Update: Early in 2014 the Bank of England admitted that banks create money.

Tuesday, 26 June 2012

The global financial crisis is exposing the scam at the root of most of the world’s misery. One of the best-kept secrets is that banks make a fortune by creating money out of thin air. Victoria Grant a 12-year-old Canadian was incensed when she found out. Earlier this year she asked an audience at a Rotary club if they ever wondered why their government was paying $60 billion a year in interest on the national debt and who was getting the money.“What I have discovered’, she said, ‘is the banks and the government have colluded to financially enslave the people of Canada.” A video of her speech went viral on the Net.

Most people believe that banks lend out money deposited with them and lying idle. In reality when banks advance a loan, they simply create the money by crediting the borrower’s account electronically. Martin Wolf, chief economics editor of the Financial Times wrote last year: “The essence of the contemporary monetary system is creation of money, out of nothing, by private banks often foolish lending.” Banks create almost all money as debt. It’s a fact admitted by the Bank of England, the Federal Reserve in the US and the European Central Bank.

It’s also a secret known in Westminster. MP Jesse Norman has highlighted the power of the banks to create money. “It is not widely understood how important this power is: of the money presently in circulation in the UK economy today, three percent takes the form of cash; 97 percent is in credit and deposits. This financial alchemy is an extraordinary privilege, which we as citizens and taxpayers underwrite.”

There is a long history of how private banks acquired a franchise to create money, profit from war and peace, pillage real assets and put governments in their pocket. The American experience is instructive. In 1764, the British Parliament – influenced heavily by the private Bank of England – passed the Currency Act making it illegal for the colonies to print their own money.  Historian John Twells says it made revolution inevitable. “Ruin took place in these once flourishing Colonies . . . discontent became desperation, and reached a point . . . when human nature rises up and asserts itself.”

The American War of Independence ended in 1783 but the battle for control of the Republic’s currency continued. The “financial question” – how money should be created and circulated – remained a burning public issue. It led to the formation of farmer’s Alliances in the 1870s and then the establishment of the People’s or Populist Party.

Mary Ellen Lease told the Populist convention in Topeka, Kansas in 1890: ‘Wall Street owns the country…We want the abolition of the National Banks and we want the power to make loans direct from the government. We want the accursed foreclosure system wiped out…” The Populists were strong on education for change. By 1892, farmer lecturers had gone into 43 states and reached two million farm families. The National Economist, a Populist magazine had 100 000 readers. Books written by Populist leaders, like William Harvey Coin’s, “Financial School” were widely read.

In 1894, Jacob Coxey and his Industrial Army of destitute unemployed men marched from Ohio to Washington to urge Congress to issue debt-free government notes. These federal dollars, “Greenbacks” had been used successfully during the Civil War. Coxey proposed Congress issue $500 million in Greenbacks to redeem Federal debt and provide work on public projects. Jacob’s march became a monetary parable in “The Wizard of Oz” written by journalist and Populist, Frank Baum.

In her book Web of Debt, Ellen Brown says: ‘Few of the millions who have enjoyed this charming tale have suspected that its imagery was drawn from that most obscure and tedious of subjects, banking and finance. Fewer still have suspected that the real-life folk heroes who inspired its plot may actually have the answer to the financial crisis facing the country today.”

In 1913 after failing twice to permanently establish a central bank in private hands bankers finally got their way. Americans spooked by the “Panic of 1907” into believing they needed such a bank were presented with identical “reform’ plans”  – under different names – by the Democrats and Republicans. A week before Xmas, shrouded in intrigue, and with opponents away, the Federal Reserve Act was hustled into existence. Americans would in future get their currency from the privately-owned Federal Reserve System and pay for the privilege.

A century later, they would also pick up the tab for the sub-prime fiasco. “Too big to fail” became the mantra as bank after bank was bailed out at extraordinary taxpayer cost and toxic assets swapped for fresh and wholesome government securities.

For now, the focus has shifted to Europe where vulnerable countries are being blackmailed into austerity. The conventional explanation is that they’ve been profligate; spending unsustainably as the global economy went into reverse. The fact that much of the debt – money borrowed from banks – was incurred after the crisis emerged in 2008 is conveniently ignored.

This week European leaders will meet at a “make or break” summit in Brussels. The preoccupation will be to save the banks from going bust and to find a way of allowing countries like Spain and Italy to borrow enough cash to get by. The Greeks will learn whether the austerity measures to which they have been condemned may be implemented a little more humanely.

The real deal will be a European banking union supervising national budgets from Brussels and effectively ending sovereignty. There has also been a momentous banker’s coup, which has gone largely unnoticed. European finance ministers pushed through a treaty updating the power of the European Stability Mechanism – a permanent rescue facility for banks – in the dead of night in January.

The secrecy parallels the passage of the Federal Reserve Act and is completely explicable. The treaty obliges member states “irrevocably and unconditionally’ to fund bank bailouts and gives the ESM and its officers “immunity from every form of judicial process”.

There may not be resistance from elected leaders but monetary reform groups are growing in numbers and influence. They want the right to issue money to be returned to people and their governments. They point to the success of the Bank of North Dakota – established in 1919 and the only state-owned bank in the US. And, like the Populists, they’re looking to reach critical mass