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Summary: Bank Robbery

I am giving a talk at the 2017 Festival of Ideas for Change on Nov 19th which summarizes why we need reform of the laws governing money-creation. The website for the festival, where free tickets can be booked, is here:

http://www.brockleysociety.org.uk/festival-of-ideas-for-change-2017/

This is a provisional version of my talk, with notes:

BANK ROBBERY.

Here’s a statistic from Oxfam: ‘The world’s eight richest individuals own as much wealth as the poorest half of the world’s population.’[1] In other words, eight people own as much wealth as three-and-a-half billion people!

How did we come to this strange, and wrong, state of affairs? After all, isn’t money something we get by doing something for someone else?

Well, the answer to that question today is ‘No!’ Money is conjured from nothing by banks for people who want to make a profit; and the same amount of money is destroyed again once that profit is taken. When money is created and destroyed in this way, human freedom and interdependency are replaced with management, exploitation, and dependence upon remote powers. It’s no surprise that eight people have managed to grab so much, leaving the rest with so little.

Our money system was created for making war, which is robbery-with-violence made legal. For many centuries, war was considered glorious, and our banking system is a left-over from that time.[2] It is a continuation of war by other means.[3] It is doing more damage than ever in our world today, and we must reform it.

But let’s not blame it all on bankers! The truth is, we’re stuck in a system that people are frightened to reform: frightened to even talk or think about! The system supplies power to those who have it, so reform won’t happen until people are familiar with the facts. Monstrosities such as ‘quantitative easing’ show how far our established powers will go, to prop up and even extend the system.

How money is created today is no secret. You can read what I’m about to say (in more complicated language) on many central bank websites.[4] But it’s unfamiliar, so I’ll try to describe it.

Money itself is simple enough: it’s the system which is complicated.[5] We all know what money is. It’s a kind of property: mine is mine, yours is yours. We know its use: we exchange it for things that are up for sale. In theory, money can consist of almost anything, because it’s property in the abstract. But money today, as we know, consists of notes, coins, and numbers in bank accounts. So – what makes these notes, coins and numbers special? The answer is pretty obvious: the law. Try phoning up a police station and complaining that someone’s stolen your Monopoly money!

And it was new laws that first allowed money to be conjured up by banks. About 300 years ago, the English Parliament, consisting of rich men voted in by other rich men, passed laws to say that debt could be bought and sold as a form of property.[6] In legal language, debt became ‘negotiable’. These laws are still in force: they mean that debt from banks can pass from hand to hand as money. That is what our money, legally, is: debt from banks. The banks like to call it their ‘obligations’.

Negotiable debt is not just excellent at funding war; it is also good at siphoning money from working people to rich and powerful people. So, bit by bit, laws making debt ‘negotiable’ were adopted by governments and their patrons across the world.[7] Socialist, communist and fascist governments are no exception: – they monopolize the system for the benefit of the Party.[8] ‘Right’ and ‘left’ may disagree about many things, but both want power, so they prefer not to acknowledge or scrutinize the source of power in the modern world. There is a much-quoted saying, attributed to Henry Ford among others: ‘It is well enough that people do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.’

Today, debts from banks pass from hand to hand as currency. Perhaps you’ve seen it written on bank-notes. This twenty-pound note, for instance, has written on it in tiny writing: ‘I promise to pay the bearer on demand the sum of twenty pounds.’ A promise-to-pay is a debt. I am ‘the bearer’ of this note – so this note is a debt to me, from the Bank of England. It’s signed by the bank’s chief cashier, someone called Andrew Bailey. Is Andrew Bailey here? Can you pay me what you promise? What? You’ll give me another note for it? Or two ten-pound notes, did you say? Oh, thanks!

A hundred years ago, the bank’s promise did mean something. I could have gone to a bank and asked for twenty pounds in gold. Now, it means nothing. The note is fake debt: it pays only itself, because it has been privileged in law to become money.

Numbers in bank accounts are also debts, not from the Bank of England, but from high street banks. Debts from the Bank of England and debts from high street banks are interchangeable. You can ask your bank to exchange some of what it owes you for notes and coins, which are debt from the Bank of England. When too many people ask a high street bank for cash, it goes bust, because high street banks create much more debt than they hold in cash.

This collusion between governments and commercial banks has developed over many years and it means that today, all our money supply is fake debt.[9]

Once you get your head around the idea of fake debt, it’s easy to understand how a bank creates money. At the moment of making a loan, the bank creates two equal-and-opposite debts: one from itself to the customer, and the other from the customer to itself. The debt from the customer is real enough! But the debt from the bank is a fake. Instead of paying interest, it charges interest – on its own debt! It need pay nothing but itself, because the law says its debt is money.[10]

In more honest days, this used to be called the ‘magic trick of banking’.[11] Now, it is less talked about. We, the people, are not supposed to know how it works!

I’ll outline just a few of the ways in which bank-money, and other kinds of fake debt, are responsible for distress and damage in our world. There are many others that I won’t have time for.

First and most obviously, for every bit of bank-created money, a corresponding amount of unnecessary debt is introduced. Who pays the interest? Ultimately, consumers. Who gets the interest? Shareholders.[12] Inequality is enhanced.

Second example: Owners of industry naturally give out as little as possible in wages. Inequality is further enhanced. It becomes harder and harder for wage-earners to make ends meet: they take on secondary debt. Extreme inequality seizes up the economy. Imagine a café with a hundred customers. Between them they have a thousand pounds. If the money is evenly distributed, all of them can buy lunch. If one of them has all the money, only he can buy lunch. Soon, the café owner is broke, like most of his customers. That’s a simplified picture of economic paralysis due to inequality.

Third example: When money is generated from nothing in secret, corrupt payments become easy. As an illustration, I’ll just mention that each Russian kleptocrat owns his own bank.

Fourth example: rich countries find it easy to buy the assets of less developed nations. The richer a country, the more money it can create, because its debts are backed by assets. Their debts are trusted: a case of honour among thieves.

Fifth example: going to war becomes easy. A government doesn’t have to say to its citizens: ‘we’re raising taxes, so we can go to war’. It simply says to a bank: ‘create some money for us: we’ll make sure the taxpayers pay you back!’ The same goes for funding new weapons systems. And national debts are a help: governments create ‘negotiable debt’ for lenders, and charge taxpayers to fund the debt. Large-scale national debts were born at the same time as those new laws.

Sixth example: savings are devalued by the vast amounts of money and debt which are created out of nothing. Interest rates go down, to save the system from collapse. When that happens, pensions – the savings from a life’s work – pay a pittance.

Seventh example: house prices. Money is created for speculators, who push up prices, so that ordinary people find it harder and harder to afford a home.

Many other outcomes could be mentioned: unemployment, environmental damage, booms-and-busts are glaring omissions in this short account. But possibly the worst outcome of all is the kind of individuals and politicians that bank-money gives power to. Ownership and power go (mostly) to insatiably ambitious and irresponsible people – people prepared to ignore inconvenient truths and the destructive effects of their actions – and to the corporations and politicians they influence and own. The crimes committed under this system are immense. Billions of people are dispossessed into poverty and debt; millions are on the move, their lands possessed and exploited by fictitious money; many lives are destroyed by wars and the degradation of our planet. These toxic balloons are all inflated by the way we create money.

So, how do we reform? Half-measures – basically, tightening the regulations – have been tried many times, but they have always been side-stepped by the finance and banking industries. The latest manifestation of this side-stepping is ‘shadow-banking’. Three years ago, shadow-banking was creating value worth more than $34.2 trillion – that’s £4,500 for every person on the planet![13] Since then, figures are apparently a great deal higher – but oddly unavailable.

Luckily, there is a simple way to reform the situation. Before the laws I mentioned were passed, debt was a private matter contracted between two people. Courts would help lenders get their money back, but were reluctant to help recover debt sold on to someone else.[14] Reform is a simple matter of turning the clock back – and getting rid of those corrupt and corrupting laws.[15]

After reform, money would still be simple property, but it would no longer be debt from a bank. There would still be borrowing and lending; there would still be inequality. There would still be shares in ownership. Notes, coins and digits would transfer to the new system; management and supervision would continue, but under a different authority.[16] Certain innovations might prove useful in such a system: for instance, open ledger systems, such as blockchain. But the essential task of reform will not be technical: it will be legal: calling a halt to the robbery that feeds unaccountable power, war, environmental destruction, loss of human freedom and moral agency.

And then, the greatest criminal enterprise ever invented would come to an end. An era of peace, prosperity and freedom might possibly, just possibly – (we are human, after all!) – begin.

………………………..

Thank you. There are print-outs of this talk available at the back of the hall, with notes to back up what I have said.

[1] https://www.oxfam.org/en/pressroom/pressreleases/2017-01-16/just-8-men-own-same-wealth-half-world

[2] The foundation of the Bank of England ‘set a precedent for proposals to accord special privileges to those who lent their money to the State for the prosecution of war.’ Ephraim Lipson, The Economic history of England (3rd ed., 1943) Vol ii, p.309.

[3] ‘The object of warfare is to take over a country’s land, raw materials and assets, and grab them. In the past, that used to be done militarily, by invading them. But today you can do it financially simply by creating credit.’ Michael Hudson, Interview, DemocracyNow! November 05, 2010. See also his Finance as Warfare, 2015.

[4] For instance, the Bank of England publication: Quarterly Bulletin 2014 Q1.

[5] J.K. Galbraith: ‘The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.’ Money: Whence it Came, Where it Went (1976) p. 5.

[6] The two principal laws were: The Bank of England Act (1694) which established private credit as a form of government-backed money, and the Promissory Notes Act (1704) which established all promissory notes as negotiable debt backed by law.

[7] In 1845 the American judge Joseph Story wrote: ‘Most, if not all, commercial nations have annexed certain privileges, benefits, and advantages to Promissory Notes, as they have to Bills of Exchange, in order to promote public confidence in them, and thus to insure their circulation as a medium of pecuniary commercial transactions.’ Commentaries on the Law of Promissory Notes (1845) p. 10.

[8] In a system of pure communism, money creation is a monopoly; in the English system which now dominates the world, governments provide ‘reserve money’ – ‘cash’ –  which passes between banks, enabling a competitive system.

[9] The only real debts in the banking system are between banks themselves.

[10] In the words of economist Frank D. Graham, ‘the promises are never called and the bank is in the delightful position of living on the interest of what it owes.’ ‘Partial Reserve Money and the 100 Per Cent Proposal’ in The American Economic Review (1936).

[11] See, for instance, W.J. Thorne, Banking (1948) p. 133. ‘The banker’s tricks of the trade are, when they are explained, hardly worthy of even a third-rate magician.’ Thorne was himself a banker!

[12] As well as bank-money, powerful organisations conjure many other types of valuable debt out of nothing, among them bonds, money-market funds, shadow banking claims, national debts. The result is growing inequality. Those who work get less; those who exploit get more. Even the most basic statistics tell the story: in industry today, wages going to workers amount to 53% of the value of output; the rest goes to shareholders. Under feudalism, owners took far less than half!

[13] https://www.reuters.com/article/us-g20-shadowbanks-fsb/shadow-banking-activity-continues-to-grow-fsb-report-idUSKBN18617B

[14] ‘The general attitude of medieval law to the assignment of debts, and the special requirements which transfers had to satisfy in order to be legally valid, made the emergence of fully negotiable paper impossible.’ Postan, Medieval Trade and Finance (1973) p. 42, quoted in Usher, The Early History of Deposit Banking in Mediterranean Europe (1943) p.72.

[15] Should reform be accompanied by massive reductions in credit/money/debt? The only time parallel in history to our situation today is post-Nazi Germany. The Nazis had created so much credit/money/debt that the economy was in sclerosis. In the currency reform of 1948 over 90% of it was simply abolished. The economy jumped from sclerosis to healthy activity in one bound. Kramer, The West German Economy, 1945-1955, 1991.

[16] The question ‘What sort of authority?’ is answered by Henry C. Simons in ‘Rules versus Authorities in Monetary Policy’, one of his essays collected in Economic Policy for a Free Society (1948).

A Devastating Plague of Kleptocracy

The West has unleashed a devastating plague of kleptocracy upon the world that is threatening all our futures. After deregulation of finance, the giant engine of Western money-creation devoured ex-Communist countries, sharing ownership of the spoils with corrupt kleptocrats whose political machinery integrated robbery and political domination. The rest of the world was already corrupted in the same way; and so now we have 8 (eight) individuals owning as much as half the rest of the world’s population.

How this kleptocracy (rule by thievery) works is simple, but apparently not a subject the mainstream press will admit for discussion.

Chief among the fundamentals is not some sexy item like ‘weapons of mass destruction’. It is ‘negotiable debt’ which means ‘debt you can buy and sell’. As I will explain, laws supporting negotiable debt mean that value can be created out of nothing on a vast scale and used to purchase the lives, work, possessions and freedom of others.

Like the most boring devil in hell, the subject of ‘negotiable debt’ is protected from scrutiny by its supreme boringness. In various forms, it has been introduced into many civilizations, and it has always been highly damaging, producing extreme inequality, social dislocation and eventually a stark alternative: reform or collapse. Some of its ancient manifestations were debt-slavery and tax-farming. (With debt-slavery, the debtor and the debtor’s family became the property of the creditor to buy and sell. With tax-farming, rulers auctioned off the tax-obligations of the citizens to the highest bidder.) The principle modern manifestations of negotiable debt are bank-money, national debt and ‘financial instruments’ that create value out of nothing.

Negotiable debt means simply ‘debt which can be bought and sold’. When the power of pure money begins to become greater than other powers in a nation – than the sword, for instance, or religion, or land, or manufacture, or business – laws are made that turn debt into a commodity. The content of such laws is, simply, that the State will enforce the collection of a debt by its current ‘owner’ regardless of whether that ‘owner’ made the loan in the first place.

The introduction of negotiable debt transforms a society. Without it, prosperity for all is in everyone’s interest – rulers included. With it, a whole new layer of people is introduced, given legal authority and power to grow spectacularly rich by squeezing every last penny out of those who work, driving them into penury, debt-bondage, and (finally) slavery or welfare.

We are all aware of ‘negotiable debt’ in one form or another: governments selling student debt perhaps, or mortgage companies flogging off mortgage debt. But these are just sideshows to the main event. The main event is this: Once debt is valuable, value can be created out of nothing. This is how bank-money works. This is how national debts work. This is how ‘financial instruments’ work which are created and destroyed (for profit) to the music of trillions of dollars each year.

It is easy to demonstrate how value is created once debt becomes a commodity. First, take a situation in which no value is created. Take two ordinary citizens: me and you, perhaps. I lend you some money. I no longer have the money; you have it. I won’t have it again until you return it, whereupon you will no longer have it. No value has been created. If, on the other hand, I lend money to a government or corporation, I get a ‘bond’ in return, equal in value to what I have lent. This ‘bond’ is negotiable, and effectively money, circulating among the wealthy and related in value to the money used by everyone else. Value has been created for those who lend.

National debts profit those with money to lend because those lenders get bonds, which are effectively money. In the words of the godfather of economics, Adam Smith: ‘The merchant or moneyed man makes money by lending money to government, and instead of diminishing, increases his trading capital.’ Montesquieu: ‘National debt takes the wealth of the state from those who work, and gives it to those who are idle.’ Hume: ‘The taxes, which are levy’d to pay the interests of these debts, are a check upon industry, heighten the price of labour, and are an oppression of the poorer sort.’ Everywhere, national debts grow in step with the predominance of bank-money – because they depend upon the same law.

Banks create money for private profit. Today, money is created, by central and commercial banks, by the simple device of creating two equal and opposite debts – which add up to nothing. When a bank makes a loan, it creates a debt from bank to borrower, and a debt from borrower to bank. The debt from the bank becomes money (the Bank of England describes how this works in its Quarterly Bulletin, 2014 Q1). What we own, when we have money in our account, is negotiable debt from a bank. It circulates among us as money, but it was created for the profit of borrowers and banks.

In practical terms, this means that when a bank ‘lends’ a billion for some purpose or other, it has, in fact, created that billion out of nothing for the profit of itself and the borrower. These billions are ‘retired’ – they disappear – when profits have been taken and the ‘loan’ is repaid. The whole process can then be repeated. The value being created and destroyed in this way comprises, at any given moment, the whole of our money supply. Unfashionable as it is to believe in devils, ‘diabolical’ seems the only word adequate to describe such an arrangement. No wonder 8 individuals have come to own more than the poorer half of the world’s population!

You would have thought the ability to ‘create money’ would be a ticket to secure and endless wealth, but banks are vulnerable because of the way they create it. When borrowers default, banks lose their assets, but their debts remain, circulating as money. Conversely, when a bank goes bust, its customers – owners of its debt – lose their money. The system is inherently unstable. Although there is a lot of money to be made in banking, the main beneficiaries of the system are not banks: they are speculators, plutocrats and – governments.

‘Negotiable debt’ supplies assets to both governments and plutocrats, so they share an interest in keeping the system going. Socialism in its current guise offers no improvement. Impressed by the power of negotiable debt (euphemistically called ‘credit’) Marx wanted to take over all its sources for the State (‘plank 5’ of his communist manifesto). Today’s socialist movements are stuck in this broken groove, suggesting no advance in justice, merely ever greater concentrations of State power.

