Assume a Community Capital Market Bank can lend money equal to its share capital. The Reserve Bank permits it to have a share Capital of $1000 that allows an extra $1000 to be lent. The lending rate is set to a 5% interest rate. The bank lends out the $2000 at 5%, and the borrower repays the loan at $400 yearly.
At the end of five years, the total value of shares is still $1000, and an extra $250 ($226+$24+$1000) in extra money was created. The extra money has gone to borrowers and lenders. The money on loan by the bank will now stay at $2000.
By contrast, with compound-interest loans, the money supply automatically increases, making it difficult for the Reserve Bank to control it.
With Community Capital Banks, the Reserve Bank has much greater control over the economy as it knows how much the money supply will increase (or decrease) with each “lever” it pulls. The simplest thing is to adjust the rate at which loans are repaid by changing the percentage of compulsory sales of Bank Capital each month.
Borrowers are incentivised to repay the loans as they become investors. More importantly, they do not pay interest on interest as their investments stop their debt from compounding.
Shares earn discounts so they can be sold to the bank to get more money rather than earn interest.
Banks are encouraged to be efficient and not give bad loans, which reduce the Capital in the bank, not the value of shares.
The Reserve Bank can see the performance of all banks in real-time and take appropriate action to correct any problems.
If banks only loan businesses money through Community Capital Markets, the economy will rapidly become more efficient. Taxes are expected to drop, and the Reserve Bank will target zero inflation rather than the current 2% to 3% range.
Critically the increase in money comes from the rise or fall in the production and sales of goods and services. The money supply does not increase from a return on money. Interest costs are saved, increasing economic efficiency by reducing the cost of loans. The existing bank shareholders miss out on the interest on interest but gain from reduced costs and fewer bad loans.
Banks adjust the money supply by changing the rate of loan money circulation rather than changing the interest rate. This is achieved by varying the number of shares that must be sold each month.
Interestingly Community Capital Banks can’t fail, but they can fade away.
