Wednesday, 10 July 2019

Durham Miners’ Gala – 2019.

I’m setting up a stall at the Durham Miners’ Gala on Saturday 13th July and handing out the article below on an A4 sheet – minus the last section of the article which argues that money created by commercial banks is counterfeit money. The hard copy version refers readers to this internet version. That “counterfeit” point is included in this internet version, i.e. in the paragraphs below.

Image of the leaflet:

The article….

The large majority of money in circulation is created by or “printed” by private banks, like Lloyds and Barclays, not our central bank (the Bank of England). Same goes in most other countries.

A small proportion is created by the BoE (e.g. £10 notes, coins etc), but most of the money supply, in particular those numbers you see on your bank statement (if you’re in credit) originate with private banks. So how do private banks do it? They do it as follows.

When anyone applies for a loan from a private bank, the bank does not need to get the money from anywhere: it can simply open an account for the borrower and credit thousands to the account. That money comes from thin air! At least a proportion of it does.

And if you don’t believe that, see the opening sentences of an article published by the BoE entitled “Money Creation in the Modern Economy” by Michael McLeay and co-authors.

Several organisations around the World are campaigning against private money creation, e.g. Positive Money in the UK and “Vollgeld Initiative” in Switzerland. Plus several Nobel economists have argued against private money, e.g. James Tobin and Maurice Allais.

The arguments against private money, i.e. the arguments for nationalising the money creation process (which is not the same as nationalising banks) do not have much to do with the traditional left of centre call for nationalising much of the economy: that is, the arguments are technical rather than political, which is why a number of Tory politicians are sympathetic to abolishing private money (not that 95% of politicians know much about this subject). Indeed, the fact that the arguments are technical is a plus, in that if it was just the left wing of the Labour Party advocating a ban on private money, most Tories would automatically oppose the idea.


The arguments against private money.

Some aspects of the arguments against private money are a bit complicated, but if you’re up for it, read on.

First, private banks are so unreliable that they have to be backed by government (i.e. taxpayers). Governments do that via deposit insurance and multi billion pound bail outs for banks in trouble. In short so called “private money” is in a sense not actually private money at all in that it has to be backed by governments.

Put another way, governments create money in two quite separate ways: first, their central banks create money (and for example spend that money buying up government debt as under QE), and second, as just mentioned, governments create money in that they stand behind private banks which lend money.

But what’s the point in having two different ways of doing the same thing? That’s duplication of effort! There’s an onus on supporters of the existing bank system to justify that duplication of effort, something they have not done.

Economic cycles.

Second, private banks increase the amount of money they create and lend out exactly when we do not want them to: i.e. during a boom. Then come the crash, they again do exactly what is not in the country’s  interests: they cut their lending.

Central banks in contrast, do the opposite: they create money and for example implement QE during recessions, and cut down on their money creation during booms.

Private money exacerbates debts.

Third, private money results in a lower than optimum level of interest which in turn results in a higher than optimum level of borrowing and debt. Reason for that can be illustrated by the following simple hypothetical scenario.

Take a hypothetical economy adopting money for the first time. Assume everyone agrees on what the basic form of money shall be: maybe gold coins or maybe paper money like £10 notes and coins made of relatively worthless metal.

The more the amount of money issued, the more people will tend to spend, and as the stock of money rises, some point will come at which the amount of spending is enough to bring full employment.

Also in that scenario, people and firms will lend to each other, sometimes direct person to person and sometimes via banks. Now there is no obvious reason why in that scenario, the resulting rate of interest would not be some sort of genuine free market rate.

But suppose private banks are then allowed to create and lend out their own home made money. As Prof Joseph Huber explains in his work “Creating New Money” (p.31), creating that money costs banks nothing, thus they are able to lend at below the genuine free market rate! The result is excessive borrowing and debt!

Private money is counterfeit money.

A fourth argument against private bank money is that such money is basically counterfeit money. Certainly the Nobel economist Maurice Allais argued that private money is counterfeit money. (See opening sentences of Ronnie Phillip’s article “Credit Markets and Narrow Banking”.) And David Hume, the Scottish economist / philosopher writing 300 years ago said the same.

So were they right? Well I’ll argue in the paragraphs below that private money is at the very least very near to being counterfeit. Here goes.

The Concise Oxford Dictionary defines “counterfeit” as “made in exact imitation of something valuable with the intention to deceive or defraud”.
As to “made in exact imitation”, when you get a loan for £X from a bank, the bank lets you believe that what it has supplied you with are pounds in just the same sense as genuine Bank of England issued pounds. Actually the bank supplies you with nothing of the sort: it supplies you with a promise by the bank to pay £X to whoever.

Put another way, BoE pounds are a liability (at least in a sense) of the BoE, while private bank created pounds are a liability of a private bank. Not the same thing! So there is definitely “imitation” going on there.

As to the word “deceive” in the above dictionary definition, the latter failure to make clear the difference between BoE pounds and private bank pounds is clearly a form of deception.

As to “defraud”, it is necessary to distinguish between private banks as genuine private banks and private banks as part of government. (As mentioned above, so called “private” banks are backed by government, and are thus arguably part of the government machine – indeed, Martin Wolf, chief economics commentator at the Financial Times once referred to bankers as “just highly paid civil servants”)

Where a private bank is acts as a genuine private institution, it is into fraud in a totally blatant way – a situation that obtained before the days of deposit insurance. Reason is that such a bank promises depositors they’ll get one pound back for every pound deposited. But at the same time, the bank lends out money in a less than totally safe manner, with the result that (as everyone knows) banks go bust from time to time (when those loans go wrong).

