Banks and Economics

 

Trapped in Escapism

Patrick Quanten

 

 

Our entire economic system relies on money and the way it is controlled. All of this, on the grand scale we experience it today, starts with the banking system. So in order for us to understand a bit more about how it works and how it influences our daily lives it is good to first of all get a historical perspective on this matter. Let’s begin with the introduction of the ‘national’ bank.

The Bank of England started as a ‘private company’ formed and funded by private subscriptions. The Bank of England only became a public institution at the end of the second World War in 1946. It was founded by Royal Charter in 1694, following the Glorious Revolution of 1688 when William III of Orange and Queen Mary ascended to the throne. Queen Mary died in 1694 and at that time the expensive wars of her husband had left the country’s finances in a mess. The public purse was overstretched and needed to be refinanced. A choice was made to accept the ideas of William Patterson with regards to how to organise this. The purpose of introducing a public fund was to reduce the unnecessary credits with loss of several millions, which in turn discouraged and obstructed further trade with foreign territories. The belief in the country’s worth and ability to repay debts was badly damaged.

In order to make ideas real political sponsorship was required and this was provided by the new chancellor Charles Montagu who managed to get a bill passed through parliament in 1694. The benefits for the private shareholders of the Bank of England would be that in return for the capital invested, which would finance the government debt, their company would be incorporated by Royal Charter and become the only limited-liability entity - thereby removing the responsibility for decisions and actions away from the individuals - to issue bank notes and trade in bonds. These powers enabled the bank to have a monopoly and in just 12 days £1.2m subscription was raised. Half of this was promised to rebuild the navy which could reassert the Britain’s Empire by providing the necessary protection for its subjects and business interests. The Bank of England bought heavily into government stock and issued notes on the security and ownership of that debt, whilst also accepting private deposits to further increase their wealth and power.

This was the start of the process of managing debt as an intangible asset represented by a banker’s note or bond, which had no intrinsic value whatsoever, up to the point where it was changed into a tangible asset of value such as gold. The ‘Goldsmids’ or ‘Goldsmiths’ controlled the supply and the holding of gold and historically had used a system of notes to record what deposits they held and their value. Over time they had created, by convention, an informal market and these notes operated as virtual money. The Goldsmith Company had existed in various forms since the 14th century. The ‘banknote’ issued by the Bank of England evolved and was modelled on the receipts and notes used by the Goldsmiths. The concept of the National Debt and Paper (Note) based money came into being at the same time as the bank opened for business. The government had found a way to spend more than it was earning as income from taxation!

The Bank of England had been opened by subscription as a private, not a national company, approved and authorised by Royal Charter, but it was not alone and had to compete for its markets. There was, to name one, the East India Company, which operated as an authorised company in the Indian markets and continued to accrue substantial profits. In 1697 parliament forbade the opening of any more joint stock companies, a deliberate anti-competitive practice to gain more control over the market. The law now required a Royal Charter for an organisation to become a Company, an entity in law, a status needed to be allowed to trade.

The 18th century saw the development of banking throughout Europe and the Bank of England established itself as the major institution in Britain but still not officially part of government. Private banks proliferated across the country and fuelled business and economic growth. In 1708 bank notes, originated as notes and receipts issued by Goldsmiths, became the only valid bank notes, a monopoly granted to the Bank of England. In 1717 the gold standard was established replacing the silver standard. In 1725 the Bank was issuing partly printed notes that needed to be completed in handwriting but this was changed to fully printed notes ranging from £20 to £1,000 in 1745. Gold shortages as a result of the Seven Years War forced the Bank to issue a £10 note for the first time in 1759. Smaller notes were needed in times of economic hardship. At the start of the war against France in 1793 the first £5 notes were issued and in 1797 the Bank of England was released from its obligation to exchange its notes on demand for gold. This significantly liberalised the overall market for money and finance as a business in its own right. The Bank no longer had to be able to back the notes up with the reserve of gold it was holding and notes could be traded by themselves. Between 1797 and 1821 the uncertainty of the war resulted in a series of runs on the Bank which drained its bullion reserve to the point where it was forced to stop paying out gold in exchange for notes all together. The Bank now issued £1 and £2 notes instead.