What effect does negotiable debt have on the wider world? Here are the words of a historian (stripped of jargon): ‘Negotiable debt is not just a way of oppressing the lower classes. It has other functions too. First, by creating large concentrations of capital, it allows governments to create military power and exercise control over wide areas. Second, it involves wealthy people in government, where they all profit together. Third, it creates a system of dependence, poor on rich, which ensures social stability. Fourth, when debt itself becomes money, a huge variety of speculative techniques opens up, by which the wealthy may increase their wealth. Lastly, negotiable debt enables governments to reward supporters with stable and long-lasting incomes.’

This short summary was included in a book celebrating the creation of value out of nothing. It says a lot, but not nearly enough. A more critical account would include many other things. Here are some: ‘Negotiable debt allows corrupt payments to be made without scrutiny. It enables predation on a vast scale by nations, corporations and individuals. It creates extremes of inequality. It favours monopolization. It transforms democracy into unstable plutocracy. It makes ‘steady-state economy’ an impossibility: because most money ends up in the hands of a few, economic growth becomes a necessity for an economy to merely function. When growth is pursued as a ‘public good’, an increase in environmental destruction must inevitably follow. Arms production and war are financed invisibly and in secret, from created money. In conditions of extreme inequality, arms production and war become, perversely, an economic corrective, as workers and soldiers earn (and spend) without producing for public consumption. Arms production and proxy wars become, monstrously, a source of economic health.’

In these ways, the development of our modern world has been profoundly affected by profoundly unjust law. It is only to be expected that as society changes, ruling powers will try, and to some extent succeed, in making laws that favour themselves. Feudal law is an obvious example – a fact easily acknowledged, because feudal law is now defunct. As conditions change, laws that favour a ruling order must yield eventually to reform, either peacefully or by violence. Feudalism yielded in France only after a Revolution; in England, only after a Civil War.

The effects of ‘negotiable debt’ have got a great deal worse over the past thirty years or so, because restraints have been removed (financial deregulation). A partial reform would be to bring back some of those restraints. Proper, radical reform would result in law only enforcing recovery of a debt if the claimant made the loan in the first place. This would put an end to value created out of nothing for the benefit of those with power.

While reform would not be difficult, arriving at a place where reform is seriously considered looks difficult, if not impossible. There is little public discussion of the significance of negotiable debt and its relation to the ills that plague us. The public is bewildered and bemused. Self-interested opposition among the powers-that-be, and the dull complexity of the subject-matter, keep even simple facts (such as those referred to above by Smith, Montesquieu and Hume) beneath the radar of public debate. When people are desperate, and reform is out of the question, they look to destruction of the whole edifice of exploitative power.

Getting rid of negotiable debt would mean that our money-supply would consist of simple units of ownership, not ownership of debt. A program of replacement, unit-for-unit, would not be difficult. In the interests of justice, it should be accompanied by some form of debt reduction. Restructuring our institutions around the new arrangement would bring new life to our tired and ailing world.

There is another aspect that makes everyone nervous about the prospect of reform, victims and profiteers alike. The system itself has become a tyrant. For those it robs, earning a living is increasingly precarious. For those it profits, who own mostly debt, their own wealth also looks precarious: the burden of created debt is now so great that a reasonable rate of interest has become an impossibility. Defaults look inevitable.

Vast wealth accumulated as debt always involves the destitution of many people and, without reform, is always, sooner or later, followed by societal collapse. We are puzzled by the kinds of monsters now emerging as political ‘leaders’, but we shouldn’t be. People are looking to robbery-by-dictator as preferable to robbery by a system that they do not understand, which is growing more extreme day by day.

It’s basic enough to be a historical cliché: Degraded humans look to vicious leaders; vicious leaders produce more degradation. We are lodged in a classic vicious circle that can only be broken by timely reform – or catastrophe. Solon founded Athenian democracy by outlawing debt-slavery. Perhaps we could found a true democracy for ourselves, by outlawing its modern equivalent: bondage to negotiable debt.

Festival of Ideas: a Martian books tickets.

If I was a visiting naturalist from Mars, the first thing I would notice about the human species is the relentless self-applause of the elites as they lead the species to multiple forms of disaster.

Next, I would notice the eager compliance, and shared self-regard, of the middle classes who do the bidding of the elites.

Then I would notice the pitiful and helpless ignorance of the masses, as their freedoms are obliterated and their lives annulled.

Then I would look up under ‘humans, planet earth’ and discover that their own great naturalist, Charles Darwin, had written that ‘intelligence and the moral instinct are the two most important attributes in the success story of the species’. I would wonder what went wrong.

I would dig a little, and find three sets of laws directing their progress to self-annihilation.

  • Laws enforcing the illusion that giving power to those prepared to do anything to get it is a form of ‘democracy’.
  • Laws enforcing the biggest enterprises on earth to be owned and exploited by people who have done nothing to contribute to anything.
  • Laws that allow the money supply to be created and destroyed at the whim and for the benefit of those who already have lots of money.

Then I would get back in my space ship, hidden in miniaturised form in a small culvert in Blackheath, and say with a sigh to my pilot Sun Ra: ‘What a pity! So much promise, so much self-delusion. Let’s go and take a look at Ursa Major!’

On the other hand, if I was a compulsive optimist, I might book a ticket for the ‘Festival of Ideas for Change’ being held in Brockley on November 20th. www.brockleyfestivalofideas.com

A Festival of Ideas for Change -November 20th.

What a world! Inequality gone mad! Democracy, a hollow sham! Quantitative Easing pours money in the pockets of the rich – and debt, debt, debt for the rest!

Corporations write the laws, finance politicians, call out tunes for the daily trudge! Arms industries feed terror and war – and our so-called ‘politicians’ are their bagmen!

Sixty per cent of citizens need drugs, legal or illegal, to get through the day! And millions in the U.S. are considering voting for a medieval devil straight out of Hieronymus Bosch, named Donald Trump…

Here in Brockley, South-East London, we are holding a Festival of Ideas for Change. No party politics, no celebrity twaddle, just GOOD ideas which could transform our world! If you don’t think we need change, keep taking those pills! Otherwise: Brockley today, tomorrow the world!

It’s a free event, but places are limited. To make sure you have a place, book FREE ticket(s) here:

https://www.ticketsource.co.uk/date/272988

There is more information about the festival on

http://www.brockleyfestivalofideas.com/

http://www.brockleysociety.org.uk/event/festival-of-ideas-for-change/

http://ivomosley.com/festival-of-ideas-for-change-nov-20th-2016/

The venue is a beautiful hall decorated with murals by 20th C. women artists:

The Mural Hall, 
Prendergast Hilly Fields College
Adelaide Avenue, 
London
SE4 1LE

Be there – if you care!

The Bad Effects of allowing Banks to Create Money

TALK FOR POSITIVE MONEY, WATERLOO, OCT. 2016:

The Wider Implications of Banks Creating Money.

Our money supply is created in a strange and confusing way. How it works, the history of how it came to be, and the laws that support it are discussed in the various chapters of my book Bank Robbery published on the websites Positive Money and The Cobden Centre. This talk, based on Chapter 6, concerns how the system contributes to certain bad practices in our world today. My intention is to emphasize the necessity for legal reform.

(i) Characteristics of Bank-Money.

A lot of what is written about money seems designed to make a simple subject difficult. When banks are allowed to create money, however, the subject itself becomes difficult, because the way that banks create money is confusing.

We are all familiar with money; we use it every day to buy stuff we want and need. Most of us also know that ‘what money is’ has varied from time to time and place to place. But today, with globalization, money is becoming pretty much one thing all across all the world: debt from banks, or ‘promises to pay’. What banks owe us – what they ‘promise to pay’ – is measured by numbers in bank accounts, and numbers on cheap paper and coins.[1]

The debts, however, are a fiction. Customers turning up to claim what a bank owes them might be given notes: but they are also ‘promises to pay’. The question ‘To pay what?’ will be greeted with silence and a shrug or a shake of the head. The answer many years ago was ‘gold’; the true answer now is ‘nothing’.

Legal fictions are created and maintained for a purpose. In this case, the fiction supports a system designed from the start to profit rich and powerful people at the expense of working people. It does its job very well.

The laws that make bank-money possible are laws that enforce the buying and selling of debt: they state that the full force of the State will be put behind the collection of a debt, regardless of whether the person claiming the money lent the money in the first place. This gives rise to the familiar modern situation where people’s debts are bought and sold; they have value.

This law enables two wealthy persons to create equal-and-opposite debts to one another and create value out of nothing. This is what a bank does when it ‘lends’: it creates two equal and opposite debts, from bank to borrower and borrower to bank. What the bank owes becomes money. Money is debt from banks to us. Because what they owe is money, banks are in the luxurious position of being able to charge interest on what they owe.[2]

Money created by banks has special characteristics that mark it out from other kinds of money which are property of a simpler type (shells, gold, stones with holes, bitcoin, etc). The first, already mentioned, is that banks are privileged to charge interest on what they owe.

A second special characteristic of bank-money is that new money is continuously created and destroyed in very large quantities, as banks lend and as loans are repaid. This contrasts with a situation in which money is pure property (whether gold, silver, stones with holes in them, or bitcoin, etc.). Where money is pure property, unencumbered by debt, it may circulate indefinitely without any increase or decrease in quantity.[3]

Another special characteristic of bank-money is that it is created by two parties (banker and borrower) when both consider they will make a profit from it. In other words, new money is created in circumstances where it will profit two parties to a private deal.

Another feature of bank-money worth remembering is that when a borrower spends some of its newly created bank-debt, the ‘money’ and ‘debt’ elements separate out. The debt stays with the borrower, but the ‘money’ element goes into circulation as money – it becomes the property of the person paid (though property of a strange kind; ownership of debt from a bank). This property may even be lent back to the bank at interest. Virtuoso operators use this separation of debt and value to end up with the value, leaving others with the debt.

These special characteristics of bank-created money enable certain sets of people to profit at the expense of the rest. This was the whole intention of the system when it was first founded, as detailed in earlier chapters.

Profits come in two categories: lawful and unlawful. Lawful (but unjust) profits are created by the system itself, as authorised by law. Unlawful profits must also be considered, however, because the system makes crime so easy. When crime is easy, many individuals will turn to it, especially if they can avoid punishment or disgrace. Advances in information technology have made financial crime a good deal easier to commit. Underfunding of enforcement makes crime easier to get away with. Cultures of criminality in the ruling classes have developed in which honesty, morality, justice and conscience are derided. Because they are of the ruling classes, these cultures are influential.

It should be an object of law to make crime difficult, not easy.

(ii) Systemic (endogenous) effects of creating money this way.

Inequality.

As already mentioned, a bank creates new money to profit itself and the borrower. The borrower uses the new money to purchase things: labour, businesses, capital assets, luxuries. The more assets a borrower has, the more it can borrow. In this way, new money enriches persons who already have money.[4]

By purchasing assets, new money enhances the value of capital assets generally. Income from these assets accumulates with their owners: rent, interest, dividends, etcetera.

The same assets may also be used as collateral for other and simultaneous financial dealings, because the same law which makes debt negotiable, makes claims negotiable too. Multiple claims are created on the same asset, and each claim has value; this is how immense markets in derivatives and shadow banking are made possible.

Using these procedures, financial speculators have gained ownership of most of the world.[5]

Money in the Wrong Hands.

Despite the cultural myths of our age, most people do not wish to give their lives over to getting more ad infinitum: they want enough to live well, in return for work they can be proud of. Our system of money-creation favours individuals for whom ‘getting more’ overrides all other considerations.[6] The consequences of power residing in the wrong hands is incalculable and perhaps most significant of all the effects of banks creating money.

Inequality and Sick Economies: Engorgement of the Economy.

Economies may suffer from many different maladies. The one that recurs again and again today is economic engorgement when most wealth is situated with a few and spending on consumables dries up (there is only a certain amount a rich person can consume).[7]

When spending dries up, profits dry up.[8]

Booms-and-Busts.

Extreme cycles of prosperity and recession are an inevitable result of banks creating the money supply due to what economists have called the ‘perverse elasticity’ of bank-created money: banks create too much money in the good times, and not enough in bad times.[9]

Debt, National and Personal.

Booms-and-busts are key to the creation of personal and national debts, vigorously exploited by today’s virtuoso players in finance.

Banks don’t just lend to speculators: they also lend to spenders, both nations and people. Large amounts of credit are lent when confidence says that everyone will profit eventually; credit is called in when the worm turns. Assets are seized. Greece today is a stark national example. People losing their homes after mortgage defaults are painful personal examples.

National Debts. National debts are founded on the same law that allows banks to create money. Wealthy people lend to governments and get a ‘bond’ – a debt instrument they can sell – in return. These bonds are effectively a kind of money among the people who buy and sell them, tied in value by the laws of negotiable debt to the money the rest of us use.[10]

For centuries, this advantage to the wealthy was no secret.[11]  With the expansion of the electorate, recognition of this simple fact disappeared under the radar.[12] The situation has become worse in recent decades because by relocating assets abroad, beneficiaries of the newly created money avoid paying their shares of the taxes that fund their wealth.

Growing Debt leads to a Non-Competitive Work Force.

Interest demands on debt, both national and personal (‘household’), adds to what workers must earn before they have anything to spend. As workers in countries with high levels of debt become more expensive, jobs are outsourced to where debt is less and labour is cheaper.

Corporations Hobbled by Bank-Created Debt.

After ‘deregulation’ in the 1970’s and 1980’s, a new phenomenon invaded city practice: replacement of share ownership with fixed-value and fixed-interest debt. Funded by banks, and operated by financial predators with money created for the mutual profit of both, this practice has reduced the adaptability of corporations to changing circumstances. These corporations become uncompetitive and fail or need state support.[13]

Arms Proliferation.

Banks feed a vicious circle between arms production and purchase by eagerly creating new money for both buyers and sellers. Banks create money for governments on the security of their citizens paying. Governments naturally compete to acquire arms: if your neighbour gets missiles, you want them too.[14] With demand guaranteed, banks willingly create money for manufacturers too.

If governments had to borrow pre-existing money to finance arms purchases, would things be different? In normal times, ‘lend me some money to buy weapons’ is not a popular request, particularly if the lender has to do without the money lent while it is entrusted to a dangerously bellicose government.[15]

In an economy suffering from a lack of consumer spending, arms production acts as an economic stimulant. Its workers make products that will not be bought by other workers: even in America, citizens do not buy missiles and bombs.[16] Armaments workers’ pockets fill up with money that will be spent on other goods, and on reducing debt.[17] Selling arms abroad is even ‘better’: share and bond holders get richer, wages are spent in the home country, death and destruction occur somewhere else. Governments give ‘aid’ to both sides of a conflict, tied to buying arms manufactured by home companies. The result is ‘proxy wars’.[18]

War.

War is massively destructive for all concerned; even winners expend labour, armaments, and human lives to no constructive effect. And yet, for an economy sick with engorgement, some of the observations made under ‘Arms Proliferation’ apply here too.

In war, governments undertake massive spending. Money goes to ordinary people in wages. What they produce is destroyed; they spend their money into the rest of the economy, on consumables and to pay off mortgages and debt.[19] Ironically, a defeated country (if not paralysed by demands for reparations) may recover more quickly than a victor country: much of its debt may have disappeared along with the institutions that created it.[20]

Bank-money and national debt make it easier for governments to finance war: they can borrow without asking permission. Banking in England was instituted and made legal precisely for the purpose of enabling war: specifically, to raise money “towards the carrying on of the Warr against France”.[21] As already mentioned, England’s head-start in the management of negotiable debt gave it advantage in war.

The Need for Economic Growth.

A steady-state economy is inconceivable when the money supply takes from most people and gives to a few; soon, most money sits waiting for investment, and spending dries up. In these circumstances of automatically increasing inequality, economic growth is a must – just to keep the economy going. Growth means that money which would otherwise sit idle pours into new factories, new employment – and the pockets of workers who will spend it.

Nature and Environments Destroyed.

The bank-money system is designed for predation and expansion. As just mentioned, only ‘growth’ can keep it from seizing up. The system itself demands relentless growth; resources and environments are plundered and destroyed.

There is however a counter-question that suggests itself. With a just money system, there would almost certainly be more general affluence. Would this general affluence be spent on more and more consumer goods; or would a different, more responsible ethos take over: would people begin to take care of our world?

Populations in Servitude.

Extreme inequality means greater dependency upon the powers of government and wealth. Governments redistribute wealth to some extent, but those ‘with’ do not like to see too much going to those ‘without’. The monetary system was designed to keep the majority dependent upon the minority, and aware of their dependency. The ethos (seldom stated out loud) is that without insecurity, the poor would do no work; behind the ethos is fear that the power of the elite will be lost.

In good times, few people bother to think of monetary reform. In bad times, anxiety and a general sense of the precariousness make it hard for people to consider major reform.

Predatory Finance: Whole Countries Looted.

Nations with strong banking sectors generate money out of nothing and export it. International predation proceeds along two different tracks, state and non-state.

State: The national currency of a strong country is a powerful weapon. Currency manufactured at almost no cost buys things abroad, after which it either becomes international currency, or sits somewhere as a storage of value.[22]

In this respect, nations behave like banks: exported currency is effectively national debt, which the creator country hopes it will never have to pay. So long as it circulates or is stored, it will never be used to claim goods from its country of origin.

Non-state (private): An efficient financial sector manufactures money in a strong currency for speculators who appropriate the resources, labour and production of a less sophisticated nation. Powerful governments often assist individuals and corporations in this.[23] The weaker nation’s government is paid off with some of the proceeds. The weaker nation, instead of receiving proper purchase value for its labour, resources and production, gets a corrupted government, heavily armed to suppress dissent and oversee rule by thugs.

