. If anyone tries to sell securities he does not own, the national brokerage agency will find it easy to detect this illegal effort, or to reverse the sale after it has been found to be illegal. No seller will be paid in cash, and illegal demand-deposit payments will be easily reversible. Moreover, no sale will be completed unless the buyer has adequate funds in his demand account, which will be held by the affiliated national check-handling agency.
Finally, concentrating all security brokerage in a single national agency will create an ideal market by bringing all buyers and sellers together in a single market for the first time.
Direct Bank-Deposit Debiting and Crediting Will Greatly Increase
In the United States, the vast majority of firms that pay wages by check still give or send wage checks to their employees and also send dividend and interest checks to their stock and bond holders. This is very uneconomical because it requires the check recipients to take or mail such checks to their banks for deposit.
This wasteful system is certain to be replaced gradually by a system in which firms send wage, dividend, interest, rent, and most other check payments directly to the payees' banks. The creation of a single national demand-deposit and check-handling monopoly will greatly facilitate such direct payment to payees' banks because all payees and payors will have their demand deposits in the same office.
Direct payment to payees' bank accounts has been common in Western Europe for many years. In 1974, the U.S. government began to make Social Security payments directly to payees' banks. This eliminates both loss of checks in transit and theft of checks after their receipt. It saves payees the cost and inconvenience of a trip to the bank or of any other effort required to deposit checks, and it assures faster crediting of payees' accounts. A growing number of U.S. firms have begun to pay wages and salaries directly to the employees' bank accounts. I predict that, by the year 2050, all wage, dividend, and interest payments will be so paid.
In several European countries, business firms send duplicate bills to debtors, who send one copy of the bill and their check directly to the creditors' banks. This system is more efficient than the customary American process because it eliminates one check transfer -- that from the debtor to the creditor. But this system can be improved. Under the coming U.S. system, firms will send their invoices directly to the creditor's bank, which will also be the debtor's bank after creation of the national check-clearing agency. Payment by check will then require no action by the debtor and will be achieved by bookkeeping entries in one office only.
Such direct payment of debts will grow until, by 2100, the vast majority of debts to business firms will be paid in this manner. It will probably begin here with automatic direct collection of recurring debts to public utilities, landlords, mortgage holders, and installment-debt creditors. Social Security taxes and personal-income taxes will also soon be collected by direct debits to payees' bank accounts. In the beginning, a single letter of instruction to the debtor's bank will allow the periodic deduction or debiting of such recurring debts. This practice is already common in Europe. Eventually, however, no specific permission by the debtor will be required. By the year 2100, automatic direct bank-deposit debiting and crediting will be universal and compulsory in the United States.
It may seem that direct debiting could be easily abused. But all fraudulent or improper debits would be accompanied by improper credits, and both could easily be reversed when proven improper. Any deliberate or repeated practice of fraud would soon become obvious, and perpetrators could easily be penalized by suitable fines debited to their accounts.
The Use of Electronic Fund Transfers Will Expand Greatly
Electronic fund transfer (EFT) will rapidly grow as a substitute for the use of checks. The use of EFT has been growing for some time. For instance, many Social Security benefits are now paid by direct electronic transfer of government funds to personal checking accounts. But the proportion of electronic transfers to total fund transfers is still probably less than 10%. This figure will rise to more than 40% by 2050 and more than 80% by 2100.
By 2050, most public-utility accounting offices, banks, insurance companies, and large retail stores will be electronically linked to one or more commercial banks so these firms will be able to directly debit and credit their customers' demand accounts. Retail-store customers will carry credit cards that will be used by store cashiers to debit customers' accounts at the moment of purchase. By the year 2100, all retail purchases of more than some small maximum amount ($5?) will be made in this way.