At the beginning of the 19th century it became clear that the Bank of England could not match the capability of the Rothschild’s dynasty. Their international network was second to none and it was powerful enough to assist national governments and to provide the resources that the country’s own national bank couldn’t. In 1825, the Bank of England had suffered another run on its reserves and it was down to its last 100k sovereigns (a sovereign had replaced the £1 and £2 notes). In a single day Rothschild injected 150k sovereigns into the Bank of England, narrowly avoiding suspending payments and withdrawals and ensuring its name and its business being intertwined with the history of the Bank of England forever.

In 1826 English Provincial Banks that were Joint Stock Companies were given the opportunity to issue their own notes, but with oversight of the Bank of England. In 1833 the Bank Charter made the Bank of England’s notes official legal tender for all sums above £5. This would ensure that, in the event of a crisis, the public would still be willing to accept the Bank’s notes and its bullion reserves would be safeguarded. Paper notes could easily be printed, while accruing gold bars was notably more difficult. Further banking crises drove Robert Peel to restrict the issue of bank notes solely to the Bank of England with a view to creating a more stable market and money supply. In 1844 all this was settled in favour of the gold held in the Bank which must exceed the notes issued. In 1846 the Barings Bank found themselves overextended in Argentina which suddenly stopped making repayments. This led to the Bank of England covering half of the Barings losses in order to prop up the market and to avoid a complete collapse of the economic market. Ever since then the Bank has taken a lead in maintaining the value of British Currency against the gold standard.

The first fully printed notes appeared in 1853. Further banking crises resulted in the suspension of the gold standard in order to prevent a collapse of the provisions for gold reserve levels. In 1914 the link with gold standard was broken once again because the government needed to preserve its stock of bullion and the Bank ceased to pay out gold for its notes. In 1925 it returned to the gold standard at least partly, that is to say for multiples of 400 ounces or more. In 1931 Britain left the gold standard and the Bank’s notes became entirely fiduciary, wholly backed by securities of other natures instead of gold bullion.

And then followed significant structural changes. In 1997 the British government announced its intention to transfer full operational responsibility for monetary policy to the Bank of England. In April 1998 the UK Debt Management Office was created as an executive agency of HM Treasury to take over the responsibility for debt management. And the beginning of this century has been marked by one banking rescue operation after another. It must be seen as a remarkable feast that a government, through its national Bank, is capable of injecting masses amounts of money, time and time again, to support collapsing banks, whilst that same government ‘invented’ the national bank because it could no longer pay back its own debt. It is never made clear as to where all those new funds actually originate from.

            Some Conclusions

ü     When the income of a government is less than its expenses a national bank is created, pooling private investor’s money to underwrite the national debt.

ü     When the national bank is unable to cover its own repayments in gold it issues paper notes and the government, whose survival is linked to that of the national bank, adds value to the paper.

ü     When the paper value is no longer able to cover the debt of the national bank an injection of private money rescues the bank and provides it with validity, again.

There are two important thoughts that spring to mind right now.

1.      Every “rescue operation” leads to an escalation of the debt. Has nobody ever thought about changing to a system whereby the country is living within its means?

2.      Who is putting money into the black hole? Who is benefitting from this kind of scenario? Why would you do that?

            Economy

An economy encompasses all activity related to production, consumption, and trade of goods and services in an area.

Market-based economies allow goods to flow freely through the market, according to supply and demand It is an economy where consumers and producers determine what’s sold and produced. Producers own what they make and decide their own prices, while consumers own what they buy and decide how much they’re willing to pay. 

 

However, the law of supply and demand can impact prices and production very rapidly. If consumer demand for a specific good increases and there's a resulting supply shortage, prices tend to rise as consumers are willing to pay more for that good. In turn, production tends to increase to satisfy the demand since producers are driven by profit. As a result, a market economy has a tendency to naturally balance itself. As the prices in one sector for an industry rise due to demand, the money and labour necessary to fill that demand shift to those places where they're needed.

Pure market economies rarely exist since there's usually some government intervention or central planning. Regulations, public education, social security or tax benefits, subsidies and other measures are all provided by the government to fill in the gaps from a market economy, to steer it in a certain direction and to help create a balance. Balance in economic terms is considered an economy that does not shift quickly according to needs and demands, according to a free market, as a free market has a natural tendency to balance itself. Nowadays, the term market economy refers to an economy that is more market-oriented in general, but still is being manipulated by interventions from authorities.

Command-based economies are dependent on a central political agent, which controls the price and distribution of goods. Supply and demand cannot play out naturally in this system because it is centrally planned.