What’s done today by finance is a continuation of what used to be done by conquest. Piercy Ravenstone wrote in 1821, concerning England’s rule in Ireland: ‘Ireland sends her surplus produce to pay the rents of her landlords in England, and her surplus poor follow to consume it.’ Today, millions walk towards the countries that have contributed to their ruin by appropriating wealth and land, selling arms, corrupting governments and destroying habitats.

(iii) Secondary corruptions.

‘Democracy’ Corrupted.

One outcome of allowing banks to create the money supply is corruption of the democratic process (so far as it exists). Those who finance political parties exercise undue influence.[24] Michael Hudson’s book Killing the Host details how financial interests have influenced not only the written law, but also the judgements made in court.

Most noticeable of all is a lack of discussion about the monetary system. In the United Kingdom, only the Green Party wants new money to be issued free of debt.[25]

A former member of the Bank of England’s finance committee has listed categories of banking abuse; there are currently 85 categories, and the list is still growing. http://www.finance-watch.org/hot-topics/blog/1186-jenkins-bank-misdeeds [26]

Capitalism – Good and Bad.

Capitalism supposedly consists of savings lent, via banks, for use by entrepreneurs. True capitalism is agile at satisfying human wants and needs. When money is created by banks, however, created money dwarfs true savings and drives the economy. The standard narrative, taught in textbooks and propagated in the media, becomes a fiction and a lie.

It used to be said that the ‘Holy Roman Empire’ was neither holy, nor Roman, nor an Empire. In just the same way, today’s ‘liberal capitalist democracy’ is neither liberal, nor capitalist, nor democratic, but a kleptocracy which gets away with writing its own laws.

Economics Corrupted.

Economics, which could contribute so much to human good by diagnosing dysfunction and presenting remedies, has become instead a propaganda machine for kleptocracy, propagating lies and relentlessly misdiagnosing in support of power. Academic journals are funded by banks; the Nobel prize for economics is not a Nobel prize at all, but an impostor funded by the Royal Bank of Sweden.

The process of corruption is no conspiracy, merely that the livelihood of economists depends upon not mentioning certain things which might discomfort those who pay them.

The Cultivation of Ignorance.

Concentrations of wealth and power, fostered by bank money, own the media and set parameters for journalism so that in many areas it dares not speak truth. Good journalism has its origin in moral belief that humans, particularly in ‘democracies’, want and need to know.

Purchase of media companies by oligarchs is a sign of the times: whole populations are now subject to dumbing down, propaganda and demoralization. The ultra-rich want to control information, which is itself a source of wealth and power. An example (28/05/2016): ‘Billionaires seize control of the information flow’: http://www.nytimes.com/2016/05/28/business/media/behind-the-scenes-billionaires-growing-control-of-news.html?_r=0

Extremist Politics.

An important secondary effect of the corruptions listed above is the drift to extremist politics. Ordinary people know they are being cheated out of freedom and rudiments of a decent life. When the ‘educated’ middle classes show little regard for truth and justice, they provoke mistrust of the entire structure of ‘liberal’ civilization. Monstrous human escapees from some medieval vision of hell – Donald Trump is a prominent example – sense their opportunity and offer themselves as a remedy. The true remedy – reform – is lost beneath the radar of public debate.[27]

(iv) Criminal encouragements.

Straightforward Corruption in Politics.

Money manufactured secretly by banks makes transparency in public affairs difficult, if not impossible. A blunt illustration: each Russian oligarch has his own bank, manufacturing money for (among other things) bribes. A bribe may be a very profitable investment – even a necessity, for someone who wants to climb to great wealth.[28]

Such corruption has far-reaching consequences. In many countries, politics and business cannot function without corrupt payments, and election time becomes an opportunity for competitive disclosure of corruptions. Outside agencies get involved – for instance agents of Putin’s Russia, with the intention of replacing governments with Russia-friendly regimes.[29]

Robbing the Public Purse.

For influential persons, the easiest way to acquire more money is to be friendly with a bank, take out a loan, relocate the money and default on the loan. The bank will be out of pocket; but friends in government may put public money towards shoring up the bank. The judicial system may be in on the racket too, turning a blind eye.

Current newspapers (2016) contain several examples. In Bangladesh, ‘some $565 million in assets are said to have been looted from the state-owned BASIC Bank between 2009 and 2012, yet the scam’s suspected mastermind, a former chairman of the bank, wasn’t troubled by the anticorruption commission investigating the fraud, reportedly thanks to his political connections.’ Banks in Bangladesh ‘are regularly recapitalized by the government — to the tune of about $640 million for fiscal year 2014 and, it is expected, more than $700 million for fiscal year 2015.’[30] In Malaysia, a ‘billion-dollar political scandal’ involves two brothers, a banker and the Prime Minister.[31] In Moldova, a large proportion of the wealth of the country has been looted and relocated with financial partners, mostly in Russia.[32]

(v) Survey: possibilities post-reform.

The way our money-supply is created contributes to many evils. Without this contributing factor, what would the world look like? No doubt the evils would continue in lesser degree. But the world would have a chance to climb out of present reality, when so much good, real and potential, seems on the point of being overwhelmed by stupidity, greed – and yes, evil.

[1] Notes and coins are part of ‘reserve money’ created by central banks; money in bank accounts is created by commercial banks as claims on reserve money. Bank of England Quarterly Bulletin 2014 Q1 details how these are forms of debt or ‘IOU’.

[2] Frank D. Graham: ‘So far, however, as the totality of bank promises becomes, and remains, part of the currency, the promises are never called and the bank is in the delightful position of living on the interest of what it owes.‘ Partial Reserve Money and the 100 Per Cent Proposal’, The American Economic Review (1936).

[3] The stone money of Yap has endless lessons for those who wish to understand money. ‘The Stone Money of Yap, A Numismatic Survey’ by Cora Lee Gilliland. SMITHSONIAN STUDIES IN HISTORY AND TECHNOLOGY • NUMBER 23

[4] The comedian Bob Hope: “A bank is a place that will lend you money if you can prove you don’t need it.”

[5] According to Oxfam, 62 individuals now own as much as the poorer half of the world’s population. http://policy-practice.oxfam.org.uk/publications/an-economy-for-the-1-how-privilege-and-power-in-the-economy-drive-extreme-inequ-592643

[6] In Keynes’ version of a better future, ‘The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.’ (‘Economic Possibilities for our Grandchildren’, 1930).

[7] The most extreme historical example of an engorged economy – Nazi Germany at the end of WWII – is also the least-studied by economic historians. It was resolved when 90% of monetary wealth was simply abolished by the U.S. military administration (1948). For a lucid account, turn to the Civil Affairs Handbook issued for the American Military government, written by anonymous economists and until recently ‘redacted’ (kept secret).

[8] Asset-prices are today being kept high by ‘quantitative easing’, the creation of speculative capital. As returns decrease, so interest rates must go down too. Eventually, even at rates close to zero, banks are reluctant to lend and the word CRASH begins to looms once again on the horizon.

[9] Lester, Richard A. Monetary Experiments (1939, 1970) p. 291; and on p.292, ‘If the monetary system is to moderate rather than magnify the business cycle, money must be segregated from banking.’ Booms-and-busts do not seem to have existed before bank-money and negotiable debt.

[10] Hume and Hamilton both noted this.

[11] Montesquieu: ‘(Public) debt takes wealth from those who work, and gives it to those who are idle. It creates capital for people who do not work, and difficulties for people who do work.’ National debts became significant as soon as debt could be traded: in fact, they became exploding phenomena. English national debt went from 6% of national income to 137% of national income in the half-century after the foundation of the Bank of England.

[12] F.W. Maitland, 1879: The people cares not to understand its own laws, because these laws are obscure and antiquated; the laws are obscure and antiquated because those who would be advantaged by their reform know nothing about them. And as our Constitution grows more democratic it becomes ever more important that our civil law should be widely known. Little will now be done by Parliament to which it is not urged from without, and in these days, when there are always many excellent and exciting electioneering cries, many questions about which it is easy to make a stir, no Minister could afford to devote Session after Session to measures, however indisputably useful, for which there was no popular demand. It concerns Liberals in particular to see that nothing is lost by those successive extensions of the suffrage which they have advocated. But something will assuredly be lost unless the electoral body can be persuaded to interest itself in our everyday civil law. Something will be lost if the spirit of law reform which was fairly awakened in Parliament some half century ago be allowed to languish before one tithe of its appointed work is accomplished.’

[13] The process is described and documented in detail in Michael Hudson, Killing the Host, 2015.

[14] Adam Smith noted that the ease of raising money via national debt and bonds induces a carelessness, even a gung-ho mentality, in governments and citizens concerning war.

[15] As mentioned below, this is not the case when the lender is given negotiable debt (‘bonds’) in return.

[16] See, for instance, Joan Robinson, Freedom and Necessity Chapter 8, for a conventional account.

[17] Examples: During the ‘arms race’ in the Cold War, the U.S. enjoyed a rare stretch of financial growth and stability: between five and ten percent per year for several decades. http://www.multpl.com/us-gdp-growth-rate/table/by-year. Today, Russia is resorting to massive armaments production to restore spending money to a plundered populace; and North Korea (where the credit-creation facility belongs not to private banks but to the state) builds nuclear weapons despite, or because of, the poverty of its people.

[18] Examples: ‘In the first six years of the Obama administration the United States agreed to transfer nearly $50 billion in weaponry to Saudi Arabia’ which then went to war with one of the poorest countries on Earth: Yemen. http://www.nytimes.com/2016/04/20/opinion/obama-saudi-arabia-trade-cluster-bombs.html  The five permanent members of the UN Security Council (China, France, Russia, the United Kingdom and the United States) are tasked with maintaining global peace and security, but companies based in these nations manufacture 71 per cent of the world’s arms (Roslyn Fuller, Beasts and Gods: How Democracy Changed Its Meaning and Lost its Purpose (2015) page 159) and the same arms companies contribute heavily to political campaigns. Sometimes the same government will fund several opposing factions: the activities of the United States in Central America are well-documented; Syria today is another example.

[19] A country mobilised for war experiences ‘disproportion between personal incomes and the value – at existing prices – of the consumable goods flowing to the civilian section of the economy; the government’s expenditures generate incomes but the goods in the production of which these incomes are earned are swallowed up by the military machine.’ Military Government Handbook, Germany Section 5, (1945) p.44. Ricardo made a similar point (1817) ‘At the termination of the war, when part of my revenue reverts to me, and is employed as before in the purchase of wine, furniture, or other luxuries, the population which it before supported, and which the war called into existence, will become redundant, and by its effect on the rest of the population, and its competition with it for employment, will sink the value of wages, and very materially deteriorate the condition of the labouring classes.’

[20] West Germany’s post-WWII ‘economic miracle’ is an interesting case in point. The ‘miracle’ began after Germany’s debts, internal and external, were written down by 90%. First, in the currency reform of 1948 stocks and bonds lost 90% of their value and 90% of government debt was wiped out. Later, with the London Agreement of 1953, its foreign debts were also reduced by 90%. ‘West Germany’s debt/income ratio remained below 25% until the 1970s; Britain’s post-war debt/income ratio started out at 175%, and remained higher than Germany’s until the 1990s’ – Eichengreen and Ritschl, SFB 649 Discussion Paper 2008-068.

[21] Clapham, The Bank of England (1944) I, 17. Also: ‘Caermarthen pointed out in the Lords, there might be objectionable clauses in the Bill (to establish the Bank of England) but it was the only means of providing money for the Navy to take to the sea that summer. This practical argument sufficed where all others might have failed.’ Cambridge Modern History Vol. V p. 268. See also Dickson, The Financial Revolution in England and Roseveare, The Financial Revolution 1660 – 1760.

[22] The billions of dollars already in Iraq before the war of 2003, and the forty billion flown there soon after, are curious examples, with an added element of ‘Where did it all go?’: http://www.cnbc.com/id/45031100 and http://www.nytimes.com/2003/05/06/international/worldspecial/06BANK.html

[23] See Perkins, Confessions of an Economic Hitman (2006) for an interesting personal account.

[24] Marx, for instance, made it the fifth plank of his Communist Manifesto that the State would supply and control credit.

[25] https://policy.greenparty.org.uk/ec.html

[26] Chapter 10 on ‘Accommodation Bills’ in Rogers, The Early History of the Law of Bills and Notes’ (2004) is an interesting case-study of a particular form of abuse, and the efforts of legal minds to address it.

[27] Examples: the right is gaining ground across Europe and in the U.S. In the Philippines, an unashamed advocate of extrajudicial murder is elected President because citizens are angry with the old élite which ‘seemed impervious to their pleas for economic equality.’ The rise of Donald Trump in the United States looks pale in comparison – so far, at any rate.

[28] Today’s example: banks are being investigated for providing money for bribes in international soccer:  http://www.wsj.com/articles/u-s-considers-role-of-banks-sponsors-in-soccer-bribery-probe-1460937132

[29] See for instance the Legatum Institute report Is Transition Reversible? The Case of Central Europe (2016). http://www.li.com/activities/publications/is-transition-reversible-the-case-of-central-europe

[30] http://www.nytimes.com/2016/04/12/opinion/bangladeshs-other-banking-scam.html?_r=0

[31] http://www.nytimes.com/2016/04/19/world/asia/malaysia-nazir-razak-cimb.html?_r=0

[32] http://nationalinterest.org/feature/tangled-web-corruption-strangling-moldova-17518

Reforming Money and Banking

Notes for a Talk, Greenwich & Lewisham Positive Money Group, Weds 14th Sept 2016.

What is ‘Money’?

There’s so much confusion about what money is, it’s worth a few sentences on the subject to see what needs to be reformed.

We are all familiar with the essential quality of money: it is something we own, which can be exchanged for other things that are up for sale.

But money, of course, has to be something more than just an abstract idea. Most people are aware that money has ‘been’ different things in different places: gold, silver, beads, stones with holes in them, etc. What is money in our globalized world of today?

Today, it is debt from a bank.[1] This is where the ‘magic trick of banking’ comes in – a simple magic trick which confuses the public and prevents it from protesting in astonishment and outrage. It also confuses many practitioners, and saves them from having to assess the results of what they are up to.

The ‘magic trick’ of banks is that they rent out their debt. The normal activity of paying interest on what you owe is reversed: banks charge interest on what they owe.

Other chapters have gone into how this works, how it came to be, and the terrible effects the system is having on our world. This chapter is about reform.

Reform.

There are laws which support the system, and a multitude of regulations which make it work. Some reformers want to change the fundamental laws; some want to adjust the regulations, so that the system still works, but more in the public interest. Generally, reformers agree on one thing: money should not be rented out at interest: it should be a form of property (like shells, or stones with holes in them, or perhaps in our computer age, digits) which we own outright.

Reform the laws, or change the regulations?

The fundamental law which authorizes all financial shenanigans (that is, dealings which create money or value rather than just intermediate money or value) is law that enables debt to be bought and sold as if it was a commodity. This law enables money to create more money.

To illustrate this, imagine that I, the author, lend you, the reader or listener, a thousand pounds. I no longer have the money; you have it. I won’t have that thousand pounds again until you give it back to me, whereupon you will no longer have it. No value has been created.

If, on the other hand, I lend the government or a corporation a thousand pounds, I get a piece of paper – a ‘bond’ – equal in value to what I have lent. This piece of paper is effectively a kind of money, limited to circulation among the wealthy but tied in value to the money that the rest of us use. I can exchange a bond among other wealthy people for other things of value, including money. This makes lending to the government or a corporation relatively risk-free and painless. It also creates new wealth for the class of those who are already wealthy (noted by Alexander Hamilton, star of a new musical taking America by storm).[2]

Bank-money is only slightly more complex than ‘bonds’. A bank-customer or ‘depositor’ owns debt from a bank. The debt changes hands when payment is made and becomes the property of the payee. The law says that this debt – these ‘promises to pay’ – can be bought and sold. This is how debt from a bank has been able to become our money supply. This is where, like a rabbit out of a hat, the ‘magic trick of banking’ appears: a banker’s debt becomes the money we use every day, and a bank can charge interest on its own debt.[3]

This law could obviously be done away with, and a previous situation restored in which law only enforces recovery of a debt for a creditor if he/she/it originally lent the money. This is the position that has my allegiance; I am looking for questioning and disagreement, so that I can understand further what might be the outcome of such a reform, for good and bad.

Opposition to Fundamental Legal Reform.

The same laws which enable banks to create money also enable governments to create national debt on a massive scale at little or no expense to the lender and great expense to the rest of the population.[4] This helps explain why both systems have endured for so long, and how governments and wealth have become so intimately entwined.

‘Democracy’ was always understood to be rule by the not-so-well-off, because the not-so-well-off are always in the majority. But today’s ‘democracies’ are dominated by the rich, because laws privilege the state and the financial sector to create value for themselves and for those who are already wealthy. This fact remains little-known for two reasons. First, voters, bored (and/or daunted) by details of finance and law, remain ignorant. Second: in key areas of the political, academic and financial worlds, ignorance – pretended or otherwise – is a prerequisite for advancement.

Lastly and most obvious, individuals who gravitate towards politics and finance are in pursuit of power and money; they are naturally disinclined to give up the single biggest common source of both. This is most notable today in the fact that ‘the Left’ is mostly uninterested in monetary reform. Marx admired the power of capitalist credit and debt creation: the fifth plank of the Communist Manifesto was that it should be taken over by the State.[5]

Reforming the Regulations.

