The process by which banks create money is so simple that the mind is repelled - JK Galbraith Photo: MrB-MMX / flickr CC
Where does money come from?
James Bruges reviews a new book about the nature of money
Spiralling inequality, chaos in the financial world and the Occupy protests force us to engage with economics. Where Does Money Come From? - A Guide to the UK Monetary and Banking System is about money itself, a subject that has, surprisingly, received little attention and about which there is widespread misunderstanding. The book states: ‘Central banks around the world support the same description of where money comes from. And yet many naturally resist the notion that private banks can really create money by simply making an entry in a ledger.’
JK Galbraith had said, ‘The process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent.’
The authors, Josh Ryan-Collins, Tony Greenham, Richard Werner and Andrew Jackson, studied the implications of bank-created money through talking to key people in the City, including members of the Independent Commission on Banking, and referring to 500 documents from central banks and regulators. On receiving a copy of the completed book, David Miles of the Monetary Policy Committee, Bank of England, said, ‘the way monetary economics and banking is taught in many – maybe most – universities is very misleading and what your book does is help people explain how the mechanics of the system work.’
Why is it important?
Does it matter that the money we use is created by private institutions? A bit of history is revealing. At the beginning of the nineteenth century gold, silver and coins were the only official currency, but banks were allowed to print notes saying ‘I promise to pay the bearer on demand the sum of £XX’. It cost them approximately five pence to print a £20 note, which they could sell for £20. Robert Peel’s government realised the anomaly and the 1844 Bank Charter Act made it illegal for anyone other than the Royal Mint to print banknotes. It now costs banks and building societies maybe £100 in administration costs to make a £100,000 loan attracting compound interest. The anomaly is the same: a business model for bankers that the rest of us can’t match.
Banks charge interest on loans, necessitating the amount of money in circulation to increase each year in order to cover this interest. The choice is either growth or recession. It was a Quaker philosopher, Kenneth Boulding, who quipped, ‘Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist.’ So it’s the monetary system itself that causes world resources to deplete.
Who does money belong to?
Most people think that the money they deposit in the bank remains their own property. This is wrong. Legally, it becomes a debt that the bank has to pay on demand but, in the meantime, the money belongs to the bank and it can do what it likes with it. The Royal Bank of Scotland, even after being bailed out by the government, invests in projects like Canadian tar sands that are directly contrary to government policy on climate change.
Our laws are biased in favour of the creditor, with bankruptcy being the only way out for the debtor. However, if loans are underwritten – guaranteed – the creditor is divested of risk, so can lend irresponsibly. This has been a major cause of third-world debt, as well as of the sub-prime mortgages that contributed to the 2008 crash. Compound interest builds on debt without any cost to the creditor, contributing to the enslavement of nations and people. There is a moral case for cancelling or reneging on certain kinds of debt – as suggested, of course, by the biblical ‘jubilee’.
The government wants banks to finance the productive sector but ‘the government has in practice no involvement in the money creation and allocation process’. It is not surprising that little of the vast sums given to banks have been loaned to small businesses, which they regard as risky. The banks have invested most of their windfall in assets such as prime property, the value of which is enhanced by Russian oligarchs.
The financial elite
The book discusses financial instruments that ‘are increasingly traded in a money-like fashion, moving around the world at great speed and frequency by investment banks and hedge funds’. The financial elite, joined by African dictators and corporations, have salted away £3 trillion tax-free in secret locations, many – perhaps most – of which are UK protectorates or ‘British Overseas territories’, the City of London itself being one of them. The UK loses £70 billion in tax annually. The value of trade in financial derivatives is ten times the value of all goods and services in the world. No one knows what’s going on but these activities are the cause of global instability and deprive governments of funds to help those in need.
What does this mean for us?
I will end with two quotations that are horribly predictive of our current situation now that banking technocrats are the main influence on, or even taking over, countries. In 1838 the banker Amsel Rothschild said, ‘Let me issue and control a nation’s money and I care not who makes its laws’.
In 1863, the Rothschild brothers, London, said, ‘The few who could understand the system will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests’.
I hope this is enough to indicate that the present monetary and banking system is at odds with our testimonies to integrity, justice, equality, community and the environment.
Quakers could help to develop an alternative to laissez-faire capitalism that relates to real life in all its local variety, provides social welfare, and encourages cooperation, creativity, relationship and play.
Where Does Money Come From? - A Guide to the UK Monetary and Banking System by Josh Ryan-Collins, Tony Greenham, Richard Werner and Andrew Jackson is published by nef publications for £14.99.
Comments
I think this argument has got off on the wrong footing, with great respect to the authors of Where Does Money Come From? Banks don’t create money, they lend it. The confusion goes back more than a hundred years, but was laid bare by Hartley Withers, one-time editor of The Economist, in 1909. He pointed out that ‘money’ has two meanings, firstly the normal one as when we go shopping. He wrote: ‘But the other most common use of the word leads to complication, because in its second sense money means not money, but the loan of money.’ Hence I would argue that when we say that banks ‘create money’ we mean it in the second sense, that banks ‘create the loan of money.’ Or to put it more simply: banks lend money. That is why I say they don’t create it.
By mrking on 17th August 2013 - 11:04
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