The definition of ‘balance’ in this respect determines what we consider to be good or bad. A strict regime where the demands are controlled by a central authority creates ‘imbalance’ and so does a loose system that floats freely between supply and demand, apparently. Since the industrial revolution we have seen a steady increase in government interference in our daily lives trying to control the economy. The price of food products needs to be harmonized. The production of solar panels is artificially driven up by subsidies. Interferences like these are said to ‘stabilise’ the economy and to create balance. However, it also results in people buying, and eventually ‘needing’, stuff they do not require. Economic activity is nowadays, to a large extent, determined by governments, not by free markets. So I would call that, in truth, a command-based economy, masquerading as a market-based economy illusion.

But the other question we might want to ask is who benefits from the economy.

Looking at the definition it must be everybody, and indeed the media is confirming all the time that if the economy is doing well we all are better off. And it is just that what is required to make the wheel of the economy turn, consumer spending! The feeling good factor!

The economy works like a simple machine in which simple transactions take place that in turn create three main forces that drive the economy. A transaction is any exchange of money (cash or credit) for goods or services. Markets are buyers and sellers coming together to make transactions. The biggest buyer and seller in the economy is the government, which now exists in two separate parts. Central government collects taxes and spends money, and the Central Bank (national banks) controls the amount of money and credit (setting of interest rates) as well as being able to print new money. Credit plays the most important part in the economy because it is the largest and most volatile component. The borrower receives money which increases his spending, which drives the economy, and the lender makes more money when the loan has been repaid because of interest payments. Only on repayment the lender will be better off!

In each transaction the buyer gives money to the seller based on how much value the product is said to have. So the harder one works the more one is able to sell and the better off one becomes. Only when the product maintains its value whilst one is working harder is the seller better off!

It’s the use of credit that leads to economic cycles. Debt allows us to consume more than we produce when we acquire the money, but it forces us to consume less than we produce when we pay it back. When we use credit, we are borrowing from our future selves. Credit becomes bad when it finances over-consumption that can’t be paid back. When it can’t be paid back the lender loses and the borrower is no longer able to get more money – he loses too – which in turn reduces the sale of products. It appears as if nobody is now better off!

Let’s take a look at the short-term debt cycle. As people and businesses borrow and lend money to each other there is economic growth. As spending increases so prices inflate. When spending and income grow faster than the production of goods, prices will rise. At some point in this rise the Central Bank will step in and raise interest rates, which makes it more costly to borrow money. Now spending begins to slow down, leading to lower incomes (one person’s spending is another one’s income). People spending less makes the prices go down. Then interest rates get lowered again. And so the cycle goes on. Remember it is the borrowing, giving people credit, that sets the cycle in motion!

But there is a far greater impact as a result of continued borrowing. Having easy access to more money also allows people to borrow more money to buy more expensive things such as houses, cars, exclusive holidays. The debt burden increases to a point where it exceeds the ability of incomes to keep up. Now people are going to spend less, income drops, which makes people less able to borrow money. Meanwhile, debt repayments continue to rise which makes spending drop even further. In order to stimulate the economy again the group needs to spend more. The individual can’t, so the government steps in and spends more money on stimulating production but now the government is spending more than it receives. Now the government needs more credit. It will try and tax the rich to give to the poor. Ultimately all of this will fall short of solving the problem of these cycles and the government will resort to printing new money. Printing more money won’t lead to increased prices if there is less credit used in the economy. But that is the problem! When it is easy to get money we borrow more and printing new money ensures that there is more money in the market, but this money can only be spend to reduce the burden of the non-repayments. So the money does not go into the economy to be spend on more goods but it goes to the lenders to ease their burden. Now only the lenders, not the borrower and not the economy, are better off!

Here I return to the original question of “why spending more than you actually have?”

I can see why it is good for production and economy if I can already buy today and re-pay tomorrow. The problem lies in the repayment and my ability to do that tomorrow. If I could be sure that my financial situation tomorrow would be exactly as it is today I might be able to judge my ability to repay my loan. However, prices fluctuate outside of my control and production is changed outside of my control, so I lose the ability of knowing my financial situation tomorrow. I may lose my income tomorrow. And who is responsible for those fluctuations? Other people and their spending behaviour, pushed and encouraged by a variety of authorities, expert advice and advertising. The conclusion must be that these cycles will continue for as long as we adhere to the adagio “the standard of living for people will rise (read: healthier and happier) with economic growth”. The truth, of course, is that it is a repeated boom and bust cycle that has been started by providing credit.