Reforming the regulations, as opposed to reforming the laws, keeps the possibility alive of creating value out of nothing. This means regulations can be altered so that certain groups can continue the process of creating financial value. Naturally, splits arise, based upon ideological dispositions. These splits are often around inclinations towards ‘left’ and ‘right’.

Taking ‘left’ first: The State should be entrusted with providing a pure, ownership-based (i.e. debt-free) money supply; but in addition it should be able to create credit for tasks that would increase the public good such as environmental improvements, health, welfare, and other nationalized goods and services.

The ‘right’ distrusts the power of government. It looks at the long history of the misuse of government power, including the printing of too much money, and says that human freedom, liberated from government control, restraint and interference, would produce goods and public services more efficiently and beneficially than the state in response to public needs. With regard to people with needs but no money, many on the right favour a universal citizens’ income. This would supply finance in such a way that people can pay by choice, rather than be provided for. Many on the left advocate this too, for slightly different reasons.

In terms of monetary reform, the common ground of right and left is the provision of money without a debt-widget. Within the current legal framework, this would mean banks holding money on behalf of customers. When lending money on, a bank would not create multiple claims on the same money; the money itself would actually be lent. This would mean banks becoming what most people think they are; receivers of lenders of savings (as opposed to creators of money).

The right has the additional concern that the value of created money should not be pegged to the good intentions of the State: it should be pegged to a commodity such as gold, that cannot be augmented at the whim of politicians. Reformers on the left who share the same objective would achieve it by creating an institution, with authority over government, that would command it to create or destroy specified quantities of money, with the object of keeping the value of money steady. This creation and destruction of money could easily be achieved by using new money to augment or replace taxation, or destroying money gained from taxation.

Time for Reform: Why Now?

Today’s laws and system date from days when elected representatives and all those who voted for them were rich. Assemblies approved the laws because the practices they authorized would increase money for rich individuals and add to the power of the state.

The system was founded in England between 1694 and 1705. It was subsequently copied all over the world and it evolved into our modern, global financial system. It has done its job so well (so over-well, you might say) that, according to Oxfam, 62 individuals now own as much as the poorer half of the world’s population. In a previous chapter of Bank Robbery I outlined other undesirable outcomes of the way money is created: how it contributes to things such as war, corruption, global warming and environmental destruction.

There is now some urgency about the need for reform. If this and other reforms don’t take place, civilization as we know it may well come to an end. The ‘reform by’ date seems to be getting closer and closer. Its clock is ticking backwards.

 

[1] The essential facts are: the government (via the central bank) and the commercial banks cooperate to create and rent out all the money we use, including notes and coins. The government creates digits called reserve, which it rents out to commercial banks. Commercial banks rent out claims on this reserve, and these claims are what we use as money. Only after these rentals have been agreed does money enter our world as circulation. As for notes-and-coins, commercial banks buy them off the government in exchange for reserve: they are obliged bt the terms of their license agreements to provide them customers on demand in exchange for claim-money.

[2] from Report on Public Credit (1790): ‘It is a well-known fact, that in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money. Transfers of stock or public debt are there equivalent to payments in specie; or in other words, stock, in the principal transactions of business, passes current as specie.’

[3] Whereas banks charge interest on what they owe, governments commit their taxpayers to paying interest on debts contracted in their name. Thus, both are somewhat covert taxes on public prosperity.

[4]   A fact noted in 1776 by Adam Smith, the ‘godfather of economics’: ‘The security which it [the government] grants to the original creditor is made transferable to any other creditor; and from the universal confidence in the justice of the state, generally sells in the market for more than was originally paid for it. The merchant or moneyed man makes money by lending money to government, and instead of diminishing, increases his trading capital.’ Wealth of Nations, Book V, Chapter 3.

[5]  ‘5. Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.’ Nazis also took control of credit creation, with banks obeying orders – or else.

 

Economic Lies and the Murder of Our World.

I am fed up with listening to lies propagated by ‘economists’. Even the terms they use are deceitful. ‘Demand deficit’ is a term used by economists to explain a recession – the theory being that people are voluntarily sitting on piles of cash, not wanting to spend it. The reality behind a recession is most people not having enough, except maybe to pay off some debt, and a few people having almost all. ‘Savings’? That’s a cover-up word for money created out of nothing by banks in quantities that make real savings valueless. ‘Bank-lending’? A euphemism for banks creating money – again, out of nothing – for those who already have it.

The whole structure of Western finance is geared to favouring the rich – and just as important, to keeping the poor poor. The structure is legal, determined by elected assemblies which until recently were voted for (and populated by) the rich.

As class dominance shifted from feudal nobility to a new financial class, so laws were passed to favour those in possession of money (see 3 paragraphs down). These laws passed kept the masses dependent and subservient. For as long as only rich people were able to vote, this situation was open and admitted. When poor people began to get the vote (late 19th century) and were able to influence legislation, these matters passed ‘under the radar’ of public debate. It became taboo to mention, acknowledge or analyze the way money is created, or how value is created by making debt ‘negotiable’ – that is, into a commodity that can be bought and sold.

In response to the new ‘capitalist’ oppression, socialism was born. Socialism advocated taking over the trammels of power lock, stock and barrel from the capitalists and entrusting them to ‘the State’. Proper analysis of these ‘trammels of power’ was neglected by socialists and capitalists alike. It is only now, when disasters looms, that laws favouring the rich are coming under scrutiny. The result is a struggle between tyranny and genuine freedom, and the possible emergence of a new moral order.

Laws favouring those with money can be summarised thus:

17th century: laws were passed so that debt could be freely bought and sold. After that, when governments borrowed money they could give lenders ‘bonds’ equal in value to what they had lent. These bonds are effectively money for the class of people who use them as money – for the wealthy.

18th century: laws were passed so that banks could begin to create the money supply.

19th century: laws were passed allowing corporations to be legally structured so that workers would be obliged to work for as little as possible, and shareholders get as much of the profits as possible.

20th century: laws were passed (and others repealed) so that people working in ‘financial industries’ could create financial value out of nothing in the form of temporary assets linked in value to money.

The results are what we see today. Governments claiming to be ‘democratic’ work for the rich; politicians and those who seek wealth without limit pushing the international agenda. Global degradation, arms proliferation, forced migrations, theft of ancestral lands, wars, new diseases, loss of freedom and independence are just some of the consequences.

Tens of millions of lives were lost to fascism; a hundred million were lost to communism; will thousands of millions be lost under cover of the lies of ‘economics’?

 

Secrets, Ignorance and Lies: Money, Credit and Debt.

I WOULD LIKE TO THANK THE MANY PEOPLE WHO HAVE GIVEN FEEDBACK TOWARDS THE FINISHED VERSION OF THIS CHAPTER, NUMBER 7 OF MY BOOK ‘BANK ROBBERY’.

“The tyranny of fraud is not less oppressive than that of force.” John Taylor of Caroline, Virginia, 1814.

Our system of money-creation was invented and developed during a time when war was seen as glorious, when the strong robbing and managing the weak was admired as good and right, and when class oppression was thought desirable in the interests of making a strong nation. Banks create money in a way that supports those activities. Today, the world is a different place and our objectives are – officially, at least – more-or-less opposite to the ones listed above. But we are still lumbered with our antiquated system of creating money as debt: all money, even notes and coin, is debt from banks of one kind or another.[1]

The title of this chapter is an accusation. A massive industry of debt-creation (‘financial services’) is today devoted to creating money and value for the rich and debt for the less-well-off. It has become an enormous cancer on humanity, draining life and livelihood from productive workers, the would-be working and the poor. As for the poor, they are now an increasing portion of the world’s population, despite advances in science, technology, entrepreneurship, productivity, mechanisation and organisation. Our money system concentrates power, and is a machine for transferring property from the people to financial predators.[2] The process has taken us so far towards self-annihilation, why not state the obvious: if you believe that riches should be gained in return for contributing something to the common good, we live not under ‘democracy’ but kleptocracy – rule by thieves.

Gaining control of the money supply has always been an ultimate dream of the ambitious. ‘The Richest Man Who Ever Lived’ – Jacob Fugger, a German born in 1459 – kick-started his career by getting control of the Emperor’s silver mines.[3] Command of the money supply brings with it command of much else besides, for the simple reason that money buys not just things, but also labour, production and political advantage. Today, it is not an individual but a class that profits from the way money is made. That class includes governments, predatory financiers and commercial bankers (who are bagmen for the rest).

Secrets, ignorance and lies defend our global financial system from democratic scrutiny. Many examples will appear as the chapter progresses, but here is a summary of the fundamentals. ‘Secrets’: it has been actively kept from public notice that banks create money when they lend: the official story, propagated even in academic text-books, has been that banks lend savings which others have deposited.[4] ‘Ignorance’: the public in our so-called ‘democracies’ are mostly ignorant of how money is created, of the laws that support that process, and of how citizens are being defrauded in the process. ‘Lies’: economists, bankers, politicians, historians and media professionals misrepresent and obscure what is going on. These misrepresentations are now so long- and well- established, that many professionals are unaware of the simple truths behind them.

It is not a small or insignificant truth that is being covered up. Banks creating the money supply opens up a chain of opportunities for destructive behaviour which makes it difficult for those who wish to do right by others to live satisfactory lives. In other words, it enables the bad in humanity to drive out the good. It is no exaggeration to say, the process has gone so far that our world and very survival are in jeopardy. How many people are taking the trouble to understand; how many are pressing for reform? At the moment, very few.

In this chapter I will attempt to outline, in simple language: first, what money is, and how it is created as debt; second, who benefits; and third, how the system feeds bad things including inequality, war, debt, corruption and environmental destruction.

WHAT IS MONEY?

We all know what money is. It is something we own which can be swapped for other things that are up for sale. For people who like their truths to be stated with a bit more gravitas, here is an economist saying the same thing:

“So long as in any community there is an article which all producers take freely and as a matter of course, in exchange for what they have to sell, instead of looking about at the time for the particular things they wish to consume, that article is money, be it white or black, hard or soft, animal, vegetable or mineral. There is no other test of money than this. That which does the money work is the money thing.”[5]

Today, money is mostly numbers in bank accounts. We own those numbers: they are OUR property and if someone steals them, we hope they will be in trouble. So what are those numbers? What kind of ‘property’ are they?

In our modern world, property, which is such a simple idea, comes in many shapes and varieties: intellectual property, for instance, or mineral rights. Bank-money is just another special case: it is ownership of debt from a bank. The numbers in our bank accounts signify how much the bank owes us. The debt is our property, because the law supports us as the legal owner of that debt.

When we make a payment, what happens? Some of what the bank owes us becomes owed to another person: it is as simple as that. This is how bank-currency works: debt from a bank passes between people as payment.

So – what does a bank ACTUALLY owe us? It used to be gold. Nowadays it is ‘reserve’ which is another set of digits created by the central bank, an organ of government. Central banks lend or sell these digits to commercial banks. Today, they also supply reserve to banks free, as part of the process known as ‘quantitative easing’, during which a government creates new money and buys back its own debt, profiting in the process.[6]

Both these sets of digits are merely typed into ledgers. Money, which buys the produce and human labour of the world, is created out of nothing. That could be an excellent idea – if it were done fairly and equitably, in a way that benefits everybody. But it is not. Money is created as debt. The simple historical fact is: after slavery, serfdom and the rest were abolished, money-created-as-debt took over as the instrument of oppression and exploitative power. It is now dominant world-wide.

We are apt to think that ‘how things are’ is how they must be. These complex arrangements around how money is created – could they be any different? Certainly they could. The short answer is: money could be created as it is today but without the added ‘debt-widget’ and without allocating the new money to speculators. If we dispense with this primitive, disabling and devastating device, we may yet recover some meaning to the words ‘democracy’ and ‘freedom’. But at present the system is protected – by secrets, ignorance and lies.[7]

MONEY: THE ACT OF CREATION.

The act of creating money happens when a bank lends. If a banker was struck by a bolt of honesty, he or she might say to a customer about to borrow: ‘Starting from nothing, we’re going to agree to owe each other a million pounds. You can use what I owe you to pay people: they’ll be happy to know that I owe them instead of you, and they’ll happily take debt from me as a payment. In return, your debt to me will be an asset on my books. You’ll have to pay me interest: but tomorrow, we’ll each have a lot more than we have today! Isn’t that clever!’

This is how money is created. When a bank makes a loan, it creates two equal-and-opposite debts that add up to zero. Those debts are valuable properties. The customer owns money (debt from the bank). The bank owns debt from the customer (most of the assets on a bank’s balance sheet are IOU’s from the loans it has made to customers). The bank has created value out of nothing.

But how does a bank profit from creating debt? The simple answer is: when debt becomes money, the conventional process of borrowing and lending is turned on its head. The bank is ‘in the delightful position of charging interest on money it owes’.[8]  The two debts the bank creates are equal in value, but not in yield. The borrower owes the bank in a straightforward way, and pays interest. The debt FROM the bank has become something valuable: it has become money, and the bank is able to rent it out.

This is confusing, and its ‘confusingness’ has protected it. For centuries, people have argued about the basics while the banks got on with making money – for themselves and for others. In 2014, the Bank of England confirmed that ‘the majority of money in the modern economy is created by commercial banks making loans’. Surely, this simple fact – long known but long denied by most economists and bankers – is now open for general acceptance.[9]

THE ROLE OF LAW.

Bank-money relies on law to support it. Money is debt from a bank; that debt has to be able to pass freely between customers, and still be regarded as valid, before bank-money will work as money. But debt was long regarded as a private matter between lender and borrower. Systems of law were reluctant to enforce debts, except between those who made the original agreement. Before debt could be freely bought and sold, a change in the law was needed. The first country to make debt ‘negotiable’ – something that could be freely bought and sold – was England when Parliament, composed of rich men voted in by other rich men, passed the Promissory Notes Act in 1704. Similar legislation was subsequently adopted by ‘most if not all commercial nations’.[10]

The Promissory Notes Act 1704 opened the most corrupt century in British history.[11] It was also, for better or worse, the foundation of the commercial and military British Empire, financing not just war but also ownership of foreign assets. ‘By 1914 the great loan-issuing houses could not unjustly claim that it was largely by their efforts that Britain held in fee not only the Gorgeous East, but the greater part of the rest of the world as well.’[12] Today, other countries rival and outdo Britain in the race to ‘internationalise’ their currencies. Nations whose currencies ‘go international’ reap huge profits: like banks, they are able to loan out debt at interest.

Once debt is negotiable, value can be created in a variety of different ways. For instance, when a government borrows it can give the lender a ‘government bond’ in return, equal in value to what it has borrowed. By doing that, a government creates assets for those who lend: within the class of lenders, a bond is equivalent to money, as Alexander Hamilton noted.[13] The lender loses nothing by lending: the public is put into debt.[14] The process takes from one class and gives to another.

Negotiable debt – bank-money and government debt – was the foundation of a new ruling class. The old feudal aristocracy, its privileges on the wane, was joined (and to some extent superseded) by a privileged class of financiers, in those days called ‘money-men’. This was obvious to people at the time and widely commented on (see chapters 3 and 4 of this book).[15]

Negotiable debt is a versatile source of ‘created value’. New ways of creating value base on negotiable debt are still being invented: derivatives, CDO’s, CDS’s, repos and ‘shadow’ banking are some fairly recent additions. With the introduction of computers and sophisticated mathematics, ‘finance’ – the creation and destruction of value – has become faster, ever more inventive, and ever more destructive.

AS WELL AS CREATING MONEY, BANKS DESTROY IT.[16]

When a borrower repays a debt to a bank, the debt no longer exists: it simply disappears. The act of creation goes into reverse. What actually, literally, happens is: a borrower assembles enough money-digits (debt from the bank and/or other banks) to repay its debt. The borrower transfers ownership of those digits to the bank, after which the debt becomes a debt from the bank to itself. Not only do the debts disappear: the corresponding assets also disappear – money, which belonged to the borrower; and the loan-asset, which belonged to the bank.

This limited life is perhaps the most important quality of bank-money. It means that new money can be continuously created, making new profits for lender and borrower without necessarily increasing the money supply. Again and again, profit can be taken from creating money. The profit in making cash is a one-off: profits from bank-money are taken in a kind of interrupted continuum, transferring assets and income from those who work to those who accumulate.

So, several key differences mark out bank-money from traditional ‘commodity’ currencies. It is created in secret and rented out at interest. It is allocated to specific persons, for the profit of bank and borrower. It is destroyed again once its extra-monetary function (its function of making a profit for banker and borrower) has been fulfilled.

WHY HAVE BANKS BEEN ALLOWED TO TAKE OVER THE MONEY SUPPLY?

It is NOT just a gigantic conspiracy, that bank-money has taken over all across the world. To be sure, it profits a few and disadvantages the majority; but practical reasons have also helped its ascendancy.

First, bank-money is convenient to use. Secondly, some of the profits of banks are recycled to benefit those with bank accounts. Thirdly, the influence on government of those who profit from private issue of money has been consistently very great, and the overlap of personnel is often great too. Lastly, the alternative – that governments create the money supply – has often proved unsatisfactory in the past. Examples of this are held up to show that it should not be allowed to happen. When governments create money – paper or digital – they usually yield to the temptation to create too much: hence inflation and hyper-inflation. Banks, on the other hand (unless they are fraudulent, or are being shored up by taxpayers’ money, as is increasingly the case today) are limited by their own self-interest in how much they create: they need to make a profit on their loans.[17]

PROFITING FROM THE MONEY SUPPLY.

