Varoufakis and the Italian minister Pier Carlo Padoan

From: "Adults in the Room", Yanis Varoufakis, 2017

Italian tip 

I was escorted from Rome’s Fiumicino airport to the finance ministry by two police cars and two motorcycles, sirens blaring. But stuck as we were in Rome’s thick traffic, all our escort managed to achieve was noise pollution, irritating other road users and my own embarrassment. Creating more noise than substance, they brought Mateo Renzi’s government to mind. Pier Carlo Padoan, Italy’s finance minister and formerly the OECD’s chief economist, is in many ways a typical European social democrat: sympathetic to the Left but not prepared to rock the boat. He knows that the EU in its current configuration is heading in precisely the wrong direction but is only willing to push for inconsequential adjustments in its course. He has the capacity to understand the fundamental illness afflicting the eurozone but is loath to clash with Europe’s chief physicians, who insist there is nothing to treat. In short, Pier Carlo Padoan is a convinced insider. Our discussion was friendly and efficient. I explained my proposals, and he signalled that he understood what I was getting at, expressing not an iota of criticism but no support. To his credit, he explained why: when he had been appointed finance minister a few months earlier, Wolfgang Schäuble had made a point of having a go at him at every available opportunity – mostly in the Eurogroup. By the time we met, Padoan had managed to strike a modus vivendi with Schäuble and was evidently not prepared to jeopardize it for Greece’s sake. I enquired how he had managed to curb Schäuble’s hostility. Pier Carlo said that he had asked Schäuble to tell him the one thing he could do to win his confidence. That turned out to be ‘labour market reform’ – code for weakening workers’ rights, allowing companies to fire them more easily with little or no compensation and to hire people on lower pay with fewer protections. Once Pier Carlo had passed appropriate legislation through Italy’s parliament, at significant political cost to the Renzi government, the German finance minister went easy on him. ‘Why don’t you try something similar?’ he suggested. ‘I’ll think about it,’ I replied. ‘But thanks for the tip.’

FT: The ‘finance franchise’ and fintech

Fintech

The ‘finance franchise’ and fintech (Part 1 & 2)

yesterday

By: Izabella Kaminska

https://ftalphaville.ft.com/2017/08/18/2192452/the-finance-franchise-and-fintech-part-1/

https://ftalphaville.ft.com/2017/08/18/2192493/the-finance-franchise-and-fintech-part-2/

Lawyers often see the financial system differently to economists or financiers. In large part, this is because they look towards the legal frameworks and commitments which bind it together, rather than the theoretical economic actions or models which are supposed to underpin it. That’s is why to a lawyer (and perhaps also to more analytically minded people) banks don’t necessarily come across as institutions which intermediate the private sector’s scarce capital (loanable funds) to the wider economy.

To the contrary, as a new paper in the Cornell Law Review by Cornell lawyers Robert Hockett and Saule Omarova argues, some of them see finance as more akin to a public-private partnership “most accurately, if unavoidably metaphorically, interpreted as a franchise arrangement.”
Here’s the crux of the argument:

Pursuant to this arrangement, the sovereign public, as franchisor, effectively licenses private financial institutions, as franchisees, to dispense a vital and indefinitely extensible public resource: the sovereign’s full faith and credit.
In the United States, public full faith and credit flows through the financial system in two principal forms. The first form comprises directly-issued public liabilities: mainly Federal Reserve notes and U.S. Treasury securities. The second, quantitatively more significant yet less commonly recognized form is publicly accommodated and monetized private liabilities. What we call “accommodation” occurs when a public authority—typically, the Federal Reserve (the “Fed”)—takes on a privately-issued debt liability as a liability of its own. “Monetization” occurs when the ultimate beneficiary of accommodation is then able to spend the proceeds thereof as if they were currency. When a public instrumentality directly or indirectly accommodates or monetizes a private liability, it effectively extends the full faith and credit of the sovereign—in this case, the United States.

It’s brave theory, not least because the view that the loanable funds theory is absolute is still being hotly debated.
Nonetheless, the three-pronged approach to understanding the financial system they propose is interesting. At a minimum it encapsulates — or at least in part offers explanations — some of the weirder things that have been going on post crisis that can’t necessarily be explained by the orthodox model alone.
To the authors, there are three ways finance operates through the economy: 1) credit intermediation 2) credit-multiplication and 3) credit generation.
Credit intermediation follows the standard view. This suggests that which is lent or invested is always something that has been previously accumulated, “hence is limited both by the finite stock of the latter and by the willingness of its private accumulators to invest it.”
If it’s been accumulated and not consumed, meanwhile, it must be intermediated because S=I.

