Debt Free Money and Less Fraction In The Reserves
The Financial Collapse In A Nutshell
It started with mortgage lenders mainly in America but also in the UK and around the world collectively lending out money at quantities beyond what they actually had in assets and deposits through the fractional reserve system. For example at a 10% reserve ratio a bank with £100 in deposits is allowed to lend £90 and keep £10 in reserve. But when the borrower (usually electronically) deposits this £90 in to another bank, then £80 can be loaned out to somebody else, who then deposits it elsewhere. Then £70 can be loaned out from this new bank. Soon we have far more credit in circulation than the original £100.
The credit in the form of mortgages were issued with extremely high interest rates compared to the value of the houses, to people with poor credit records. As illogical as it sounds high rates were charged to poorer people as a way to reduce risk and reap more profits in the long run.
The banks then took large pools of these inflated mortgages (called derivatives), and sold them as a financial product to invest in, based on the idea that all of these people would pay back their mortgages and make everyone rich.
Over time these derivatives were swapped, mixed with other investments, repackaged and made their way all over the world. All on the basis that the borrowers could pay back their mortgages at the interest charged. It became a giant bubble based on the value of human faith. Or as some might say gambling.
When the US economy naturally slowed down and property prices fell, as is expected lots of the original borrowers could not afford to pay back their mortgages and so the whole string of investment collapsed.
Because the financial system is based on credit rather than assets, all banks, hedge funds, lenders etc rely heavily on borrowing money from other banks through the fractional reserve system. Suddenly nobody wanted to lend and therefore nobody could borrow. The entire bubble had burst.
Britain’s Northern Rock based its business model on borrowing money from other banks, using this credit to lend out new credit as mortgages, and then selling the pool of mortage debt for a profit to other investors. Because of this interconnected sinking ship of debt Northern Rock collapsed and its regular high street account holders withdrew their deposits on mass – taking away their reserves.
Instead of allowing this utterly illogical business practice to fail, tax payers were then forced to bail out these failed banks that were gambling and counterfitting account holders money – in turn adding to the national debt of the country. In the UK we were forced to nationalise Northern Rock and buy billions of shares in Bradford & Bingley, RBS and Lloyds Banking Group.
In total British taxpayers have stumped up around £1trillion in bailout money. All of which was borrowed on behalf of the government and must be paid back. In other words the debt owed by private banks and lenders has been nulled and passed on to the people who will pay it back through taxation and cuts to public services.
The official national debt is £1.1 trillion, the true figure is closer to £4.8 trillion. Britain is bankrupt, and the interest on the debt exceeds any cuts currently being made. In other words the debt will still increase each year regardless.
The Deficit & National Debt In A Nutshell
Although the collapse of the private financial sector has added huge sums to the national debt, Britain was already well in the red thanks to the method by which Government’s make, or more accurately borrow money.
The Government have illegal wars to fight, the European Union to pay and if they can remember hospitals and public services to fund.
Most people think this is paid for by the tax payer. It perhaps was once, but now money the government collects via taxes is so insignificant to the amounts they spend, it only covers the interest on their debts.
The majority of Government funds are actually borrowed from private banks, just like we borrow from the highstreet. You might have a few hundred in bank charges, they are pushing £4.8 trillion in the red!
So the Government needs £500 million to inavde another middle eastern country…lets say Iran. They go to the Treasury and the Treasury issues £500 million in government bonds or gilts, better described as IOUs.
Overseas investors, insurance companies and private bankers purchase these IOUs and now the Government, or more accurately the people are £500 million more in debt. We have to pay this sum back with interest. Currently we can only afford to make repayments if we sell even more of these bonds to private institutions. In other words we are stuck on a never ending fishing line of credit and debt.
Debt Free Money
There is a solution, it’s called Debt Free Money, or Publicly Created Money. This is money created by the Government or a public body for the people. Instead of borrowing money when it needs to pay for schools, roads, the NHS, or heaven forbid wars…it’s entirely feasible that the the Government on behalf of the people can create it itself.
The Bank of England has historically created debt free money when it printed notes and coins; which it then sells at face value to the private banking system on demand, when cash is needed for transactions. The money generated by printing notes and coins is debt free and can be used to fund public services.
Unfortunately unlike post WWII when it was at 50%, only about 3% of money in circulation today is notes and coins created debt free by the Bank of England.