It should surprise no one when a minority manages to commandeer the fruits of human labour and invention. Throughout recorded history, as soon as there is more than enough to keep people barely alive, battle is joined for the surplus. The winners usually make laws to ensure that they carry on being the main profiteers. Usually (as, for instance, in feudalism) these laws have been open and acknowledged but the laws which support today’s oligarchies – laws around the creation of money and financial value – are not publicly understood.

Today, wealth above the bare necessities has never been greater. Machines and computers help to produce stuff in vast quantities. When a new source of profit appears – a new kind of production, a successful enterprise, a new kind of asset (such as digitised personal information) – money is created in large amounts by banks, and allocated to predators to appropriate the source of profit.

The introduction of non-human labour was addressed by the economist David Ricardo nearly two hundred years ago. Economists usually promote the interests of those chasing wealth and power; but Ricardo was struck by a bolt of pure honesty when he wrote in 1821 that machinery shifts wealth and power to those who own and control production. “If machinery could do all the work that labour now does, there would be no demand for labour. Nobody would be entitled to consume anything who was not a capitalist, and who could not buy or hire a machine.” He also wrote: “These truths appear to me to be as demonstrable as any of the truths of geometry, and I am only astonished that I should so long have failed to see them.”[18]

Ricardo came to this realisation late in life. Mainstream economics ignored his observation. Instead, it took an observation known as ‘Say’s Law’ (in Say’s words, ‘the more men can produce, the more they will purchase’) to mean that money from production automatically becomes money for spending.[19] Say’s Law has no relevance to the effects of who gets to create the money supply. For generations, this omission of the ‘money factor’ seems to have absolved mainstream economists from noticing the most obvious outcome of allowing banks to create money, which is the extreme inequality it produces.

As a result of credit-creation relocating assets, wealth accumulates in a golden triangle of banks, governments, and financial predators. Wages, kept to a minimum as is natural in competitive capitalism, remain fairly constant. Inequality grows; and meanwhile the gremlin of debt invades like an invasive weed. For every piece of money there is a corresponding piece of debt, but the two do not stay together; they soon part company, as looked at later in this chapter.

Developing inequality in money and debt brings problems for rich as well as poor. Producers need consumers to buy their products, or their profits will dry up. Eventually, people outside the golden triangle are not spending enough to keep production profitable. In language used by modern economists when the truth needs a bit of modification, there is a ‘demand deficit’.[20] The result is ‘business cycles’ – economies lurching in and out of booms and busts – which are also looked at later in this chapter.

BAD EFFECTS: A QUICK SURVEY.

Many of the observations in the following sections have been made frequently in the past, only to be forgotten. Money in the form of credit/debt is the ‘magic’ fountainhead of power: questioning its moral legitimacy is a quick route to the economist’s graveyard.[21]

The bad effects of the way we create money tend to be exacerbations of things that happen anyway. Some of these things are inherently bad (like war); others (such as inequality) would not be bad in small doses. An economist has made an analogy for the second type: a domestic cat is generally a well-loved addition to a home: enlarge it into a tiger, and it is less desirable.

Once debt can be bought and sold, complexities arise that boggle the human mind. Most financial workers are only aware of the little patch they work in. People are protected by ignorance from understanding the full implications of what they are involved in. Below, I try to unravel some of the implications. The list is tentative.

Inequality.

Extreme inequality is good for no one. As well as setting the stage for a great deal of human misery it has the effect of seizing-up the economy. Imagine a café with a hundred customers: between them they have a thousand dollars to spend. They are all thirsty, but only one of them has bought a cup of coffee. The café owner is puzzled; he’s not making any money. What he doesn’t know is that one person has all the money; the others are all broke. Soon, the café owner will be broke too. That is a simple picture of economic paralysis due to inequality.

Inequality is of the ‘household cat’ variety. A certain amount is inevitable, perhaps even beneficial. Extreme inequality is a different matter. At the one end, it puts excessive amounts of power in too few hands. At the other end there is poverty, disempowerment and displacement – desperate people searching for how to make ends meet, and many others at a loss how to flourish.

Bank-money is just one of a number of institutions and legally-authorised devices that enhance inequality. Others include trusts, wealth-protecting corporations, laws enabling tax-avoidance, and laws passed to reward those who finance political parties. We allow banks to exist because we believe ‘banks lend savings, so businesses can grow.’ This is a myth on two counts: banks create the money they lend, and very little of the money they create goes to productive businesses: at present, 3% according to economist John Kay.[22]

The most significant inequality is not income but in assets: in ‘what you are worth’. When the politician Bernie Sanders says that ‘one family owns more wealth than the bottom forty percent of the American people’ he is not talking about their income but about their accumulated wealth.[23] This kind of wealth is created by banks making loans.

Banks create money when they lend; they lend when banker and borrower both believe they will make a profit. The new money purchases assets.[24] The process enhances the market value of assets generally, making those with assets relatively richer and those without assets relatively poorer. Income from those assets accumulates with the people who own them: rent, interest, dividends, etcetera. The same assets may be used as collateral for many simultaneous financial dealings, because the same law which makes debt negotiable, makes claims on the assets of others negotiable too.

When banks create the money supply, power and wealth are not just concentrated; they are also placed in the wrong hands. Despite the cultural myths of our age, most people do not wish to give their lives over to getting more and more ad infinitum: they wish for enough to live well, in return for work they can be proud of. Our system of money-creation favours people for whom ‘getting more’ overrides all other considerations (this theme will return).[25]

When Adam Smith (godfather of economics) said ‘All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind,’ he was not saying it approvingly; he was issuing a warning.[26] Extreme inequality is the end aimed at by would-be ‘masters of mankind’. When resistance fails, they succeed.

How bank-created money promotes inequality has been looked at in more detail in Chapter Two of this book.

Debt, National and Personal.

When banks create the money supply, a world in which property is widely distributed is transformed into a world in which property is owned by a few and the rest are in debt. Probably no one will be surprised by this statement. But how does the process work?

It seems obvious that when money itself is created debt, the amount of debt in the world must increase. But the fact that money is debt FROM banks is confusing. If they owe us, surely that’s their problem! But then, for banks, as already mentioned, lending is topsy-turvy. A bank lends its own debts: it is ‘in the delightful position of charging interest on money it owes’.[27] ‘What it owes’ is a bank’s lifeblood. Because ‘what it owes’ is money, it is also the lifeblood of the world – rented out at interest.

How does this contribute to the worldwide debt problem we have today? The sequence of events is simple, but hard to understand because of the double nature of everything involved. A bank creates two equal-and-opposite debts, which add up to zero. Both debts are also valuable assets for the other party. The bank’s asset is its loan, on which a borrower pays interest (the asset will disappear once the borrower has repaid). The borrower’s asset is what the bank owes it; it is money. Money leaves the borrower bit-by-bit, as payments are made; after that, it circulates. The debt, however, stays with the borrower, who must pay interest, and eventually accumulate enough money to repay the loan.

If that is not horrible to keep in mind, I don’t know what is. But the significant point is easy: every bit of money in the world signifies the existence of a borrower somewhere, paying interest on that money. Who are these borrowers, paying interest on the money of the world?

Again, the true story is not obvious. It is a misunderstanding of how vast amounts of money are made, and of the role that debt plays in the process, to suppose that debt lands immediately with the poor and money with the rich. Bank-money is borrowed by people with assets (collateral), in order to make more money: once money is made, it is invested. Too much un-invested money sitting around in possession of the rich is a sign of an unhealthy economy. Instead of being in the ownership of people wishing to spend, it is in the ownership of people waiting to invest. Money that could be circulating is stagnating in pools.

When just a few people own most of the assets, income from those assets accumulates with them too: rent, interest, dividends, etcetera. ‘The few’ do not want to spend this income: – or rather, there is so much of it, they cannot spend it: they want to re-invest it. Money stagnates, while professional finance-workers seek (and invent) ways of making it grow. The world is in a kind of crisis pictured (in extreme form) in the café story above.

To keep going in this kind of scenario, businesses – the café owner, for instance – have to borrow. Individuals also have to borrow, to meet obligations undertaken during the good times. Governments may also have to borrow, to support citizens and industry. If the statistics are to be believed (compilers warn they are unreliable at best, because governments and banks lie about, or misrepresent, what is going on) the money supply of the world is at about 60 trillion dollars, the total national or public debt of the world is about the same, and the total debt of the world is nearly double both of those added together.[28] In other words, half the world’s debt is only indirectly related to government borrowing and money-creation, via the economic conditions these create; and of course some will not be related at all. According to the Wall Street Journal world debt is three times (313%) world GDP, or yearly production of goods and services.[29] Another statistic to boggle the mind: enservitude in action.

National Debts. Laws allowing debt to be bought and sold make it easy for governments to borrow. Banks willingly create money for governments to spend – until a nation’s debt becomes too great for its citizens to fund. Wealthy people are much keener to lend to governments if they get a ‘bond’ – a debt instrument they can sell – in return. As Adam Smith pointed out 250 years ago, once debt can be bought and sold, lenders get an asset in exchange for their money which starts life equal in value to what has been lent, and may well increase in value thereafter.[30]

Again, history supports this account. National debts became significant as soon as debt could be traded: in fact, they became exploding phenomena. English national debt went from 6% of national income to 137% of national income in the half-century after the foundation of the Bank of England.[31] The South Sea and Mississippi Bubbles (both 1720) are landmark examples of what can happen. Careful management is needed to keep national debt at its job, of funding government spending while simultaneously ‘taking the wealth of the state from those who work and giving it to those who are idle’.[32]

There is an often-repeated cliché that ‘the national debt is a way of making our children and grandchildren pay for what we use today’. This is not correct: everything, from missiles to food, has to be paid for before it is used. When the government borrows in order to pay for things (rather than creating debt-free money) it is creating assets for one class – the class of ‘lenders’ – and burdening another class – passive citizen-borrowers – with interest and repayment.[33] The new assets, created for lenders, act as money within the class of those who possess them.[34] Descendants of those passive citizen-borrowers, are, of course, also in hock; for in this human world of ours, subjugation is an inherited condition.

National debts in some countries – the U.S. for example – have reached such dizzying heights that interest payments, even at very low rates, represent a substantial day-to-day drain on incomes. For the rich, there are positive knock-on effects: low interest rates, necessary for the survival of nations that are heavily in debt, mean that money can be created very cheaply. In these conditions, new money is created not for productive industry (whose value goes down as it becomes less profitable) but for speculation in asset prices, which rise automatically in response to money pouring in (house prices, for instance). The trick is to invest in one class of assets as it is rising, and sell before the market crashes: not a risk-free enterprise, but not difficult either for those prepared to give it time and mental effort.

Private Debt.

Booms-and-busts prepare the ground for private debt. When times are good, banks create easy money for people on the collateral of their homes, businesses or other assets. People get into debt, confident they will be able to pay it off. When the worm turns, incomes dry up and panicky banks call in loans. Debt becomes a burden: borrowers sell assets at a loss, and are in debt. The most familiar examples of this are people who dream of owning their own home. Early comers find success while prices are still reasonable; meanwhile speculative borrowers (who borrow more cheaply as interest rates go lower) push prices up. Homes become unaffordable to those who come later.[35]

Booms and Busts.[36]

When banks create the money supply, borrowing large amounts of money becomes easy for those who have collateral – in other words, for the rich. Large amounts of money are created for speculators to purchase profitable businesses and assets whose price is rising. In booms, ownership becomes located with a few, rather than being widely dispersed among many. Steady production, the profits going to the owners, continues the build-up of money owned by people who already have an excess. They do not spend most of this excess money on consuming things (how many yachts can any human want?); they look for opportunities to invest it.

Money is also created for borrowers who need money to spend, on the security of whatever assets they own. For a while, all seems rosy: then the growing assets of the few and the diminishing assets of the many – in other words, growing inequality – make it obvious the worm will turn: not enough goods are being purchased and businesses are delivering less profit. At that point, feedback goes from positive to negative. Banks respond to a ‘downturn’ by calling in debts and destroying money. Economists have called this characteristic of bank-created money ‘perverse elasticity’ – money is easy-to-get during booms, and hard-to-get during busts. Positive and negative feedback are supplied at precisely inappropriate times.[37]

Soon, the sheer quantity of debt can no longer be funded at conventional rates of interest. In response, governments drive down interest rates, making money even cheaper to rent (borrow) for those who already have it. Speculation replaces investment: new money is used to create ‘bubbles’ in markets such as housing real estate. Huge profits are taken by professional speculators before, during and after the inevitable crash.

Busts would rectify the situation somewhat by reducing capital values and debt, but lawmakers and regulators intervene in the interests of the wealthy, massively reducing interest rates and propping up the value of assets with devices like ‘quantitative easing’. These efforts merely prolong the recession or depression. The underlying cause – the gulf between massive wealth on the one hand, and poverty and debt on the other – remains.

Eventually, economies do emerge from recessions and depressions. Wars, expanding markets, debt reduction and default, falling capital values and other developments may each or all play a part in reducing inequality; upon which the cycle must begin again.[38]

Arms Proliferation.

Banks feed a vicious circle between arms production and purchase by eagerly creating new money for both buyers and sellers. They create money for governments on the security of their citizens paying (permission neither asked nor given). Once demand is guaranteed, banks willingly create money for manufacturers too. Governments naturally compete to acquire arms: if your neighbour gets missiles, you want them too.

Citizens, unaware even of how money is created, remain unaware of how their economies are skewed to arms purchase and/or production. Without bank-money, governments would have to borrow pre-existing money to finance arms purchases. In normal times ‘lend me some money to buy weapons’ is not a popular request, particularly if the lender has to do without the money lent, while it is entrusted to a dangerously bellicose government.[39]

There is another relationship between economies based upon bank-money and arms production. In economies (such as those based upon bank-money) where massive inequality is a persistent problem, arms production acts as an economic stimulant. Its workers make products that will not be bought by workers (even in America, citizens do not buy missiles and bombs).[40] Armaments workers’ pockets are filled with spending-money that will be spent on other products, rectifying somewhat the ‘demand deficit’.[41]

From the point of view of national profit, selling arms abroad is even ‘better’; owners of corporations get richer, wages are spent in the home country, death and destruction occur somewhere else. Again, banks will create money for all sides – except, perhaps, for those who look like they will lose.

A secondary effect of this is pervasive hypocrisy in international affairs, as politicians and diplomats become salespersons for armaments to sustain the economy. Another is the ‘proxy wars’ being fought in unstable countries, using arms made by rich nations.[42]

War.

Perhaps it’s an impossible dream that humanity should be done with war; perhaps not. Whatever the future holds, it is certain that when money is created out of nothing by banks, and national debt is contracted in the name of anonymous and passive citizens, war is more affordable.

Sometimes wars are started to divert public attention from economic troubles at home: the war started by Argentina’s General Galtieri on the Falklands is a typical example. Some economists maintain that war can solve those economic problems too. There is strong disagreement between different schools of economists about this.[43] Barring the obvious attractions of thieving other nations’ belongings, and making a defeated nation pay, the idea that war can be economically ‘a good thing’ is both illogical and repulsive. War involves the murder of many people who could be building a better world, the destruction of property and productive industry, and the laying waste of agricultural land.

And yet, there is a very specific context in which war can be economically ‘beneficial’. The logic is quite simple. As explained above, an economy can be paralysed by the kind of extreme inequality which is aided and assisted by banks creating the money supply. A period of war is one way to cure the disease although, like many clumsy cures it may kill the patient too. It works as follows.

In war, governments undertake massive spending. The money goes to ordinary people in wages. What they produce is destroyed (used up in war). There is little for workers to spend their money on, and often that little is rationed. Furthermore, luxury purchases may be discouraged out of ‘patriotic duty’. As a result, people use their money not just to buy basics but also to pay off mortgages and debts.[44] Ironically, a defeated country (if not paralysed by demands for reparations) may recover more quickly than a victor country: much of its debt may have disappeared along with the institutions that created it.[45]

Bank-money makes it easier for governments to finance war: they can borrow without asking permission: banks will lend as much as citizens can afford to pay. Banking in England was instituted and made legal precisely for the purpose of enabling war: specifically to raise money “towards the carrying on of the Warr against France”.[46] As already mentioned, England’s head-start in making national debt negotiable (1704) also gave it an advantage in war.

Arms development and proliferation, as described in the previous section, makes war more likely – and more destructive. The hope that advanced weaponry (such as nuclear bombs) makes war inconceivable is optimistic: it has been frustrated many times in the past, and is not an idea to be relied upon. In the 1890’s, for instance, people believed that airships and high explosive bombs made war between civilised nations inconceivable: who in their right mind would declare war when their cities could quickly be reduced to ruins? And yet, fifty years later (1944) how many cities were indeed in ruins?[47]

It can be argued that democratic scrutiny of the way money is created and spent might make war not less, but more likely, the theory being that people love war, or at least prefer it to peace. It is only under exceptional circumstances, however, that ‘ordinary’ people (as opposed to politicians, bankers and profiteers) wish to throw life, limb and property into the mayhem of war, especially modern war. A fair financial system would help nations steer clear of the kinds of ‘exceptional circumstances’ that make people resort to wanting war.

Finally, a fairly obvious point: there are better ways to cure economic paralysis than the massive and unnecessary destruction of war.

Plunder and Predation at Home and Abroad:

(i) Plundering the Home Country.

