A Virtual Central Bank (VCB) is a similar concept for the financial sector.  If we centralize the data processing functions of all private banks into one virtual system, the private banks would become the marketing and distribution sectors of the financial system.  Money (M1) itself would be a form of basic energy produced and controlled in the VCB much in the same way an electric power plant generates enough electricity to meet the needs of it's customers in real time. 

All M1 and M2 accounts would exist in a virtual central data processing system.  This practice is not new, many of today's large banks process the accounts of smaller regional banks in their mainframe data processing centers. The back end data processing is always kept separate from the front office customer facing functions.

Since the VCB would be the only depository for M1+M2 funds, the VCB would provide a 100% reserve for all bank deposits.  There would be no systemic risk on the part of the commercial banks in it's domain.  There would be no large vrs. small bank risk exposure, no reserve requirements at the commercial banks, no capital ratios for them to meet.  A VCB makes all bailouts unnecessary, there would be no run on the banks, since all of them would have the same system as the source of funds.

Credit would always be available, since the source of credit is the M1+M2 monetary base on deposit at the VCB.  There would be no credit freeze because private banks in the domain do not have any DDA accounts, all accounts are carried at the VCB, an account relationship with a private bank in an attribute of the account, not an asset of the private bank. 

The only way for a commercial bank to fail would be if it's assigned customer base leaves for a competitor's bank, due to poor customer service or lack  thereof.  The VCB Board could also terminate a private bank it it has taken on undue risk by funding unproductive loans or investments over and above a certain threshold. 

A 100% reserve system does not allow private monetary expansion by the fractional reserve deposit money multiplier (m=1/r%). In the private banking system, fractional reserve requirements allow the banks in the system to generate fresh money into the M1 monetary base by the fact that they can lend out the complement of the reserve to others or themselves in a cycle known as the money multiplier.  Under a VCB domain, there is no wall between the commercial banking system and the central bank, and therefore no boom and bust cycles caused by inflationary money supply increases in  private banks.  

A VCB system does not generate money in an uncontrolled fashion, every penny  of fresh money is generated in the social account of the bank, and is available to the VCB system and to all of it's representative commercial banks at the same time. All of the banks, large or small, regional or national, would have the same level of access to the social monetary pool controlled by the VCB.

A VCB system is non-inflationary by default, it can generate funds when needed, and also destroy them when they threaten to overflow monetary demand.  There would be no no cycles of boom and bust which are out of it's  control, and therefore no economic cycles that are unplanned or unforeseen.  The VCB would become the new monetary system that ends our repeating  cycles of monetary expansion and contraction.

A VCB provides only public monetary generation, since it is the only source of funds for the M1+M2 monetary base.  Money that is to be deposited into the VCB must be from an account already in the system.  As a fundamental rule, all debits in the VCB must have a corresponding credit within the same domain.  No faux money outside of the VCB can penetrate it without any regulation or control, as  is the case in our current flawed private banking system.

Since the VCB is a distributed processing network, we could some day define a global virtual bank comprised of all of the national VCB's linked together in a secure global network.  All of the banks in the world would  be linked in a Virtual Global Bank super-domain, where each account in each of the VCB's could be accessed.  It is a matter of unified software  and XML data standards.   What are the possibilities of that! 

Atlanta, GA
Tue, 07 Apr 2009