The authors note if this really was the case, all financial institutions would be styled as mutual funds or peer-to-peer type organisations. Which of course they’re not, hence the other theories, which aim to explain the banking phenomenon very specifically.

“Credit-multiplication” they note is the most familiar counter-example. This encapsulates the theory of fractional reserve banking, the idea that the banking system lends out more than it receives in investor deposits and holds only enough of the latter to handle anticipated daily withdrawals. The rest is continuously lent out.

Even here, however, there is an element of loanable funds in play. The “rest” which is being lent out, can only sustainably be lent out this way for as long as it is not needed by the original investor. In the event of depositors wanting more money out than the bank expected, the bank must locate said funds in the market to make good on the claims. If not, it runs into distress. Consequently, specific funds are still be tracked and positioned in the economy on a singular basis. It’s just that because of the velocity in play it appears that “the aggregate funds lent or invested constitute a multiple of the funds originally supplied by private savers, with the multiplicative factor inversely proportional to the reserve ratio.”
According to the authors, however, these two theories aren’t enough to satisfy how the banking system actually works. The third model of ‘credit-generation’ also needs to be factored in.

What they observe is that because the reserve can be preposterously small in the credit multiplication model — even sitting at zero if the fluidity of the system is continuously kept in check via a robust and continuous form of real-time clearing — the idea that any form of loanable funds are vital to the system may be an incorrect assumption. “Instead, it might be more accurate to view lending institutions as generating finance capital, rather than simply intermediating or even multiplying it.” That’s the none-to-many model.

If banks are free to create money from thin air, what then are the limitations?
The authors argue since credit outstanding is not fundamentally dependent upon—or, therefore, limited by— pre-accumulated investment capital, it must be limited only by investment opportunities which are viewed as potentially profitable. “In other words, credit is endogenous rather than subject to exogenously given, pre-accumulated funds.” If the opportunities are there, banks will generate the funds (on effectively maximum leverage by way of an accounting trick) to find ways to finance them.

There is a catch though! It’s only authorised institutions which officially have this power, say the authors. This is how the public balance sheet comes into play. As noted:

“Where credit flows conform to the multiplication or generation models, as they do in all modern financial systems, the public inevitably becomes the financial system’s principal protagonist.”

Effectively the public sector ends up being responsible for both authorisation — including any associated supervisory responsibilities — and for guaranteeing the intrinsic value of these magically constructed liabilities, especially when banks are unable to honour them (due, let’s say, to a breakdown in the clearing mechanism and/or a failure in their investment strategies at a systemic level).
That, in any case, is how the public-private franchise evolves. Banks operate as agents of the sovereign balance sheet, creating money — via the creation of assets, simultaneously with the creation of liabilities — when they believe the investment cases justify them. These asset/liabilities need only to be funded on a holistic basis to the extent that regulations require them to be funded.

You might at this point be thinking about the shadow banking sector? Does it too have the power to operate a credit generation model?
Our take would be, yes — yes it does. If shadow banking liabilities are accepted by the wider banking system as cash or a cash equivalent (indistinguishable from bank-generated cash liabilities) there isn’t necessarily a guarantee the shadow bank in question — whether unwittingly or purposefully — is properly funding those liabilities (since it’s outside of the supervisory loop). If they’re not properly funded, or if there’s excessive margin lending going on, they’re either credit multiplied or credit generated.

The difference is, the public balance sheet is not theoretically supposed to be on the hook for guaranteeing such liabilities if and when things go wrong.
The problem is… even if the public balance sheet is not theoretically responsible for defending shadow banking liabilities, the revolving door between the shadow-banking sector and the official sector by way of liability transfer opens the “authorised system” to contamination.
As the authors note, this revolving door is in part fuelled by the presence of leveraged investors in capital markets:

….capital market investors—not only financial institutions but also ordinary investing individuals—are able to finance their purchases of securities in capital markets by borrowing (directly or indirectly) from banks, in accordance with the model in Part II above. To the extent such levered investing is a basic fact of the capital markets, it defies the fundamental assumption that “accumulators” of scarce funds directly finance issuing firms. It shows that capital market investors themselves often act as the true “intermediaries” in the process of transferring capital from banks—the ultimate “investors” in securities purchased with the money borrowed from them—to firms.

