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Chapter 7: Secrets, Ignorance and Lies: Money, Credit and Debt
CHAPTER 7: SECRETS, IGNORANCE AND LIES: MONEY, CREDIT AND DEBT.
“The tyranny of fraud is not less oppressive than that of force.” John Taylor of Caroline, Virginia (1814).
Our money system relies on people not understanding it. If people understood it, they would demand reform.[1]
The most outrageous falsehoods are propagated daily about money and banking. Here are one or two examples:
‘A commercial bank is fundamentally nothing more than a middleman to put these two groups of people (investors and entrepreneurs) together in an efficient way’.[2]
This untruth is repeated regularly in education and the media, and most people believe it. The ‘middleman’ story is denied repeatedly and explicitly by authorities who know about the system, and are honest.
Here are some authoritative denials of the ‘middleman’ narrative:
The Bank of England: “One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them…[this] ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. …Rather than banks lending out deposits that are placed with them, the act of lending creates deposits – the reverse of the sequence typically described in textbooks.”[3]
Abbott Payson Usher (20th century banking historian): ‘The essential function of a banking system is the creation of credit, whether in the form of the current accounts of depositors, or in the form of notes. The form of credit is less important than the fact of credit creation.’[4]
Joseph Schumpeter (economist): ‘It is much more realistic to say that the banks ‘create credit’, that is, that they create deposits in their act of lending, than to say they lend the deposits that have been entrusted to them.’[5]
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Chapter 6: American, Won and Lost
CHAPTER 6: AMERICA, WON AND LOST.
After the United States gained its independence from Britain, it became powerful in the world in two very different ways: as an idea, and as a reality.
‘America the idea’ is a land of freedom and democracy, equality and opportunity, promoting these aspirations and values across the world.
‘America the reality’ is an international power. It was built on genocide and slavery. Today, a carefully managed monetary system allots wealth to those who do no productive work. In the wider world, America destabilizes popular governments, promotes tyrannies, creates dollars to purchase foreign resources for corporate exploitation and sponsors foreign wars to establish new bases of military and financial power.
For a long time ‘American the idea’ successfully camouflaged the activities of ‘America the reality’. Today the camouflage is wearing very thin indeed.
‘America the reality’ became stronger than ‘America the idea’ as the powers of money and corporate industry won out over the idealism and the good intentions of many of its ‘founding fathers’[1] and of countless others. Central to this development was the adoption of British banking as a way of creating money.
The adoption of British banking by America has an interesting history. After Independence, the American elite opted for the method favoured by their old colonial masters and rejected homegrown approaches to money-creation, some of which had been both just and efficient (see below).
The new elite liked British banking for the same reason it was loved by the British parliament – because it favoured government power and private wealth. The collusion of finance and government power, via circulating credit, is a very resilient form of concentrated power, because although everyone can see the bad effects, few people understand how it works. Governments across the world have since adopted the method for the same reasons: to augment their own power, and to make it easy for their supporters to increase their own wealth.
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Chapter 5: Bubbles and Adam Smith
CHAPTER 5: BUBBLES AND ADAM SMITH.
This chapter explores how laws enabling debt to be bought and sold transformed Britain. Suddenly, vast quantities of money and value were being created out of nothing. The effect was dramatic and widely commented on. Some people thoroughly approved, while others saw a new kind of tyranny taking over – a tyranny of fictitious wealth.
Speculators and ‘projectors’[1] soon realized that when money and other types of value can be created out of nothing, different types of debt can be created and used to raise prices, and therefore value. Assets can be bought with money made from nothing, prices can be talked up, more money can be created to fuel and satisfy demand, and – hey presto! – when the assets are re sold, sky-high profits are made. The table was laid for an orgy of speculative greed – and the orgy began almost immediately.
‘It was as if all the lunatics had escaped from the madhouse at once’ commented a Dutch observer.[2]Hysteria for speculation took hold of public life. English poets, novelists, and playwrights wrote and argued about the virtues and vices of ‘Lady Credit’ – and joined in the orgy themselves. A whole century of literature – Daniel Defoe, Jonathan Swift, Alexander Pope, along with many less famous writers – was given over to satirising the new society of speculators and credit-worshippers.[3]Hogarth did the same in art.
The profits of speculation left ‘honesty with no defence against superior cunning’ wrote Jonathan Swift in Gulliver’s Travels.[4] Speculations in credit ‘ruin silently… like poison that works at a distance… by the strange and unheard-of engines of interest, discounts, tallies, transfers, debentures, shares, projects, and the devil-and-all of figures and hard names,’ wrote Daniel Defoe, author of Robinson Crusoe.[5]
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Chapter 3: How Money Works Today: A Summary.