If you are an influential person in a country where corruption is the norm, the easiest way to acquire more money is to be friendly with a bank, take out a loan, relocate the money and default on the loan. The bank will be out of pocket; but a friendly government may put public money towards shoring up the bank. Government and the judicial system may be in on the racket, with ministers taking percentages and the judiciary turning a blind eye.

This month’s newspapers (April 2016) contain several examples. In Bangladesh, ‘some $565 million in assets are said to have been looted from the state-owned BASIC Bank between 2009 and 2012, yet the scam’s suspected mastermind, a former chairman of the bank, wasn’t troubled by the anticorruption commission investigating the fraud, reportedly thanks to his political connections.’ Banks in Bangladesh ‘are regularly recapitalized by the government — to the tune of about $640 million for fiscal year 2014 and, it is expected, more than $700 million for fiscal year 2015.’[48] In Malaysia, a ‘billion-dollar political scandal’ involves two brothers, a banker and the Prime Minister.[49]

Poor countries are particularly vulnerable to such robberies. In Western ‘democracies’ this kind of behaviour is less individual, more systemic. Systemic corruption is indicated by Western banks increasingly needing and taking injections of public money to shore them up.

Plundering abroad.

(ii) International predation.

Nations with strong economies and banking sectors generate money out of nothing and export it. International predation proceeds along two different tracks, state and non-state.

State: The national currency of a strong country is a powerful weapon. Currency manufactured at almost no cost buys things abroad, after which it becomes international currency, or sits somewhere as a storage of value.[50]

Laws authorizing the buying and selling of debt ensure that newly-created money has parity with local currencies. In this way, nations behave like banks: exported currency is effectively national debt, which the creator country hopes it will never have to pay. So long as it circulates or is stored, it will never be used to claim goods from its country of origin.

Non-state (private): Private predatory finance acts in a similar way; but it transfers ownership into private, usually corporate hands. An efficient financial sector manufactures money in a strong currency for speculators who appropriate the resources, labour and production of a less sophisticated nation. Powerful governments often assist individuals and corporations in this.[51]

These two processes make it easy for a strong country to appropriate resources, labour and production. The process becomes seamless with the corruption of the weaker nation’s government and political/civil process. The weaker nation, instead of receiving proper purchase value for its labour, resources and production, gets a corrupted government, heavily armed to suppress dissent and oversee rule by thugs.

What is done today by finance is a continuation of what used to be done by conquest. The English economist Piercy Ravenstone wrote in 1821: ‘Ireland sends her surplus produce to pay the rents of her landlords in England, and her surplus poor follow to consume it.’ Today, millions walk towards countries that have in one way or another contributed to their ruin by stealing wealth, selling arms, corrupting governments and destroying habitats.

Straightforward Corruption in Politics.

Many countries in the world suffer from the simplest form of corruption – favours handed out by politicians and bureaucrats in return for payment. In such countries, money manufactured secretly by banks for private citizens makes transparency in public affairs difficult, if not impossible, and bribery very easy. A blunt illustration: each Russian oligarch has his own bank manufacturing money for (among other things) bribes. A bribe may be a very profitable investment – even a necessity, for someone who wants to climb to great wealth.[52]

In a substantial number of countries, public life is corrupt to an extent that politics and business cannot function without corrupt payments. This gives outside agencies the opportunity to disrupt the political process by selectively disclosing corruptions. The technique is actively being used with devastating results by (for instance) agents of Putin’s Russia, the intention being to destabilize existing governments and install Russia-friendly regimes.[53]

Democracy Itself Corrupted.

One outcome of allowing banks to create the money supply is corruption of the democratic process so that it favours those who finance political parties. Money-creation is such that almost every group competing for power wants it to continue – so they can control it.[54] In the United Kingdom, the Green Party is the only large party to have bucked this trend: they wish new money to be issued free of debt, and spent on democratically-approved projects.[55]

Criminal and Semi-Criminal Behaviours.

This chapter is mostly about the legal bad effects of banks creating money. It also has the unfortunate effect of facilitating criminal and semi-criminal behaviours. Not only is bank-money created and allocated in secret; it is created with an equal-and-opposite debt: who owns the value, and who pays the debt become separate as soon as spending takes place (see the section ‘Debt, National and Personal’ in this chapter). This is pretty much an open invitation to criminal activity. Unlike the legal (systemic) bad effects, these kinds of incidents appear in the press and media when they are detected. Governments make healthy incomes from detecting them, fining the corporation, and letting the individuals go free.

The function of law is to make crime difficult. Negotiable debt makes crime so easy that a mass of regulations is needed to keep it under any kind of restraint. A former member of the Bank of England’s finance committee has listed categories of banking abuse; there are currently 85 categories, and the list is still growing. http://www.finance-watch.org/hot-topics/blog/1186-jenkins-bank-misdeeds [56]

If money was created in a just and equitable and transparent manner (see the last section of this chapter) there would be nothing like the same opportunities for engaging in criminal practice, evading the law or establishing corrupt regulations without the electorate noticing.

Capitalism – Good and Bad.

Capitalism supposedly consists of savings and accumulated profits lent, via banks, for investment. Entrepreneurs make creative use of the savings to produce goods and services. This kind of capitalism is a pretty good idea: it is incredibly agile at satisfying human wants and needs. If it was the story whole and true, who would object?

But it is only a small part of the true story. Money is created by banks, and the money they create dwarfs true savings. The narrative of ‘banks-lend-savings’ is no longer valid (though it is propagated in many economics textbooks). It has been swallowed up and superseded by the narrative outlined in this chapter. The deceit looks threadbare when interest rates are near or below zero. Who but a mad person would lend savings, only to get back less than they lend?

It used to be said that the ‘Holy Roman Empire’ was neither holy, nor Roman, nor an Empire. In just the same way, today’s ‘liberal capitalist democracy’ is neither liberal, nor capitalist, nor democratic, but a kleptocracy which gets away with writing its own laws.

The Cultivation of Ignorance.

Concentrations of wealth and power, fostered by bank money, lead to journalism and economics that dare not speak truth. Good journalism has its origin in moral belief that humans want and need to know the truth. Purchase of media companies by oligarchs is a sign of the times: whole populations are now subject to dumbing down, propaganda and demoralization. The ultra-rich want to control information, which is itself a source of wealth and power. An example from today’s paper (28/05/2016): ‘Billionaires seize control of the information flow’: http://www.nytimes.com/2016/05/28/business/media/behind-the-scenes-billionaires-growing-control-of-news.html?_r=0

Nature Destroyed: the Need for Economic Growth.

A steady-state economy is inconceivable when the money supply takes from many and gives to a few; soon, most money sits waiting for investment, and spending dries up. In these circumstances of automatically increasing inequality, economic growth is a must – just to keep the economy going. Growth means money that would otherwise sit idle, pouring into new factories, new employment, and the pockets of workers. The café situation referred to above is cured.

This need for growth means that resources and environments are plundered and destroyed. Human welfare is not served, but destroyed.

Unemployment and Forced Idleness.

When bank-money is used to purchase existing businesses, profits must be made by reducing costs, and among those costs are the wages of workers. But surely, reducing costs is good: isn’t it called ‘maximising efficiency’? True ‘maximised efficiency’, however, means workers earning just enough to survive (or even less, if the state is willing to provide the rest) and maximised profits for owners.

As wages are driven near or below subsistence level, and other workers are made redundant, many extra people must be looked after by the state. The money for this comes out of taxes paid by workers (or more national debt). Human workers become more expensive; machines and computers gain an unnecessary advantage.

As workers become more expensive, jobs are outsourced to where labour is cheaper: this supposedly leads to greater prosperity in low-paid countries, but most noticeably it leads to greater riches among corporate shareholders in wealthy countries.

Extremist Politics.

An extremely important secondary effect of the corruptions listed above is the drift to extremist politics. When ordinary people know they are being cheated and denied the rudiments of a decent life, political extremists sense their opportunity. Nationalist extremists of right and left appeal to a cheated public.

Example from today’s paper (12/05/2016): A ‘new strongman of Manila’, Rodrigo Duterte, is elected President of the Philippines. An unashamed advocate of extrajudicial murder, citizens elected him because they are angry with the old élite which ‘seemed impervious to their pleas for economic equality.’[57] His rise to head-of-state seems particularly surprising in light of his boast that he has personally killed 1,700 people unlawfully. The rise of Donald Trump in the United States looks pale in comparison – so far, at any rate.

CODA: THE FEW AND THE MANY.

It may seem that the claims made in this chapter are too wide-ranging, but I believe the opposite is the case: some important secondary effects of money-created-as-debt, such as the nihilism of global ‘high’ culture, have not even been mentioned. Ditto its effects upon climate change, and scientific integrity.

We like to assume the world is run on lines that are just. But we are in a period of transition from oligarchies based on class and money towards democracy, and sometimes it seems we are stuck in the worst of both worlds, under an oligarchy that dominates by deception. Money and power are in adjacent rooms, with a revolving door between them. True democracy (if people want it) needs concerted thought and action.

Humans are fond of blaming others for things that are their own fault. Patriarchal societies blame women for the evils of the world (from the Bible we have Eve corrupting Adam; from Greek mythology we have Pandora releasing the evils of the world from a food storage jar). Christians have long blamed Jews for destructive financial arrangements even though money-creation has long been a protected Christian activity. Today, citizens blame politicians and bankers for the madness of the world – even though they (we) have the collective ability to demand change, if we are determined to use it.

Only citizens can make reform happen. It is unrealistic to expect an oligarchy to voluntarily give up the source of its power, even when the world is collapsing all around it.[58] Power attracts those who want more: it is an addiction. So, in large amounts, is money, and the comforts and diversions that it provides. The world and its beauties, human life, our ideals of freedom and democracy, are being degraded and destroyed. How lazy are we? Do citizens, voters, ordinary humans feel no compunction to intervene?

Removing laws that support negotiable debt would be a start. It would have far-reaching effects. A form of cash could be created which could still be borrowed and lent, but would not be debt from the very outset.[59] Today, digital systems would make this relatively easy.

We could go further. Sharing the benefits of human achievement, past and present, implies the justice of a basic income (provision of spending money for every citizen, regardless of need). What might follow from such a provision is an interesting topic – to be considered in the next chapter, which will be on Reform.

………………………………………………….

[1] In England for example, 97% of money is debt from commercial banks to customers; the other 3% – including notes and coins – is part of ‘reserve’, which is debt from the Bank of England to commercial banks. ‘Reserves are an IOU from the central bank to commercial banks’ says the Bank of England and ‘there are three main types of money: currency, bank deposits and central bank reserves. Each represents an IOU from one sector of the economy to another. Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves.’ Bank of England Quarterly Bulletins 2014 Q1 and 2010 Q4, available online.

[2] John Taylor, friend and correspondent of John Adams and Thomas Jefferson, described bank-money thus in 1821. Adams and Jefferson were in full agreement with Taylor on this. See Chapter Five of this book.

[3] The Richest Man Who Ever Lived: The Life and Times of Jacob Fugger, Greg Steinmetz (2015).

[4] For those with a stomach for detail, a painstaking analysis of what happens when a bank lends is provided by Professor Richard Werner: http://www.sciencedirect.com/science/article/pii/S1057521914001070.

[5] Frances Walker, 1888.

[6] Profits for government include buying back its own debt with newly-created money and paying less interest on reserve than they get from holding interest-paying assets as security for commercial banks’ reserves (‘seigniorage’).

[7] The final chapter of this book will address the subject of reform.

[8] Frank D. Graham, ‘Partial Reserve Money and the 100 Per Cent Proposal’. American Economic Review, 1936.

[9] ‘…rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.’ The Bank of England, Quarterly Bulletin 2014 Q1. The truth has been known for a long time by anyone who cared to acknowledge it: see, for instance, Charles Franklin Dunbar (1893): ‘deposits are created by the act of the bank when loans are increased, and cancelled when loans are repaid.’

[10] Joseph Story, Commentaries on the Law of Promissory Notes (1845).

[11] ‘Never before in English history had so much money passed so quickly through so many hands and, inevitably, some of it stuck as it passed.’ Henry Roseveare, The Financial Revolution 1660 – 1760, p 44. See also Brantlinger, Fictions of State (1996).

[12] W.J. Thorne, Banking, 1948 p. 31. For ‘war’ see Dickson, The Financial Revolution in England (1993); for ‘resources’ see Banking (1948) p.31 (also pp 97-9 for a simple description of how bank-loans create deposits).

[13] Alexander Hamilton, from Report on Public Credit (1790): ‘It is a well known fact, that in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money. Transfers of stock or public debt are there equivalent to payments in specie; or in other words, stock, in the principal transactions of business, passes current as specie.’

[14] Adam Smith, 1776: ‘the security which it [the government] grants to the original creditor is made transferable to any other creditor; and from the universal confidence in the justice of the state, generally sells in the market for more than was originally paid for it. The merchant or moneyed man makes money by lending money to government, and instead of diminishing, increases his trading capital.’ Wealth of Nations, Book V, Chapter 3.

[15] A somewhat later comment (1832): ‘The direct tendency of the principles of the Economists is … to replace the feudal aristocracy, from which Europe has suffered so much, with a monied aristocracy more base in its origin, more revolting in its associations, and more inimical to general freedom and enjoyment.’ John Wade, The Black Book.

[16] ‘…repaying bank loans destroys money just as making loans creates it.’ – Bank of England Quarterly Bulletin 2014 Q1.

[17] The threat of losing expensive ‘reserve’ to other banks means that individual banks have to be competitive. C.A. Phillips, misunderstood and little-read nowadays, provides the best explanation (Bank Credit, 1931).

[18] Ricardo, Works VIII: 399-400 and Works VIII, 390.

[19] In the language of economics: ‘aggregate production necessarily creates an equal quantity of aggregate demand’.

[20] An older-school economist says the same: ‘Full regular employment of the factors of production demands the maintenance of a proper proportion between the production of consumable commodities and that of capital goods; that proportion varying, of course, with changes in methods of production. In other words, there exists at any given time an economically sound ratio between spending and saving. Excessive spending (as in the war) encroaches on saved capital, and impairs future productivity. Excessive saving operates, through deficient demand for commodities, to slacken the sinews of production and produce more capital goods than are able to be put to full productive use.’ J.A. Hobson, The Economics of Unemployment (1922).

[21] The banker’s tricks of the trade may be ‘hardly worthy of even a third-rate magician’ but kept secret they are the devastation of the world. W.J. Thorne, Banking (1948) p. 133.

[22] Other People’s Money (2015) p.1 and Chapter 6.

[23] Widely reported Jan/Feb 2016 as part of Sanders’ campaign to become presidential nominee. Sanders also points out that Walmart employees are paid so little, the government has to supplement their wages; thus the richest family in America is also the biggest profiteer from welfare payments.

[24] The comedian Bob Hope: “A bank is a place that will lend you money if you can prove you don’t need it.”

[25] In Keynes’ version of a better future, ’The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.’ (‘Economic Possibilities for our Grandchildren’, 1930).

[26] Wealth of Nations (1776) Book III, Chapter IV.

[27] See earlier in this chapter, under MONEY: THE ACT OF CREATION.

[28] Estimate from the Wall Street Journal: http://blogs.wsj.com/economics/2013/05/11/number-of-the-week-total-world-debt-load-at-313-of-gdp/

[29] http://blogs.wsj.com/economics/2013/05/11/number-of-the-week-total-world-debt-load-at-313-of-gdp/

[30] See footnote 13.

[31] Mitchell, British Historical Statistics (1990) and Ritschl, ‘Sustainability of High Public Debt’ (1996).

[32] The quoted words are from Montesquieu, De l’Esprit des Lois (1748) Part 4, Book 22, Chapter 17.

[33] Just as banks create money as negotiable debt, so governments create debt as a negotiable commodity. The difference is that banks charge interest on what they owe; governments pay interest on what they owe. Here we see the worst of all collusions between governments and money-power.

[34] See note 13, above (Alexander Hamilton).

[35] http://www.thisismoney.co.uk/money/article-2968673/Homeownership-England-falls-2-hit-lowest-level-29-years-high-house-prices-lock-young.html

[36] Schumpeter, a leading 20th century economist, asserted that the old-fashioned argument used in this paragraph to explain business cycles is ‘contemptible’ and ‘beneath discussion’. Apparently, ‘it involves neglect of the elementary fact that inadequacy or even increasing inadequacy of the wage income to buy the whole product at cost-covering prices would not prevent hitchless production in response to the demand of non-wage earners either for ‘luxury’ goods or for investment.’ If this were true, the trillions being held today (2016) at near-zero interest rates would be busy employing the poor to make luxury goods and build new factories.

[37] Lester, Richard A. Monetary Experiments (1939, 1970) p. 291; and on p.292, ‘If the monetary system is to moderate rather than magnify the business cycle, money must be segregated from banking.’

[38] ‘Business cycles’ do not seem to have existed before bank-money and negotiable debt.

[39] As mentioned below, this is not the case when the lender is given negotiable debt (‘bonds’) in return.

[40] See, for instance, Joan Robinson, Freedom and Necessity Chapter 8, for a conventional account.

[41] Examples: During the ‘arms race’ in the Cold War, the U.S. enjoyed a rare stretch of financial growth and stability: between five and ten percent per year for several decades. http://www.multpl.com/us-gdp-growth-rate/table/by-year. Today, Russia is resorting to massive armaments production to restore spending money to a plundered populace; and North Korea (where the credit-creation facility belongs not to private banks but to the state) builds nuclear weapons despite, or because of, the poverty of its people.