Nevertheless, the shadow banking sector — since it does not on the surface have access to a lender of last resort — still attempts to regulate itself by using government paper as its equivalent of “base money”. This, as the 2008 crisis shows, de facto extended the public guarantee since only the government can create more of its own public debt. If the cost of not supplying high quality public debt to the shadow banking sector is potential systemic contamination of the official sector (due to the intermingled state of respective liabilities), as it was in 2008, chances are the state will act to defend the unofficial system. Its choice from then on is whether to extend the public-private franchise, in exchange for the right to supervision, or not.

Doing so ex post facto, however, doesn’t set a good precedent for the shadow banking systems of tomorrow, which can then assume they can operate according to their own non-supervised terms in a risk-inducing way until something goes wrong and they are forced to become supervised entities.
That, in a nutshell, is the theory of the financial franchise: even those institutions which are not officially franchised may be implicitly franchised because nobody can be sure if their collapse will or will not pose a systemic threat for the official sector in the long run.

What this has to do with fintech is coming up in our next post. (below)


In the first part of this two-parter we explained how the “financial franchise” theory of finance works, as thought up by Cornell lawyers, Robert Hockett and Saule Omarova in a new academic paper in the Cornell Law Review. (It should be noted, the theory isn’t necessarily unique as much as combinatory since it channels both Chartalist thinking and shadow banking collateralist thinking.)

What’s really interesting, however, is how it applies to the budding fintech sector, which aims to increase its independence from the official sector by recreating models based on loanable funds (credit intermediation) assumptions. These models, most famously, include peer-to-peer systems and cryptocurrency.

The authors imply these institutions will learn the hard way that once a credit generation model backed by a public-private franchise is in play in the economy, it’s almost impossible to go back. The reason being: all exclusive loanable funds systems carry a major competitive disadvantage on cost of funding vs established public-private franchise systems, and are hence likely to be outcompeted.

From the authors:

In its aspirations to render both the banks and the central banks redundant, this new-century fintech sector portrays itself as a revolutionary alternative to the existing financial system. Ironically, however, despite its disintermediation rhetoric, what this currently unfolding “fintech revolution” seeks to create in practice is a pure form of the orthodox “one-to-one” intermediation model of finance, as described in section I.A.1 above, in which traditional intermediaries such as banks or securities broker-dealers are replaced by electronic peer-to-peer transaction platforms.
Fintech enthusiasts view modern technology as the magic key enabling the flow of pre-accumulated capital among freely-contracting private parties, on a scale sufficiently large to obviate the need for publicly sanctioned and supported credit-generation. In that sense, fintech revolutionaries are essentially envisioning a sort of financial “return to Eden”—or, at least, to the putatively peer-to-peer origins of finance.

While the authors note it’s probably too early to decisively write off fintech, the way things are proceeding seems to support their theory. In short, they believe that if these systems are to expand beyond their peripheral place, they will have to reintegrate into the core finance franchise system eventually:

Without sustained direct access to the ultimate public resource flowing through that system—the public’s full faith and credit—alternative finance is not likely to outgrow its present fringe status. In fact, as this Part shows, marketplace lending is already effectively re-integrated into the core financial system, if only as a new variant of shadow banking. Cryptocurrencies may be moving in the same direction.

For more on how peer-to-peer is already turning into a conventional banking model see Kadhim’s work on the likes of Rate Setter and Zopa.
On cryptocurrencies, specifically, the authors note:

…the value of cryptocurrencies is tied fundamentally to their convertibility into conventional currencies, such as U.S. dollars backed by the full faith and credit of the United States. Cryptocurrencies are therefore likely to remain on the fringes of the financial system. Not surprisingly, startup cryptocurrency firms have reportedly been looking for partnerships with banks that have the resources and scale to reach mainstream audiences.
The second implication is that bitcoin’s high volatility as a store of value makes it an attractive underlying commodity for derivatives trading. In September 2014, TeraExchange established the first regulator-approved U.S. bitcoin derivatives trading platform. It may be only a matter of time before large U.S. FHCs enter this market and turn virtual currencies into the raw material for derivatives trading. The emergence of a deep market for hedging—and speculating on—bitcoin risk would, in turn, enable growth in the bitcoin acceptance rate in commercial transactions. Thus, as in the case of marketplace lending, the most likely mechanism for the success of cryptocurrency, ironically, involves its integration into the existing financial architecture—again, through the familiar channels of shadow banking, described above.