Driving the behaviour of people up and then down again, making them feel rich and then making them feel poor, seems to have become a national sport. Or even better, an international sport! Once again, why? Who benefits?

Whoever can steer or commandeer regions and people in a certain direction will be able to pre-empt the richness or poorness in time and space. Whoever has the power to decide when and where to inject money, to lend various governments money, to persuade governments what is best, can predict the result in time and space. And ultimately, whenever we are in financial dire straits we go and talk to people we know have more money than we have. In other words, there is always a higher financial power, above the one we are dealing with.

            And there is more

While the second World War was still raging in Europe in July 1944, the United States invited delegations of 44 countries to the small ski resort of Bretton Woods. The official aim of the conference was to define the basic features of an economic order for the post-war period and to provide the cornerstones of a system that would stabilise the world economy and prevent a return to the situation that had existed between the two world wars. The conference had been preceded by several years of secret negotiations between the Americans and the British on plans for a new world monetary order. Very soon it became clear that excessive war spending had weakened the British negotiation position, which had in fact turned that country into the biggest debtor and pushed it to the brink of insolvency. The undisputed victor of the second World War, however, was the United States. It had become the largest international creditor, holding nearly two-thirds of the world’s gold reserves and it commanded half of all global industrial production. All this resulted in the acceptance of the plan proposed by economist Harry Dexter White, leader of the US delegation and the International Monetary Fund was born.

The US dollar was to constitute the sole centre and was to be pegged to all other currencies at a fixed rate while its exchange relation to gold was to be set at $35 per ounce of fine gold. The plan was supplemented by US demands for the establishment of several international organisations designed to monitor the new system and stabilise it by granting loans to countries facing balance of payment problems. The gold-dollar peg and the establishment of fixed exchange rates partially reintroduced the gold standard and by fixing all exchange rates to the US dollar Washington deprived all other participating countries of the right to control their own monetary policy for the protection of their domestic industries.

Furthermore, the distribution of voting rights for the proposed organisation was also far from democratic. Member countries were given voting rights according to the contributions they paid, not according to the size of their population. This meant that Washington, because of its financial superiority, secured itself absolute control over all decisions. The US claimed for itself the right to be permanently informed about the financial and economic conditions of all countries involved. On December 27, 1945, 29 governments signed the final agreement.

The rules for membership in the International Monetary Fund (IMF) were simple. Applicant countries had to open their books and were rigorously screened and assessed. After that they had to deposit a certain amount of gold and pay their financial contribution in their own currency to the organisation according to their economic power. So national gold reserves, the public finances and security of an independent country, were transferred into private hands. In return, they were assured that in case of balance of payment problems they were entitled to a credit up to the extent of their contribution, in exchange for interest rates determined by the IMF and the contractually secured obligation of settling their debt to the IMF before all other debts. So in times of trouble they were guaranteed to get money for the amount they had deposited. In other words, in times of trouble you get your money back – and pay interest on the loan!

The IMF was run by a Board of Governors to whom twelve executive directors were subordinated. Seven were elected by the members of the IMF and five were appointed by the largest countries led by the US. From the very beginning the IMF has been an institution launched by, controlled by and tailored to the interests of the United States, designed to secure the new superpower economic world domination. But they went even further. By establishing so-called ‘standby arrangements’ the principle of conditionality was added to the IMF toolbox. The granting of loans was now subjected to conditions that went far beyond the specification of loan deadlines and the level if interest rates. When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid. Starting in 1958, they obliged the governments of debtor countries to draw up ‘letters of intent’ in which they had to express their willingness to undertake ‘reasonable efforts’ to master their balance of payment problems. And then we take it further one more step by slicing the loans into tranches, called phasing, which ensured a total submissiveness of the respective debtor country for as long as there was still money owing, which in practice now looks as if it will be forever.

The IMF insists that agreements between the IMF and its debtors should not be considered international treaties and therefore should not be subject to parliamentary approval, which lifts it out of the possible control by representatives of the electorate. And finally, the IMF decreed that any agreements with it were not intended for the public eye and had to be treated as classified information. Take note of the fact that the country’s finances are about the ‘public purse’ and that they have now become hidden from public view.

