The global finance sector today exercises extraordinary power over society and in particular governments, industry and labour. The sector dominates economic policy making, undermines democratic decision-making, has financialised all sectors of the economy including the arts, and has made vast profits, often at the expense of both governments and the productive sector.
Despite its detachment from the real economy and from state regulation, the global finance sector has succeeded in capturing, effectively looting, and then subordinating governments and their taxpayers to the interests of financiers.
For the monetary system to be managed as a public good, there must be greater public understanding of money, and how the system works.
Unfortunately citizens will not receive much help in understanding or taming finance from the economics profession, from regulators or officials because many are either uninterested or ill-informed about the nature of both money and banking.
For society and the economy to function effectively, it has to be defended, protected and upheld. This can only be achieved through regulation based on society’s widely shared values of honest and fair dealing, and on the institutions based on those values.
Today trust in our monetary system ought to be upheld by public authorities – the courts, accountants, regulators, central bankers - accountable to, and trusted by society.
Backed by large swathes of the economics profession, criminals, charlatans, Ponzi schemers and common thieves are effectively granted free rein to rob and loot, to cheat and lie, to evade tax, to launder money, to move vast sums of illicit ‘dirty’ money across borders – and to do so unfettered by law or regulation.
This deluded economic theory (that trust does not need to be carefully regulated and upheld by qualified, publicly accountable institutions like the law) originates in the flawed understanding that so many professional economists have of money.
The whole, vast, shaky edifice of today’s liberalised financial system has been erected on this flawed understanding of money, and on hopeless attempts to transform the social relationships at the heart of money into marketable ‘products’.
It is because of the flawed foundations of economic orthodoxy – taught in almost every university of the world - that society suffers both periodic shortages of finance, and regular and sometimes catastrophic financial crises.
There need never be a shortage of money to solve the great scourges of humanity: poverty, disease and inequality; to ensure humanity’s prosperity and wellbeing; and the ecosystem’s stability.
Left to run amok, a banking and financial system can, and regularly does have a catastrophic impact on society and the ecosystem. Managed badly a financial system can usurp and cannibalise society’s democratic institutions.
No monetary and banking system can function well without a system of regulation, without sound accounting, and without a system of justice that enforces contracts, and prevents fraud.
Our monetary systems have been cut loose from the ties that bind them to the real economy, and to society’s relationships, its values and needs. That is largely because our monetary systems have been captured by wealthy elites who, with the collusion of regulators and elected politicians have undermined society’s trust, and now govern the financial system in their own narrow, rapacious and perverse interests.
Small groups of individuals and corporations in the private finance sector made historically unprecedented capital and criminal gains. Vast wealth was extracted from those outside the sector. Inequality exploded. Trust and confidence in the banking system and in democratic and other public institutions waned.
The transfer of economic power away from sound, elected, accountable institutions to wealthy elites had hollowed out democratic bodies and placed key decision-makers – like the heads of global banks - beyond the reach of the law, of regulators and politicians.
While our universities turned a blind eye to this capture of a great public good for private gain, knowledge of the monetary system was scant, and sometimes deliberately buried.
As a result of this citizens… remain on the whole ignorant of the workings of the financial system and its operations…ignorant of ways in which money or credit can be deployed as a public good.
It is obfuscation and confusion that led the financial sector to abuse one of society’s greatest assets: trust.
The experience of financial de-regulation has shown that capitalism insulated from popular democracy degenerates into rent-seeking, criminality and grand corruption.
If we are to prevent the kind of cataclysm that befell the world in the first half of the 20th century, then greater public understanding of how the financial system operates, and how it can be reformed, is vital.
I have two overriding objectives, First, to challenge and nail the argument that ‘there is no money’ for society to address major threats, to fight poverty and to meet human needs.
Second, I want to force into the open a subject that is taboo: the role of private, commercial banks in the creation of money ‘out of thin air’.
Monetarists, such as those that advised Mrs Thatcher’s government, never accuse the private commercial banking system of ‘printing money’. Yet the private banking system ‘prints’ 95% of the money in circulation in Britain, according to the governor of the Bank of England.
The blind spot for the private creation of credit is part of the ideology rooted in the belief that “free, competitive markets” are the best way to organise the finance sector and the economy. This belief is in turn rooted in contempt for the democratic state – a contempt actively expressed by the Thatcher government of the 1980s.
