Money from nothing: the alchemy of banking
THE subject of bankers' bonuses has once again reared it's ugly head, with calls from within the EU for caps to be introduced.
For me the real issue is not bankers' bonuses: this is just a symptom of the illness rather than the disease itself.
The real issue, the cancer that gnaws away at society and political policies and efforts to create a just and fair world, is that nearly all the money we possesses or owe, individually and as a nation, was created by an act of modern day alchemy.
John Kenneth Galbraith, a former professor of economics at Harvard and advisor to J F Kennedy, once claimed: "The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled"
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So what is this process, that is so simple that it 'repels the mind' – but is, according to Galbraith, deliberately obfuscated to 'evade the truth'?
The simple truth is nearly all money is borrowed into existence, at interest, which the banks enjoy the sole benefit of.
While many believe banks lend money deposited by savers, in reality this money is usually handed to the banks' investment arm to gamble with on the stock exchange.
So where does the 'money' banks lend come from?
Under the Fractional Reserve Banking system currently operated, banks are able to lend many times the value of the deposits they hold in reserve.
Mervyn King, the former head of the Bank of England, described it thus: "When banks extend loans to their customers, they create money by crediting their customers' accounts."
Martin Wolf, chief economics commentator for the Financial Times, was more forthright with his assertion that "the essence of the contemporary monetary system is the creation of money, out of nothing, by private banks' often foolish lending".
This is done quite simply. You ask the bank for a loan, the bank agrees to loan you the money if you agree to pay it back. Your promise to pay it back is recorded on the bank's balance sheet as an asset.
As if by magic, the bank now has the money lend to you from the new 'asset' created from nothing but your promise to pay it back.
Currently, research by economists suggests 97 per cent of the 'money' in existence has been created this way, with only three per cent being issued by Central Banks – and even the veracity of this money is questionable, as it still loaned into the system at interest.
Consequently, the private banks enjoy interest payments on 97 per cent of the 'money' in existence, with the 'money' they created as credit via loans, effectively siphoning money out of the system – which the banks can use to fund their obscene bonuses.
Personally, I find the argument that bonuses must be paid so the banking industry's great and good do not flee the UK to be ill-conceived.
I am no businessman, but I am pretty confident that if I was given the power to create money from nothing and charge people interest for the privilege of borrowing it, even I could generate a handsome profit .
Every pound we 'own', is a debt owed by someone else. The Government and the country is paying billions per year in interest servicing debts based on an accountancy trick.
An accountancy trick Parliament sought to end with the Bank Charter Act of 1844, which restricted the powers of banks to issue their own promissory notes (money) and gave exclusive note-issuing powers to the central Bank of England. The banks' ability to 'create' money in the form of their own bank notes was outlawed. Just as it is illegal for you or I to create our own bank notes, it is illegal, under the Bank Charter Act of 1844, for banks (other than the Bank of England) to do so.
However, this piece of legislation never foresaw the rise of the digital era. The private banks no longer need to issue notes, they just 'extend credit' – ie create numbers in an account when a loan is created. This is, at present, quite legal, despite it having exactly the same effect as private banks issuing their own banks notes – it inflates the money supply when they 'lend', and constricts it when they cut back on lending.
The consequences of all this are profound, particularly in the political arena.
The voter, at present, effectively has two choices: Vote Labour and have a Government that digs us ever deeper into debt until we eventually go bankrupt, or vote Conservative and have a Government which pays down this fraudulent debt and, in doing so, reduces the money supply and inevitably keeps us in a state of recession. Either way, the private banks and those with a vested interest in maintaining this system wins and wider society loses.
Just imagine, if the state created its own money – interest and debt free – rather than 'borrowing', at interest, money that the banks have created out of thin air as debt.
Rather than increasing its debt to fund education, healthcare, defence, the infrastructure etc, the state could issue its own money to fund these. Instead, we have system where the private banks have used the money they have created from thin air to inflate property prices and levels of domestic and national debt to unsustainable levels, while making the select few 'obscenely' rich in the process.
Ultimately, why should private banks have the power to create money from nothing to benefit the few, when the state could have this power to use for the good of society?
Surely the time has come for our politicians and policy makers to address where money comes from, how it is created and for whose benefit – and find alternatives to the current system, which is little more than a Ponzi scheme.