[42] Examples: ‘In the first six years of the Obama administration the United States agreed to transfer nearly $50 billion in weaponry to Saudi Arabia’ which then went to war with one of the poorest countries on Earth: Yemen. http://www.nytimes.com/2016/04/20/opinion/obama-saudi-arabia-trade-cluster-bombs.html  The five permanent members of the UN Security Council (China, France, Russia, the United Kingdom and the United States) are tasked with maintaining global peace and security, but companies based in these nations manufacture 71 per cent of the world’s arms (Roslyn Fuller, Beasts and Gods: How Democracy Changed Its Meaning and Lost its Purpose (2015) page 159) and the same arms companies contribute heavily to political campaigns. Sometimes the same government will fund several opposing factions: the activities of the United States in Central America are well-documented; Syria today is another example.

[43] A statement such as ‘The Second World War, not the New Deal, ended the Great Depression’ is guaranteed to get different schools of economists arguing.

[44] A country mobilised for war experiences ‘disproportion between personal incomes and the value – at existing prices – of the consumable goods flowing to the civilian section of the economy; the government’s expenditures generate incomes but the goods in the production of which these incomes are earned are swallowed up by the military machine.’ Military Government Handbook, Germany Section 5, (1945) p.44. Ricardo made a similar point (1817) ‘At the termination of the war, when part of my revenue reverts to me, and is employed as before in the purchase of wine, furniture, or other luxuries, the population which it before supported, and which the war called into existence, will become redundant, and by its effect on the rest of the population, and its competition with it for employment, will sink the value of wages, and very materially deteriorate the condition of the labouring classes.’

[45] West Germany’s post-WWII ‘economic miracle’ is an interesting case in point. The ‘miracle’ began after Germany’s debts, internal and external, were written down by 90%. First, in the currency reform of 1948 stocks and bonds lost 90% of their value and 90% of government debt was wiped out. Later, with the London Agreement of 1953, its foreign debts were also reduced by 90%. ‘West Germany’s debt/income ratio remained below 25% until the 1970s; Britain’s post-war debt/income ratio started out at 175%, and remained higher than Germany’s until the 1990s’ – Eichengreen and Ritschl, SFB 649 Discussion Paper 2008-068.

[46] Clapham, The Bank of England (1944) I, 17. Also: ‘Caermarthen pointed out in the Lords, there might be objectionable clauses in the Bill (to establish the Bank of England) but it was the only means of providing money for the Navy to take to the sea that summer. This practical argument sufficed where all others might have failed.’ Cambridge Modern History Vol. V p. 268. See also Dickson, The Financial Revolution in England and Roseveare, The Financial Revolution 1660 – 1760.

[47] In Ewen Monteith’s story The Witches’ Clutch (1894) the inventor of the airship says: ‘I say my discoveries will make war impossible. Consider how soon I could make the proudest city on earth a seething mass of ruins.’

[48] http://www.nytimes.com/2016/04/12/opinion/bangladeshs-other-banking-scam.html?_r=0

[49] http://www.nytimes.com/2016/04/19/world/asia/malaysia-nazir-razak-cimb.html?_r=0

[50] The billions of dollars already in Iraq before the war of 2003, and the forty billion flown there soon after, are curious examples, with an added element of ‘Where did it all go?’: http://www.cnbc.com/id/45031100 and http://www.nytimes.com/2003/05/06/international/worldspecial/06BANK.html

[51] See Perkins, Confessions of an Economic Hitman (2006) for an interesting personal account.

[52] Today’s example: banks are being investigated for providing money for bribes in international soccer:  http://www.wsj.com/articles/u-s-considers-role-of-banks-sponsors-in-soccer-bribery-probe-1460937132

[53] See for instance the Legatum Institute report Is Transition Reversible? The Case of Central Europe (2016). http://www.li.com/activities/publications/is-transition-reversible-the-case-of-central-europe

[54] Marx, for instance, made it the fifth plank of his Communist Manifesto that the State would supply and control credit.

[55] https://policy.greenparty.org.uk/ec.html

[56] Chapter 10 on ‘Accommodation Bills’ in Rogers, The Early History of the Law of Bills and Notes’ (2004) is an interesting case-study of a particular form of abuse, and the efforts of legal minds to address it.

[57] http://www.nytimes.com/2016/05/12/opinion/rodrigo-duterte-philippine-election-manila.html?_r=0

[58] The French and Russian revolutions are classic examples.

[59] This has consistently been the recommendation of those who wish for justice, common sense and economic well-being in money-creation. The websites publishing these chapters, Positive Money and The Cobden Centre, both have detailed proposals towards that end. See the paper published by Positive Money: Digital Cash: Why Central Banks Should Start Issuing Electronic Money (Jan 2016) and The Cobden Centre’s page of proposals to replace bank liabilities with money that is property, and credit backed by genuine savings.

http://www.cobdencentre.org/2010/09/plans-for-reform/

http://positivemoney.org/wp-content/uploads/2016/01/Digital_Cash_WebPrintReady_20160113.pdf

 

Secrets, Ignorance and Lies: Money, Credit and Debt.

(Bank Robbery, Chapter 7: what follows is a draft prior to publication. Comments welcome).

“The tyranny of fraud is not less oppressive, than that of force.” John Taylor of Caroline, Virginia, 1814.

This chapter is about the bad effects of creating money as debt.

WHAT IS MONEY?

We all know what money is. It is something we own, which can be swapped for other things that are up for sale. For people who like their truths to be stated with a bit more gravitas, here is an economist saying the same thing:

‘So long as in any community there is an article which all producers take freely and as a matter of course, in exchange for what they have to sell, instead of looking about at the time for the particular things they wish to consume, that article is money, be it white or black, hard or soft, animal, vegetable or mineral. There is no other test of money than this. That which does the money work is the money thing.’[1]

Today, money is debt from a bank.[2] In 2014, the Bank of England confirmed that ‘the majority of money in the modern economy is created by commercial banks making loans’. At last, this simple fact – long known, but long denied by most economists and bankers – must surely be generally accepted.[3]

The creation of money out of nothing, as two equal and opposite debts, is an extremely simple process. If a banker was struck by a bolt of honesty, he or she might utter these words to a customer about to borrow some money: ‘Starting from nothing, we’re going to agree to owe each other a million pounds. You can use what I owe you to pay people: they’ll be happy to know that I owe them instead of you, and they’ll take debt from me as a form of payment. Your debt to me will be an asset on my books. In the meantime, you’ll pay me interest. So tomorrow, we’ll each have a lot more than we have today! Isn’t that clever!’

When debt becomes currency, conventional understanding of borrowing and lending is turned on its head. Most debts carry an interest charge from borrower to lender: a bank, however, is ‘in the delightful position of charging interest on money it owes’.[4]

Before this kind of money – debt from a bank – could become currency, a law was needed to support the buying and selling of debt. The first law to do that was the Promissory Notes Act (passed by the English Parliament in 1704); similar legislation was subsequently adopted by ‘most if not all commercial nations’.[5] This legislation opened the most corrupt century in British history; it was also, for better or worse, the foundation of the commercial and military British Empire, financing war and ownership of resources across the world.[6]

Once debt became negotiable, the door was open for value to be created in a variety of different ways. Adam Smith noted in 1776 that it had become easy for governments to borrow: it could charge the debt to the people, and the lender would not lose or forgo anything by lending: ‘the security which it [the government] grants to the original creditor is made transferable to any other creditor; and from the universal confidence in the justice of the state, generally sells in the market for more than was originally paid for it. The merchant or monied man makes money by lending money to government, and instead of diminishing, increases his trading capital.’[7]

Negotiable debt was the foundation of a new privileged class. The old feudal aristocracy, its privileges on the wane, was joined and to some extent superseded by a privileged class of financiers. This was obvious to people at the time and widely commented upon (see chapters 3 and 4 of this book).[8]

Negotiable debt is a versatile source of ‘created value’. New ways of creating value are still being invented: derivatives, repos, ‘shadow’ banking etc. are some fairly recent additions. If you believe that riches should be gained in return for contributing something, we live not in democracies but in kleptocracies. A massive industry of debt-creation is devoted to creating value for the already-rich. It has become an enormous cancer on humanity, draining life and livelihood from the working, the would-be working and the world’s poor, which is now an increasing portion of the world’s population despite all the advances in science, technology, entrepreneurship, productivity, mechanisation and organisation.

Bank Money as Currency.

Banking was not born in 1704; it has been around since Babylonian times (at least). Many historical records exist of payments being made by transfer of bank liabilities (the official word for bank debt). Bank liabilities only started to become dominant as a form of currency, however, after buying and selling debt became legally supported and enforceable.[9]

As well as creating money, banks also destroy it. When a customer repays a debt, the money disappears along with the bank’s asset (the debt from the borrower).[10] Limited life is an important quality of credit-money. It means that new money can be continuously created, making new profits for banker and borrower without necessarily increasing the money supply. The profit of making cash is a one-off: bank-money, on the other hand, transfers assets and income from those who work to those who accumulate in a sort of interrupted continuum.

So three key differences mark out bank-money from traditional ‘commodity’ currencies: it is rented out at interest; it is allocated to specific persons for specific purposes; and it is destroyed again once its extra-monetary function (i.e. its function of making a profit for both banker and borrower) is fulfilled.

Despite being only debt from a bank, money is, nevertheless, a kind of property. In our modern world property, which is such a simple idea, comes in many shapes: intellectual property rights for instance, or mineral rights on a piece of land. When we own money, we own legal recognition that we are the creditor of a bank. That recognition is our property, and if someone steals it, we hope they will be in trouble.

PROFITING FROM THE MONEY SUPPLY.

Gaining control of the money supply has always been an ultimate dream of the ambitious. ‘The Richest Man Who Ever Lived’ – Jacob Fugger, a German born in 1459 – kick-started his career by getting control of the Emperor’s silver mines. Command of the money supply brings with it command of much else besides.

Today, it is not an individual but a class that profits from the way money is made. That class consists of governments, predatory financiers and commercial bankers (who are bagmen for the rest). Debt-currency has gradually replaced almost entirely older forms of currency, such as coin which had a value as metal similar to its value as money.

It should surprise no one when a minority manages to commandeer the fruits of human labour and invention. Throughout recorded history, production over and above what keeps people alive has been fought over. The winners have usually made laws to ensure that they carry on being the main profiteers. Usually (as, for instance, in feudalism) these laws have been open and acknowledged, but the laws which support today’s oligarchies – laws around the creation of money and financial value – are shrouded in secrecy and sometimes in outright lies. Many of the observations that follow have been made frequently in the past, only to be buried; others (such as the relationship between bank-money and inequality) are actively and repeatedly denied.

BAD EFFECTS: A QUICK SURVEY.

Many of the bad effects of the way we create money are exacerbations of things that tend to happen anyway. Some are inherently bad (like war); others would not be bad in small doses. An economist has made an analogy for the second type: a domestic cat is generally a well-loved addition to a home: enlarge it into a tiger, and it is less desirable.

The privilege of profiting from negotiable debt is protected by the difficulty the human mind experiences when it tries to grasp complications that arise when debt can be bought and sold. ‘The creation and exploitation of mutual and reciprocal obligations that favour a few’ is not a familiar subject area. This protects economists from having to acknowledge what’s going on even to themselves, let alone to the general public.

Some suggested bad effects of creating money this way are listed below. Many of them feed into each other; all are fed by the way we create money. The list is tentative.

Inequality.

Underlying many of the bad effects of credit-money is the extreme inequality it promotes. Inequality is in the ‘household cat’ category. A certain amount is inevitable and many would say even desirable. Extreme inequality is a different matter. At the one end, excessive amounts of power are in too few hands. At the other end there is poverty, disempowerment and displacement – desperate people searching for how to make ends meet, and many others at a loss how to flourish.

Despite the cultural myths of our age, most people do not wish to give their lives over to getting more and more ad infinitum: they merely wish for enough. Our systems of money and power favour people for whom ‘getting more’ overrides all other considerations (this is a theme that will return).

How credit-money promotes inequality is gone into in more detail in Chapter Two of this book.

Arms Proliferation.

Bank-money forms a vicious circle between arms production and purchase. Banks create money for governments who borrow at the expense of their citizens. Governments compete to acquire arms: if your neighbour gets missiles, you want them too. Competing governments guarantee a strong demand; so banks willingly create money for manufacturers. Citizens, unaware even of how money is created, remain unaware of how their economies are skewed to arms purchase and/or production. Without bank-money, governments would have to borrow pre-existing money to finance arms purchases.

To make things worse, in economies where inequality is a problem, armaments manufacture acts as an economic stimulant. It employs a workforce to make products that will not be bought by workers (even in America, citizens do not buy missiles and bombs).[11] This fills workers’ pockets with spending-money that will be spent on other products. This method of re-setting the balance between capital and spending has another attraction: it is politically acceptable to the traditional ‘right’ (a liking for expenditure on arms for ‘defence’ goes with a dislike of distributing money as ‘welfare’). An example: during the Cold War, the U.S. enjoyed a rare patch of financial growth and stability. When the state acts as banker, things can get even worse: a poor country can prosper by arming itself to the teeth: bankrupt Germany (1933-9) became all-too-well again by armaments production: North Korea builds nuclear weapons.

Even more grotesquely, a nation with a strong and productive arms industry may earn huge foreign income from selling arms into warring nations. All around the world we have ‘proxy wars’ being fought in unstable countries, using arms made by arms-selling nations. Lobbyists of the arms-manufacturers encourage (very successfully) their governments to funnel ‘foreign aid’ to rival factions in unstable countries, stirring conflict and war.[12]

War.

Perhaps it’s an impossible dream that humanity should be done with war; perhaps not. Whatever the future holds, it is certain that money created out of nothing makes war more likely to happen. To begin with, it makes it much easier for governments to raise finance: they can borrow as much as they like, created out of nowhere, using their citizens as guarantee. As already mentioned, England’s head-start in legalising ‘negotiable debt’ (1704) gave it an advantage in making war.

Grotesquely, (a common observation) war can also be economically ‘beneficial’.[13] War was always profitable as theft-writ-large. Now, it serves as an economic stimulus in a similar way to armaments production: via government expenditure, war relocates money with those who wish to spend it and away from those who wish to invest it. It is resorted to as a way out of depression: ‘The Second World War, not the New Deal, ended the Great Depression’ – for the United States as well as in Nazi Germany. A need for re-construction has the same effect: defeated countries often do rather well after a devastating war (for example France after 1871; Germany and Japan after World War II).

A Multitude of Corruptions.

The system of money-creation by banks is corrupt in itself in that it favours and advantages some over the rest. But it also fosters and favours other forms of corruption:

Democracy Corrupted. Political parties need a lot of money to organise and fight elections. The democratic process becomes somewhat theatrical, as different parties claim to represent ‘the common interest’. In reality, the continuance of the financial system is a paramount objective of all mainstream parties, who offer future benefits in return for financial support. Money is created and borrowed in large amounts, in expectation of future benefits.

Straightforward Corruption in Politics. Many countries in the world suffer from the simplest form of corruption – favours handed out by individuals in power in return for payment. In such countries, money manufactured secretly by banks for private citizens makes transparency in public affairs difficult if not impossible. Scrutiny of financial dealings in the public sphere – formerly a central requirement of any democratic constitution – is not a realistic possibility. A blunt illustration: each Russian oligarch has his own bank manufacturing money for (among other things) bribes. A bribe to a politician may be a profitable investment – even a necessity, for someone who wants to climb to riches.

In a substantial number of countries, public life is corrupt to an extent that politics and business cannot function without engaging in corrupt practices. This gives outside agencies the opportunity to disrupt the political process by selectively disclosing corruptions: this technique is being actively used by (for instance) agents of Putin’s Russia, to destabilize neighbouring governments and install Russia-friendly regimes.[14]

Law Corrupted. Law is as vital to us as the air we breathe – and equally vulnerable to pollution. It is the job of professional lawmakers to make laws, and they make them in quantity, far too many for ordinary people to scrutinize.

Laws entrust government agencies with power to issue permits, grants, special tax breaks and so forth. Lobbying today involves vast sums of money devoted to influencing the law and its application. Evidently it works, or the money would not be spent.

‘Crony capitalism’ describes businessmen conniving with politicians for a bigger slice of the pie. When the connivance is illegal, we call it corruption. When laws and regulations are made which favour particular interests, the law itself is corrupted.

The ultimate and original corrupt law is the law that makes debt a negotiable commodity.

Capitalism Corrupted. Bank-money transmogrifies free-market capitalism into a form of covert kleptocracy. Capitalism supposedly consists of savings and profits lent, via banks, for investment. When money is created by banks as reciprocal debt, however, this narrative becomes an outright lie (though it is propagated in many economics textbooks): newly-created money dwarfs true savings. The lie looks particularly threadbare when base rates go towards or below zero. Nobody lends at minus interest! If I have £1,000, I would rather keep it than lend it, if in a year’s time I will only get £990 back!

It used to be said that the ‘Holy Roman Empire’ was neither holy, nor Roman, nor an Empire. In just the same way, it can be said that ‘liberal capitalist democracy’ is neither liberal, nor capitalist, nor democratic, but a kleptocracy which gets away with writing its own laws.

Radicalization in Politics.