The ruling classes prefer the debt based economy because it works as a control mechanism and allows the monied elite to skim off the top in a never ending cycle of booms and busts, or as we are experiencing today a great depression. The top bankers and businesses are still posting record bonuses and hoarding profits in off-shore tax havens and tax-free foundations.
If we can reach a point where the people can issue debt free money for public services and spend it in to the economy for projects that benefit the people, we will have a much more sustainable and fairer system.
As posted on Sovereignty.co.uk – It is the debt-based nature of our money supply which drives this need for “growth”. This is because it is the debt in the system which institutes an intrinsic inflationary imperative into the economy, driving itself, and us, recklessly onward.
Debt is the driver. For example, debts for industry mean that industry has rising costs of production and has to raise its prices.
Debts for individuals mean less disposable income, depressing consumer spending power, leading to wage demands.
Systemic debt in society tends to constantly work to push costs and prices upwards, disposable income downwards and wage demands upwards.
And the only way the economy can try to meet these demands is to keep growing and growing. The economy has to keep growing to meet the demands of these debts.
Debt is to the economy as high-octane fuel is to a jet engine. But this is not jet-propelled growth, its…
Endless debt leads to endless pressure for endless growth.
To summarise, when money is being created as a debt at its point of origin, then it will feed into other debts throughout the economy and require more people and businesses to go into debt to service them, which leads to another increase in the debt-based money supply, which leads to more people and companies acquiring debt, and so on and on.
A money supply based on debt is compelled to keep growing unsustainably like a vicious Towering Inferno. And like Steve McQueen’s character, Fire Chief O’Hallorhan said in that film: “It’s out of control, and it’s coming your way!”
Less Fraction In The Reserve
This leads us to our second solution. The Fractional Reserve system of creating credit willy nilly, by lending out more than exists (with interest on top) is the root cause of the financial bubbles that eventually burst.
If there was stricter reserve ratios or banks operated at full reserve, (only lending what was available in deposits), there would not be artificial growth in the economy and therefore no explosive collapse either.
MP Douglas Carswell who recently introduced a Bill in parliament to reform the banking system explains:
Who owns the money in your bank account? That small question has profound implications. According to a survey by Ipsos MORI, more than 70% of people in the UK believe that when they deposit money with the bank, it is theirs—but it is not. Money deposited in a bank account is, as established under case law going back more than 200 years, legally the property of the bank, rather than the account holder. Were any hon. Members to deposit £100 at their bank this afternoon or, rather improbably, if the Independent Parliamentary Standards Authority was to manage to do so on any Member’s behalf, the bank would then be free to lend on approximately £97 of it. Even under the new capital ratio requirements, the bank could lend on more than 90% of what one deposited. Indeed, bank A could then lend on £97 of the initial £100 deposit to another bank—bank B—which could then lend on 97% of the value. The lending would go round and round until, as we saw at the height of the credit boom, for every £1 deposited banks would have piled up more than £40-worth of accumulated credit of one form or another.
Banks enjoy a form of legal privilege extended to no other area of business that I am aware of—it is a form of legal privilege. I am sure that some hon. Members, in full compliance with IPSA rules, may have rented a flat, and they do not need me, or indeed IPSA, to explain that having done so they are, in general, not allowed to sub-let it to someone else. Anyone who tried to do that would find that their landlord would most likely eject them. So why are banks allowed to sub-let people’s money many times over without their consent?
My Bill would give account holders legal ownership of their deposits, unless they indicated otherwise when opening the account. In other words, there would henceforth be two categories of bank account: deposit-taking accounts for investment purposes, and deposit-taking accounts for storage purposes.
[This is the system recommended by proposals such as Irving Fisher's 100% Money solution and the modern full reserve banking proposal available at www.BankofEnglandAct.co.uk]
Banks would remain at liberty to lend on money deposited in the investment accounts, but not on money deposited in the storage accounts. As such, the idea is not a million miles away from the idea of 100% gilt-backed storage accounts proposed by other hon. Members and the Governor of the Bank of England.
My Bill is not just a consumer-protection measure; it also aims to remove a curious legal exemption for banks that has profound implications on the whole economy. Precisely because they are able to treat one’s deposit as an investment in a giant credit pyramid, banks are able to conjure up credit. In most industries, when demand rises businesses produce more in response. The legal privilege extended to banks prevents that basic market mechanism from working, with disastrous consequences.