Like doctors and dentists, bankers’ roles must be carefully defined and regulated, and their rewards must be modest. Incompetence, fraud and theft must likewise be punished.
Above all, there should be wider understanding of how a monetary system can be managed to serve the interests of all sectors of the community, and not just the privileged owners of private wealth.
Monetarist and other orthodox economists encourage politicians to persist in a form of despair; that society is helpless to control a man-made, socially constructed, globalised, and increasingly anarchic financial system.
This book is written to challenge that dominant flawed ideology. *
In mounting a challenge to finance we must gain confidence from this truth: finance capital has no greater fear than democratic regulation and reform of the monetary system. This is because monetary reform will transform the balance of power between democratic societies, the ecosystem and finance – in favour of democracy, society and the ecosystem.
Another popular misconception, the idea that commercial banks can only create credit or lend on the basis of a fraction of ‘reserves’ or cash or ‘capital’ in the bank.
Because the central bank provides cash on demand, there is therefore no limit to the cash, bank money or credit that can be created by commercial banks. In other words, there is no ‘fractional reserve’ or ratio.
Despite massive bailouts by taxpayer-backed central banks, I contend that most global banks are still effectively insolvent. Government guarantees and backing, coupled with the manipulation of balance sheets, is what stands between today’s global banks and insolvency.
In order to repay rising debts, firms and households are obliged to exploit natural and human resources in a way that is damaging in the medium, never mind the long, term. Employees are expected to work longer hours, to generate more goods and services, and to do so at lower rates of pay.
Natural resources (like the land, forests and seas of fish) are exploited at exponential rates, to enable firms and even governments to generate the income needed to repay debts. (Think of Brazil stripping forests to generate the hard currency needed to repay foreign debts.)
These developments add social insecurity and ecological instability * .
Society must learn from these grave errors, that the great public good that is the ‘magic’ of credit-creation by the private banking system must be managed and carefully regulated if lending is to be affordable, sound and sustainable, and if society as a whole is to benefit.
Usury is today widely accepted as normal in western economies that have been weakened, morally, politically and economically, by the parasitic grasp of finance capital, and immobilised by heavy burdens of debt.
In order to repay debts that have accumulated exponentially, society is obliged to extract more and more assets from Labour on the one hand, and Land on the other.
In other words, the earth’s limited resources have to effectively be cannibalised to repay the world’s creditors.
Today, by controlling the dominant rates of interest in an economy, finance capital once again controls and holds the economy to ransom. It is finance capital, not central bankers or politicians that exercises overbearing, and unaccountable power over society and the ecosystem.
For individual loans made by banks to firms and individuals the interest rate is determined by bankers and ‘submitters’ in the back offices of banks like Barclays. History teaches us that it need not ever be high; and it need not be determined by powerful individuals or institutions with excessive wealth.
Wielding the weapon of interest, finance capital effectively holds society, governments and industry, but also the ecosystem, to ransom over repayment of its loans. However, this is only because society, elected governments and industry have conceded this despotic power to finance capital.
Today notes and coins make up a tiny proportion of the money we use every day – bank money. In Britain, only 3% of the money in circulation is in notes and coins. Instead money today takes the intangible and invisible form of credit cards, Oyster or Metro cards – or even ‘mobile money’, We never touch it, or indeed see it – except as a charge on our bank account,
Society does not need coins, commodities or even banks to do business; to make undertakings, to give promises and to create credit. Society does not even need banks to bring together those with money but no purpose so that they can meet those with purpose but no money.
The holders of wealth, by demanding high rates of return on their surplus or savings, effectively suppressed the risky activities of innovation, creativity, commerce and production.
Perhaps the most difficult aspect of the theory of bank money is this: bank money held in banks does not necessarily correspond to what we understand as income. It does not necessarily correspond to any economic activity.
There is no tangible quantity of money that corresponds to the aggregate of employment, or of activity in an economy at any point in time. This is because a tangible quantity or quality is not a characteristic of money.
Money’s quality, its acceptability and validity is simply due to it being able to facilitate transactions. Given our confused understanding of money, this is a difficult concept to grasp.
The development of the modern banking system was a great civilizational advance. As a result of that advance, societies with sound banking systems and related institutions, and with democratic oversight of those institutions, could mobilise finance for development. In such societies there is never a shortage of money.
