Inequality and the banking system

Written by Ivo Mosley (Guest Author) on December 15, 2014. 

 http://www.positivemoney.org/2014/12/inequality-banking-system/

Inequality is the major economic, political and cultural evil of our times. In this short article, I want to explore how banks feed inequality in the act of creating our money supply.
To understand how banks increase inequality, it is necessary to understand the ‘magic trick’ of banking, by which a small quantity of money held by a banker is turned into a great deal of money in circulation. How the ‘magic trick’ works today is simple: governments, via central banks, provide commercial banks with ‘base money’ on demand. Base money stays hidden in accounts owned by commercial banks at the central bank. Commercial banks then create claims on their ‘base money’, which they lend at interest. These claims are known as ‘credit’, and when a borrower makes a payment that ‘credit’ goes into circulation. Credit is what we pay with every day when we pay from our bank accounts: it is the majority of the money supply.
The most significant result of credit displacing cash is that interest is now charged on almost all of our money supply. Whereas money used to be something we owned outright, almost every bit of money we now use carries an interest charge. These interest payments add to the expense of everyday living, and to the wealth of those who are already wealthy. This is why banking has been called by those who understand it ‘a machine for transferring property from the people to capitalists’ (John Taylor of Caroline, Virginia, 1753-1824) .
A second way in which inequality is augmented is the ease with which governments are able to borrow money newly-created for them by banks. The interest on these loans is charged to all tax-paying citizens, and paid to bankers and others who buy government bonds – in other words, to those who already have money to spare.
A third way in which bank-credit increases inequality, is that banks loan new money on the prospect of making a profit. Most new money today is allocated to speculators gambling on rising asset prices (property and share prices), once again increasing the wealth of the rich.

Legal Authority

Banks were first given legal authority to create credit out of nothing by the English Parliament, at a time when it consisted of rich men voted in by other rich men. The only legislation necessary was to make bankers’ promises legally enforceable regardless of whether they had assets to back up their promises (the Promissory Notes Act of 1704 was the key piece of legislation). The motives of MP’s have never been doubted: as individuals they wanted to get richer, and as a government they wanted to borrow for war. Since then, the banking system has been effectively a private finance company for governments and capitalists, funded by the labours of their citizens. (This is the description provided by the eminently respectable historian of English law, William Holdsworth, 1871-1944).
English legal authorization of banking practice was a world first: before then, banks operated in a legal grey area, dealing mostly with merchants and monarchs. When other governments saw how much power the new banking gave to English capitalism and warfare, they adopted similar legislation. Today, governments across the world accept banking practice in conformity with international commercial law.
In light of these long-known facts, it is hardly surprising that inequality has increased to such an extent. Most citizens are now dependent upon either government or capitalists (owners of corporations) for their daily bread.
The most terrible effect of bank-credit is to give power to corporations, politicians and speculators who have little or no moral consideration for the future: their concerns are not the usual human concerns of doing right and contributing, but the minority interests of accumulating vast wealth and power. Civilizations have always been characterised by those who hold influence and power, and ours is no exception. Bank-credit gives vast wealth to people who care only for making more. The vacuous nihilism of our new elites has corrupted human culture. Culture is not some kind of add-on, it is the collective understanding of how we may live well and prosper. Humanity today is in some danger of joining that class of species whose evolutionary paths have ended abruptly in extinction.

Legal Authority And Reform

Normally, a person may only sell property rights on a specific piece of property in their ownership. This is as much a matter of common sense as of law: you can’t sell Buckingham Palace unless you happen to own it, or mortgage your house sixty times over then spend the money. Overturning centuries of legal tradition, the Promissory Notes Act of 1704 made a banker’s promissory note enforceable regardless of whether or not it had been issued against a specific property. This enabled banks to create promissory notes at will, gambling on the probability that not all customers would arrive at once to claim ‘their’ cash.
Reform would not be so difficult: it would consist merely of insisting that banks obey the same laws as the rest of us. The process would have to include (i) the replacement of (digital) credit money with (digital) money owned outright and (ii) withdrawal of the licence allowed banks to create claims on assets they don’t have. Obviously, the new ‘just financial society’ would involve a gradual movement of wealth, influence and power to those who produce and create, away from those who speculate, manipulate and jockey for power.
Most people who are familiar with the reality of bank-credit also profit from it, so it is useless to expect reform from within. Politicians affect to understand nothing of how banks create money despite the simplicity of the process described above. Economists are reluctant to acknowledge the facts. But public opinion in this digital age can move mountains and even civilizations, so if the knowledge summarized above were more widely known, who knows what the future might hold!