I mentioned a while ago that I’m enrolled on a MOOC (massive, open, online course) about banking and the money system. As promised, I’m blogging about some of the things that I’ve learnt (we’ve covered the definition and history of money so far).
Banking is probably the least trusted of professions. They don’t share their profits with taxpayers, but they’re happy to force their losses onto us. They make big decisions that affect everyone in the world, without consulting us. They’re beyond effective regulation. This is a move towards totalitarianism, with banks at the centre. We still have wiggle room (or I wouldn’t be allowed to write this), but time is running out. It’s not a question of ‘evil bankers’ – it’s about a system that’s evolved to concentrate wealth in ever fewer hands, and that slowly destroys our ability to do anything about it. As US Supreme Court Justice Louis Brandeis said:
‘We can have democracy or we can have great wealth concentrated in the hands of the few. We cannot have both’
Charging interest on loans of non-existent money
I’m going to try to explain how banks manage to have so much power – but please don’t respond by saying ‘it’s more complicated than that’. Yes, it is, but I’m deliberately trying to make it uncomplicated, so that people can get a handle on it, because really, very few people understand it.
For example, last week I had a conversation with someone who had spent his entire career in the banking sector. He started to tell me about the fractional reserve banking system – in a way that made it clear that he found it objectionable. He explained that through various historical quirks, it now transpires that banks can lend out around ten times the amount of money that they have in ‘reserve’ at the Bank of England. So they can just ‘magic’ almost all money into existence out of nothing. Worse – when the money that they create from nothing is lent out, and ends up in another bank, that bank then treats that as ‘real’ money, and can keep it in reserve, and lend out ten times that amount.
I knew that this wasn’t true – it’s much worse than that. Fractional reserve banking in the UK didn’t make it to the new millennium, and now we have zero reserve banking. He didn’t believe it, and it was only when I showed him this – https://en.wikipedia.org/wiki/Reserve_requirement#United_Kingdom – that he was shocked to learn that the UK reserve requirement is actually zero. Banks have no restrictions on the amount of money they can create (and charge interest on), with nothing to back it. This is as true for the purchase of government bonds as it is for loans to business / individuals.
So, the upshot is that banks create money when they make loans, and charge interest on money that they never had. Here’s an explanation:
‘The process by which banks create money is so simple that the mind is repelled.’
They get away with this by a bit of accounting sleight of hand. The loan is added to the books as an asset, but when it is deposited in the borrowers account, it’s added as a liability. They cancel each other out, and when the principal of the loan is repaid, it is snuffed out. However, this doesn’t take interest into consideration. When most mortgages are paid off, more interest has been paid than principal / the value of the house, which isn’t bad business when you understand that banks didn’t have the money to lend in the first place. It makes so much money (and in fact, interest, because it compounds year-on-year, has always been the world’s biggest money spinner), that it concentrates wealth in banks – so much that it subverts democracy as their wealth overflows into the political system. But that’s only half of it. In a stable economy, the principal of loans can be repaid, but the interest cannot – where would it come from? The economy is forced to grow to enable interest to be paid. And this constantly-growing economy is why the biosphere is being destroyed. And even if it comes from increased velocity of money around the economy, this will have a similar effect on global ecology. This has to stop if we are to survive, and this means that interest has to be removed from the heart of our exchange system.
Bank / government collusion
The banks get a monopoly licence to create money as debt and to charge interest on it, and the state gets to spend as much as it likes without taxes and without public consent. (both these things cause inflation – sometimes more quickly than at other times, but always inflation, a hidden tax). This is how they do it.
Inflation is a rise in prices and wages – but that’s the effect not the cause. A better definition might be ‘too much money chasing too few goods and services’ – but this is still an effect rather than a cause. Inflation is caused when the amount of money in circulation increases, and this happens when banks create money as loans, with interest attached (as mentioned above). But also, the state increases the amount of money in circulation by borrowing from the Bank of England (or the central bank in other countries, which means from banks, ultimately, as it’s their money in the central bank) by selling bonds (promises to pay in future – a bond is an ‘iou’ in other words). In return, the state gives the banks a licence to lend money they don’t have (to businesses and home-owners as well as government), and charge interest on it. As mentioned, this interest can’t be paid back in a stable economy, so the state has to pump more in by selling more bonds to the central bank – and so on.
Ordinary people pay for it – inflation can be seen an invisible tax. It’s the banks who make all the money from this in the form of interest on private debt (as the state debt will never be paid back). This debases the currency, but legal tender laws prevent people from refusing the debased currency. Without legal tender laws, people would be able to refuse ‘legal tender’ currency, but accept cryptocurrencies, local currencies, credit of all sorts, gold or other commodities etc. But at the moment legal tender has to be accepted, and is required to pay tax.