The knock-on effects of the corruptions listed above are increasingly severe. They create an opportunity for political extremists. There is strong public awareness that working people are being cheated: but because public ignorance is carefully cultivated (in media and academia, see below) no one is familiar with how capitalism might be restored to its honest form. Extremists offer themselves as less-bad alternatives to the status quo. Many voters feel that it is better to live with one openly dishonest crook than with an anonymous myriad.

The Cultivation of Ignorance.

Ignorance of money-creation is positively cultivated by professional economists and the media. Academics in sensitive disciplines are compliant with the demands of power. To give an example: when the Iron Curtain came down, east European professors in disciplines such as Political Theory, History, Philosophy and Economics were replaced en masse by Western-trained professors.

Mainstream media, owned either by the State or by large corporations, are also compliant. In the words of a financial journalist: ‘It’s part of a journalist’s job to know instinctively – no one tells you! – how close you can go to those lines that can’t be crossed.’ Over the past sixty years, ownership of the media has been consolidated into a very few hands, and the media are now run as money-making machines. Good journalism is done not for profit but for moral belief – belief that humans want and need to know the truth. Purchase of media companies by oligarchs is one of the most damaging trends and a sign of the times: not just because ‘who controls the media controls the message’ but also because whole populations are subjected to dumbing down, propaganda and demoralization as a result.

Nature Destroyed: the Need for Economic Growth.

A steady-state economy is inconceivable when the money supply takes from many and gives to a few; soon, most money sits waiting for investment, and spending dries up. (A rich man can only wear one suit of clothes at a time, and has only one stomach; owning more than one yacht and a dozen houses becomes not a pleasure, but a bore.)

In these circumstances, economic growth becomes a necessity, because it is the simplest means by which money will return to the pockets of spenders. In times of growth, money waiting for investment pours into new factories, new employment, and the pockets of workers who will spend it.

This necessity for growth means that resources and environments are plundered and destroyed without (necessarily) doing very much for human welfare. ‘Economics’ has developed a set of values, or assumptions, to justify this destructivity: the more stuff we have, the more needs are cultivated in us and satisfied, the happier we will be. This set of values is certainly not substantiated by experience, common sense, or statistics: it is put forward to justify the activities of those with an insatiable lust for getting richer.

Large concentrations of capital, managed for profit, push for familiar goals: to employ as few workers as possible, to pay them as little as possible, and to manufacture as much as possible. Goods then have to be produced as cheaply as possible, so that workers and the state-assisted can afford them. They must also be made short-lived, to encourage repeated purchase. Thus we have built-in obsolescence, our land and seas ever more polluted with rubbish.

False Goals: ‘Homo Economicus’.

From this set of values or assumptions, it is a logical step to set goals for society generally of maximised efficiency and productivity. These goals are not merely deadly to future human life; they smother consideration of reality. The productive capacity of man-and-machine is today almost unimaginable: we are nowhere near its limits. We could all be buried a hundred foot in products made by machines, if they worked at full output! A new model of production and consumption is urgently needed, although it may be too late to avoid environmental catastrophe.

Booms and Busts.[15]

During booms, large amounts of money are created for speculative finance to purchase profitable businesses: ownership becomes located with a few, rather than being widely dispersed. Steady production, the profits going to the owners, continues the build-up of money looking for investment.

Money is also created (against the security of their assets) for borrowers who wish to spend; in other words, for people getting into debt with no way of repaying the debt except to sell assets.

For a while all seems rosy: then, the growing debt of the many and the growing assets of the few – in other words, growing inequality – makes it obvious the worm must soon turn. The many slow their spending, and the few enjoy less profits of production.

Banks respond to the change in circumstances by calling in debts and destroying money. Economists have called this characteristic of bank-supplied money ‘perverse elasticity’ – easy money during booms, money disappearing during busts.[16]

Debt, National and Personal.

It seems obvious that if money itself is created as debt, the amount of debt in the world will increase. But who, as a result, becomes more indebted to whom, is not quite so easy to answer. The fact that money is created as debt FROM banks does not help clarify the issue.

It helps a bit when we consider that every time a bank creates a debt from itself, it creates a matching debt TO itself; and what is more, the bank gets interest on what it owes. It also helps if we remember that money is only created when both bank and borrower are confident that it will be profit them both. Some of the bank’s profits are shared among customers – thus reducing their bank costs: this makes banks super-competitive with other forms of transaction management and money-storage. They have an unfair advantage.

The system has been nurtured over the centuries because of these profits, because the money it produces does other things, besides just ‘be money’: it takes interest, it provides new money in very large quantities to those who already have assets, and it enables governments to borrow at the expense of their citizens without agreement or scrutiny. This is consonant with the historical account of how bank-money developed: see Chapter 1 of this book.

National Debts. Laws that allow debt to be bought and sold make it easy for governments to borrow. As Adam Smith pointed out 250 years ago, once debt becomes negotiable, lenders get an asset in exchange for their money – government bonds – which start life equal in value to what has been lent, and may well increase in value thereafter.

Again, history is consonant with this account: national debts became significant as soon as debt could be traded. After 1704, national debts became exploding phenomena. The South Sea and Mississippi Bubbles (both 1720) are landmark reminders of what can happen.

There is an often-repeated cliché that ‘the national debt is a way of making our children and grandchildren pay for what we use today’. This is not correct: everything, from missiles to food, has to be paid for before it is used. If the government borrows in order to pay for things, it is actually creating assets for one class – the class of ‘lenders’ – and taking from another, the passive class of citizen-borrowers.[17] True, the descendants of those citizen-borrowers are also in hock; for in this human world of ours, subjugation is an inherited condition.

Private Debt.

Booms-and-busts prepare the ground for private debt. When times are good, banks create easy money for lenders and people get into debt, confident they will be able to pay it off – or at least pay the interest. Then the worm turns, money is no longer easy to get, and debt becomes a burden. The relationship of debtor-debt keeps the masses complicit, compliant, up to their nostrils not just in debt but also in subjugation.

House ownership is another minefield laid by negotiable debt. Money created for would-be homeowners is also created for speculators. The result is an inflation in property values; year on year, more debt must be assumed to aim at a position of ownership. Meanwhile, actual (effective) ownership goes down as governments, reacting to business cycles, diminish the value of genuine savings by inflating the economy with money fed to banks and speculators.

Economic Crisis: Booms and Busts.

A boom is a period of exceptional affluence: the economy is expanding and massive amounts of new money are being created for borrowers. To begin with, a good proportion finds its way into the pockets of producers and employees. However, the way money is created – for those who already have large assets – ensures that ownership increasingly resides with a few.

There is a limit to the amount rich people can consume: that is, to how much they can spend in a way that money re-locates with the poor (purchasing a Rembrandt, for instance, has little effect on inequality: money passes from one wealthy individual to another).

As the poor have less to spend, consumption goes down, and production becomes less profitable. A respectable way of talking about this (in the language of economics) is: ‘modern economies are prone to settle into states of inadequate aggregate demand to sufficiently employ their labour forces.’ A less respectable way is to imagine a café: a hundred people are sitting there, and somehow we know that between them they have a thousand pounds. But only one person has bought a cup of coffee. What has gone wrong? Well, it so happens that one person has all the thousand pounds, and all the others have nothing.

Economists don’t like talking about the café situation as a model for the economy; but they need some way of referring to spending drying up: it is too obvious, and it has too many undesirable consequences for the rich as well as for the poor. It’s an ‘elephant in the room’ and it’s making itself felt by crashing around and breaking up the furniture. Mainstream economists talk of ‘demand deficit’ and look for other ways to explain it besides the way money is created. Other factors do apply (such as the tendency for capital to increase by compound interest) and they concentrate on those.

Various recipes are suggested for curing the café situation. The most common one is to tax the man with all the money and redistribute it, so that others can buy coffee too. A better recipe, often suggested but never (so far) followed, would be to reform the system that helped one person get all the money in the first place.

Busts rectify the situation somewhat by reducing capital values, but the process is usually held back by lawmakers and regulators who intervene in the interests of the wealthy, propping up the value of assets (while pretending to prime the pump of money-creation) with devices like ‘quantitative easing’. These do not work because the underlying cause – the gulf between on the one side massive wealth, on the other poverty and debt – remains unaffected.

International predation.

Nations with a strong economies and banking sectors are able to generate money out of nothing – along with individuals and corporations skilled at using it. International predation proceeds along two different tracks, state and non-state.

State: The national currency of a strong country is a powerful weapon. Currency manufactured at no cost is sold abroad, where it becomes an international currency. Laws adopted internationally (authorizing the buying and selling of debt) ensure that the newly created money has parity with local currencies. In this way, nations behave like banks: the exported money is effectively national debt, which the creator country hopes will never have to be paid, although it has been exchanged for very real goods. Strong nations compete to put their currencies into a dominant position, to enjoy the benefits of buying a lot for no expense.

Non-state (private): Private predatory finance acts in a similar way, but transfers ownership to private, usually corporate hands. An efficient financial sector manufactures money in a strong currency for speculators who appropriate the resources, labour and production of a less sophisticated nation.

These two processes make it easy for a strong country to appropriate resources, labour and production. The process is made seamless by the corruption of a weaker nation’s government and political/civil process. The weaker nation, instead of receiving proper purchase value for its labour, resources and production, gets a corrupted government, heavily armed to suppress dissent and to oversee rule by thugs.

What is done today by finance is a continuation of what used to be done by conquest. The English economist Piercy Ravenstone wrote in 1821: ‘Ireland sends her surplus produce to pay the rents of her landlords in England, and her surplus poor follow to consume it.’ Today, we see millions walking towards countries who have in one way or another contributed to their ruin.

Unemployment and Forced Idleness.

Unemployment is enhanced in two ways by huge amounts of capital created out of nothing (as opposed to borrowed out of personal savings):

  1. Jobs are outsourced to where labour is cheaper: this supposedly leads to greater prosperity in low-paid countries, but most noticeably it leads to greater riches among corporate shareholders.
  2. Money created by banks upon promise of profit pushes businesses to ever-greater internal efficiency, throwing workers onto state benefit, where taxpayers pick up the bill for their continued livelihood.

With increasing concentrations of capital and power, humans are increasingly faced with a choice between corporate servitude and unemployment.

Terrorism.

The concentration of power and money in the hands of individuals who are addicted to getting more has consequences that are multifarious and deadly.

For many decades now, foreign policy among Western nations has been dominated by the desire of big financial players, and the political parties they fund, to get (and maintain) access to resources in foreign lands. Support for gangster governments; bombing; deals with corrupt foreign elites; these and other nefarious techniques have become everyday policies for countries of the prosperous West. Pervasive hypocrisy – ‘the bad things WE do are justified, the bad things others do are monstrous’ – blinds us to the reality that the only behaviour we can reliably change is our own.

Culture.

Culture is our name for everything which conditions collective group behaviour – whether that group is a nation, a class, a religion, or a tribe. Culture, transmitted across generations, is always changing but yet has a certain continuity; it attempts to nurture collective well-being. The effects on culture of how we allocate wealth and power are probably the worst of all for our future survival, but they are also hardest to describe.

It is a well-worn cliché that power tends to corrupt those who hold it. It’s nearly as much of a cliché that power tends to degrade and infantilize those whom it promises to protect. Culture promoted by commerce and power tends towards anti-culture – that is, it promoting not well-being but self-destruction. Instead of searching for how best to live, it becomes a series of transgressive, trivial or meaningless acts held up for applause.

The Corporation and Freedom.

The commercial corporation is the prime vehicle for concentrations of money and power, hiding ownership and making it easy for people to avoid human obligations such as paying taxes. It began to achieve full legal ‘personhood’ soon after debt was made negotiable.[18] It obliges workers to devote their working lives to maximising the income of owners who know little and care little about what the corporation does – besides make money. “Of all the differences between man and the lower animals, the moral sense or conscience is by far the most important,” wrote Charles Darwin. ‘Moral sense or conscience’ withers away as individuals in corporate employment must obey the corporate objective – to increase the affluence of those who might have no interest in how that money is gained.

In these circumstances, freedom loses its meaning of ‘freedom to do what one believes is right’, and adopts a series of other meanings.

Humans, a sociable and moral species, are dissatisfied living in the variety of circumstances outlined above. No wonder drugs, either legal or illegal, are needed by so many to get through their days.

CODA: THE FEW AND THE MANY.

We like to assume the world is run on lines that are vaguely just. We also like to think of ourselves as ‘democratic’ but it is an illusion to imagine that ordinary people are in charge. The real content of contemporary ‘democracy’ is that ‘we the people’ vote for political parties who exercise power. Money and political parties are adjacent rooms, with a revolving door between them. The people who hold power and wealth in our world are interconnected.

Humans are fond of blaming others for things that are their own fault. Patriarchal societies blame women for the evils of the world (from the Bible we have Eve; from Greek mythology we have Pandora releasing the evils of the world from a food storage jar). Christians have long blamed Jews for destructive financial arrangements even though money-creation has long been a protected Christian activity. Today, citizens blame politicians and bankers for the madness of the world – even though they (we) have the collective ability to demand change.

Only citizens can make reform happen. It is mere foolishness to expect an oligarchy to voluntarily give up the source of its power. Power attracts those who want more: it is an addiction. So, in large amounts, is money. The world and its beauties, human life, our ideals of freedom and democracy, are being destroyed. How lazy are we? Do we feel no compunction to intervene?

Removing laws that support negotiable debt and preferential creation of money would be a start. Digital cash could then be created to replace it, which could still be borrowed and lent, but it would not consist from the very outset of debt.[19]

We could go further. Sharing the benefits of human achievement, past and present, would mean some variety of basic income (that is, provision of spending money for every citizen by the government, regardless of need). This would not just be more equitable; it would also reduce crime; it would reduce how much people need over and above basic income and therefore decrease employment costs; and it would increase meaningful human freedom to do what seems right. When experiments in equitable money distribution have been undertaken, reductions in crime, mental disease and drug-use have been reported. Implemented on a wider scale, we might expect reductions in all the evils listed above.

………………………………………………………

[1] Frances Walker, 1888.

[2] In England, 97% of this is debt from commercial banks; the other 3% – notes and coins – is debt from the central bank. See Bank of England Quarterly Bulletins 2014 Q1 and 2010 Q4.

[3] ‘…rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.’ The Bank of England, Quarterly Bulletin 2014 Q1.

[4] Frank D. Graham, ‘Partial Reserve Money and the 100 Per Cent Proposal’. The American Economic Review (1936).

[5] Joseph Story, Commentaries on the Law of Promissory Notes (1845).

[6] For ‘corrupt century’ see Brantlinger, Fictions of State (1996); for ‘war’ see Dickson, The Financial Revolution in England (1993); for ‘resources’ see W.J. Thorne, Banking (1948) p.31 and also pp 97-9 for a description of how bank-loans create deposits.

[7] Wealth of Nations, Book V, Chapter 3.

[8] A somewhat later comment: ‘The direct tendency of the principles of the Economists is … to replace the feudal aristocracy, from which Europe has suffered so much, with a monied aristocracy more base in its origin, more revolting in its associations, and more inimical to general freedom and enjoyment.’ John Wade, 1832.

[9] Many writers have addressed this subject, among them R.D. Richards (The Early History of Banking in England) and W.S. Holdsworth (A History of English Law).

[10] Reserve, sold on demand by central banks, includes cash (notes-and-coins): they are the equivalent of lubrication, allowing bank-money (97% of actual money in circulation) to operate smoothly.

[11] See, for instance, Joan Robinson, Freedom and Necessity Chapter 8, for a conventional account.

[12] Often the same government will fund several opposing factions: the activities of the United States in Central America are a well-documented example. Ask D.G. for reference.

[13] Lekachman.

[14] See for instance the Legatum Institute report Is Transition Reversible? The Case of Central Europe (2016). http://www.li.com/activities/publications/is-transition-reversible-the-case-of-central-europe

[15] Schumpeter, a leading 20th century economist, asserted that the old-fashioned argument used in this paragraph to explain business cycles is ‘contemptible’ and ‘beneath discussion’. Apparently, ‘it involves neglect of the elementary fact that inadequacy or even increasing inadequacy of the wage income to buy the whole product at cost-covering prices would not prevent hitchless production in response to the demand of non-wage earners either for ‘luxury’ goods or for investment.’ If this were true, the trillions being held today (2016) at near-zero interest rates would be busy employing the poor to make luxury goods and build new factories.

[16] Lester, Richard A. Monetary Experiments (1939, 1970) p. 291; and on p.292, ‘If the monetary system is to moderate rather than magnify the business cycle, money must be segregated from banking.’

[17] Just as banks create money as negotiable debt, so governments create debt as a negotiable commodity. The difference is that banks charge interest on what they owe; governments pay interest on what they owe. Here we see the worst of all collusions between governments and money-power.

[18] Joint-stock companies, ancestors of the modern corporation, were originally licensed by Royal Charter. The corporation began to gain an independent legal existence during the 18th century: see A Treatise on the Law of Corporations, Stewart Kyd (1793–1794). The process was made complete in a legal ruling, Salomon v A Salomon & Co Ltd (1896), since when corporations have concentrated on acquiring more ‘human’ rights – without acquiring any more human duties.

[19] See the paper published by Positive Money, Digital Cash: Why Central Banks Should Start Issuing Electronic Money (Jan 2016). The Cobden Centre suggests one-off replacement of bank liabilities with state-created cash.

http://positivemoney.org/wp-content/uploads/2016/01/Digital_Cash_WebPrintReady_20160113.pdf

http://www.cobdencentre.org/2013/01/aep-and-the-chicago-plan-revisited/