The Banking Function: What Nelson Nash Really Meant

You analyze cash flows for a living. You understand ROIC, WACC, and NPV calculations. You know the difference between operating income and free cash flow.

But here’s a question that might stop you cold: What percentage of every dollar in the economy flows through the banking function?

Nelson Nash had the answer: 34.5 cents.

More than one-third of every dollar moves through some form of banking intermediation. Not sometimes. Always. Every transaction. Every purchase. Every investment. Every economic exchange requires the movement of money—and someone profits from that movement.

That someone is usually not you.

Today we’re going deep into Nash’s core insight. Not the mechanics of policy loans or cash value accumulation—we’ll cover those later. Today is about understanding the function itself. The invisible system that shapes every financial decision you make.

The Pilot and the Headwind

Nash used a simple analogy to explain the banking function.

Imagine you’re a pilot flying from Point A to Point B. You calculate the distance: 1,000 miles. You calculate your airspeed: 500 mph. Simple math says you’ll arrive in two hours.

But there’s a headwind. Fifty miles per hour, directly opposing your flight path.

Your ground speed is now 450 mph. Your flight time is now 2.2 hours.

The headwind doesn’t change your destination. It doesn’t change your aircraft. But it absolutely changes your economics. More fuel burned. More time required. Higher operating costs for the same outcome.

The banking function is the headwind in your financial life.

Every time you finance a purchase—whether through explicit borrowing or implicit opportunity cost—you’re flying against that wind. The question isn’t whether the wind exists. The question is: who benefits from it?

In traditional finance, banks benefit from the headwind. They profit from the friction. They earn interest on the resistance you face when moving your capital from one place to another.

IBC makes you the beneficiary of your own financial headwinds.

Understanding the 34.5% Figure

Where did Nash get that 34.5% number?

He studied the flow of money through the economy and tracked how much profit gets extracted at each stage of financial intermediation. Banks don’t just profit from direct lending—they profit from payment processing, currency exchange, transaction clearing, capital allocation, and dozens of other services that make commerce possible.

Consider a simple transaction: you buy a car.

• The dealership borrows money to stock inventory (bank profit)
• The manufacturer has lines of credit for production (bank profit)
• You finance the purchase (bank profit)
• The payment processing for your transaction (bank profit)
• The currency clearing if parts came from overseas (bank profit)

Each touch point extracts value. Each intermediation step generates profit for financial institutions.

Nash’s insight: this happens whether you control any of it or not.

The banking function operates with or without your participation as an owner. The only question is: are you on the receiving end or the paying end?

The Austrian Foundation

Nash was influenced by Austrian economics—particularly Ludwig von Mises’ work on money and credit. The Austrians understood something that mainstream economics missed:

Money isn’t neutral. The control of money creation and allocation is the ultimate economic power.

Whoever controls the money creation process—whether government central banks or private commercial banks—controls the flow of capital to productive uses. They determine which projects get funded and which don’t. They decide who gets access to cheap capital and who pays premium rates.

This power generates enormous profits for those who wield it.

Nash asked a radical question: What if individuals could wield that power at the personal level? What if you could become the central banker of your own financial life?

This isn’t about eliminating banks entirely—that’s impossible in a modern economy. It’s about capturing the banking function within your personal financial system.

How the Banking Function Manifests in Your Life

Let’s examine how the banking function shows up in a typical professional’s financial life:

Mortgage Interest: $350,000 house, 30-year mortgage at 6.5% = $792,000 total payments. You pay $442,000 in interest over the life of the loan. That’s profit extracted by the banking function.

Auto Financing: Three cars over your career, $45,000 each, financed at 6% over 5 years = $161,000 in total payments. You pay $26,000 in interest. Banking function profit.

Credit Cards: Average professional carries $8,000 in revolving debt at 18% APR. Minimum payments over 10 years = $14,000 total. Banking function profit.

401k Loan: When you need $50,000 quickly, you borrow from your 401k at 7% and pay interest to… yourself? No. You pay interest to the plan administrator, who profits from the transaction. Banking function profit.

Business Line of Credit: $100,000 line for equipment purchases at prime + 2%. Annual interest expense: $6,000+. Banking function profit.

Add it all up: Over your 30-year career, you’ll pay hundreds of thousands of dollars in interest to financial institutions. This isn’t counting opportunity costs—the profits you could have earned if you had been the lender instead of the borrower.

Every dollar of interest you pay is a dollar you didn’t capture for yourself.

The Velocity Problem

But there’s a deeper issue than just interest payments: velocity.

Money sitting idle earns nothing. Money in motion can be productive multiple times. Banks understand this—they don’t let deposits sit in vaults. They lend them out immediately, earning spreads on the velocity.

Your money moves slowly. Bank money moves fast.

