Readers letters
I have written to PE in the past regarding banking, finance and the sector’s contribution to the boom bust cycles typical of neo-liberal economics. As an engineer, my inquisitive nature has led me to ask question on the subject of the money system, and I have found the answers rather alarming. I wonder how many of my fellow professional engineers are also aware of the basic premises which lie at the core of our financial system. Understanding the essence of money makes the economic situation that we are currently experiencing abundantly clear. Those in political power don’t appear to understand the problem, and flap around trying to implement ineffective policy such as austerity measures. Meanwhile the financiers collect their million pound bonuses even though the rest of the country is in recession and millions are unemployed.
It is no surprise that so few people understand money. I for one wasn’t taught the subject at school, which is odd when you consider its importance in our daily lives. The vast majority of those who work in finance and banking don’t understand the monetary system either. They are so focussed on their specialised little part of the game that they never seek to understand the bigger picture. One also suspects that since the money is flowing like Dom Pérignon, they’re unlikely to ask any questions.
The vast majority of the UK’s money supply is electronic. While the Bank Charter Act of 1844 restored power for the printing of paper money to the Bank of England, this law has never been updated to take into account the electronic money which makes up the vast majority of the money currently in circulation (around 97%). This 97% is created by private banks when they lend to individuals, businesses and governments. When I say create, that is to say the credit (money) did not exist before they typed that amount into the bank account of the debtor. So 97% of the money supply is issued as interest bearing debt. To service this debt, the productive economy needs to create a surplus, a part of which is paid back to the banks for their ‘financial services’ (typing numbers into a computer screen). When loans are provided to businesses which can produce a surplus (increase economy) then there is a good chance that a business can repay the debt, turn a profit (and exist to continue to pay the debt and employ people) as well as to give the banker his interest payment. The banker receives his pound of flesh purely because he has the legal power to create money out of nothing. Incidentally there is no limit on the amount of money banks can create. Some might argue that banks create credit and not money, but when you consider that the government (read taxpayers) via the FSCS (financial services compensation scheme) backs bank deposits with cash, credit is as good as cash.
In reality, banks do not lend significant amounts into the productive economy. Instead they seek easy, risk free investment vehicles which they can collect interest on loans against. Ideally this will be something finite, and the amount of lending will be unconstrained. Cue property (read land), and derivatives speculation. Asset bubbles require willing participants, something the industry of vested interests has been pushing since banking deregulation in the seventies. Selling the dream of property ownership has been their goal, and they have successfully washed the majority of the brains in the UK. We love the idea that we can all get rich sitting on our backsides doing nothing, as we watch the asset bubble fuelled by unconstrained lending grow and grow. Extracting rent is how bankers make their money, and it seems everyone else wants a piece of the action too. The sad thing is that investment of significant debt into the unproductive economy (houses are depreciating assets), means that the interest on that debt needs to be paid from somewhere else in the economy; either from the productive economy through taxation of income, production and consumption, or the payment of the interest on the debt through the borrowing of more interest bearing debt. And still Mervyn King thinks that the way to get out of recession is to get the private banks lending again, as though this wasn’t what caused the problem in the first place!
As you can see we have landed ourselves in a position where one and all, from the government (read: taxpayer) to every man woman and new-born child, whether we have borrowed money to invest into the property pyramid scheme or not, are all in debt to the bankers. We are paying this debt burden via direct and indirect taxation, via tenancy agreements and mortgage repayments (which are a much higher proportion of income than they really need to be), and via the debt that every government holds which also needs to be serviced. Furthermore, as virtually all money is issued by private banks as interest bearing debt, when the debts are repaid or foreclosure occurs, cash disappears from the economy, and recession follows. If we want cash in the economy in our current system, someone has to ‘borrow’ it from a bank at interest.
How have we allowed the financial sector get such a stranglehold on our productive economy? How have we allowed them to hold the privilege to create money out of nothing, let alone charge an interest rate of their choice on it? How have we allowed, let alone encouraged, such enormous borrowing to the property sector and other zero sum game ‘investments’ when it is actually a parasite draining money from the productive economy to the banks? These financial matters may be above the interest of many, but they should not be above the interest or the discussions of professional engineers because we are involved in the productive economy.
Given its effects on our economy and all of our livelihoods, shouldn’t we as a society be better informed on monetary policy and educate ourselves on the real facts of the financial system, and its true benefit to the economy? People are waking up to the fundamental issues, and a number of organisations are coming forward with solutions to the financial crisis. One such is www.positivemoney.org and its campaign for monetary policy reform is gathering pace. Such a significant change will not come from the top down, but from the bottom up, from such grass roots movements as this. I encourage you all to get involved in the debate and to spread the word.
Andrew Goodman
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