A rate of interest at 3% made creation and innovation affordable and attractive for inventors, artists, entrepreneurs and merchants, because there was a better expectation of making a return (profit) of 3% or more - with which to repay the debt. Repayment of a debt with an interest rate of e.g. 8% was far less likely to be affordable.
The establishment of a banking system that ensures access to credit for all those that are not existing owners of wealth, can be understood as the culmination of a great struggle between the wealthy creditors or moneylenders of pre-banking eras - and debtors.
The wresting of control over the allocation of finance from private wealth holders meant that the system was then aimed at wider public and commercial interests. This manifested itself in the glory of the Italian Renaissance, in the Netherlands as the Reformation, in the English and Scottish Enlightenment, and in the emergence of the United Sates of America.
The big questions that arose were these: how could society maintain control over this great public good? And to what ends should it be put?
We live in turbulent political and financial times, and in a global economy dogged by failure. We survive precariously on a planet warmed by human greenhouse gas emissions and disturbed by a human-induced mass extinction. The financial system at the time of writing is volatile, corrupted, and widely discredited. Scandals of miss-selling, theft, manipulation and fraud abound. *
Governments of the OECD economies have abandoned efforts to manage, re-structure or re-regulate the global banking system so that it serves the real economy and wider society.
The effect of austerity policies therefore is to exacerbate the indebtedness of western firms, households and individuals; to punish those innocent of causing the crisis, while increasing the value of assets (debt) owned by those responsible for it.
Austerity has opened up political space for right-wing, populist political parties like the US’s Tea Party, France’s National Front and Golden Dawn in Greece. These are the social and political consequences of enacting policies that enrich the few, while impoverishing the majority; policies based on the interests of ‘robber barons’ and on the flawed theories of ‘defunct’ economists.
Far from re-regulating the financial system, governments stand idly by as the global credit bubble – which was never fully deflated after 2008 – is reinflated by central bank operations. Having done little to re-structure or re-regulate the global finance sector, central bankers have used a range of tools at their disposal – including Quantitative Easing – to help bankers clean up their balance sheets.
In the real economy, investment, wages and salaries have fallen, and the poor have become poorer.
Borrowers are already indebted; the financial crisis has been exacerbated by ‘austerity’ policies that have increased unemployment, and lowered tax revenues, profits, wages and incomes.
Furthermore, the crisis has been used by politicians to promote the ideological aim of ‘shrinking the state’.
The global banking system has not been fixed, re-structured or re-regulated. Debts in the Anglo-Saxon economies have not, on the whole, been deleveraged (written off, or paid down). *
However, bankers continue to engage in speculation – undeterred by regulators - in the hope of making quick capital gains which can be used to help clean up their balance sheets.
The prolonged nature of the crisis, the volatile financial system combined with austerity policies have all served to undermine confidence in lasting recovery by those active in the productive, corporate sector.
Both low levels of corporate investment and the wider economic crisis cannot be addressed without first re-structuring, re-regulating and managing global finance capital.
As a result of austerity and the repression of lending by banks, citizens of the US and Europe have endured years of suffering from rising unemployment rising rents and taxes and falling incomes. At the same time, governments have used the crisis to cut back on welfare payments and to privatise public services.
By borrowing cheap from the central bank and lending dear into the real economy, private bankers are able, with the help of public servants at central banks, to re-capitalise their institutions and to do more to clean up their balance sheets. These ‘repairs’ to the finance sector’s own finances are made at great cost to society, and to the productive economy as a whole.
Because regulators and policy-makers have taken a ‘hands off’ approach to the private banking system, the authorities cannot ensure finance is transmitted to the rest of the economy. They seem unable to learn from the past, when governments regained control over the financial system.
By failing to re-regulate and re-structure the banking system, policy-makers have exposed citizens of the global economy to further financial crises and economic failure.
As long as the banks remain vastly complex bundles of businesses, the executives running them remain above the law. No wonder they are lobbying hard to prevent meaningful re-structuring! *
These facts are widely known and understood, but not acted upon.
Today we live in a world in which the public infrastructure that is money production has been captured and subordinated to the interests of a wealthy elite - finance capital. Rentiers - individuals or institutions that live by unearned income - have not been euthanized by the banking system. On the contrary: they are in triumphant possession of it.
