Where does money come from?

This week's guest post comes from James Bruges. James, an environmentalist, is a memberof Redland Quaker Meeting and blogs on the Quakernomics site.

He is the author of:
The Little Earth Book,
The Big Earth Book
and The Biochar Debate: charcoal's potential to reverse climate change and build soil fertility.
He spoke about climate change at the 2009 Schumacher Conference - see the video on YouTube.

He is currently working with David Friese-Greene, advising an organisation in India (SCAD) on the use of biochar for soil fertility, and applying this experience to problems with the spread of Sudden Oak Death in Wales.

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BOOK REVIEW

Where Does Money Come From? A guide to the UK monetary and banking system
By Josh Ryan-Collins, Tony Greenham, Richard Werner and Andrew Jackson
A nef publication.

Review by James Bruges

Spiralling inequality, chaos in the financial world and the Occupy protests force us to engage with economics. Where Does Money Come From? is about money itself, a subject that has, surprisingly, received little attention and about which there is widespread misunderstanding. It says:

Central banks around the world support the same description of where money comes from. And yet many naturally resist the notion that private banks can really create money by simply making an entry in a ledger.

And JK Galbraith had said,

The process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent.

The authors studied the implications of bank-created money through talking to key people in the City including those on the Vickers Commission, and referring to 500 documents from central banks and regulators. On receiving a copy of the completed book Professor David Miles of the Monetary Policy Committee, Bank of England, said,

the way monetary economics and banking is taught in many - maybe most - universities is very misleading and what your book does is help people explain how the mechanics of the system work.

But does it matter that the money we use is created by private institutions? A bit of history is revealing. At the beginning of the 19th century gold, silver and coins were the only official currency, but banks were allowed to print notes saying 'I promise to pay the bearer on demand the sum of £XX'. It cost them, say, 5 pence to print a £20 note, which they could sell for £20. The Tory government of Robert Peel realised the anomaly and his 1844 Bank Charter Act made it illegal for anyone other than the Royal Mint to print banknotes. It now costs banks and building societies, say, £100 in administrative costs to make a £100,000 loan attracting compound interest. The anomaly is the same: a business model for the '1%' that the '99%' can’t match.

Banks charge interest on loans, necessitating the amount of money in circulation to increase each year in order to cover this interest. The choice is either growth or recession. It was a Quaker philosopher, Kenneth Boulding, who quipped,

Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist.

So the monetary system causes world resources to deplete.

Most people think that the money they deposit in the bank remains their own property. This is wrong. Legally, it becomes a debt that the bank has to pay on demand but, in the meantime, the money belongs to the bank and it can do what it likes with it. The Royal Bank of Scotland, even after being bailed out by the government, invests in projects like Canadian tar sands that are directly contrary to government policy on climate change.

Our laws are biased in favour of the creditor, with bankruptcy being the only way out for the debtor. However if loans are underwritten the creditor is divested of risk so can lend irresponsibly. Irresponsible loans were a major cause of third-world debt as well as of the sub-prime mortgages that contributed to the 2008 financial crash. Compound interest builds on debt without any cost to the creditor, contributing to the enslavement of nations and people. There is therefore a moral case for cancelling or reneging on certain kinds of debt – as suggested, of course, by the biblical ‘jubilee’.

The government wants banks to finance the productive sector but

the government has in practice no involvement in the money creation and allocation process.

It is not surprising that few of the vast sums given to banks have been loaned to small businesses, which they regard as risky. The banks have invested most of their windfall in assets such as prime property, the value of which is enhanced by Russian oligarchs.

The book discusses 'financial instruments' that

are increasingly traded in a money-like fashion, moving around the world at great speed and frequency by investment banks and hedge funds.

The financial elite, joined by African dictators and corporations, have salted away £2 trillion tax-free in secret locations, many – perhaps most – of which are UK protectorates or ‘British Overseas territories’, the City of London itself being one of them. The UK loses £70 billion tax annually. The value of trade in financial derivatives is ten times the value of all goods and services in the world. No one knows what’s going on but these activities cause global instability and deprive governments of funds to help those in need.

I will end with two quotations that are horribly predictive of our current situation now that banking technocrats are the main influence on, or even taking over, countries. In 1838 the banker Amschel Rothschild said, 'Let me issue and control a Nation's money and I care not who makes its laws.' Then in 1863 the Rothschild brothers, London, said,

The few who could understand the system will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.

I hope this is enough to indicate that the monetary and banking system is at odds with Quaker testimonies to integrity, justice, equality, community and the environment. Quakers could help to develop an alternative to laissez-faire capitalism that relates to real life in all its local variety, provides social welfare, and encourages cooperation, creativity, relationship and play.

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Two useful articles by Richard Murphy:

• Collect the Evaded Tax

• The Cost of Tax Abuse

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Many thanks to James for this post. An earlier version of this article appeared in The Friend of 9 December 2011.

Related material: see the obituary for Richard Douthwaite, co-founder of FEASTA