The Bank of England
The Purpose of an Economy – 2
In the previous section we looked at a number of functions that an economy should ideally provide to be fit-for-purpose. I feel it would be useful to review the points we raised:
- To facilitate the trade of material resources, goods, and services between populations, both in the context of within domestic surroundings, i.e., within a country’s boundaries and also between differing countries and states.
- To facilitate beneficial and sustainable trade between people.
- To facilitate trade that is equitable between people.
- It should provide a stable and inflation-free environment.
- It should provide a framework that encourages long-term investment.
- The economy should not provide any mechanism that unfairly transfers wealth to any one group of society.
- The economy should not unreasonably burden governments and society with debt.
100 Percent Monetary Backing
In the first article we introduced the idea of 100 percent money backing for our currency. This is simply supplying what most people believe already occurs, they believe there is real money behind the loans that they take out. So for many this would not seem like a huge change. It would, however, in actuality, be a real fundamental change with numerous positive benefits that would be worth bringing to your attention.
To begin with, it is not simply the fact that all bank deposits for current accounts would now be 100 percent-backed by real money, this money would no longer be created by debt, it would no longer be created out of nothing by private corporate interests. This backing would not apply to the investment arm of banking, the gambling side, if you wish. This change would introduce many beneficial changes and opportunities. Returning the right to create money back to the sovereign state would bring to an end to the centuries old debt-creation system that enriched the banks and impoverished society. No longer would the government have to go cap in hand to borrow from commercial banks, allowing them to create money that society could create for itself without adding further interest charges and debt to the already out of control national debt. The banks would have to pay the country (albeit a very small charge) for the money that we supply to them for their 100 percent backing. This would create a sounder currency, there would no longer be any concern for a run on the banks, at least in the sector that is backed by 100 percent money. This would be pointless, as everybody’s money would now be 100 percent secure.
The national debt could be monetised and paid off over a period of time. With the full backing of the resource of the entire country, its entire labour force, and its entire infrastructure to support it—this would provide a sound foundation for growth opportunity. Whilst it would not permit spending willy-nilly, it would provide the opportunity to also permit investment in the infrastructure of the country. Upgrading the infrastructure, after all, would be adding to the quality of the sovereign backing. A country with a sound and efficient infrastructure, is much better able to be a productive country. In Hijacked,[i] we gave the example of the island of Guernsey where their local parliament, the States of the Channel Islands, elected to directly finance a number of infrastructure projects, by creating the money for the projects, as sovereign money, as established by sovereign authority. This worked so well it enabled the island to eventually build schools, a further college, repair roads and undertake coast preservation work. What may also interest you, is Guernsey, at that time was considered as a very low-tax country, they had no capital gains tax, no inheritance tax or estate duty, no purchase or sales tax, no Value Added Tax, and no capital transfer tax. They also had no national debt, nor any external debt.
Whilst this is a small example, of a small Island, the principle is the same, it could be applied to any country, or a bigger island, like the British Isles—which could be realised once Britain exits the European Union. It could be considered a golden opportunity for the UK, an opportunity that would be much more problematic under EU rules, with compulsory VAT, and homogenised banking regulations.
Debts for Us, Financial Crime Rewarded
It is hard to overemphasise how significant having no national debt would be for a country. There is hardly a country in the world without a very significant national debt. US debt is given as $21.15 trillion, with its interest costs being $169 billion per year. This of course excludes US household debt, which is approximately $12.25 trillion. Add to that student debts of $1.26 trillion, and you have all lot of debt.[ii] With Gross Domestic Product (GDP) running at $19.8 trillion, this makes US debt 106.8 percent of GDP, which effectively means that debt has exceeded income.
As a contrast, UK national debt is approximately £1.76 trillion. In 2010 the interest on the national debt was running at £42.9 billion for that year. Currently the interest payment on UK debt is running at £52 billion a year, which is approximately 85.57 percent of GDP. This can seem like just a lot of big figures, but just to give some substance to these numbers, back in 1997, the debt was running at 40 percent of GDP. The labour government of the time will be forever remembered as the government that doubled the national debt to 80 percent of GDP in 2014,[iii] most of it under the auspices of the Prime Minister, Gordon Brown, and his reckless spending policies, and ignoring the cost.
Much of this of course was due to the bank bailouts and the Quantitative Easing program instituted by the Bank of England, to cover the absolutely reckless gambling and speculations made by the banking sector associated with the American Sub-prime mortgage debacle of 2007/8. In the UK for example, £445 billion was created by the Bank of England, and pumped into the banking system and the financial industry.
Quantitative Easing, was initially instituted by the American Federal Reserve in August 2007, which by 2015 had increased its balance sheet from about $870 billion to $4.5trillion. Other central banks instituted their own Quantitative Easing programs, such as the European Central Bank (€1 trillion), and the Bank of Japan ($1.4 trillion).[iv]
What is important to understand here is this money was simply created by these central banks and pumped into the financial system. We know that from 2007 to 2017, there were in excess of 17 million foreclosures in the USA (that we now know was mostly due to miss-selling). Some of this Quantitative Easing could easily have been diverted to save these people from being ejected from their homes, and effectively being made homeless. It could have been invested into the economy in many different ways, instead saved much of the banking industry from bankruptcy, and effectively sent the message, that no matter how irresponsibly the banks gamble with our economy, they will be rescued, and the likelihood of any prosecution for malfeasance is virtually nil.