The government is doing what it needs to do to try to avoid recession. Ultimate control in the relationship lies with the banks. There are central banks in every country. The central bank / state system allows governments to extract wealth from the people who create it by deficit spending, and the banks to do the same thing by charging interest on money as they create it, as debt / loans.
This is how they fleece us – how they extract money from productive people and give it to unproductive people, who accumulate so much wealth that they are able to direct the human ship. This extracted wealth gives rise to the derivatives market, as the money men (OK, money people, but it’s mostly men) find new ways to grow their money and extract it from people who do useful work. The derivatives market is now ten times the size of the productive economy of goods and services, and parasitical on it.
See Douglas Rushkoff’s Throwing Rocks at the Google Bus for a horrifying description of how the modern financial system works.
Why ultimate power lies with banks
Trump has filled his cabinet with Goldman Sachs people. The US cabinet is the global boardroom, where the big decisions are made – by bankers. If Clinton had won, it would be exactly the same. In a poll conducted by Positive Money only 1 in 10 politicians knew how money is created at all, let alone about a zero reserve requirement. Banking regulation is written by bankers and delivered by lobbyists to largely clueless politicians who need banks to purchase government bonds so that they don’t have to increase taxes to keep the economy afloat.
The ‘business cycle’
This is the endless cycle of ‘boom and bust’ that most see as inevitable in a capitalist economy. However, booms and busts can easily be caused by banks by expanding or restricting the amount of money in circulation – by buying government bonds (or not), and by lending (or not). After busts, they foreclose on millions of homes and farms. This tends to be a right-wing argument (it was a favourite of Milton Friedman), but the right then blame the government for selling bonds to avoid raising taxes, which causes inflation, and let the banks off the hook (and vice versa for the left), when in fact it’s a problem caused by an alliance of banks and state.
Why it’s urgent
The normally reserved, conservative (and triple-peer-reviewed) Proceedings of the National Academy of the US recently highlighted the coming ‘biological annihilation’. If we don’t take this seriously, nature is going to deliver a terrible vengeance on our children or grandchildren. As mentioned, the root of the problem is the interest at the heart of our banking system.
There are groups of extremely capable people working to take back the land, energy supply, food supply, technology, governance, media, housing, employment – but we can’t do any of that unless we take back money. Whoever controls the means of exchange (the banking / money system) controls everything, and they’re not going to let us have the land, or anything else. We can play at the margins, but we can’t take it back. They’ll price us out; they’ll vilify us in their press; they’ll legislate against us; and ultimately, they’ll use violence – which will currently mean jail in the West, but worse elsewhere.
Marx was wrong – power doesn’t rest with the ownership of the means of production, but with the ownership of the means of exchange. We have to take back the means of exchange, or taking back the means of production will be impossible. This will require co-ordination. But what will be the hub around which we might co-ordinate? Party politics has been shown to be impotent, and no-one who has studied 20th century history (or at least not many) still holds out hope of a centralised, revolutionary solution. I’m sure that at some point, the Co-operative movement, the Permaculture movement or even the Transition movement were considered candidates, and although those movements will be part of a solution, they’re not the hub around which we can co-ordinate.
A potential solution
A group of academics – some of them tutors on the MOOC – have been developing a global mutual credit plan called the ‘Credit Commons’, to take back the means of exchange from the banks. I’ve been looking into similar ideas for decades, and this is the best idea I’ve ever come across, in that respect.
It’s difficult to know the best way to explain it. I explained it to a friend’s seven-year-old son, and he got it immediately. Kids don’t have the baggage of experience to get in the way, and can more easily envisage new ideas working. He happily explained to me how bank buildings could be turned into shops, bakeries and flats when banks aren’t needed any more. I’m with him.
For adults, I think this might be the best way to describe it. At the moment, banks use a system of mutual credit clearing in their dealings with each other. Back in the day, runners were sent between banks at the end of the day, with real money to settle accounts between them. Legend has it that runners met in coffee houses and came up with a plan to save their shoe leather, which they explained to bank managers, who eventually implemented it. Banks could keep accounts with each other, and instead of paying off short-term debts between them (because more cheques had been written by one bank’s customers and deposited in another than the other way round), they could just keep a record of where they stand with each other, and it would all balance out in the end. Differences were always temporary, and there was no need to clear with cash at the end of every day. I’m not sure this story is true, as the bank runners would have been talking themselves out of a job, but nowadays, banks don’t transfer money between each other, they just keep accounts and operate a mutual credit clearing system.
