Bank Robbery: How the money system makes some rich, others poor

Banks create new money in massive amounts – always as debt. How does this work towards making financial predators rich and productive workers poor? Here are one or two examples.

First, a short-term example. Someone who has a lot of money borrows more, specially created for them by banks. The person buys a business, lowers wages, replaces humans with machines, sacks some workers and demands that others work harder, obliges the business to behave more ruthlessly. The borrower makes a great deal of money, pays back the original debt (which immediately disappears) – and moves to the next acquisition. Corporate law assists the predator in this. Living standards of workers are pushed down; predators make easy money.

A longer-term example: the so-called ‘business cycle’. The cycle begins with banks creating vast amounts of new money and lending to all and sundry.[22] This creates a rosy expectation of ‘prosperity for all’. The tide of new wealth, however, conceals an undertow of debt. The tide turns: interest payments have been draining the general prosperity, and creditors begin to demand repayment. Borrowings (which once seemed like the dawning of a new age) have become unprofitable and unsustainable. As old loans are repaid faster than new loans are taken out, the money supply shrinks. Assets go to financial speculators and creators of debt; borrowers are ruined.[23] This ebb-and-flow is repeated over and over again.

The monopoly example: someone introduces a new, good idea into business practice: perhaps the use of computers for recording transactions; perhaps a network of private cars to act as taxicabs; perhaps an internet marketplace. A financial operator borrows a huge quantity of freshly-made money to do two things: to set up a global network, and to crush rivals – putting them out of business. A monopoly results.

The result of all this is our world today, where most money sits in vast pools of private and government ownership while most people live (and die) on minimal dispensations from above. Meanwhile, debts pile up on working citizens as they borrow for basic expenses, and become less and less able to pay interest on their accumulating debts. Once again, compound interest begins to take its impossible (inevitable?) toll.

Assets were relocated from ‘the people’ to predators first in England[24] then in America[25] then in Southern Europe[26]. The process is now happening across the world, as bankers create currency for international appropriations. This kind of predatory behaviour is reproduced between nations: nations with strong currencies act somewhat like banks, creating money in their own currencies to buy the assets of weaker countries, hoping that the created currency will stay abroad, circulating or in storage (because if it comes home, it will be used to buy assets of the home country).[27] They also lend: when interest can no longer be paid on a loan, compound interest kicks in. The results of compound interest are devastating. Nigerian President Obasanjo said at the G-8 summit 2008:

‘We had borrowed around 5 billion dollars by 1985-6. To date, we have paid back 16 billion dollars. Now we are told we still have 28 billion dollars of debt…. If you would ask me what is the worst thing in the world, I would say ‘compound interest’.[28]

After several centuries of these kinds of predation, vast pools of money are owned by corporations, nations and private speculators. Financial predators are no longer so dependent on banks; they can find other, still cheaper ways of borrowing immense quantities of money.[29] Reformers should address this problem too.[30]

And all the while, interest payments on the entire money supply are going to banks and their shareholders, adding costs to everything that is purchased.[31]

Further injustices arising from laws of ‘negotiable debt’

Laws that enable banks to create money – laws of ‘negotiable debt’ – make possible a host of other unjust practices.

National debts have already been mentioned. The question has been asked many times: ‘When governments have the power to create money, why do they borrow money created by banks – at great expense to taxpayers, and at great profit to richer citizens?’[32] The standard economist’s answer is that when governments create money, they get carried away and create too much, resulting in runaway inflation. This has certainly happened from time to time, and has been happening today in unstable countries run by partially-insane dictators (for instance in Zimbabwe under Robert Mugabe). But it is also true that governments have frequently created money responsibly, restoring their nations to life and prosperity.[33] These episodes of rationality and justice have always come to an end, however. The nexus between power and wealth wins out and while voters’ attention is elsewhere, the power to create money is restored to private banks.[34]

The next two injustices are good examples of why some practices are doomed to stay ‘beneath the radar’ of public debate; although they are immensely damaging, their complexity keeps them hidden. The first is ‘public-private partnerships’ (U.S.-speak) or ‘public finance initiatives’ (U.K.-speak). Government agencies create negotiable debts paying high rates of interest to financiers, who borrow at low rates of interest. Money is effectively robbed from taxpayers and paid to parasites. The process tears the heart out of public services, whose slow decline promises more profits for predators, from eventual sell-offs.

The second is a similar technique used to loot corporate industry, giving wealth to short-term owners and managers and loading debt on the workforce. Companies borrow money (via selling bonds, a form of negotiable debt) to ‘buy back’ their own shares, enhancing share values and supplying directors with large bonuses, meanwhile hobbling the efforts of productive workers with added debt.[35] The result is counterproductive in the long run, as the company becomes less competitive, but in the short term it is highly profitable – for a few.

