The Genteel Way of the Banker

from “The Screwing of the Average Man” By: David Hapgood”

 

During the first third of the century bankers were often synonymous with robber barons. [J.P. Morgan] left us such industrial giants as U.S. Steel and AT&T. Morgan created these and other corporate gold mines by using his capital to destroy competition and bring one industry after another under the control of one, or at most a handful of companies.

[Bankers have come to play the role of] faithful guardians of the national economy, with such urges as their profit motive kept discreetly under wraps. As John Kenneth Galbraith remarked, “If anybody else is lobbying for a higher price, we take for granted that they want more dough, but if a banker is lobbying for higher interest rates, this is pure unadulterated righteousness. Everybody else says they want more money, but let David Rockefeller speak for higher interest rates and, boy, that’s statesmanship.”

[Banks depend on our] almost total ignorance of things financial to pull off some of the most outrageous, but always genteel, screwings of them all. The genius of these bank heists is that they never tamper with the principal, they just keep developing new and better ways to avoid paying interest on it.

These days checking accounts are probably the bank swindle that touches us the most directly. It is a rare soul who finds anything odd in the way he is paying the bank ten cents a check so the bank can lend out his money at 10 percent interest. And those of us who thought we were outsmarting the game in signing up for free checking by maintaining a minimum balance, say $500, are in equally bad straits. Unless you are the sort who tries to buy candy from vending machines by writing a check, you are foregoing far more in lost interest on the $500 than you could possibly save on the free checking.

Although the amount of an individual’s loss is still not breathtaking, interest-free checking accounts are perhaps the biggest things banks have going for them. On any given day, commercial banks — the only ones allowed to handle checking accounts — are holding $200 billion in checking account money. This amounts to 40 percent of these banks’ assets and they don’t have to pay a penny of interest to use it. At 10 percent, the bank customers are losing a total of $20 billion a year.

In the theoretical free market, competition would soon force all banks to pay interest, or lose their checking accounts to the more aggressive fellow across the street. But here’s where the federal government, that guardian of the free enterprise system, comes in. Banks are protected from the rigors of competition by a series of federal laws which produce monopoly behavior without the inconvenience of actually creating a monopoly… The government’s role in the operation is also a perfect way to deflect criticism from the banks, who are reaping the benefits… If you complained to your local banker, he would patiently explain that the decision was not made by him…

Although the thrill of the daring daylight bank robbery has appealed to the American psyche since the heyday of Jesse James, most bank-inflicted screwings have all the drama of a TV dinner. Gentility is the watchword and most bank hustles are impeccably legal, abstract and rather boring — like the bankers themselves… The swindles directly affecting the customer are little noticed because the loss to the individual is small and, because of their complexity, they are hard to detect. The big swindles [CN — e.g. the $40 billion “line of credit” to Mexico], which invariably involve the government, do not arouse public indignation because, though the swindle is obvious, it is far from clear who is being taken by whom…

The perils of competition are held at bay by the difficulty of getting into the banking business. Although opening a medium- sized bank often requires less capital than starting a chain of pizza parlors, you need considerably more to become a banker than the requisite capital and the yen to close down operations at 3 p.m. every afternoon. The sine qua non to go into banking is a charter, issued either by your state banking commissioner or the U.S. Comptroller of the Currency. This is just another area where the government shelters banking from the normal rigors of a competitive economy. According to free enterprise theory such decisions as starting a business are made by the investors, those with money to lose, but when it comes to banking these decisions are placed in the hands of the government regulators.

The criteria for getting a charter are pretty foggy, but political clout generally helps on the state level. For the more prestigious federal charters, the major criterion is a guarantee that your bank won’t hurt any existing banks. You not only have to prove that your banking won’t cause any other bank to fail, but also that you won’t even cause a dip in their profit margins. Your clients will all be new ones: those who have just moved into the area… Reduced to its simplest, this means that in an era of zero population growth there would be no new banks.

