Bank Robbery: Inequality and the Banking System

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inequality

Chapter 2 (You can read the Chapter 1 here)

Extreme inequality is the main economic, political and cultural evil of our times. This chapter is about how bank-credit, as money newly-allocated and carrying an interest charge, increases inequality, transferring wealth and power from ordinary people to governments and the very rich. It is an old story, investigated in detail by the early American economists John Taylor, Daniel Raymond and William M. Gouge, but long since buried under arguments between competing advocates for big-State and big-business. Somewhere, the economics of what we live for in the West – freedom, democracy, equality, justice – have got lost.

Concern for inequality and the suffering of others brings in consideration of ethics and justice. There is indeed an ethic supporting the new hierarchy, which says: ‘It is right that the few have so much money; they are the cleverest among us; their management of money amounts to genius and what’s more, it increases the overall prosperity of humanity’. The corollary of this is: ‘At the bottom of society are the feckless, the lazy, the incompetent, the stupid.’

Entirely buried under this ethic is the fact that the ultra-rich are beneficiaries of what John Taylor called (1821) a ‘machine for transferring property from the people to capitalists’As described in the last chapter, this system consists of giving certain institutions the privilege of creating money in a way that profits and advantages the powerful. The losers are those who, for whatever reason, don’t join, serve or profit from this system: they may be inclined to live in freedom, morally and independently. After 300 years of circulating credit, this has become difficult.

One of the stranger things (of these strange times we live in) has been to watch governments, in a crisis caused by too much money in the wrong hands, pouring money into the same wrong hands via ‘quantitative easing’.

In quantitative easing, governments create brand-new money and use it to buy government debt (bonds) from large non-bank corporations (e.g. pension funds and insurance companies). The money (in the U.K. 375 billion; in the U.S. 3.5 trillion) does three things. First, by buying back government debt, it lowers the cost of government borrowing. Second, it gives companies ready cash to buy other assets (stocks, corporate bonds, shares, buildings); this raises the price of capital assets generally, making rich individuals and corporations richer. Third, it gets banks out of trouble by refilling their ‘reserves’ free of charge when the company deposits its brand-new money: this increases their reserve ratio, making it safer for banks to lend. In theory, banks will lend to businesses producing goods that people want to buy; but in our post-crunch world, most people have little excess money for spending and ‘productive enterprise’ is less profitable as a result, so most bank-lending goes to rich people to buy more assets. The price of those assets increases, and banks and investors again get richer.

Helped on by ‘quantitative easing’, inequality has now risen to almost incredible levels. There is a choice of statistics to express this inequality, most of them mind-boggling. An example: according to an Oxfam report (‘Working For The Few’, Jan 2014) the richest 85 individuals in the world are worth more than the poorest 3.5 billion. Another example: 25,000 people die from hunger each day, while a new billionaire is created every second day. From another angle: in 1983, the poorest 47% of America had $15,000 per family (2.5 percent of the nation’s wealth): in 2009, the poorest 47% of America owned zero percent of the nation’s wealth (their debts exceeded their assets).

The concentration of power and wealth in a very few individuals signifies a new social order. No rich individual is capable of day-to-day management of his/her own affairs: they are served by hierarchies of people and corporations. Many levels and branches of human and corporate ‘persons’ devote their working lives to maximising wealth at the tip. Laws are manipulated, taxes avoided, costs are cut, workers shed, regulations ‘captured’, environments destroyed, etcetera.

The poor are treated more and more exploitatively – and yes, with more and more contempt. Distant orders are given by departments devoted to cost-cutting and ‘efficiency’ – meaning more profit to shareholders; the state picks up the cost of these ‘efficiencies’. Overarching decisions affecting millions of lives are made at greater and greater remove by people who never have to witness the suffering and death they cause. This ‘remove’ is perhaps the most important factor in human affairs: if you are not close to the death or suffering your activities require, you can easily ignore it.

The bizarre, hideous and outrageous doctrine known as ‘austerity’ means cutting back on essential state-provided services. Poor and independent people, already bled into penury by the financial system, are deprived of the very basics of compensatory provision, and move from poverty to desperation so that kleptocrats may continue to get richer.

Perhaps just as strange, the alternatives being offered by political parties in countries suffering economic devastation (Greece, Portugal, Italy) look back to left- and right-wing totalitarianism from the last century.