Under today’s liberal financial architecture, governments are encouraged to raise funding for public expenditure by borrowing from the private finance sector, and not from their own central banks. The rates on that borrowing are fixed by invisible and unaccountable players in global bond markets.
As a result of this dependence on private finance, the power of the global bond market over governments is used to force policy changes on reluctant electorates.
Today in both rich and poor countries finance capital is despotically in command of democracies. Economic activity is held back; firms are bled dry by rentier activity; loans are hard to come by, and the rates on lending often usurious.
And millions of people are immiserated by unemployment; many more millions impoverished. Inequality has risen to levels unprecedented in history.
When academics collude with creditors and financiers to grant finance capital such despotic power over society, democracies are inevitably hollowed out and democratically elected politicians rendered irrelevant and powerless. *
This loss of democratic control over the financial system in general and private credit creation in particular means that the state cannot regulate in the interests of society as a whole. This is partly a result of powerful lobbying and manipulation by bankers; but also of public ignorance of the basic elements of credit creation and bank money.
In other words, this is a crisis of ignorance and political impotence in the face of a set of ideas serving the interests of the few.
The task therefore is political: society must reject the marketization of social relationships and of the social construct that is credit. Instead we must once again restore these social relationships to the fields of law, ethics, and standard setting. By regaining democratic oversight and regulation of the great public good that is our monetary system, society will by political means (that is by mobilising political will and enacting legislation and regulation) once again subordinate finance to its proper role, of servicing real markets in goods and services.
This suite of policies – management of credit creation; of interest rates across the spectrum of lending; the regulation of mobile capital; and the management of the exchange rate - gradually loosened the control wealthy elites had over the financial system and the economy. They formed the basis of the Bretton Woods financial architecture, which while it endured (1945-1970) was, and still is defined as ‘the golden age’ of economics.
Keynesian monetary policies managed the banking system in the interests of society as a whole, ensuring that all major stakeholders in the economy enjoyed ‘a share of the cake.’
The Classical theory elevates the role of finance capital and capital markets in the lending markets, and restores to private wealth the power to determine interest rates. It is a collection of plausible fantasies – an ideology - that has enriched the rich, and systematically replaced more democratic policies and financial management.
The neoliberal economic policies of the German Bundesbank and the ECB have placed Eurozone economies at the mercy of the reckless and unfettered speculation of capital markets, and their usurious rates of interest.
Today’s robber barons enjoy eye-popping stocks of wealth that are historically unprecedented. And the rates of interest they demand for parting with this wealth make the usurious practices of the money-lenders of the past seem modest.
This campaign against Keynes was part of a wider effort by finance capital to undermine our democracy. A renewed appreciation of Keynes’ legacy will not be sufficient to break the power of finance, but it is certainly necessary.
How can we restore to our democracy the public good that is the modern banking system? *
First, the public must develop a much greater understanding of how the bank money system works. And many still do not understand how the private banking system created debts, vast as space, with which to crash the economy.
Given the defeatism of our leaders, it is imperative that the people must lead.
We must reinvigorate our political and democratic institutions, because they are the vehicles by which society collectively and democratically agrees to legislative and regulatory change. We must understand that if our democratic institutions have been hollowed out by liberalisation and privatisation; if our politicians have been co-opted or captured, stripped of policy-making powers, and of the power to allocate resources – then that is not accidental, but the deliberate result of finance capital’s actions, its lobbying and its consequent despotic power over us all. To challenge finance, it is essential that we engage in, rebuild and strengthen democratic political parties and institutions; that we participate in political debate and in elections, and in loud, open discussion about issues that have a profound impact on our lives
In other words, we, the people, have to organise politically; and to be clear about the financial and economic transformation we aim for, in order to bring about a more ecologically sustainable world.
We do not have to reinvent the wheel. We do not need a social revolution. We simply have to reclaim knowledge and understanding of money and finance; knowledge that has been available to society for many centuries.
Of course finance and their friends in the media, the universities and the establishment will resist, because monetary reform is the thing they fear most – even more than the revolts and occupations of city squares by citizens.
But that great transformation can only happen if we the people equip ourselves with a full and proper understanding of money-creation, bank money and interest rates – and then begin to demand the reform and restoration of a just monetary system, one that makes finance servant to the economy, and removes it from its current role as master of the economy.