EFT is, or will soon become, much cheaper than the use of checks because it saves the costs of writing checks, sending them through the mail, and processing them in bank accounting offices. It also results in instant payment and instant verification of payment. It eliminates delay in payment, bank float, and bad checks. The marginal cost of using existing facilities for electronic fund transfers, like the marginal cost of using an existing telephone network, is usually zero. And existing phone or telegraph networks can often be used for electronic fund transfers. Finally, future improvement and growth in the use of electronic bank accounting machines -- i.e., computers -- will will make the processing of electronic transfers ever faster and cheaper.
The Number of Independent Banks Will Radically Decline
By the year 2100, the number of U.S. banks will almost certainly be fewer than 100, compared with about 15,000 in 1985. This trend is easily predicted for several reasons.
First, the number and relative importance of small, independent banks has long been declining. The number of banking offices operated by U.S. chain banks grew almost steadily from 2,500 in 1925 to more than 40,000 in 1984, a period during which the number of one-office banks declined by more than 50%.
Second, chain banking has developed much further in advanced countries other than America. For instance, the five largest British banks have more than 10,000 branches and hold about 75% of all demand deposits (i.e., checking accounts). A similar concentration of commercial banking exists in most European nations, and in Canada there are only 71 such banks.
There are more than ten times as many commercial banks in the United States as in any other Western country. More than half of American commercial bank assets are held in the 100 largest U.S. bank-holding companies, and the smallest 10,000 banks hold only about 10% of such assets. The chief reason there are still so many small banks is that the states, with federal approval and support, have protected small, mostly rural, banks by not allowing competition from out-of-state and/or big-city banks, despite the fact that the latter are more efficient.
Third, one-office banks are relatively inefficient. Whenever chain banks are allowed to compete with one-unit banks, they grow much faster than the latter because they can operate more cheaply. They enjoy all the economies of largescale management and operation -- volume purchasing of supplies, volume borrowing of funds, standardization of supplies and equipment, lower advertising costs, greater division of labor among both workers and machines, etc. The chain banks pass some of these savings on to their customers, who therefore increasingly prefer to deal with chain banks.
Fourth, restrictions on chain banking will gradually be weakened. The rise of chain or branch banking has been radically restricted by law in the United States. The National Bank Act of 1864 prohibited national banks from establishing branches. They are now allowed to have branches in states that allow state banks to do so, but about one-third of the states still allow only one-unit banks. As bankers, borrowers, voters, and politicians become more aware of the growing advantages of branch banking, they will gradually relax or end all legal restrictions on such banking. By 2050, all limitations on chain banking in the nation will probably have been eliminated.
Small-town bankers have long been the chief opponents of interstate chain banking. But the big chains have learned from experience that the best way to expand into new areas is to buy out small-bank stockholders. Since such stockholders have usually received generous prices for stock that was previously hard to sell, they are rapidly becoming reconciled to the probable future rise of national chain banking.
Chain banks can afford to offer generous and tempting bids for small banks because they know that these banks will become much more profitable when operated as branches of chain banks. It is highly probable, therefore, that most small U.S. banks that do not fail in the near future will be purchased by large chain banks before the year 2100.
Moreover, the continued concentration of agriculture and the declining number of U.S. farms will cause many small-town banks to fail or to reduce their dividends, and this will in turn help to persuade many small-bank stockholders to sell their stock to chain banks.
The Private Creation of Money Will End
Since banks do not have to give out cash when they make new loans, but merely create new demand deposits, they can loan more money than actually exists and benefit by charging interest. In other words, banks can and do create money for profit.
The making of a new, additional bank loan always achieves three quite distinct results: It increases the supply of money in circulation, it increases the assets of the borrower, and it creates additional income for the bank. Individual banks make new loans, thereby increasing the supply of money, in order to increase their interest income. They pay little if any attention to the incidental effect upon the total quantity of money. Indeed, they are usually unaware of any such effect because they do not know whether other banks are offsetting it by calling in old loans. And some naive bankers still deny that banks can create money.