And all this in what we like to call ‘democracies’!

There is a simple reason why no significant ‘just and reasonable’ alternative is on offer. The fundamentals of the financial system are far beneath the radar of public perception and debate; meanwhile, more and more complex ‘financial instruments’ grow from the fertile ground of ‘fictitious credit’, with the result that the visible manifestations of the system are more-or-less incomprehensible.

The American founding fathers were aware of much of this. John Adams wrote, in a letter to Thomas Jefferson: “All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.” How much more relevant are those words today!

The system today is similar to how it was in Adams’ day, only worse. Credit is 97% of money, whereas in his day it was considerably less than half. Chapter One examined the evolution of our bizarre system. Put simply, the government (via the central bank) creates digital money (reserves) which the banks buy at auction in exchange for government bonds. The banks then create claims on this digital money, and those claims – now called ‘credit’ – are rented out and become 97% of our money supply. To complete the picture, it is necessary to add that notes and coins are part of ‘reserve money’, purchased by banks and released to the public as a service to attract and keep customers. Otherwise, reserve money stays entirely within the banking system; only ‘credit’ may be owned outside it.

The main features of the system which contribute to inequality are these:

1. 97% of our money supply is lent at interest. The profit goes to banks and spreads out, via investors, to increase the price of other capital assets (i.e. to making the rich richer). Again simply put (by John Taylor, friend and colleague of Jefferson and Adams) the interest paid to banks on our money supply is a ‘tax raised by the rich and powerful on the poor and the productive’.

2. Governments borrow money (newly-created for them) from banks, by negotiation only with the banks themselves. The deal for the banks is: governments commit their citizens to pay interest, and to repay the loan at some time in the future. When the loan is repaid, the credit-money disappears, allowing the bank room to make a new loan. The new money gives spending-power to governments over and above taxation, at the expense of productive citizens who must pay the price in more taxes.

3. The availability of borrowed money, newly-created in large amounts upon mere promise of a return, means that large corporations, which avoid paying taxes and influence law-making, borrow to prey on smaller, more efficient enterprises made vulnerable by the effects of (1) and (2).

The result has been a relentless growth in the dependence of citizens on large powers – on governments and private corporations. As the poor are reduced to below subsistence levels, so the government steps in to intervene and win votes. But the drift to inequality cannot be stopped without reforming the system; nor can independence, equity and justice be restored without the same.

Bank-currency has ramifications in many different areas of our lives. It not only relocates wealth; it relocates it to a specific type of person. Just as medieval feudalism gave power to individuals in every society devoted to war, so bank-currency gives it to individuals devoted to getting more money. Keynes looked optimistically to a world governed by a different, more equitable social ethic:

‘When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals… The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, which we now maintain at all costs because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.’

Hip hip, hooray! But not yet.

When the system was just beginning, its character was obvious for all to see. It was praised by some and deplored by others – for identical reasons. It was ‘an excellent way to fund wars': approved by some, deplored by others. It enabled financiers to ‘engrosse the commodities and merchandises of their own and other countries, so that none can be had but at the second hand': approved by some, deplored by others. It lowered the interest rate at home, allowing capitalists to lend fictitious credit at higher rates abroad: ditto. It allowed ‘boundless power’ to financiers to lend to the government, thereby giving ‘boundless power’ to government too: ditto.

The predatory powers of created capital are as much at work between nations as they are inside nations. A country devoted to efficiency and production, and with an efficient banking system, lends money created out of nothing to a foreign government, which distributes it among voters and ‘friends’ to buy goods from the creditor country. Government is corrupted and voters get into debt along with all other citizens except a few ‘friends’ and pilfering government officials (who may relocate vast sums of money, perhaps to London, England or Florida – or anywhere else of their choice). Whole peoples become indebted and find their assets swallowed up by financial speculators: Greece is selling its temples and beaches, Italy is selling its marble mountains. A world-wide system has been created by banking privilege which can only begin to be made equitable by financial reform.

As mentioned in the first chapter, the system was established internationally by laws ‘annexing certain privileges, benefits, and advantages to Promissory Notes… in order to promote public confidence in them, and thus to insure their circulation as a medium of pecuniary commercial transactions’. These ‘privileges, benefits and advantages’ may just as easily be taken away again, but only if citizens become familiar with reality. Three hundred years of history have shown that elites are happy for the truth to be buried deeper and deeper, not so much with lies as with a blind spot in public recognition, so that eventually it is never noticed at all.