Since 1956 regular monthly meetings are held between IMF representatives, creditors and debtors, where a scope of extremely important decisions were taken without parliamentary consent and hidden from the eyes of the public. On the back of a wave of declarations of independence by African states at the beginning of the 1960’s the IMF took advantage of the crippling financial situation these plundered countries were in and offered its services as a creditor. As credit lending required the debtor’s membership of the IMF over 40 African states joined in no time at all. The influence over African policies by the IMF grew substantially in a few years.

Soon, however, the tide was to change. In 1971 the US, for the first time in its history, ran a balance of payments deficit. At the same time the imbalance between the global dollar supply and the US gold reserves assumed such dimensions that the dollar had to be devaluated against other currencies. On August 15, 1971, president Nixon severed the link between gold and the dollar. In March 1973 the system of flexible exchange rates to be established by the central banks was introduced by the G10 (top ten industrialised nations), without consulting a single country outside the G10. The abolition of the fixed exchange rates in fact terminated the core tasks of the IMF. The only role left for it was that of a tender in charge of the allocation of funds and their conditionality. They were still entitled to inspect the accounts of applicants and thus exercise direct influence on their policies.

The oil crisis of the mid-seventies, combined with a global economic recession, required massive loans from banks and the IMF to countries all over the world. They didn’t care where the money was used as long as the interest payments were coming in on time. The situation changed when the chairman of the US Federal Reserve raised the prime rate by 300% in order to reduce inflation in 1979. The US slipped into another recession and the debt burden of the developing countries at the beginning of 1980 amounted to a total of $567 billion. A payment default of that magnitude would have led to the collapse of many Western banks and therefore had to be prevented at all costs. The IMF stepped in as a lender of last resort! The Fund took advantage of its incontestable monopoly position and tied the granting of loans to harsh conditions.

            Further Conclusions

ü     When governments are unable to meet debt repayments there is always a pool of money to be found to cover those debts. Somebody somewhere has more money than the government!

ü     Being unable to cover their own governmental debt and having lost their credibility as borrower of private money they all join up and put their own reserves together.

ü     This fund, managed by private hands outside of democratic conditions, is ruled by the largest contributor, who sets out the rules.

ü     This fund attaches conditions to the loan, whereby the fund determines the political policies of its members over and above any parliament in any country.

It must be clear by now that stating that economic growth is good for everyone is only telling half a truth. The economy runs in cycles of boom and bust, which allows for times of serious distress and hardship to a lot of people. The reason for this is quite simply because the economic boom is an artificial event, triggered by nothing less than credit. Providing people with more money than they actually possess allows for greater spending and for more production. Everybody happy indeed. However, within a short period of time people fail to meet their repayment requirements and the economy slumps. Everybody in misery.

Then we enlarge the picture. When people are poor and production is low the government inject more money into the system, give people money to create more buying power in order to rekindle the economy. Great. Everybody happy. Only now the government runs out of money and has to borrow money it can’t repay. So wherever they got the money from, neighbouring countries or other well-to-do-businesses (private money), they are soon to be short of money because of non-payment too, while the governments have been rescued, at least for now. Then ultimately a lender will appear who is willing to cover ‘everything’ on the condition that the lender is given the power to ensure that everything is being done to keep to the deadlines of interest repayments. Now you have sold your country into private hands!

The other poison that has slipped into our society, almost unnoticed, is the limited-liability company. This shields the perpetrator from having to take any kind of responsibility for his actions. When a company becomes a legal entity and no person actually is that legal entity then the person running the company can in fact do whatever. When it goes horribly wrong and he leaves a lot of unpaid bills and empty commitment promises the company disappears without compensating the damage it has created. The person walks free and is, in fact, able to continue, maybe even start in the same way again. The link between on the one hand our words and deeds and on the other the responsibility for our words and deeds should never be broken. From the moment we can’t hold anybody responsible anymore we have lost the leverage to call a halt. Enough is enough only means something when it is possible to intervene and stop whatever is going on, but if nobody can be forced to take responsibility you have been disarmed in your strive for honesty.

What no bank and no banking system has achieved, has been done by the IMF. Lending money on strict conditions of handing over your sovereignty clearly means so far and no further. Now the lender is in charge of the actions of the borrower. In simple terms, 189 countries worldwide are being ruled by the IMF and being held economic hostage by the lender of last resort.

If you do not want to live in a society based on this model you will have to disappear and start your own society. I suggest you make absolutely sure the following two systems are kept far away from your new way of living:

1.      No credit beyond “you still owe me a bag of tomatoes”

2.      Accountability – everybody is personally responsible for his/her own actions

 

 

March 2020

 


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