As I shall explain, if the market mechanism worked as it should, once demand for credit started to increase in an economy, banks would raise the price of credit—interest rates—in order to encourage more savings. More folk would save as a result, as rates rose. That would allow banks to extend credit in proportion to savings. Were banks like any other business, they would find that when demand for what they supply lets rip, they would be constrained in their ability to supply credit by the pricing mechanism. That is, alas, not the case with our system of fractional reserve banking. Able to treat people’s money as their own, banks can carry on lending against it, without necessarily raising the price of credit. The pricing mechanism does not rein in the growth in credit as it should. Unrestrained by the pricing mechanism, we therefore get credit bubbles. To satisfy runaway demand for credit, banks produce great candy-floss piles of the stuff. The sugar rush feels great for a while, but that sugar-rush credit creates an expansion in capacity in the economy that is not backed by real savings. It is not justified in terms of someone else’s deferred consumption, so the credit boom creates unsustainable over-consumption.
Policy makers, not least in this Chamber, regardless of who has been in office, have had to face the unenviable choice between letting the edifice of crony capitalism come crashing down, with calamitous consequences for the rest of us, or printing more real money to shore up this Ponzi scheme—and the people who built it—and in doing so devalue our currency to keep the pyramid afloat.
Since the credit crunch hit us, an endless succession of economists, most of whom did not see it coming, have popped up on our TV screens to explain its causes with great authority. Most have tended to see the lack of credit as the problem, rather than as a symptom. Perhaps we should instead begin to listen to those economists who saw the credit glut that preceded the crash as the problem. The Cobden Centre, the Ludwig von Mises Institute and Huerta de Soto all grasped that the overproduction of bogus candy-floss credit before the crunch gave rise to it. It is time to take seriously their ideas on honest money and sound banking.
The Keynesian-monetarist economists might recoil in horror at the idea, because their orthodoxy holds that without these legal privileges for banks, there would be insufficient credit. They say that the oil that keeps the engine of capitalism working would dry up and the machine would grind to a halt, but that is not so. Under my Bill, credit would still exist but it would be credit backed by savings. In other words, it would be credit that could fuel an expansion in economic capacity that was commensurate with savings or deferred consumption. It would be, to use the cliché of our day, sustainable.
Ministers have spoken of their lofty ambition to rebalance the economy from one based on consumption to one founded on producing things. A good place to begin might be to allow a law that permits storage bank accounts that do not permit banks to mass-produce phoney credit in a way that ultimately favours consumers and debtors over those who create wealth. With honest money, instead of being the nation of indebted consumers that we have become, Britons might become again the producers and savers we once were.
With a choice between the new storage accounts and investment accounts, no longer would private individuals find themselves co-opted as unwilling—and indeed unaware—investors in madcap deals through credit instruments that few even of the banks’ own boards seem to understand.
These solutions may not be perfect, and they need to be implemented carefully soas not to disrupt the economy fruther. Lobbying against us will be a given. We also need to address the hidden motives of institutions like the Bank of England and the US Federal Reserve, who often seem to work hand in hand with private interests despite being the central banks of the people.
The US Federal Reserve essentially works independent of the Government, hides from oversight and has close ties to the likes of Goldman Sachs, who conveniently act as its broker on the bond market.
The Bank of England was a private Bank until 1946, when an act of Parliament provided for its nationalization. The stockholders were compensated, and the bank subsequently dropped virtually all its private business.
Although technically owned by the state, the bank is largely controlled and run by those from the world of commercial banking and conventional economics. The members of the Court of Directors, who set policy and oversee its functions, are drawn almost entirely from the world of banks, insurance, economists and big business.
In 1977 the Bank set up an obscure subsidiary entitled BANK OF ENGLAND NOMINEES LIMITED, or (BOEN), which is actually listed as a private company, owned by the Bank of England. Records show that it only has 2 of its 100 £1 shares issued (to who? Nobody knows). Its function isn’t clear, but this is what is listed:
“To act as Nominee or agent or attorney either solely or jointly with others, for any person or persons, partnership, company, corporation, government, state, organisation, sovereign, province, authority, or public body, or any group or association of them….”
This bizarre company was granted an exemption by the Secretary of Trade, from the disclosure requirements under Section 27(9) of the Companies Act 1976 , because, “it was considered undesirable that the disclosure requirements should apply to certain categories of shareholders.”
We have a long way to go, but unless we start discussing truly progressive banking reforms, or children and our childrens children will be stuck in anever ending black hole of debt, that under the current system can only be solved by slavery and the destruction of public services.