Money and Banking
“Much of the present misery in the world derives from a general failure to understand the nature of money, banking, and credit.”
There has long been a common misconception that money is created by the government, however that isn’t the case. A government can only borrow money through issuing securities with their central bank in exchange for money. Fiat money is created then when private banks extend credit, in other words money is created out of nothing, but a promise, a credo (Latin for belief), and enters into circulation as interest-bearing debt. When new credit is issued the money supply expands and when debts are repaid the money supply contracts, this is what causes the boom and bust cycle. Therefore if all the private and commercial debts within the economy were repaid and settled, the economy would implode because there would be no money supply.
“Of all the many ways of organising banking, the worst is the one we have today.”
Private banks are legally required to use fractional reserve banking which allows them to loan out many times more than they have on reserve and consequently they inflate the money supply. Money is loaned out faster than loans are repaid which creates growth imperative as the need to pay back an increasing amount of debt requires an increasing amount of economic activity. This fosters a short-termist attitude towards investment, short-term gains have precedent over long-term sustainability. Meanwhile, people are forced to egotistically compete amongst themselves to obtain money already in existence and the nature of compounding interest ensures that some debtors eventually default as there isn’t enough money going around to repay all the debt.
In more recent times, continual market deregulation by neoliberal economic policy has led to the formation of huge speculative bubbles from over-financialisation. Put simply, more and more of the economy has become virtualised through the use of credit as a product in and of itself. Derivatives are financial instruments granted special legal exemptions that make them an attractive means of extending credit by repacking outstanding debts and selling them on whilst obfuscating the credit risk and offering strong creditor protections to counterparties. In this way, derivatives can be used to hedge against risk by passing it on to other parties. Alternatively, derivatives can be used to acquire risk and speculate on the future value of the underlying assets and then buy and sell future contracts accordingly as a means of making profit. It’s possible then for traders to make vast financial gains by betting on things like natural disasters, the defaulting of sovereign debt and so on. According to the Bank of International Settlements, as of June 2011 total over-the-counter derivatives contracts have an outstanding notional value of over $700 trillion dollars, that’s more than 11 times global GDP – the total economic output per year. Clearly, there are a lot of bad debts floating around,
wrapped up in bureaucracy and sold on to the future. This is economically and ecologically unsustainable. Debt is being repackaged and money printed because there isn’t the absorptive capacity of the World to absorb the debt.
Eventually speculative bubbles burst as bad debts recoil all the way back to the banks whilst governments attempt to keep the system going on a little longer. Public money is used to bail out the banks whilst “austerity measures” are applied to the citizenry and “quantitative easing” is implemented to stimulate the economy and also has the consequence of deflating the currency. None of these actions actually address the structural issues with the banking system and instead just lead to a shorter and more sever business cycle. Is it any wonder then that most of us are dull, dispirited, frustrated and suffocated by the current mindset? According to the World Bank, in the last 25 years alone there have been 97 banking crises and 176 monetary crises. The only way out of our spiralling debt problem is to default or live through a hyperinflationary depression.
“The current money system obliges us to incur debt collectively, and to compete with others in the community, just to obtain the means to perform exchanges between us.”
As the Occupy movement have highlighted, our current economic system concentrates wealth in the hands of the few. According to research by the New Economy Working Group, for the past thirty years more than 80 percent of the benefits of U.S. GDP growth have gone to the richest 5 percent of Americans, whilst the bottom 50 percent experienced a net decline. A significant causal factor is that our banking system is based on usury and therefore tends to concentrate wealth as it is biased towards capital accumulation – those with the most gain the most. The fact that private banks have a monopoly over money creation enables them to dictate the overwhelming majority of transactions in society by who has access to credit. As citizens we are locked into this one-dimensional and deficient monetary system and forced to use legal tender for the clearing of debts and the payment of taxes.
Many people are now aware that money and banking have been politicized and structured to achieve the centralization of power and the concentration of wealth in order to circumvent democratic processes. Unless significant changes are made to the way the banking and monetary system works, there will be further financial crises, rising inequality and poverty, social unrest and starvation, revolution and war, as well as faster environmental breakdown over the coming years.
“Today’s economy is not a recession, it’s the end of an era.”