Socialism for the Rich - Capitalism for Everyone Else
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Socialism for the Rich - Capitalism for Everyone Else

Written by Mark Braund Wednesday, 27 July 2011
Few people question current arrangements for money issue, but allowing privately owned banks to create money is like putting a three year old in charge of a sweet shop.

The wider public is depressingly disinterested in the workings of the economy; nowhere is this more evident than in their ignorance of the monetary system. If more people understood the means by which banks create money, the way it swells the coffers of the already wealthy, and the destabilising effect it has on the real economy, then surely there would be a outcry of Murdochian proportions.

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Banks create money by making loans to their customers. This method accounts for around 97 per cent of the money in circulation. Nearly all money is created as debt, repayable at interest. This means that all loans have to be repaid with money also created as debt and loaned at interest. No wonder the economy struggles, when the system of money creation heaps cost upon unnecessary cost. And no wonder the banks generate such enormous profits.

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Entrepreneurs – Banks Are Not Your Allies…

This system, known as fractional reserve banking, is an integral part of the nexus of unearned wealth: Banks’ shareholders earn dividends from the super-profits extracted by the process of money creation; banks loan money to their own investment arms to finance speculative activities which undermine the real economy and then pay themselves unwarranted bonuses from the proceeds; and money issued as debt helps drive up asset prices, especially land, through the housing market and the market for commercial property.

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Not only does the system of money issue skew the economy in favour of the already wealthy, it places an unnecessary burden on genuine entrepreneurs by charging them for the use of money. Money is not wealth, but it is required to pay for land, labour and capital. Why should enterprising businesspeople pay a premium for the use of money, when without it business is impossible?

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It gets worse: Through the activities of credit card companies, banks try to cover up their economic misdemeanours by lending money for consumption to those unable to earn enough to get by. This creates an impression that the economy is in good health because people keep spending. In fact, UK personal debt, at £1,452bn is roughly equivalent to the country’s GDP.

Reformed Capitalism - for Everyone

If they are to remain in private ownership, banks must be obliged to work under a revised system of full reserve banking: they should only lend money which they can fund from deposits and reserves. If the money supply needs to be increased, new money can be issued through banks by a central authority. Banks can continue to lend money at interest in order to cover their costs, and make a reasonable profit, but they should not be permitted to create new money at interest, and they should be required to compete for business by offering the best possible savings and borrowing rates to their customers.

The current system of money issue widens the gap between rich and poor by concentrating its lending for investment on large corporations, while charging the economically excluded exorbitant rates on borrowing for consumption. It conspires against an optimal supply of money by ensuring that the quantity of money in circulation never reflects the amount of wealth being created, thus introducing instability into the economy and driving the damaging cycle of boom and bust.

Economic stability, business efficiency and social justice all demand a complete overhaul of the monetary system.

“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled.” John Kenneth Galbraith
Mark Braund

Mark Braund

Mark Braund Is a freelance writer with a specific interest in the prospects for transformative social change towards a more just, inclusive and sustainable society. He also is regular contributor to the Guardian and lives with his family in London

Website: www.markbraund.com

9 comments

  • Comment Link Valiant Dickson Wednesday, 27 July 2011 14:30 posted by Valiant Dickson

    Mark this article is decidedly uninformed even if banks "only lend money which they can fund from deposits and reserves" they would still be practicing fractional reserves banking as your savings would be lent out leaving only a fraction of your savings held in reserve for you. if banks were unable to borrow money immediately from the central bank or federal reserve by "creating it" then paying the base rate for it and deducting that amount from the central bank/ reserve there would be far more runs on banks when savers decided to move their money which had been lent out

  • Comment Link Mark Braund Wednesday, 27 July 2011 15:01 posted by Mark Braund

    Valiant Dickson: Space prevented me from outlining in detail the mechanics of full reserve banking, but a good description can be found here:

    http://www.positivemoney.org.uk/2011/07/what-exactly-is-full-reserve-banking-2/

  • Comment Link Tim Glover Wednesday, 27 July 2011 15:42 posted by Tim Glover

    Great article - short and to the point.

    It is clear that this is how "low powered" money is created. But I am vert unclear about "high powered" money. Is this government debt? And is government ernment debt created in the same way? It must be, because there is an outcry whenever the government bypasses the banking system and prints its own money - but the mechanism is obscure

    Thanks

  • Comment Link Archie Dean Thursday, 28 July 2011 00:11 posted by Archie Dean

    Couldn't agree more with the general timbre of your post. For one thing, it's bordering on the incredible that any competent bank could currently ever make a loss so stacked is the deck in their favour.

    The contradiction as pointed out by Valiant Dickson is stark however. On the one hand you say that money is not wealth, something that I would agree with - it's actually the key to the puzzle in my view - but on the other you say that banks should only be able loan what money they hold as a result of 'deposits and reserves'. But hold on a moment, what are 'deposits and reserves' if they aren't stored, already existing wealth against which claims are being issued, at interest, by the bank? As is pointed out, if the ‘deposits and reserves’ are anything but real wealth and / or overall lending exceeds the real value of these reserves, then you are still practising fractional reserve banking.

    There exists, or so it seems to me, a confusion. We use the same word 'money' to describe both real wealth (like gold or silver) and credit money, which is intrinsically worthless and exists only to facilitate the process of exchange, and the issue of which is currently controlled by private banks as a consequence of State sanctioned legal tender laws.

