What is a bank?

A:

Summary

"Banks" are government-chartered lending businesses that receive the privilege of funding their lending activity by storing & transacting money on behalf of the public, and then sharing their cost of default with the public.

When someone wishes to start a business, they must either use their own property as capital, or produce a financial model and offer potential investors the opportunity of owning a portion of the expected future earnings in exchange for their capital. Pitching a business opportunity to investors, or raising capital, is hard work. Furthermore, if the business spends the capital without earning a revenue, it must inform investors, "It's all gone," because owning revenue also requires owning its expenses.

On the other hand, there is a type of business that excuses a person from all the hard work of raising capital, and further, owning all the expenses associated with its revenue. When someone receives a "bank" charter from the government, they receive the privilege of bundling the services of storing & transacting money on behalf of the public with their own service of lending. Therefore, if this business requires money for its lending activity, the government gives it permission to simply place a 4-letter word above its front door and wait for people to walk in and offer them money—since everyone requires assistance with storing & transacting money. Furthermore, if the "bank" spends all the money its storing & transacting for others on lending, then it may inform its investors, "It's still there," because the government grants this business the privilege of measuring whatever loans they've accumulated on their balance sheet to be "money". Since expected value & delivered value are scientifically different quantities, falsely measuring the value a lender personally expects to be the same as publicly-recognized delivered value forces the public to share in the cost of default when their expectations are violated by the Physical Universe, "False!".

TL;DR

It's helpful to first understand that "bank" is not a technical word; it's a legal word defined in federal law that mandates the existence of a specific business model within the private sector. A business model is a thesis for how value may be physically added in an economy, and is subject to constant evolution due to the advancement of research and the division of labor.
According to 12 U.S.C. § 1841 (c), a "bank" is defined as a business that simultaneously:

  1. "accepts demand deposits"
  2. "[supplies] payment to third parties"
  3. "[supplies] commercial loans"

Lawyers & legislators are similar to mathematicians in that they are free to aim the equal sign at whatever they wish to produce as many definitions as they wish. However, once the equal sign is aimed at an object possessing physical dimension (i.e. not intellectual), the duty to step in and prove the definition's physical stability belongs to the scientist. To a physicist, the business model defined above may be simplified as three additional services hypothesized to add value to "money", a service supplied by the U.S. Treasury:

  1. store
  2. move (change ownership)
  3. lend

Now, we will evaluate the physical properties of each function:

To store, an owner leaves some measurable quantity of property in a single location, and then returns to measure the quantity as unchanged. Since property is not sold & repurchased during its storage, there is zero market risk* while this action is performed, i.e. riskm = 0.

To move, an owner changes the position of some measurable quantity of property from one location to another (a change in location may also include intellectual coordinates, i.e. a change in ownership). The quantity of the property is measured to have remained unchanged during its change in position (i.e. movement). Since property is also not sold & repurchased during its movement, riskm = 0.

To lend commercially, an owner swaps ownership of some quantity of property for a promise to receive an increased amount in the future. When a promise is sold to borrow property, an expense is paid (interest). When a promise is redeemed, a revenue is earned (interest). Therefore, the business of selling, purchasing & redeeming promises admits the presence of market risk (riskm > 0) because the 'Profit = Revenue - Expense' relationship must be negotiated.

Capital is any property used to negotiate a profit. Borrowing & lending aside, businesses are offered capital in a free market because they are judged to negotiate profit well, or produce a positive rate of return. From the perspective of a currency-issuing government that faithfully executes its duty as Impartial Observer on behalf of The Physical Universe, profit testifies when riskm > 0 may be physically interpreted as reward > 0. Therefore, the technical eye must be able to spot an absurdity if there remains in existence a business model that continues to acquire capital while the rate of return expected of it is defined by government to be as low as possible. To strengthen discernment, the difference between the following scenarios ought to clarify when the absurdity is realized:

  1. Most consumers enter a "bank" to demand the services of storing & moving money regardless of its signaled return, "Can I store my property here and obtain a plastic card from you?"

  2. All investors who enter a business to demand a fraction of its signaled return ask, "Will you accept this capital in exchange for a fraction of the return I've measured you to produce?"

Mandating the existence of a firm that simultaneously stores, moves, and lends money not only requires blurring the lines between property & capital, but it does so in favor of firms who exploit government authority to reach across these lines and access capital at prices the free market would not likely accept IF the opportunity cost of capital was scientific (not dictated by government), and publicly accessible.

Another issue with this hypothesized "bank" entity which is not mentioned in the definition above is receiving government privilege to double-count money's ownership:

  1. Someone first stores money with a "bank".
  2. The "bank" uses the newly-stored money to purchase a note from a borrower, or lend them money.
  3. The note replaces the money in the vault.
  4. The borrower is the new physical owner of the money—which is no longer in the vault.
  5. The "bank" is authorized by the U.S. Treasury to measure the note as "money still owned" by the person who first stored it.

The most common form of capital within the business of borrowing & lending is credit. Credit measures one's faith in the opinion of another to predict the truth—and is testified in the credit market by the judgement, acceptance, and therefore purchase of a promissory note. Receiving the authority to double-count money's ownership between those who produce & consume promissory notes (credit) is to reckon the lending industry's judgement of the existence of value as possessing more authority than that of the U.S. Treasury, and more importantly, the opinion of the Physical Universe.

Though it may be tempting to mitigate the effects of fear to one who is lending money to a "bank", distorting the physical effects of the transaction by informing them that they are merely storing it breeds economic infertility because it conditions people to lend money for reasons having nothing to do with exercising judgement in the pursuit of the riskm > 0, an aim which results in reward > 0 when negotiated successfully. Viewed from the other side of the transaction, allowing a "bank" to refer to credit as "deposits" is to increase undue confidence in one who has received a government exemption from having to earn credit the natural way: "In the presence of riskm > 0, this economic actor produces reward > 0, so lend faithfully". A borrower must only receive a loan from someone who accepts the cost of default, an arrangement which is not difficult to produce for a borrower who is constantly measured to produce opportunity, and ultimately, fulfills their word.

To protect the trust of those you govern is to command it. "I am worthy of credit because I am a bank" violates the public's trust because it has no physical meaning, and thus, violates the trustworthiness of the government that certifies it. Money signals the green light to move goods & services because they are proven to have already been delivered elsewhere by its owner. If only a promise was delivered, e.g. "I'm buying this car with borrowed money," then only the note's purchaser (lender) must pay the cost of default, and not an entire economy forced by its government to count the goods & services promised to pay for the car as "delivered"—a scientifically false statement permitted to cloud public expectation.

In short, a "bank" defines nothing but a government subsidy to competitors of capital & credit who expect to survive by promising, rather than physically producing, added value. The demand for capital is signaled by a verifiable rate of return, which is a number produced from a measurement; not a government-defined word ("bank"). It therefore behooves the U.S. Treasury to subject all economic participants to the same scientific standard so that the statement, "I am worthy of credit because my actions produce this number," has physical meaning.

 

*Note: Market risk refers to the risk that separates expenses from revenue. Conducting a business means consuming the risk between expenses & revenue to secure a profit, e.g. "I have to walk across the bridge of uncertainty from expenses to revenue to earn a profit because a free market does not guarantee buyers."

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