The Bank-State Bargain
“I react pragmatically. Where the market works, I’m for that. Where the government is necessary, I’m for that. I’m deeply suspicious of somebody who says, “I’m in favor of privatization,” or, “I’m deeply in favor of public ownership.” I’m in favor of whatever works in the particular case.” J K Galbraith
There’s no getting away from it. Banks create money out of nothing when they extend loans and then charge borrowers interest on this newly created capital. The result is an ongoing multi-billion pound/ dollar subsidy breaking the basic rules of capitalism. What is perhaps even more surprising is that there appears to be no explicit description of the ‘bargain’ underlying this important arrangement. What follows is an exploration of elements of a possible rationale for an unspoken agreement.
Until quite recently there was surprisingly fierce argument over the way in which money is created. Thanks largely to determined and repeated enquiry by monetary reformers [1] and propogation of the issue via social media, there is now consensus over the role that private banks play in originating money in the form of loans, essentially ex-nihilo – out of thin air.
Recently the Bank of England somewhat belatedly broke their silence and joined this consensus via an in-house publication on the subject [2]. So we have a little light shining in on the phenomenon of which J.K. Galbraith in 1975 wrote: “The process by which banks create money is so simple that the mind is repelled.[3]”
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