Thus the promise by such banks to depositors that depositors’ money is safe is plain simple fraud!!

In contrast, where private banks are backed by government via deposit insurance, bailouts etc, the question arises as to why banks enjoy the luxury of taxpayer funded protection, but institutions which perform a very similar function to banks do not, (those institutions being unit trusts, mutual funds, private pension schemes and so on).

To illustrate, there are unit trusts (“mutual funds” in American parlance) which accept deposits and lend to a variety of relatively large borrowers: i.e. those unit trusts buy bonds issued by corporations, cities, local authorities, etc.  But those unit trusts are denied the sort of support that banks get! Indeed, those unit trusts are specifically prohibited from promising depositors they’ll get all their money back!

In short, private banks have over the decades and centuries pulled a huge amount of wool over politicians’ eyes: that is, banks have managed to get themselves into a highly privileged position: they are effectively “defrauding” the country at large.

The conclusion is that private banks are either into counterfeiting pure and simple, or they are into activities which are as near counterfeiting as makes no difference.

Incidentally and finally, if you are tempted to wonder whether private banks unbacked by government would not be risky for depositors, that’s a legitimate concern. The answer is what’s know as “full reserve banking”. That’s a system where banks obey much the same regulations as mutual funds now have to obey in the US: that is, where a depositor wants a specific sum to be totally safe, the relevant bank must invest the money in nothing more risky than bonds issued by a limited number of relatively responsible governments, perhaps just the bonds issued by the government where the bank is located. That way, depositors’ money is safe, but they earn little interest

In contrast, where a bank lends to any borrower who is more risky than a government (e.g. mortgages) those supplying the bank with relevant funds must be prepared to take a hit if the loans go bad. At least that involves consistent or similar treatment for banks and other financial institutions which perform much the same function as banks.

Saturday, 6 July 2019

An illogical, self-contradictory aspect of our bank system.

As Edmund Burke said, “Custom reconciles us to everything”. In plain English, it doesn’t matter how raving bonkers some aspect of our economic, social or political system is: as long as that aspect is customary, a large majority of the population will accept it. Cannibalism is accepted in societies where cannibalism is accepted, if you’ll excuse the tautology.

Anyway, and moving on to banks, money market mutual funds (MMMFs) are banks of a sort: like banks, they accept deposits and make loans. During the recent recession, one of America’s MMMFs failed: the “Reserve Primary Fund”. 

Anyone could have predicted that an MMMF would fail at some point and for the following very simple reason. Those funds accept deposits and lend on the money to relatively safe borrowers: i.e. they buy bonds issued by blue chip corporations, cities, etc. But (again, as anyone can tell you) there is no such thing as a totally reliable borrower. That means that at some stage, an organisation lending to those borrowers is absolutely bound to fail.

The reaction of the US authorities was the correct one: they barred MMMFs which lend to anyone more risky than a limited number of sovereign governments from promising depositors that those depositors are guaranteed to get $X back for every $X deposited.

But banks lend to a variety of borrowers who are nowhere near as reliable as blue chip corporations and cities. But banks are allowed to promise borrowers their money is totally safe!!

Raving bonkers, or what?

Of course banks can be made totally safe by having them insured by governments, and indeed that is done via deposit insurance and multi-billion dollar bail outs for banks in trouble.

But by the same token, flouting helth and safety regulations or drinking excess alcohol can be made a relatively safe  in that government insurance could be provided for those flouting those regulations or drinking too much alcohol. That is not a good argument for flouting those regulations or drinking too much alcohol. 


Another excuse for letting banks promise depositors their money is safe, when it quite obviously isn't (but for deposit insurance etc) is that the effect is stimulatory. I.e. such insurance encourages banks to do more business, lend more etc (i.e. create more debt).

Well one answer to that is the central banks (and governments) can provide any amount of stimulus anytime by creating and spending money into the economy. Moreover, that form of stimulus involves no sort of risk of bank failures, followed by ten year long recessions. Lending by commercial banks certainly serves a purpose, but there is no reason for artificially encouraging it, and hence artificially inflating the total amount of debt.

Second, the above “stimulus” argument applies to MMMFs just as much as it does to banks. That is, promising those who deposit at less than totally safe MMMFs that their money is totally safe would encourage people to deposit at those institutions, which in turn would make it easier for blue chip corporations, cities, etc to borrow! Think of the economic benefits (I don’t think).

But why not take it a stage further and have government organised insurance against loss for those investing on the stock exchange or government organised and taxpayer backed insurance for ships? Think of the economic benefits….:-)

Curiously, most of those who complain about excessive amounts of debt also back the existing bank system which, as explained above, results in an artificially high level of indebtedness.

Cannibalism or the existing bank system seem wholly logical and reasonable once you’re used to them.

In contrast to the existing bank system, there is full reserve banking. Under full reserve, the above mentioned rules that now apply to MMMFs (unless banksters have managed to get the new MMMF rules rolled back) are applied in a wholly consistent manner. That is, no organisation is allowed to accept deposits (i.e. promise those placing money with such organisations that their money is totally safe) if such money is not in fact totally safe.