GLOBAL FINANCE FOR DUMMIES

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Posted by EWN Business on Jun 28, 2011 in Paul Polke -

In the 17th Century people left their gold with goldsmiths for safekeeping

ALTHOUGH many of the terms peculiar to global finance are alien to us the system is easily understood when explained in layman’s terms.

Money is not created by governments but by banks; they create and lend money to governments in much the same way as they give you a credit card. The credit available maxes; finance implodes, money supply runs short, governments stop spending and you’re out of a job. Very few governments run their own banks but those that do often have successful economies; living standards are better. On the other hand privatised banking cartels have been a disaster and because their system is deeply flawed the worst is yet to come.

Banks create credit that must be paid back with interest so repayments constantly outstrip loans so more loans have to be made to keep up; it is a pyramid system fated to collapse; to consume itself.

It started off simply enough. In the 17th Century people left their gold with goldsmiths for safekeeping. In return they were issued with receipts, which we know as banknotes. As people would only collect their gold 10 percent of the time this meant the goldsmiths could lend out 10 times as much in banknotes secure in the knowledge that there was sufficient gold to cover the notes in circulation.

In effect those 90 percent of notes were counterfeit and today this is called ‘fractional reserve banking’. It became institutionalised when the Bank of England was founded in 1694.

In this way the bank financed the government; it was the national money supply. Only the interest was ever paid; the original loan was always outstanding. This flawed system is almost universal.

Noted economic analyst Ellen Brown and author of ‘Web of Debt’ says there are alternatives; loans in future would have to be interest free but transition would be formidable. Another option is to place the banks in public ownership. In this way the people own the bank; it is a co-operative and the interest and profits are recycled for the people, not the bankers benefit. The immediate benefits include lower taxation, improved public services and less expensive public infrastructure; roads, hospitals, schools, transport, etc.

Bringing into public ownership private banks has been shown to reduce the cost of public projects by between 30 – 50 percent. It is the reason why Hitler’s Germany, in just three years, morphed from a bankrupt pariah to a super state second only to the U.S.A. Others like Libya have similarly benefited from public-owned banking.

Public owned banks go much further back. Benjamin Franklin’s Pennsylvania colony operated a ‘land bank.’

Money was printed, lent to the community, recycled and re-lent. It was a bank owned by the people for the people. The colonists paid no taxes except excise taxes. There was no inflation, no government debt. When the money supply is run by a private bank the profits are creamed off.

The privately owned Federal Reserve Bank was then set up; it basically ate itself, which resulted in the Great Depression

The first U.S. private bank was set up in 1791. It was called The First U.S. Bank and led to ruin. President Lincoln avoided ruinous Civil War debts by reverting to the public owned money control system. He was assassinated and his independent ‘greenback’ system was halted. The privately owned Federal Reserve Bank was then set up; it basically ate itself, which resulted in the Great Depression.

Robert H. Hemphill, credit manager of the Federal Reserve Bank of Atlanta, wrote in 1934: “We are completely dependent on the private banks. Someone has to borrow every dollar we have in circulation. If the banks create (print) ample synthetic money we are prosperous; if not, we starve.” The owners and shareholders of the banks were happy. The system meant they were in control and they were more powerful than governments.

Throughout modern history control of the money supply has been wrested from privately owned banking cartels but fiscal oligarchs don’t give up easily. Wars are declared when governments opt out of the cartel.

Next week we take a look at those who did succeed and those that are doing so right now.