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How a Bank Would Function Under Ideal Capitalism

July 8, 2015 by · Leave a Comment 

The concept of ideal capitalism does not rely on altruism, faith or some idea that there is moral good in the generation of wealth. Pure capitalism is a philosophy that tries to take the intrinsic selfishness of humans, and harness that force into something that produces for the good of all. In this system, which exists only on paper in the purest form, a bank would function very differently from how it does today.

Starting a Bank

Anyone could start a bank for any reason, so long as he or she was able to raise the capital to do so. Banks are in the practice of wealth management, so it’s not hard to picture a financial consultant or accountant deciding to build on a career’s worth of knowledge by striking out on his own. He or she is free to loan to whoever is deemed worthy, probably based on credit scoring, and there are no restrictions stating otherwise.

 photo bank_zpslxlyjmjw.jpgInterest

In purely capitalist scenarios, this fictional bank would set interest rates based on staying competitive within the market. The rates could be whatever the market deemed, but could be based on many proprietary factors the lender uses. The lender is not bound by any particular terms and restrictions, so every deal can be customized to the borrower and lender’s intent. Thus, each transaction is truly mutually beneficial.

Failure

If this fictional bank uses poor lending standards to judge borrowers and their ability to repay, the bank may suffer financial difficulties when those borrowers default. In a purely capitalist society, there are no groups to bail out such an ailing business and it sinks.

Capitalism is guided by morality, as this example illustrates, but it’s the morality of self-preservation. Ignoring or circumventing that principle reduces the effectiveness of a capitalist system.

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