More examples of value being created out of nothing are derivatives, money market funds and repos. These are all forms of negotiable debt. ‘Repos’ are another example whose complexity is enough to make an outside observer weep. Selling an asset, with an agreement to subsequently repurchase the same asset, is used to create a chain of valuable debts in the form of ‘repurchase obligations’. The combined ongoing value of these and other ‘negotiable debt instruments’ is today many times the total value of global GDP.[36]

These virtuoso tricks relocate assets with a few, whose prosperity contributes nothing but inequality and human misery. Possibly this is the most negative of all the negative effects of our current system: it locates wealth, and therefore power, with individuals who pursue it for its own sake, regardless of damage to others. The result is a massive loss of moral direction in the conduct of human affairs. Even the ‘charitable’ activities of such people tend to pursue personal ‘visions’ which are often in conflict with human welfare and freedom.[37]

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This was the second part of Chapter Eight of the book Bank Robbery. You can read the 1st part here. Next parts will be published in the next few days.

(You can read the previous chapters here: Chapter 1, Chapter 2, Chapter 3, Chapter 4, Chapter 5, Chapter 7)

[sws_blue_box box_size=”630″] These are the personal views of the author, they don’t necessarily reflect the views of Positive Money; they are intended to stir up the debate. [/sws_blue_box]

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[22] The synchronicity of banks creating credit, not from conspiracy but from individual self-interest, is well-described by C.A. Phillips in Bank Credit (1931) pp 74-5.

[23] The process used to be much more discussed. For instance, William M. Gouge, in his authoritative book A Short History Of Paper Money And Banking In The United States (1833, p.26) describes how during business cycles ‘Multitudes become bankrupt, and a few successful speculators get possession of the earnings and savings of many of their frugal and industrious neighbors.’

[24] Bolingbroke on the aftermath of credit-creation by bankers: ‘A new interest has been created out of their fortunes and a sort of property, which was not known twenty years ago, is now increased to be almost equal to the terra firma of our island.’ Letter to the Earl of Orrery, quoted H.T. Dickinson Liberty and Property 1977 p 52. Originally written sometime between 1709 and 1711, the letter was reprinted in Camden Miscellany XXVI 1975 p 146.

[25] Jefferson complained in 1825 that government in the United States was becoming “an aristocracy, founded on banking institutions and moneyed incorporations under the guise and cloak of their favored branches of manufactures, commerce and navigation, riding and ruling over the plundered ploughman and beggared yeomanry.” Letter to William B. Giles, Dec. 1825.

[26] Michael Hudson covers this in Killing The Host (2015).

[27] This is why the U.S. both enjoys the privilege of the dollar as the principal international currency, and the highest external debt.

[28] Quoted in Margrit Kennedy, Occupy Money (2012) p. 18. From the same book, same page: ‘In 2008 developing countries were paying back $13 for every $1 they were receiving in development aid’.

[29] For instance, Uber is borrowing from Saudi Arabia to advance its global monopoly: https://www.nytimes.com/2016/06/02/technology/uber-investment-saudi-arabia.html?_r=0

[30] Aristotle’s idea of distributive justice, the modern concept of ‘unjust enrichment’, and pragmatic desires for functioning economies would all suggest this. See later in this chapter, under ‘Reforming the Law’. The provision of basic income might also be a desirable extra – in conditions when machines are producing most consumables – and also more possible to realise.

[31] ‘How much’ is being paid on the primary debt of the money supply itself should be an easy calculation for a statistician: average bank lending rate times the money supply; for the UK perhaps £80 billion per annum? This does not include the costs of secondary debts taken on to cope in a world where money itself is debt

[32] Montesquieu: ‘(National) debt takes the wealth of the state from those who work, and gives it to those who are idle; in other words, it gives the wherewithal to work to people who do not work, and difficulties to people who do work.’ De L’esprit des lois, 4, 22, 17. Or William F. Hixson, It’s Your Money (1997) p.114: ‘The very idea of a government, that can create money for itself, allowing banks to create money which the government then borrows and pays interest on, is so preposterous that it staggers the imagination.’

[33] American colonies of Great Britain were especially good at the constructive use of state-issued paper money: Maryland, Pennsylvania and Virginia are examples. See Richard A. Lester, Monetary Experiments and ‘State-Issued Currency and the Ratification of the U.S. Constitution’ by Mary M. Schweitzer in The Journal of Economic History Vol. 49, No. 2 (June 1989), pp. 311-322.

[34] See, for instance, Chapter 19 in William F. Hixson, Triumph of the Bankers: ‘Union Financing of the Civil War, 1864-1866’.

[35] Michael Hudson, Killing the Host (2015) gives a good overview and account of this. Also see http://www.barrons.com/articles/stock-buybacks-are-driving-companies-into-debt-1470459686 and http://www.reuters.com/investigates/special-report/usa-buybacks-cannibalized/

[36] ‘The 2007 global GDP was $54.5 trillion. In the same year, the capitalization of financial markets, public and private securities and banking system assets reached 4.2 times the global GDP. However, if we add to this the ‘value’ of OTC products and derivatives, then this figure is 16.6 times.’ From Panagiotis E. Petrakis, The Greek Economy and the Crisis: Challenges and Responses, 2014.

[37] Such as the war on cash promoted by Gates and others (http://norberthaering.de/en/32-english/news/784-gates-india-demonetization); or fantasies of intergalactic travel, so that when the planet is made uninhabitable a select few may escape; or robotization of work, so that the few may clean up completely and render the rest of humanity redundant.

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Photo Credit: Gary Knight via flickr, CC BY 2.0