The Credit Commons idea is that we use exactly the same system of global mutual credit clearing, but we just organise it ourselves without banks. This has only been possible since we’ve had the internet, although the way in will be through a group of known and trusted businesses and individuals. The ‘front end’ would look exactly the same – shops, swipe cards, contracts etc. But the back end wouldn’t contain banks.
Credit Commons works well in the Overton Window, because it’s not focused on criticising the free market or the state (which may alienate left or right), but on building an alternative to banks, which is generally fine by everybody.
[PS: As of April 2019, the Open Credit Network has been launched. If you’re a small business, please express interest.
I’ll be blogging more about this as it develops, but in the meantime, here’s some recommended reading:
History of money
Felix Martin, Money: the Unauthorised Biography.
Thomas Greco, the End of Money and the Future of Civilization.
Tim Jenkin, What Comes After Capitalism? That is the Wrong Quesion. Inspirational article.
Matthew Slater and Tim Jenkin, the Credit Commons: a Money for the Solidarity Economy.
The views expressed in our blog are those of the author and not necessarily lowimpact.org's
1Sophie Paterson September 17th, 2017
Brilliant stuff, Dave! I’ll be sharing far and wide.
2Tidakada September 17th, 2017
Great talk yesterday on the “Soap Box” at Tooting Foodival Dave. People were really engaged with what you were saying. We only have one planet!
3Dave Darby September 17th, 2017
I think that what you were saying about the earth being a tiny speck in a unimaginably large universe is really important. It doesn’t take much thought to realise that wealth is a zero-sum game. Money isn’t – we can all have an infinite amount of money, but what it can buy – REAL wealth – is finite, or at least it is right now for humans. It’s what that tiny speck can provide us with, and as long as some people (even perceived ‘good guys’ like Bill Gates or Mark Zuckerberg) have too much wealth, some will have to do with less. The whole world can’t live like the average American. It’s completely impossible, and if we don’t stop pretending that it isn’t, we’re going to slide towards extinction. Sharing – vitally important, and the only ethical way to live – but destroyed by capitalists, who try to make us believe that Uber and Airbnb are part of the ‘sharing’ economy.
4Joshua Msika (@Joshua_Msika) September 18th, 2017
I’m just reading David Graeber’s book “Debt: the first 5000 years”. It’s amazing to see how many times in history we’ve been at this point before – and to see how previous societies have dealt with debt crises like the one we’re facing now. In Mesopotamia and other Bronze Age kingdoms, massive debt amnesties were declared by the monarch on a regular (but unpredictable) basis. Given we don’t have a global monarch, that might prove more difficult. I’ve yet to finish the book, but I’m looking forward to read what Graeber has to say about the future, based on his analysis of the past 5,000 years.
Note that your statement “nowadays, banks don’t transfer money between each other, they just keep accounts and operate a mutual credit clearing system” is not quite fair when taking history into account. In the historical record, ‘keeping accounts and operating a mutual credit clearing system’ was actually money, just about as often as cash was money. In fact, the mythical runners between banks hardly ever existed. I know you’re trying to keep things simple, I guess I’m just showing off my newfound knowledge! ?
5Dave Darby September 18th, 2017
Yes, I guess I’m trying to stimulate people to learn more, or to realise that something is seriously wrong. You’ll know that already if you’ve read Graeber.
With the credit clearing, I was trying to explain how things could be, but without the banks. They provide nothing that we couldn’t provide to each other, but without interest (or the corruption of democracy).
Yes, I think there were a lot of myths around the ‘runners’, and I’m guessing that their idea for a moneyless credit clearing system for the banks they worked for was the stuff of legend.
6veganollie September 28th, 2017
Erma gerd this sounds so exciting! I want to get involved with this. Building an alternative to capitalism is my dream!
7Noname June 9th, 2021
Buy a cash box instead. Don;t take loans.
8Perplexed Pete June 10th, 2021
It is worse than you describe. In Fact, banks create money out of thin air without any need for reserves or deposits. Here is a link to an article by bank of england economists describing how private banks create most of our money when they issue loans: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
Banks charge interest for loaning money they never had to begin with. And governments force us to use this bank-created money for paying taxes, AND settling most contracts (legal tender laws). So we are literally forced into unpayable debt with private bankers by the government puppets who are supposed to protect our rights.
9Dave Darby June 10th, 2021
Perplexed Pete – completely agree (although it does say exactly that in the article – including a link to the same Bank of England quarterly bulletin).