But the creation of money and demand deposits by banks or other private agencies will gradually be reduced and, before the year 2100, prohibited by law, for the following reasons:
First, the creation of money has long been generally recognized as a natural function of government, because private creation of money enables private persons to enrich themselves at the expense of the public. It is obvious that successful counterfeiters so enrich themselves. It will eventually be generally recognized that bankers and borrowers of new bank money also do so.
Second, whenever bankers or their borrowers spend new money, they tend to raise price levels and thereby reduce the purchasing power of, and consumption by, the general public. The private creation of new bank money makes it far more difficult for any government to properly control the growth of the total quantity of money in circulation and the resulting price levels. And failure to properly control the quantity of money in circulation has often resulted in a severe business depression and heavy unemployment, or in runaway inflation and a business boom.
Third, the creation of demand deposits that are not backed 100% by cash creates the risk that banks may fail whenever depositors demand more cash than is in reserve behind such deposits. The lower the reserves, the greater the risk that the commercial banking system may become insolvent, and the mere threat of such insolvency may cause or deepen a serious economic recession. The U.S. banking system has repeatedly become insolvent, and the risk of such a crisis is greater today than anytime since 1933, because U.S. commercial banks have made many bad loans and their average cash reserve (3%) is now abnormally low. In 1984, the Federal Reserve System had to provide $11 billion to bail out the Continental Illinois Bank, the eight-largest U.S. bank, in order to prevent a run on other banks.
The best way to prevent banks from creating money and causing inflation is to require that all bank money -- i.e., demand deposits and bank notes -- or at least all new, additional bank money, be backed 100% by money created by the government. Then the function of creating new money will be entrusted to an independent government monetary agency. The adoption of 100% cash reserves will also end the risk of bank runs.
To enable the commercial banks to build up 100% reserves behind all demand deposits and bank notes, without a reduction in their earnings, the U.S. government will probably print the required amount of new reserve money and give it to banks free of charge. This new paper money will be legal tender only for interbank transactions.
The most useful function of banks is to collect and invest savings. To perform this function, they do not need to create new bank money or to hold and transfer demand deposits, which are funds in use -- not savings ready for investment. When these three quite distinct and unrelated functions are separated and assigned to different agencies, each will be performed more efficiently because each agency will be designed and operated to perform one function only, with no conflict of interest between two or more functions.
Making Economic Behavior Rational
Nearly all of the eight major monetary and banking reforms predicted above will occur gradually and simultaneously over several decades. Only the creation of a single national demand-deposit-holding and check-clearing agency will probably require a sudden drastic compulsory change in the system. And even this radical reform can be largely achieved gradually and without government coercion if free competition results in the survival of only one national chain of commercial banks.
All of the predicted reforms, and many others, will be aspects or illustrations of a much more general or fundamental social trend, namely the universal and inevitable trend toward rationalization of all economic behavior. Humanity has an instinctive or hereditary desire to rationalize, or make more efficient, all social behavior. Thus, it is always possible to predict the future by determining what behavior will be most rational or efficient.
PHOTO : Automated teller machines are becoming easier to operate and more pervasive, allowing
PHOTO : everyday banking to be conducted in stores, malls, or anywhere else. Electronic banking
PHOTO : and record keeping could reduce the amount of cash people carry and make it easier for
PHOTO : authorities to identify illegal exchanges of money, says Beckwith.
PHOTO : Credit cards will be used to make more and more purchases, replacing cash and checks,
PHOTO : predicts Beckwith.
PHOTO : Bank customer applies for loan. Banks "create" new money when making loans, increasing the
PHOTO : money supply and exacerbating inflation. This private creation of money will be curbed in
PHOTO : the future, says Beckwith. Loans in the form of new demand deposits will have to be
PHOTO : backed 100% by cash.
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|Title Annotation:||futurist suggests cash money may become illegal in future|
|Author:||Beckwith, Burnham P.|
|Date:||Mar 1, 1989|
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