Consider your savings account. You deposit $50,000. The bank pays you 0.5% interest while lending that money at 7%. They earn $3,500 annually on your capital while paying you $250. They capture the velocity premium.

Now consider your 401k. You contribute $25,000 annually. It sits in mutual funds, growing or shrinking with market whims. Meanwhile, you finance your life with borrowed money at 6-8% interest because your capital is locked away until retirement.

Your capital moves at retirement speed. Your needs move at life speed.

Banks solve this timing mismatch by keeping capital liquid and lending against collateral. You could solve it the same way—if you controlled your own banking function.

IBC as Banking Function Capture

Here’s what Nash discovered: whole life insurance policies function as private banking systems.

A properly designed policy accumulates capital (cash value) that you can borrow against without:

• Credit qualification
• Usage restrictions
• Forced repayment schedules
• Third-party approval

The cash value becomes your bank’s deposits. The policy loans become your bank’s lending portfolio. The dividends become your bank’s profits.

You’re not just earning a return on investment—you’re capturing the banking function profit that would otherwise flow to institutions.

Let’s make this concrete:

Traditional System: You need a $40,000 car. You get a loan at 6% for 5 years. Total payments: $46,400. The bank earns $6,400 in profit from your financing need.

IBC System: You take a $40,000 policy loan against cash value. You repay yourself $850/month for 5 years ($51,000 total). Your policy value continues growing via dividends. The “extra” $4,600 you paid stays within your system, adding to future banking capacity.

Same financing need. Same payment schedule. Completely different profit destination.

The Compound Effect

Here’s where this gets powerful for high-earning professionals.

The banking function compounds over time. Every interest payment you recapture becomes capital that can generate future banking profits. Every loan you make to yourself instead of taking from a bank strengthens your position for the next financing need.

Traditional professionals: Pay interest to others for 30 years, then try to accumulate wealth in the final decade before retirement.

IBC professionals: Capture banking profits for 30 years while simultaneously building capital, creating both wealth and cash flow.

The difference isn’t just mathematical—it’s philosophical. You stop thinking like a customer of the banking system and start thinking like an owner within it.

Why Professionals Miss This

You’re sophisticated. You understand leverage, capital structure, and risk-adjusted returns. So why haven’t you applied these concepts to personal finance?

Because the banking function is invisible.

You can see a stock price move. You can track your 401k balance. You can calculate the ROI on a real estate investment. But you can’t see money flowing through the banking system. You can’t watch the velocity of capital. You can’t observe the extraction of profits from every financial transaction.

What’s invisible becomes ignorable.

Nash spent years teaching people to develop what he called “imagination”—the ability to see the financial flows that shape their lives. Once you see the banking function operating, you can’t unsee it.

Every mortgage payment becomes visible.
Every car loan becomes visible.
Every credit card payment becomes visible.
Every 401k loan fee becomes visible.
Every lost opportunity to capture velocity becomes visible.

You start seeing the system instead of just participating in it.

The Control Question

Nash boiled everything down to a simple question: “Who controls the banking function in your life?”

Right now, the answer is probably:

• Wells Fargo controls your mortgage
• Toyota Financial controls your car loan
• American Express controls your credit card
• Fidelity controls your 401k loan
• Chase controls your HELOC

A collection of institutions profits from your capital needs while you remain a perpetual customer.

IBC asks: What if you controlled that function instead?

Not by eliminating banks—you can’t. But by building parallel capacity. By creating your own pool of capital that responds to your needs on your timeline at your rates.

By becoming your own banker in the truest sense.

The Austrian Insight Applied

Von Mises wrote: “The banking business is subject to the same laws that govern all other business enterprises.”

If you understand this, you understand IBC. Banking isn’t mysterious. It’s capital allocation with spread capture. Borrow at one rate, lend at another, profit from the difference.

You already understand this business model from your corporate career. You’ve just never applied it to personal finance.

The banking function will happen in your life whether you control it or not. Money will flow from capital sources to capital needs. Intermediaries will extract profit from the flow.

The only question is: will you be an intermediary, or will you remain a customer?

Making the Shift

Understanding the banking function changes how you think about every financial decision:

Before: “Should I pay off my mortgage or invest in the stock market?”
After: “How can I capture the banking function in this decision?”

Before: “What’s the best return on my excess cash?”
After: “How can I maintain liquidity while building banking capacity?”

Before: “Should I lease or buy?”
After: “How can I own the asset while maintaining control over financing?”

This shift from customer thinking to banker thinking is Nash’s greatest contribution.

Not the product recommendations. Not the policy illustrations. The fundamental reframe of who profits from your financial life.

The banking function represents 34.5% of all economic activity. The question isn’t whether you’ll participate. The question is which side you’ll be on.

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This is educational content only and not meant to serve as financial advice. Consult with qualified professionals to determine if IBC strategies are appropriate for your situation.