I’ll show my age here, but I remember a time when if I handed a Scottish bank note to an English shop assistant, it was often queried as to its legality. My riposte would be, not only was it legal but, unlike the English notes, the Scottish bank had to have the funds in its account to honour it. Such are the myths we form our assumptions on, that then go on and become entrenched as fact by the simple truth of them having little relevance to our everyday lives. Believe it or not, this is a key factor in the creation of money and is as relevant today as it has been since ‘money’ was first traded.
Generally we are not in the money game. We use banks and juggle our domestic or business accounts, but in the main all we want is to balance what we earn with what we need and, in both the domestic and business sense see some progress for our efforts. In this sense banks were the monoliths of prudence the avatars of financial probity, that rapped your fingers if you were lax in your domestic budgetary or over ambitious in your business plans. “Over trading” followed the “Tut” for business plans, “over spending” for domestic, followed by “We’re here to make money for our depositors not lose it.” (Which certainly in the UK sense was half true if you insert a full stop after the word money – the depositor bit, is and was, a lie.)
It’s a lie on two fronts. The first is when you deposit your funds in a bank the money becomes the banks money. They can use it to invest, gamble or spend on anything they like.
The second is they use depositors’ money to finance the funding you require!
They don’t. With the computer age and electronic money all they do is type the amount your short to cover the housekeeping, or the overdraft you need for the business plan into the keyboard and no matter whether its £500 or £5 million that’s new money in the system. The same applies to car loans or house mortgages.
Of course they charge you interest and possibly service charges for the favour and claim these are needed to meet their running costs and profits. But if you default on the £500 or £5 million you won’t just be sued for the loss of profit on interest and direct costs, you will be sued for the lot, when all they did was type the required digits into a computer. In simple terms the money only becomes ‘real’ in the payments you make, the interest you pay and when you default. It is the magic elixir which underpins the myth of prudent banking.
There’s a basic physics element to this:
More money in the economy = more debt.
Less debt = less money in the economy.
“But,” you argue, “the central bank, the Bank of England controls how much they can spend (loan) etcetera”?
Not true, the Bank of England only controls the amount of coin and notes in the economy. Even when it pumps out the odd £300 billion in quantative easing, it’s just copying the private banks practice of typing digits into a keyboard and sending a proportion of each tranche to the banks. There’s a history to this.
Round about 1840 the banks run riot with the new concept of paper money and its relevance to their, by now established, fractional reserve banking practices and leveraged their deposits in much the same manner as they did from 1980 to 2008.
In 1844 the government of the day decreed, private banks would no longer be able to print or stamp cash and only the Bank of England would be responsible. This has never been changed or updated.
While it would be ridiculous to expect the 1844 legislators to predict the computer age, it shouldn’t be beyond the competence or wit of their present counterparts to see this loophole and the threat it posed and take the necessary steps to close and regulate it. After all the private banks did and exploited it to the maximum and beyond.
Of course by 1980s privatization was the buzzword, then why not privatise money and its supply. So perhaps the lack of competence was more by design than lack of wit?
Some more figures to chew on.
Physical cash in the system = £53 bn. Approx 3%
Electronic money = £2,200 bn.
If banks had collapsed in 2008, amount of money per £1,000 in deposits =£12.00
In 2011 = Around £70. So better but still not inspiring on the prudent front, and a lot less than society as a whole has had to ‘invest’ in order to save them.
Then we have the bleat by the banks that they are major contributors to the economy of the nation and how their golden bonuses are earned by supermen.
So let’s look at their claim. (these are 2009 figures)
The banks (all UK banks) paid £18bn in Salary tax. - £ 8bn Corporation tax, and
£30bn earned by the licence to print money and charge interest on it. But in the same year they got £100 bn in transfer support from the Bank of England. So by my arithmetic, instead of putting £50 bn into the economy as claimed by their PR outfit the British Banking Association, they took £44 bn out of it. With friends like these who needs enemies?
There’s a rider to this. When the BoE prints notes and distributes them, it charges a small fee to the banks for each note, coin etc. If the BoE were to charge a similar amount for all the money the banks create we could pay off all the interest in the national debt and eventually the debt itself. Eventually it could be used to set up a resource fund for future unforeseen crises, similar to Norway’s oil fund. I wonder why they haven’t thought of that?
One more gripe. We hear a lot from our political stewards on how we have to emphasise the manufacturing base of the economy especially to encourage the growth and prospects for small and medium sized companies. The businesses that supposedly will create the 2.5 million jobs to eradicate the dole queues, invigorate the great unwashed and release their latent talents and absorb the redundant public servants. How do our master of fiduciary juggling fair in their commitment to that aim. After all they do have over £2,000bn of their own electronic money out and running about?
How much do they invest in the productive economy – engineering, widgets, new builds (yes, even housing come under this bracket) call it anything that demands physical manufacturing or service?
Around ……..wait for it, 8%! The rest is in speculative investments and mortgages which do not contribute a tinker’s fart to the real economy.
They say there’s a reason for this, seemingly business lending is riskier and costs more to administer than mortgage lending.
Now you know who’s been pumping the nitrogen into the housing market and why if house prices stayed in line with wages or vice versa, the average wage would either be £8 -9 thousand per year more, or house price average would be around £90k less.
A strange symbiotic relationship has been created between our bankers and our government since 2008. In as much as having been saved by the government, the bankers are now controlling it. You have also the strange situation where a central bank that can print money (BoE) gives it to private banks at zero or next to nothing rates for the private banks to leverage up by X 10 -15 – at one stage 30 times under fractional reserve rules (if they still apply) buy government bonds with it and then charge us interest on the money we gave them? Doesn’t make sense does it?
This is much as is presently happening in Greece. Only Thatcher has already sold off our family silver, whereas Greece’s is still up for grabs.
But the real question is why, as a nation, borrow money and pay interest to a bank that hasn’t the money in the first place and merely types the figure into a keyboard. Ultimately the nation is the only value backing its currency. Should the nation not print or decide the amount of electronic digits it needs and release them without charging itself interest?
The sad conclusion to all this is for all the obfuscation of rank and privilege and fuffle of tradition that plagues this island with its sovereignty of Crown and State, they’ve been asleep at the helm and allowed the money men to buy our democracy.
No doubt they will be well rewarded for their dereliction. Or, were they part of it and regard our debt peonage earned by our own apathy, insidiously introduced by the dumbing down propaganda transmitted by the mainstream media?
Author's note: I would like to thank all the posts, blogs, commentators, academics, and institutions, I’ve borrowed, copied and plagiarised, some of the figures and their context from. There are too many to remember and individually list or thank but two I will mention are Positive Money and GolemsXIV.