Since banking practice was made legal, its workings have been overseen by regulators, not the justice system. Financial operators only come up against the law if their robbery oversteps the privileges granted them, and strays into legally-recognised fraud. The justice system is then obliged to confront some of the complexity which may emerge once deceptive practices are legitimised. Two hundred years ago the learned judge Lord Eldon had to decide between competing claims based on fictitious paper assets. ‘I must say that the speculations about paper certainly outran the grasp of the wits of courts of Justice,’ he remarked with lovely English understatement. The puzzle of how to deal with illegal fraud in the context of so much legal fraud is still with us: most perpetrators get off scot-free.

Very few people in a normal state of mind jump with excitement at the chance of learning about bank-money. But the system has transitioned from empire-building, oligarchy-creating to world-destroying, end-of-time stuff. It is time for reform. A terrible gap has opened up between the wonderment we could have created on Earth and the present situation, which can only be compared with the dream related by Procopius towards the end of the Roman Empire: the Emperor first consumes all that is good in the world and spews it out as excrement; then he consumes his own excrement, too.

But reform must be the subject of another chapter.

 

Please sign our petition to tell the future Prime Minister of the UK that money creation should only be used in the public interest. And if you’ve signed it already, share it your friends on Facebook and Twitter. And/or send them an email – here’s a simple text you can copy:

I’ve signed this petition to prevent banks from creating money. I think you’ll find it interesting – have a look and consider to sign the petition too! http://bsd.wpengine.com/petition

 

 

 

 

 

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Ivo Mosley (Guest Author)

Ivo Mosley is the author of 'In The Name Of The People' (Imprint Academic, 2012) and of the forthcoming book 'Bank Robbery'.
  • Donald Beal

    This is another attempt to post a comment about this article – the first was flagged for moderation and deleted. Since IMO the comment did not break any of the normal rules about polite and legitimate commenting I’ll try again with some clarifications. Also I’d like to make it clear that I agree with the overall sentiments of the website and the author about the banking system.

    The comment relates to the paragraph about Quantitative Easing.

    The paragraph starts: “In quantitative easing, governments create brand-new money and use it to buy government debt (bonds) from large non-bank corporations (e.g. pension funds and insurance companies). The money (in the U.K. 375 billion; in the U.S. 3.5 trillion) does three things. First, by buying back government debt, it lowers the cost of government borrowing. Second, it gives companies ready cash to buy other assets (stocks, corporate bonds, shares, buildings); this raises the price of capital assets generally, making rich individuals and corporations richer. Third, it gets banks out of trouble by refilling their ‘reserves’ free of charge when the company deposits its brand-new money: this increases their reserve ratio, making it safer for banks to lend.”

    I am concerned about the statement “Second, it gives companies ready cash to buy other assets…”.

    This statement seemed to imply that the brand-new money is transferred into companies as ready cash.

    The statement “Third,… when the company deposits its brand-new money…” confirms the implication that the QE brand-new money is transferred into companies. This is simply wrong and misleading.

    I think our criticism of the existing system should be based on accurate statements.

    In fact, the newly-created money stays in the central bank, and is not available to any company, nor even to commercial banks as new money. Moreover, the bonds that the central bank has bought to perform QE, were previously bought by companies or banks with their money, and thus the sequence “Government sells bond, Central Bank buys bond” actually REMOVES money from circulation – although the money re-enters the economy gradually as the government spends it. So QE itself does not increase the amount of money in circulation!

    However, it is true that the “reserve ratio” of commercial banks increases. The new central bank money is counted as an asset of commercial banks and gives them more freedom to lend – to anyone.

    Whether they actually do lend is up to them. There is no simple relation between new central money and additional bank lending, and thus no simple relation to the money supply.

    A bigger effect of QE is to increase the price of bonds generally (big new buyer in the market!) and thus reduce the interest bonds pay. This causes investment funds with a long-term goal (e.g. pension funds) to gradually switch from bonds to other assets, such as property and stocks and shares, causing a rise in those asset prices too. The assets rich people and companies buy are increasing in value partly because bonds now get so little interest that pension funds and any other genuinely long-term funds have to switch from bonds to other assets, even though those assets are risky, and partly because ever-increasing lending is driving prices up. This is now an international process and is a recipe for disaster. It is self-sustaining only until a panic starts, and a new (larger) financial crisis ensues.