The key phrase in all of this is “overbanking.” Although never precisely defined, it appears to refer to a competitive situation where banks are forced to start offering free checking and a few of the more aggressive units start grumbling loudly that they want to pay interest on checking accounts, as well, to attract even more deposits… Unhealthy competition was… on the regulatory mind when an application for a bank charter on Key Biscayne island, where the only bank is run by Charles G. (Bebe) Rebozo [CN — one of Nixon’s buddies], was denied by the U.S. Comptroller.

Regulators also screen banking personnel, not the $115-a-week tellers, but the Ivy League vice-presidents, looking for those most likely to launder money for the mob. Of course, laundering money in the name of public service elicits quite a different response from banking regulators. Some of the Mexican money that paid for the Watergate burglary originally came from a Minneapolis businessman, Dwayne Andreas, who shortly thereafter received a federal charter to be the only banker in a giant new shopping center in Minnetonka, Minnesota. Most applicants for a bank charter are supposed to exude qualities like “character” and “integrity.”…

Once you have gained entry to the banking business, the water’s fine. As in any monopoly, the profits are high, the stress is low, and the risk of loss is minimal… It is also getting harder for the average man to get the fruits of those profits through the corporate income tax, for the banks, while making more money, have managed to reduce the amount they have to pay in taxes — their effective tax rate, 38 percent in 1961, was down to 17 percent by 1972.

Government helps the banks help themselves in other ways as well. Take the government’s habit of leaving federal funds in interest- free bank accounts… Following the laws of physics, these deposits gravitate to those banks that already weigh the most. A 1972 House Banking Committee study found that just 102 big banks hold 43 percent of these no-interest funds. And the largest account is, not surprisingly, at David Rockefeller’s Chase Manhattan, followed by another Rockefeller bank, First National City.

[…]

The banks put the government’s money to good use — with the government itself. Banks invest much of that $6 billion in interest-free federal deposits in U.S. Treasury bills, on which the government was paying, at this writing, about 8 percent. Thus, incredibly, the government is paying the bank 8 percent in order to borrow back the government’s own money. From the bank’s point of view, it is collecting 8 percent for passing the money from one government pocket to another.

[…]

It is not surprising that Uncle Sam is rather reticent about his banking policies. Almost all government files on the granting of bank charters, for example, are off limits because, in the words of a former acting Comptroller General, “We don’t want anyone to come in here on a fishing trip.”

The national debt, as it is now managed by the government, is another vast bonanza for the banks, and an equally large disaster for the average man. Since 1953, the government has allowed banks to buy a piece of the national debt… Congressman Wright Patman… believes that letting the banks in on the national debt has cost the public from $350 to $500 billion since 1953. Part of this is billed indirectly to the average man, in higher taxes to finance the higher interest rates his government has to pay. Part of it hits him indirectly — in mortgages at 8.5 percent, as of this writing, almost twice the pre-1953 rate, and in higher interest on all his other forms of borrowing… The government has managed the national debt in such a way as to maximize bank profits and add to the interest costs to the general public…

Hardly anyone protests, or even notices, the handling of the national debt, though the impact on the public is obvious. ITT makes headlines when it raids the government, while the banks go on quietly picking up much larger booty. This is the genius of banking: the bankers take us in ways that are discreet, complicated, legal and boring…

The national debt swindle is far too abstract, too lacking in drama or obvious villains, to stick in most people’s minds. The government’s subsidizing of banks with interest-free accounts is a model of discretion. No taxpayer’s money is actually delivered to the banks; there is no budget item reading “bank subsidy.” The government merely fails to collect from the banks, and nowhere in its accounts is there a listing for “failed to collect from banks: $400 million.” The hustling of the client is done by rules… so well established that they are rarely questioned. The treatment is administered in a spirit of sober responsibility; there are no used car dealers in this business. If you don’t mind being considered dull, banking may be the best way to do it.

 

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