DEMOCRATISING BANKING THE PROBLEM STATED
“… it is patent that in our days not wealth alone is accumulated, but immense power and despotic economic domination are concentrated in the hands of a few, who for the most part are not the owners, but only the trustees and directors of invested funds, which they administer at their own good pleasure. This domination is most powerfully exercised by those who, because they hold and control money, also govern credit and determine its allotment, for that reason supplying, so to speak, the life-blood to the entire economic body, and grasping in their hands, as it were, the very soul of production, so that no one can breathe against their will.”
Pope Pius XI, in the Encyclical Quadragesima Anno, 1931.
It is now acknowledged by a growing number of economists, parliamentarians, bankers and observers that national economies and international trade systems are seriously malfunctioning. The human misery and deprivation generated by these problems in all nations is so obvious as to require no elaboration. The factors contributing to this breakdown have been narrowed down by the sheer weight of experience and events, and now many are increasingly focusing on the most common denominator – debt.
There is no national economy which has not been warped by the debt factor, be it external or domestic debt. There is no industry – primary, manufacturing or service – which has not been distorted from its original purpose by the impact of debt. There are no nations, peoples, communities or families which have escaped the ramifications of inflation, recession, punitive interest rates etc. Perhaps the ultimate revelation has been that of Professor R.T. Naylor, of Canada’s McGill University, who has shown in his “Hot Money” (Unwin Hyman, 1987) that the world as a whole is running an annual deficit which can never be paid under present policies, and which is inexplicable to bodies such as the International Monetary Fund.
These crucial developments have forced a growing number of leaders in many parts of the world to direct their attention to the source of debt, rather than its effects. It is the author’s view that no remedy to the debt crisis is possible without drastic changes to the accounting procedures involved in the creation of money and debt. Unless they themselves have the fortitude to initiate and take part in the necessary remedies, Trading Banks -particularly private Trading Banks – are bound to become victims in a revolutionary rethink generated by this crisis. Communities would rather see bank profits, assets, and even bank viability sacrificed than their own future. In a world of unprecedented productive capacity, it must be possible to make it increasingly safe for individuals, industry, and financial institutions too. It is with this imminent scenario in mind that the following proposals should be considered.
THE PROBLEM WITH THE PROBLEM
Deeper than the debt problem itself, with all its attendant woes, are those factors associated with society’s inability to focus on it clearly. The focusing problem has not stemmed from a dearth of publicists. Millions of people have come to some understanding of it, with high profile names amongst them, from Lord Acton to President Lincoln to William Jennings Bryant, to Charlie Chaplin. Thousands of volumes have been written in the hope of a recognition of the debt problem reaching “critical mass”, and generating corrective action. This it has not done, though a small movement to maintain this knowledge is well based to self-perpetuate itself.
A great many monetary reformers have attributed their lack of success to the entrenched powers of those controlling money creation. This influence can hardly be overstated. No media baron, for instance, is in a position to antagonise his primary financiers. However, this acknowledged, their lack of response has been a lack of response. The first question is, why?
The elementary proposition taken to the public has approximately been:-
- “The creation of money has been captured by private interests. These interests have enmeshed all nations in debt, financed and heavily influenced the media, industry and government worldwide, in the beginning to defend their privileges, and later to direct policy.
- “The result is massive worldwide debt, with debt dependency bringing inflation and depressions, much as a dependency on alcohol results in binges and withdrawal symptoms.
- “National efforts to repay debts through exports to gain funds to do so, have resulted in “trade wars”, and sometimes in shooting wars. When this proves unequal to the task, trading blocks (the E.E.C., NA.F.T.A.) are formed to gain greater leverage.
- “Nothing has worked, and nothing can, except issuing new credit debt free. “A reform to issue all national monies debt-free to their peoples is the answer.”
The problem with the above is not that it isn’t true. It is. The problem is that it is not credible. Most people take the view, quite reasonably, that for the above to be true, there would have to be an identifiable entity (or entities) with assets about the size of all the money in the world. Where is this stupendously rich mortgagee, who creates and owns all the world’s money? The short answer – “The Banks” – is simply not credible.
Why? Take the balance sheet of any trading bank (or all of them together), and there are usually several non-bank companies of comparable size in most countries. All the shares of all the Banks in any country, could be bought for a month or two of gross national production. Who can believe that Banks create practically all the money in the world, own it, and lend it out at interest to increase it, and yet are only an investment of average returns, with assets comparable to other large companies?
The above could only be true and credible to either a lunatic, or to somebody who understood some other factor, some missing key to the enigma. This key lies in the Banks’ accounting procedures. Yes, Banks do create money, and thereby create then – own assets. The assets so created amount to over 90% of the world’s money supply. Why isn’t this obvious?
Because Banks creatively account liabilities for themselves, equal to their asset creations, which shroud this activity. When the money supply of a nation is created by its banks, the Balance Sheet of that Banking system looks like this:-
1. Shareholders’ funds
1. The Money Supply* (as loans) (Legal tender, about 5-7% of M3 is excluded here)
2. Other assets:- Bank buildings, reserves, office equipment, etc.
However, when the borrowers spend the loans which create our money supply, the payees then make a deposit in the banking system. These deposits are strictly held in trust. Nobody’s bank deposit is ever reduced to loan it out.
Non-banking companies never account other people’s funds held in trust, as either increasing or decreasing those companies’ net worth. These funds are accounted as assets held in trust for which there is an equal liability to the depositor. Solicitors Trust Funds don’t make solicitors either richer or poorer for holding them, for instance.
If Bill gives you his wallet containing $100 for safe-keeping while he goes swimming, you hold a deposit of $100 (an asset), and a liability to Bill for $100. Your net worth is not affected. Yet what happens when you deposit your $100 in a Bank?
To return to the balance sheet of the Banking System above, what happens when the money supply is deposited back into the Banks in trust? The above Balance Sheet is amended as follows:
1. The money supply (as deposits)
2. Shareholders’ funds
1. The money supply* (as loans) (legal tender excluded)
2. Other assets:- buildings, reserves, office equipment etc.
Deposits are added to the Liabilities column. Suddenly, the richest business in the country, which creates and owns practically all the money in existence, masks this fact by mis-accounting funds held in trust.
Mis-accounting deposits, which they are forbidden by law to touch, and hold strictly in trust, creates a lie to cover an originally fraudulent, though now accepted and Government licensed practice, of a banking system which creates money for itself. This is the fence around the fraud. The next thing to be said, however, is that this was not a cunning trick, created to fool a world of innocent citizens, and even the Bank’s own shareholders.
It was an historical accident. With a few notable exceptions (William Paterson, the founder of the Bank of England in 1694, said: “The Bank hath benefit of interest on all monies it creates out of nothing”), early bankers did not understand their role as money creators.
They began by lending their deposits of gold, so their deposits were liabilities and their loans assets. Only later was it realised that by making a loan they created an additional deposit. It was later again that the world totally abandoned the gold standard leaving the Banks creating all money.
None of the above makes the Bankers bastards, or is intended to defame, but it has left all of us, bankers, bank shareholders and the world’s people with a curious financial system which we have to survive.
Perhaps most curious of all, is that IF bank deposits are ever accounted correctly, two great winners would emerge, bank shareholders and their citizen clients. The former because Banking companies will shed perhaps 90% of their liabilities, while retaining their assets. The latter because the debt system will be exposed and discarded for a system originating national money as a free issue to citizens.
Source by Ross Scholes