Bank Robbery

Published today, the new book ‘Bank Robbery’ by Ivo Mosley, sets out some of the damaging results of banks creating our money supply. In this guest blog he describes some of the basics of that process.

Oxfam’s new report revealed today that the 22 richest men in the world have more wealth than all the women in Africa. Just how did levels of wealth inequality get this bad?  

The answer to that question is fairly simple but rarely talked about: it’s to do with where our money comes from. The way money is created today allows certain individuals to get unimaginably rich without having to contribute anything in return. This way of creating money got full legal backing over three hundred years ago, first in England then across the world. And following deregulation since the 1970s, the system has become even easier to exploit.

So, how does money creation work? The key lies in our banking system, because most of today’s money is created when banks make loans. A borrower obviously owes the bank what she or he has borrowed, but not many people know that legally the bank owes the same amount to the borrower. This debt from the bank becomes money! This, of course, is completely different to the standard pretence of banks, that they lend what others have deposited. In 2014, the truth of this statement was publicly acknowledged by the Bank of England with its bulletin ‘Money creation in the modern economy’.

When a bank lends, two equal-and-opposite debts are created out of nothing: the bank owes the borrower and the borrower owes the bank. But laws have established that debt from a bank is money, so the bank pays the borrower merely by acknowledging its debt. The confusing nature of this essential truth has itself helped protect the system from public notice and scrutiny for a long time. When the borrower repays her or his loan, the bank’s debt will disappear. So, unless the borrower asks for cash, the bank will have paid out nothing except an acknowledgement of its own debt. In truth, this kind of debt would be better called ‘fake debt’ because it pays nothing out except itself. 

This is where government duplicity comes in, because the other two types of money -‘cash’ and ‘reserve’ – are also fake debts: they too are ‘promises-to-pay’ which pay out nothing except themselves. In the words of the Bank of England, currency (cash) is ‘an IOU to customers’ and reserves are ‘IOUs from the central bank to commercial banks’ (Quarterly Bulletin 2014 Q1). All these debts are valuable because the law supports debt as a commodity. The diabolical genius of the system is that it depends upon something counterintuitive and hard to grasp. 

The logic of making a payment in the system, however, is simple. When a customer pays someone, the bank (legally and technically) no longer owes that amount to the customer; it owes it to the person who has been paid.

So: our money supply today is legally debt from banks, central and commercial. The system was invented with a purpose: to centralize wealth and power in the hands of the ruling classes. It has been very good at its job. Inequality began to grow immediately in England once the laws were passed (1694 and 1704) and it is now beyond horrible across the world. 

The system also encourages financial speculation. Unlike productive investment, speculation drives up asset prices with little or no other benefits. With access to huge quantities of money created out of the blue, speculators buy up the hard-created assets of others. This means that for hundreds of years, a main consideration underlying economic activity, particularly in the corporate sector, has been to increase profits for speculators.

Today’s system means that for every bit of money in existence, a corresponding amount of real debt has been created. There’s no point complaining about the amount of debt in the world without confronting this fundamental fact: it means we cannot hope to pay off our collective debts without also decreasing the total amount of money in circulation, which would have a destabilising effect on our economy. To truly diminish debt we must transform our current money system.

This also makes it extremely difficult to tackle inequality. Wherever this system has been established in the past, inequality has ballooned and only massive redistributions of wealth or debt jubilees have been able to save society from collapse. In its first manifestation, in ancient Mesopotamia, sovereigns would periodically cancel all debts to prevent the whole nation falling into slavery. Closer to our own time, socialism – redistribution – emerged as a dire necessity to counter desperate poverty, exploitation and starvation among the poor.

But the bad effects of creating money this way spread far beyond inequality and debt. My book explores how it also breeds environmental destruction, colonial robbery, war, helplessness and hopelessness; and how it makes democracy pretty meaningless, because true power always rests with money – on which we all depend. Very few voices are speaking out against the system, and groups who are, as part of the international movement for monetary reform are often under-resourced or run solely by volunteers.

Last but not least, because so few people understand the system, no one knows where to turn to start creating a better world. Horrid spectres of extremism and dictatorship rear their ugly heads, because voters do not understand how they are being robbed. Instead of reform, blame and brutality take centre stage.

And yet: reform would be simple, if only we all demanded it! The proposal I advance in ‘Bank Robbery’ is that if debt were no longer a commodity to be traded, the system would collapse. We would just have to remove those laws which say that ownership of a debt can be passed around like cigarettes or sweets. Debt from private banks would no longer be able to pass from hand to hand as property – as money. After reform, money would stay in permanent circulation. Lending and borrowing would still be legal, but only the original lender would be supported by the power of the State when trying to reclaim a debt. Banks would only be able to lend out deposited money, which is what most people assume they do now; and a great number of other financial tricks would no longer be supported in law. 

The system was unabashedly created in order to centralise power with a ruling class. That is what it did, and what it still does today. A ruling class of power-seekers and profiteers tends to have a blind spot for everything except its own interests. In the words of Adam Smith, “All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.” Which is why, in the words of another old thinker (Acton), those who are disadvantaged must call for change: ‘it is by the combined efforts of the weak to resist the reign of force and constant wrong, that liberty has been preserved.’

Ivo will be speaking at the launch event for his book ‘Bank Robbery’ at 7.30pm this Thursday 23rd January, at the Prince of Greenwich pub, 72 Royal Hill, Greenwich, London, SE10 8RT. The event is run by our local Greenwich group, full details here. 

You can purchase a copy of the book from the publisher Triarchy Press or from Amazon.