CHAPTER 3: HOW MONEY WORKS TODAY: A SUMMARY.
This chapter summarises how money works today. For convenience’s sake, there will be some repetition of material covered elsewhere.
Founded on debt rented out at interest, the money system is difficult for most human minds (mine, for instance) to grasp. It is counter-intuitive, so much so that a leading banking historian (Lloyd Mints) described it as work of the devil. In his own words:
‘It would seem that an evil designer of human affairs had the remarkable prevision to arrange matters so that funds repayable on demand could be made the basis of profitable operations by the depository institutions. It is wholly fortuitous that an income can be earned from the use of such funds, but this being so has resulted in the creation of institutions which have largely taken over control of the stock of money, an essential government function.’[1]
Authoritative sources describe our system of money and finance much as it is described in this chapter. Journalists, teachers and writers of textbooks, however, tend to describe an entirely different (mythical) system in which ‘savings’, rather than newly-created money, form the basis of capitalism.[2]
What is ‘Money’?
We all know what money is. It’s something we can own which can be swapped for other things that are up for sale. It is a kind of abstract property: mine is mine, and yours is yours.
For people who like their truths to be stated with a bit more gravitas, here is an economist saying the same thing:
‘So long as, in any community, there is an article which all producers take freely and as a matter of course, in exchange for what they have to sell, instead of looking about, at the time, for the particular things they themselves wish to consume, that article is money, be it white, yellow, or black, hard or soft, animal, vegetable or mineral. There is no other test of money than this. That which does the money-work is the money-thing.’[3]
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Chapter 4: Early Days
CHAPTER 4: EARLY DAYS.
The situation we are in today has evolved over many centuries. Economists had plenty of time and opportunity to comment – and comment they did. Only recently has it become highly controversial to notice that banks create money, let alone to discuss the implications.[1] This makes the comments of earlier economists particularly interesting – for their honesty and perceptiveness.
This chapter begins with economists commenting on the increasing power and influence of bank-credit. It finishes with a fascinating (and very modern) suggestion from 1707 of how money shouldbe created, fairly and realistically for the benefit of all. The proposal is similar to many reform proposals being put forward today.
Here are some features of bank-money that writers on economics were reacting to (some unfavourably, some favourably):
- Bankers create more in ‘credit’ than they have in ‘cash’.
- Their credit becomes money when it circulates in making payments.
- When bank-credit becomes money, interest siphons money from working and productive people to wealthy and powerful people.[2]
- Money created by banks increases the powers of government and concentrates the power of capital in fewer and fewer hands.
- Bank-credit feeds war, predatory nationalism and national debt.
- Increased concentrations of power bring new moral values: neglecting justice in favour of social management, exploitation and direction from above.
For roughly two thousand years, from the days of Aristotle to the end of the Middle Ages, economists did not pretend to be ‘scientists’. First and foremost, they were moral philosophers. They wrote about money and power in relation to law and the morality of human well-being. Aristotle, for instance, believed that money should be a means of exchange, not allowed to ‘breed’ more money.[3] Money, he said, is a human invention. We must be careful that it produces good, not evil.
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Chapter One: The Money Supply: How It Came to be Created by Banks
CHAPTER ONE: THE MONEY SUPPLY: HOW IT CAME TO BE CREATED BY BANKS.
The most important fact in economics today goes unmentioned by most economists and bankers: money is created as debt from banks, and it is cancelled when debts are repaid.[1]
I have asked many economists and bankers why this is so seldom mentioned, and always I get the same response: it’s too difficult for the public and most students to understand.
In fact, it’s not so difficult to understand. A famous economist once wrote: ‘The process by which banks create money is so simple that the mind is repelled.’[2]
Why, truly, is the fact so seldom mentioned? Another venerable quotation supplies the answer: ‘The general ignorance (of banking and finance) is not caused by any peculiar difficulty of this branch of political economy, but because those who are best informed are almost all interested in maintaining delusion and error, instead of dispersing both.’[3]
I introduce these respectably-sourced quotations to show that the statement ‘money is debt from banks’ is not an outrageous and invented claim like so many statements today, but something that has been known for a long time.
For instance, many years ago, if you looked up ‘Banking and Credit’ in the Encyclopaedia Britannica you would find the following paragraph: —
‘When a bank lends… two debts are created; the trader who borrows becomes indebted to the bank at a future date, and the bank becomes immediately indebted to the trader. The bank’s debt is a means of payment; it is credit money. It is a clear addition to the amount of the means of payment in the community.’[4]
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