    Using gold or silver, or any other commodity for that matter, any transaction undertaken is, effectively, a barter - an immediate exchange of equivalent value. Using credit money however, the full transaction is incomplete, the money received by the seller of the surrendered goods being simply a claim to goods of equivalent value to be made at some future time.

    Both 'methods' and variations thereof enable efficient exchange. The preference as to which to use should be a matter for nobody but those involved in any particular transaction.

    With regard to credit money though, the problem revolves principally around the right of issue - as indeed you indicate. That the banks have abused their position is beyond question, but the real problem is, as always, politics. Without the legal tender laws and the accompanying threat of force to back them up, huge swathes of the population would have long since deserted the Pound, the Dollar, the Euro or whatever other currency is being deliberately debased by the politicians in favour of something more stable.

    The ‘Sovereign Money’ solution suggested by so many monetary reformers, the ‘Positive Money’ campaign being one of many, does nothing to remedy the elephant in the room - monopoly. Allowing government to create money takes us out of the frying pan and places us squarely into the fire. This ‘solution’ simply re-establishes the existing monetary dictatorship under new management. Under these proposals, the largest debtor by a country mile, the State, remains free to continue to spend at will to the point of bankrupting entire nations as we see so very clearly all over Europe and the US today.

    Government should not issue or control money. Money is a neutral agent whose sole function is facilitating exchange. It need not be the offspring of Banking or State privilege. Interest-free credit money can be created apart from any Banking or State cartel, and the entire process can be democratized. Having described so carefully the corrupting effects that result from centralizing the money power, do you not find it curious that the ‘Sovereign Money’ folk then ask us to accept it when under the control of politicians and bureaucrats? To suggest that it is in any way possible to implement strict measures to separate control of
    ‘Sovereign’ money supply from any political influence is to inhabit a fairy tale or to be convinced by the most crass of all the political illusions. It is a suggestion that conveniently ignores all the lessons of history in respect of centralized government. To give government ultimate control over the means of exchange is to both invite and encourage all kinds of extensions over and above the existing abuse. Thus to give, say, the Bank of England the power and responsibility to manage the money supply and create new money as and when the economy is judged to need it goes only to present additional opportunity for manipulation, control and profit for the select few and their cronies in a position to take advantage, or, supposing the fallacy of an absolutely honest ‘we’re genuinely here to help’ State (!!??) it’s simply akin to central planning. For heaven’s sake, just how many times does central planning have to fail before the entire concept is consigned to the dustbin of history. It’s just not a good idea if it doesn’t work!!

    Thomas Greco, an American monetary reform campaigner whom I greatly admire says it all better than I ever could: -

    “Money is a human contrivance, the primary purpose of which is to enable the easy exchange of goods, services, and capital assets. The way in which a monetary system is designed and operated determines how effectively and efficiently it achieves that purpose.

    Since money is such a fundamental and necessary element in the process of economic interaction, it has often been the object of political manipulation and control, and, in fact, central bank and government monopolies have become virtually universal throughout the world.

    We believe and contend that there is no economic advantage, and much disadvantage to monopoly control over money and banking. When people have a choice of currencies and exchange mechanisms, the advantages of exchange can be more fully realized, economic equity can be advanced, and people will be empowered to more fully meet their material needs”.

    Elsewhere, and in respect of the dysfunctional nature of the dominant money and banking regime Greco comments:

    'The centralization of power that this system enables, and the principles upon which it is founded, are driving the world toward ever greater conflict, environmental defoliation’s, and disparities of wealth and quality of life. There is an urgent need for the denationalization of money and the separation of Money and State, but it will not come through political reform efforts’.

    ‘It can however come through the process of free people exercising their rights of contract and association’.

    ‘The primary obstacles we are facing are: -

    1) Legal Tender status of the money that is created by Central Banks like the Federal Reserve in the United States, the Bank of England in Britain and other Central Banks in countries around the world, which gives their currencies an advantage in the market place.

    2) The monopolization of Credit creation by the Banking Cartel.

    3) The lack of an objective, non political unit of account with which to measure values and to specify prices.

    ‘But none of these need prevent us from creating parallel exchange mechanisms that can be used voluntarily in place of legal tender. We have the power ourselves to extend credit to one another, without the involvement of any bank and to decide who is credit worthy and to what extent. It is within our power to write our own contracts in terms of any value unit we wish to define and to specify the forms of payment we will accept, within a circle of associates, bound by contract.

    After all, it is goods and services that pay for other goods and services. Money is just an intermediary device used to facilitate the process. But conventional money is not the only facilitating device.

    The way it works today we have credit money that is monopolized by the banking cartel. So, we have this arrangement between banking and politics where the private productive sector gets starved of credit while the public sector the government, gets lavished with credit to fight wars and maintain an empire around the world. Additionally, when banks make loans they are basically giving us back our own credit and charging us interest to use it, and this interest feature of the credit money system causes debt to grow just with the passage of time’.

    So, the answer is not to have either a State monopoly or a Private monopoly by State sanction - it’s to have neither.

    AD

  • Comment Link amedeo Thursday, 28 July 2011 08:44 posted by amedeo

    core tier 1 and other similar ratio are just a fraud. we need to move back to use the old loan to deposit ratio.
    historically banks had a loan to deposit ratio under 100%. RBS, HBOS, Northen rock at the top of the crisis had a ratio above 250%. astonishing! and now are not far from this value.
    if it's not possible to force banks to have a loan to deposit ration capped to 100%, the State can do a simple thing: remove its guarantee on the deposits over such banks. The market will do the rest of the job.

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