Check out the video below by the organisation Positive Money, on the failure of Quantitative Easing:
Another important point to make here is regarding the hypocrisy behind the Quantitative Easing program. If the same central banks were to create money to pay off some of their national debts, or fund improvements to the infrastructure, or even help fund any social programs, there would be howls of protest from the banking fraternity and their shrills. There would be predictions of dire consequences, particularly with regard to inflation. Yet there were no howls of protest when they were the receivers of this largesse, and there were very few signs of inflation, except in the luxury goods market for expensive yachts, top-end housing and expensive cars and such-like. Most of this largesse found its way into the coffers of the super-rich, the top 1 percent, and even more into the coffers of the 0.1 percent, the very wealthiest people who sit at the top of the pyramid of wealth.
In my book Hijacked, I charted the trials facing the dispossessed British rural population who lost their self-sufficiency and independence of livelihood, and effectively became a labour force that paid rent for their land and housing. The aristocracy simply collected the rent, they were what economists referred to as the rentier class. I showed how they were eventually eclipsed by the rise of finance and banking, who basically replaced the aristocracy, and became the new rentier class. The whole idea of the rentier, was to collect the economic rent in all its various forms, without having to actually do anything for it, such as work for a living. The banking system, however, went one better by supplying the government with money they could have easily supplied for themselves, allowing the banking system the monopoly privilege of creating the money out of nothing creating an effective debt, and subsequently charging interest for the privilege—they effectively rented the economy to the country. They have a constant stream of income, due to the interest charges on the national debt, and following all the deregulation, can gamble as much as they like and operate offshore in varying tax havens, and pay negligible sums in the way of taxation.
Money Creation and the Magic of Compound Interest
Another important aspect of the invasive nature of debt, is the way it only seems to grow, and never seems to decrease, is due to the nature of compound interest. The rule of 72 illustrates this, by revealing how quickly debts can escalate in size to double its original size. For an example, if you borrow $1 million dollars at 8 percent interest, you divide 72 by 8 which gives 9. This explains if you do not pay off the original $1 million dollar loan, with the interest compounded, within 9 years the loan will have doubled. This may help you understand why our national debt never seem to get smaller, nor do the debts of the developing countries. Such is the nature of banking, that this is exploited with great relish. When you consider that they only have to have a liquidity loan reserve of 2 percent at best, this permits a lot of money creation, to further charge interest on. It might not surprise you to know that two of the richest men in the world, J P Morgan and John D Rockefeller are reputed to have referred to compound interest as the eighth wonder of the world, and of course they both went on to found the greatest banking dynasties of all.
Many people are unaware that banks ‘create money out of nothing’, and we can clarify this important point here. If you go to a bank and ask to borrow some money, say $10,000, providing the bank agrees, they will ask you to sign an agreement to pay their interest rate on the debt created. Once that is achieved, they simply type into their keyboard, and hey presto, you now have $10,000 in your account. It doesn’t come from anywhere, it is simply created by the bank on the strength of your agreement. So when we suggested above that this system is replaced with 100 percent money, it would mean for the first time the banks would have a backing for your loan of actual money. So you can see why so many people believe allowing banks to do this, and charge interest for the privilege is preposterous. On top of this, you could take this loan and pay your builder for work you had done, and he could then take it to his own bank and deposit it. His bank could then make loans against this money. Banks are also allowed to loan in excess of their liabilities, being required only to keep a small reserve against loans (currently as reported in Hijacked less than 2 percent in the UK and 1 percent in the USA). So this second bank would be able to lend out a further $9,800, which could be deposited in another bank which would also be able to lend out against it (again keeping just 2 percent as liquidity reserves). By this means a large sum is created out of nothing via numerous loans on which interest and loan fees must be paid. For those of you who would like a deeper explanation of this topic, I refer you to my previous two volumes, plus other works cited (both in theses volumes and in these papers), and videos posted on this site.
