The Return of Private Banking, With Sprinkles
Following up on King's post below about the antics of the Fed, let me mention an interesting piece in today's Wall Street Journal about an ice cream parlor in Pittsburgh that operates a small "banking" business on the side. The shop owner, Ethan Clay, accepts deposits and offers 5.5% monthly interest, paid in the form of store credit, redeemable in ice cream, coffee, waffles, etc. He'll extend small loans for a flat rate and will cash checks. It's an honest business and his customers, are delighted to participate.
Naturally, the State of Pennsylvania is doing everything it can to shut him down. The Journal quotes Ed Novak, a spokesman for the Pennsylvania Department of Banking: "We are going to do something. You can't mess with people's money." It's hard to beat the irony of a banking regulator complaining about "messing with people's money." How, one wonders, would Mr. Novak describe what his overlords at the Federal Reserve have been doing? Flooding the market with dollars, artificially levitating the stock market and depressing interest rates -- does he imagine that none of this (all brought to you by the unelected mandarins at the Federal Reserve) has "messed" with the value of everybody's money?
As the Journal reports, the big problem is that the State isn't exactly sure how to shut down Mr. Clay. The article quotes Richard Sylla, financial historian at NYU, who observes that there is a common-law right to engage in banking. But private banks have fallen out of favor because they lack government-backed insurance. Fair enough, but if the customers are willing to take a chance in return for 5.5% monthly interest, payable in ice cream, why should the State intervene? Mr. Novak warns that a return to the "private banks" of the nineteenth century is too risky. "Banking in the 19th century was a hit-or-miss proposition," he says.
Worse than today? Consider this report from Cato, which examined the history of nineteenth century banking, in which both state-chartered and unchartered "free" banks issued their own banknotes without any central coordination from the federal government.
By 1860 there were more than 1,600 private corporations issuing banknotes and an estimated 8,370 varieties of notes "in form, color, size, and manner of security." . . . The U.S. economy grew at an average rate of 4.4 percent per annum over this period, while prices fell at an average annual rate of 0.1 percent. GDP was 20 times higher at the end of the period, while the price level remained roughly constant, indicating that competing banks provided neither too many nor too few notes during this period of strong economic growth.
One might argue that the economy could use more entrepreneurs like Mr. Clay "messing" with people's money.
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Comments:
Sep '10
Re: The Return of Private Banking, With Sprinkles
We'll really know its bad when people prefer to get their interest in ice cream instead of dollars.
Dec '10
Re: The Return of Private Banking, With Sprinkles
I have 10 year old who would be all for saving so long as the interest went to her.
Nov '11
Re: The Return of Private Banking, With Sprinkles
You gotta understand, people are rubes who cannot make decisions for themselves. Sure, you and I can understand things and make financial decisions for ourselves after investigation followed by a rational risk and cost-benefit analysis.
But what about the great unwashed masses of "regular people"? You are simply setting them up to be stolen from when you unshackle banks and let them do whatever they want to their customers.
We need mommy government to protect them and us from ourselves!
Nov '11
Re: The Return of Private Banking, With Sprinkles
Also, if you tried to link to that Cato report, I don't think it worked.
Edit: Okay, it works now.
Edited on September 14, 2012 at 6:23pmMay '10
Re: The Return of Private Banking, With Sprinkles
Ya know... I can think of some scenarios where "private banking", on perhaps a larger scale than an ice cream parlor, would be a very attractive option. Little islands of relative safety in a very stormy economy.
Mar '11
Re: The Return of Private Banking, With Sprinkles
This is outrageous. A private, voluntary transaction that is not subject to Federal regulation or cartel calculation! It must be stopped at once!
Nov '11
Re: The Return of Private Banking, With Sprinkles
H-m-m: 66% interest (simple) annualized on deposits and 12% annual rate on the loan. Great ice cream for the customers...
Re: The Return of Private Banking, With Sprinkles
Here's what I predict -- this is a small business with great trouble getting working capital. So he -- it's a he? -- extends credit and allows pre-payment. If he extends credit for his own customers, and allows prepayment only for his own goods, this is absolutely legal. Been done for years. As long as what he lends and pays interest in is goods he sells, he's fine.
He's what finance texts call a "nonbank bank." Banks are defined as both taking deposits and making loans, in currency form. J.C. Penney used to own a Delaware bank in the 1980s and 1990s, as a nonbank bank.
This is pretty common in countries where the banking system doesn't serve small and medium sized businesses. Is that where we are in the US? Problem is more than half our businesses right now don't want to borrow.
Aug '12
Re: The Return of Private Banking, With Sprinkles
I see a major shortcoming in this kind of business activity. Without strong government regulation, where are the opportunities for graft?
Nov '10
Re: The Return of Private Banking, With Sprinkles
I love it. Money is the lifeblood of the economy. It is the information system by which the forces of supply and demand are coordinated. One of the big problems with the current US economy is that artificially low interest rates have thrown supply and demand completely out of whack. The sooner we can get the government out of the money supply and banking business the better. This is a step in the right direction, and I like ice cream!
Jan '12
Re: The Return of Private Banking, With Sprinkles
OK it's backed by frozen assets but sounds like a Ponzi scheme to me.
Jul '12
Re: The Return of Private Banking, With Sprinkles
The story made NPR this morning. Half-asleep but I think the "putting the fun in fungible" aspect caught their eye. It will eventually dawn on them that this is indeed the face of capitalism. And that it desperately, desperately needs a napkin.
Jul '12
Re: The Return of Private Banking, With Sprinkles
Is everyone totally asleep? This is an outraged regulators' double-play. An unregulated financial activity that leads to obesity and its adverse health consequences. Where are Mrs. O and Mayor B on this outbreak of highly-caloric greed? Oprah wept.
Sep '10
Re: The Return of Private Banking, With Sprinkles
Considering the microscopic interest my current savings account is giving me, a free milkshake every now and then would be a big improvement.
If they tried this in NYC, would withdrawals be limited to 8 ounces a day?
Oct '10
Re: The Return of Private Banking, With Sprinkles
I can't say I approve. Too much potential for fraud. Still, it's an amusing story.
Jun '11
Re: The Return of Private Banking, With Sprinkles
I'm all for a free market in banking as long as there is no fraud. One bank pays for FDIC insurance and proudly advertizes that fact. It pays a quarter of a percent per year on deposits. Another bank has no insurance. A fact that it openly discloses. It pays five percent per year. What's wrong with giving the consumer the choice? We allow consumers to choose between triple A rated bonds and those with lower ratings. Why should banks be different?