There are also many popular misconceptions related to banking itself; this section will attempt to explain the functioning of a bank at a level anyone can understand, while at the same time pointing out how the framework of regulation, if it is enforced, provides an absolute barrier against taxpayer loss and guarantees that operating banks are in fact safe and sound institutions.

We will begin with "Bank Of The Rock", which for simple purposes we will define as the only bank in the world. It will begin with no money either in deposits or capital, again, to keep the example simple. In the real world of course banks have capital, both in the form of original investment and physical goods (e.g. the building the bank physically resides in, etc.)

In our "one bank" world banks are required to hold a 10% "reserve ratio." That is, they must hold 10% of all deposits in reserve, and may lend the rest.

On the first day BOR ("Bank Of The Rock") is open Joe walks into the bank and deposits $10,000. He earned this money by growing corn which he has harvested and sold.

The bank now owes Joe $10,000; it has borrowed that $10,000 from Joe. For this privilege it will always pay him; sometimes that payment is in interest but even if there is no interest paid Joe has received something of value - a place to store his money where it is, at least in theory, safe from fire or theft.

The bank now has an asset ($10,000 in cash) and an exactly balancing liability ($10,000 owed to Joe.)

Shortly after Joe leaves with his deposit receipt (which is in fact documentation of a loan he made to the bank!) Jane walks in and wishes to borrow money to buy a car. The bank loans Jane $9,000; it must retain $1,000, or 10% of Joe's deposit, as noted above.

The bank's books are once again in balance; it now has $1,000 in cash and $9,000 in the form of a promissory note signed by Jane. In addition the bank has ownership of the title of the car Jane purchased as security. The bank still owes Joe $10,000.

This cycle can repeat itself (the car dealer may come in and deposit the $9,000 he received) until approximately 10 times the amount of money deposited has passed through the bank.

This gives rise to the claim that banks "create money", but that claim is in fact false.

What happens if Joe comes in after Jane leaves and demands his cash? The bank doesn't have it, but it does have an asset worth $9,000, the title to the car plus Jane's promissory note.

Therefore, the bank could sell into the market that note and title in exchange for $9,000 and return Joe's money. The bank in doing so would deplete all of its assets and cease to exist but nobody has lost money or gotten anything for free.

In this case above the bank has no "excess" capital. The owners put up nothing to start the bank and nobody has contributed to ownership (such as with a public company traded on a stock exchange.) Of course in the real world there is excess capital when a bank is set up and many banks are in fact traded on a public stock exchange.

The important fact here is that so long as the bank makes only good loans nobody can lose money. But what defines a "good loan"?

A good loan is one in which the collateral held is equal to or exceeds the outstanding balance. That is, if you buy a house and put down 20% in cash, the bank's security (e.g. your home's title) is sufficient that if you fail to make the payments, or the bank suddenly needs cash to pay off depositors, it can either sell the mortgage to someone or (in the event you do not pay) can foreclose and resell the property, losing nothing.

All other loans are not "good" loans, they are in fact unsecured. An example of an unsecured loan is a credit card; the bank does not have title to the groceries you buy with it, and even if they did, that title wouldn't be worth anything once you got done eating.

So long as banks never lend out more money on an unsecured basis than they have in excess capital there is no risk to the banking system nor any risk of loss except for the owners of the bank who knowingly contributed that excess capital and accepted the risk of loss.

The proper function of banking regulation is to insure that no bank ever lends out more money on an unsecured basis than it has excess capital. Banks like lending on an unsecured basis because they can charge more interest; your credit card is more expensive than your mortgage precisely because there is no security on the loan and if you do not pay your credit card bill the bank will lose most or even all of the amount you charged.

But when a bank lends more on an unsecured basis than it has in excess capital if those borrowers do not pay the bank is insolvent and someone inevitably must have money stolen from them to replace that which was imprudently lent. Since we desire people to feel safe about their banks and not force asset fire sales (which otherwise will occur due to rumors, justified or not) we provide depositor insurance, thereby guaranteeing that losses, if any, will wind up absorbed by the taxpayer.

This is both unacceptable and unnecessary; if the government has sufficient regulatory surveillance it will detect a bank's unsecured loan balances outstanding exceeding their excess capital, minus a cushion to account for the time required to seize and liquidate it (e.g. the existing "6% Tier Capital Ratio".) Government must then immediately step in, shut down the offending institution and liquidate it to protect everyone involved except for those who contributed excess capital to the enterprise with a voluntary assumption of risk.

Some people claim that this sort of federal regulation is inherently wrong. The Party asserts otherwise; a bank by definition lends fractionally and thus is inherently exercising a privilege granted by The Federal Government from which it gains a tremendous benefit (the right to earn profits via leverage.) Since the bank is inherently utilizing the credit of the sovereign it is an extension of the Constitutional power to coin money and fix its value, and The Government therefore has not only the right but the duty to supervise these institutions to prevent losses to the taxpayers or depositors.

Glass-Steagall was a law that provided many procedural safeguards in furtherance of this goal. Passed after The Depression it barred banks from having "trading" subsidiaries that could put bank capital at risk, as well as strictly controlling leverage and reserves. The dismantling of this law, along with others, caused The Government to lose control over its proper regulatory mandate in the banking system and as a consequence created The Credit Crisis.

The Party calls for the re-imposition of Glass-Steagall and enhanced surveillance to return banking to a sound foundation.