It is little wonder that banking has been equated by so many as ‘parasitic’. In my first book, Unhealthy Betrayal, [v] I compared them with cancer (it was a book more based on health), a disease that eventually takes over the whole system, zaps the strength and is totally destructive. Matt Taibbi, described the bankers Goldman Sachs as “a great vampire squid, wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”[vi] Professor Michael Hudson, in my view, one of the most clued-up economists in the world, in his excellent volume, Killing the Host—How Financial Parasites and Debt Destroy the Global Economy, describes some of this destructive nature:
Extractive finance leaves economies emaciated by monopolizing their income growth and then using its takings in predatory ways to intensify the degree of exploitation, not to pull the economy out of debt deflation. The financial aim is simply to extract income in the form of interest, fees and amortization on debts and unpaid bills…To the financial sector, the most important privatization is that of money creation. The aim is for economies to become dependent on bank credit rather than government spending to provide money and credit needed to grow.[vii]
One of the obvious ways the economy is drained by this parasitic activity, is the interest charges. We reported above that the UK taxpayers were having to pay interest on the national debt to the tune of £42.9 billion in 2010. That is a lot of money effectively taken out of the tax take that could have been spent on upgrading infrastructure, schools, social programs etc. It is also money that would have been spent into the economy that would help create a vibrant economy. Of course, many in the banking fraternity would like to argue that the banks would spend this income into the economy also. The reality is that approximately 80 percent of banking investment is into the housing market, which in a large part simply has been a significant force behind the inflation of house prices. It is also mostly a myth that they lend to small businesses, they much prefer to lend to larger businesses, particularly the large multinationals, businesses that are considered very low-risk. Unfortunately, most finance is seeking quick returns, the higher the better, the idea of investing in the long-term future of a company has never been a serious feature of banking, particularly in the USA and the UK. Banking and finance has become increasingly more predatory and competitive, and most of this activity has moved to off shore tax havens, and is represented what by what we refer to as the shadow banking system—much of this is elaborated on in Hijacked.
Another effect of this system of banking is the inherent instability of it. We mentioned how its preponderance to lend on the housing stock suits its purpose, banks cannot really lose money if prices rise, as it has the housing collateral as security on its loans. Banks are also happy to lend to wealthy customers, who in turn are happy to borrow money at the current low interest rates and speculate in both the housing market and the stock market. In a rising market it is easy money to make, with little real outlay. This kind of lending is historically associated with creating bubbles, in the housing market and the stock market, than tend to peak and then crash, as happened with the 1929 stock market crash, which was followed by the Great Depression of the 1930s. The 2007/8 crash being another example.
So far this paper has simply been discussing the effects on our economy of private banking monopoly of money creation, pointing out just a few pitfalls of this system. There are a number of other ways our economies can be distorted in negative ways, fiscal policy (taxation policy), for example can have a major influence on the running of our economy and the way financial resources are distributed, it can also have unintended consequences.
Whilst we have only discussed one aspect of our economy, that of the privilege of money creation currently under the monopoly of private banking interests, we have shown how it impacts most of the original functions that an economy should ideally provide to be fit-for-purpose. It shows how our current system fails every parameter except the first one that of facilitating trade, which it does achieve to some degree. It does however also fail here, in that being responsible for the creation of the national debt, it restricts trade, and if you add household debt, mortgage debt, and corporate debt, this huge debt pile restricts trade on an ever increasing scale, leading to what economists refer to as debt deflation, which is what we are currently being faced with. Professor Michael Hudson makes the comment that ‘The growth of debt has become the major cause of economic downturns, austerity and financial polarization, creating financial crashes and, in severe cases social crises.’ And further that ‘Debt may be viewed as financial pollution, entailing major cleanup costs.’ Whilst we may have inherited our financial system with its roots based in the early requirements of British capital for its imperial pursuits following industrialization, it has evolved into a very different beast today. Again, Michael Hudson eloquently expresses today’s reality as regards to its solution:
The solution will be shaped by the fact that financial power tends to transform itself into political power, and also into legal and even cultural power, as it seeks to shape the electorates perceptions in ways that serve its own objectives. On the most abstract level, society’s shape is being transformed by the principle of compound interest working out its power politically, fiscally and in the intellectual plane of academic economics. In this respect finance has an intrinsic personality and an implicit evolutionary strategy, even if this worldview is not fully conscious. [viii]
It is my view that it is imperative for us all to become better acquainted with some of these basic fundamental principles, such as the banks private monopoly of money creation (except, of course, for bailing out finance when its profligate gambling and deceits come home to roost and the central banks then are permitted to create money). My belief is that change will only come from a coordinated real grass movement for change from us, the voters, when we are educated enough to realise this economic system ran for banking interests is not fit for purpose, and needs to be replaced, and the shackles of debt thrown off. It is for this reason I write these articles and books to help offer you a different viewpoint than you are able to get from the mainstream media. It is up to you whether my books or these papers will ever see the light of day. Hopefully you will share them if you find them informative and useful.
In the next section we will look at some of the effects tax policy has on the health of our economies.
Andrew A D Burgoyne
[i] Andrew A D Burgoyne, Hijacked—How the Banking Industry, Finance, and Corporate Interests, Have Hijacked Our Economy and Corrupted Democracy, Fundamental Press, 2018
[iv] Katie Allen. “Quantitative easing around the world: lessons from Japan, UK and US.” The Guardian. Thu 22 Jan 2015.
[v] Andrew Burgoyne, Unhealthy Betrayal—How the Manipulation of Science and Politics by Corporate Interests Destroys Health and Threatens the Future of Humanity, Fundamental Press, 2015.
[vi] Matt Taibbi, “The Great American Bubble Machine,” Rolling Stone, July 9, 2009.
[vii] Michael Hudson, Killing the Host—How Financial Parasites and Debt Destroy the Global Economy, ISLET Verlag, 2015.
[viii] Michael Hudson, The Bubble and Beyond—Fictitious Capital, Debt Deflation and Global Crisis, ISLET-Verlag, 2012, p99.