    QE also has the notable effect that it enables the government to borrow at almost zero interest because it pays the interest to the central bank which pays it back!

    I think it is important to understand the mechanisms. The new QE money does NOT add to the money in circulation, despite numerous articles assuming that it does.

    • landlubber

      I would like to have a definitive explanation of QE my understanding is that it
      operates as follows;

      The BoE (or Company A) sells a £100,000 10yr bond to company B.

      Company B lodges the bond at its bank and expects to receive the interest payments on it for the next 10yrs.

      The economy tanks 3yrs after company B paid for the bond and is short of cash. It’s in trouble and no one wants to buy its bonds, it has a cash flow problem (along with hundreds of other companies in its position)

      Major contraction of the economy is to be avoided if possible so the BoE buys company B’s (and other companies government or ‘blue chip’ bonds) with £100,000 it creates electronically Company B’s bank account is now £100,000 to the good, no
      cash flow problem.

      The BoE now has a government issued bond (or ‘blue chip’ bond issued by company A) it receives the interest for the next 7yrs and retires the £100,000 debt (that it created 7yrs before) when the government or company A pays it the bonds face value. Back to square one but during the previous 7yrs £100,000 that otherwise would not have been available to company B has been restored to its balance sheet by the use of £100,000 that it would have otherwise been unable to access (the £100,000 it originally paid for the government or ‘blue chip’ bond from
      company A would have normally been out of its reach for 10yrs by which time it
      and no doubt thousands of other companies could have gone under). The BoE’s purchase was made with money created out of nothing and company B was the beneficiary.

      • Graham Hodgson

        It’s true that the first round of QE did include buying private sector bonds, but this was to create a market in these bonds, to enable companies to keep issuing them when it looked as though the normal market was about to collapse in the summer of 2009. It only lasted a few months and the BoE has steadily reduced its holdings once normal market operations resumed. This chart compares market activity and QE holdings. The vast bulk of purchases have been of gilts aimed at holding down the medium- to long-term ends of the yield curve, in line with overnight rates tied to the Bank’s policy rate of 0.5%. This reduces the cost of long-term bond finance for government and for all other credit-worthy companies whose bond yields are linked to gilts at issue. While the banks can’t resume lending (and creating money in the process) due to capital constraints as in my reply to landlubber above, fund managers receiving flows of existing money from investors can, and are subscribing to new bond issues.

    • Graham Hodgson

      “In fact, the newly-created money stays in the central bank, and is not
      available to any company, nor even to commercial banks as new money.
      Moreover, the bonds that the central bank has bought to perform QE, were
      previously bought by companies or banks with their money, and thus the
      sequence “Government sells bond, Central Bank buys bond” actually
      REMOVES money from circulation – although the money re-enters the
      economy gradually as the government spends it. So QE itself does not
      increase the amount of money in circulation!”

      When government originally issued the bonds, they were first bought by primary dealers in the US (22 institutions of which 15 are banks) or gilt-edged market makers in the UK (21 institutions 19 of which are banks). These all have central bank reserves and the bonds were paid for from these. M1/M4 monetary aggregates were unaffected. When the pension funds bought the bonds from these market makers, their deposits were depleted so monetary aggregates fell (the account balances of the monetary institutions selling them are not included in monetary aggregates), but when the government spent the sales proceeds, the recipients’ bank balances were credited by the banks which received the reserves spent by the government and the monetary aggregates were restored. Bond-financed government expenditure is monetarily neutral.

      When the central bank bought the bonds from the pension funds, it paid for them by crediting the reserve accounts of the pension funds’ banks. Those banks in turn credited the pension funds’ deposit accounts. The pension funds were then free to spend these increased balances. The pension funds had given up the bonds and acquired new “cash in hand and at the bank” as it is usually expressed on company balance sheets. No other private sector balance had been debited in the course of these transactions, so new money had been placed into circulation. True the money only circulated within the financial markets, but it was new money and it does circulate.

      What didn’t happen was any change to banks’ capital. They had acquired new reserves and new deposits, £ for £, $ for $, so they had sufficient liquidity to support additional deposits (they typically target 8 of deposits per 1 of reserves), but they had no new capital to backstop the new loans needed to generate those deposits. So no new lending.

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