For more on that last part see Dan McCrum’s latest on Goldman Sach’s recent foray into investment advice on bitcoin “as an asset class” in which they predict the price will surge in a frenzy of speculation, before going on to halve — while simultaneously disclosing that the Goldman Sachs trading desk “may have a position in the products mentioned that is inconsistent with the views expressed in this material”.

Related links:Goldman’s sketchy case to buy (and then sell) bitcoin – FT Alphaville
The finance franchise – Cornell Law Review

Greece repays a loan: an ECB typical shenanigan

Success story (by Varoufakis, from "Adults in the room", 2017)

While Stournaras was taking over at the finance ministry during the hot summer of 2012, the folks at the EU and IMF were trying to solve a little conundrum of their own. The loans for the second bailout had been delayed by the twin Greek elections and would not start arriving before the autumn. Unfortunately, Athens was meant to send just under €3.5 billion to the ECB, one of its many unpayable debt repayments, on 20 August. How could that happen given that the coffers were empty? When the troika has a will it discovers a way. Here is the wizardry they used to conjure up the necessary illusion, narrated in slow motion so that the reader can fully appreciate the magic.

- The ECB granted Greece’s bankrupt banks the right to issue new IOUs with a face value of €5.2 billion – worthless pieces of paper, given that the banks’ coffers were empty.

- As no sane person would pay money to buy these IOUs, the bankers took them to the finance minister, Stournaras, who stamped on them the bankrupt state’s copper-bottomed guarantee – in reality a useless gesture since no bankrupt entity (the state) can meaningfully guarantee the IOUs of another bankrupt entity (the banks).

- The bankers then took their worthless IOUs to the Central Bank of Greece, which is of course a branch of the ECB, posting them as collateral for new loans.

- The Eurogroup gave the green light to the ECB to allow its Greek branch to accept these IOUs as collateral and, in exchange, give the banks real cash equivalent to 70 per cent of the IOUs’ face value (a little more than €3.5 billion).

- Meanwhile, the ECB and the Eurogroup gave Stournaras’s finance ministry the green light to issue new Treasury bills with a face value of €3.5 billion – IOUs issued by the state, which of course no investor would touch in their right mind given the emptiness of the state’s own coffers.

- The bankers then spent the €3.5 billion they had received from the Central Bank of Greece – in fact from the ECB itself – when they pawned their own worthless IOUs in order to buy the state’s worthless IOUs.

Lastly, the Greek government took this €3.5 billion and used it to pay off ... the ECB!

Taibbi: Is LIBOR, Benchmark for Trillions of Dollars in Transactions, a Lie?

While nuke kooks rage, British regulators reveal rip in financial space-time continuum and $350 trillion headache

British bank regulators recently revealed that they’re abandoning LIBOR, the framework used for hundreds of trillions of dollars in financial transactions. Oli Scarff/Getty

By Matt Taibbi

2 days ago
https://www.rollingstone.com/politics/news/taibbi-is-libor-crucial-financial-benchmark-a-lie-w497305

It was easy to miss, with the impending end of civilization burning up the headlines, but a beyond-belief financial story recently crept into public view.
A Bloomberg headline on the story was a notable achievement in the history of understatement. It read:
LIBOR'S UNCERTAIN FUTURE TRIGGERS $350 TRILLION SUCCESSION HEADACHE
The casual news reader will see the term "LIBOR" and assume this is just a postgame wrapup to the LIBOR scandal of a few years back, in which may of the world's biggest banks were caught manipulating interest rates.

Related

Taibbi: Government Misled Public on Fannie/Freddie Takeover

 

While Russiagate rages, the bitter fight over the future of the real estate market continues 

It isn't. This is a new story, featuring twin bombshells from a leading British regulator – one about our past, the other our future. To wit:

1. Going back twenty years or more, the framework for hundreds of trillions of dollars worth of financial transactions has been fictional.
2. We are zooming toward a legal and economic clusterfuck of galactic proportions – the "uncertain future" Bloomberg humorously referenced.

LIBOR stands for the London Interbank Offered Rate. It measures the rate at which banks lend to each other. If you have any kind of consumer loan, it's a fair bet that it's based on LIBOR.

A 2009 study by the Cleveland Fed found that 60 percent of all mortgages in the U.S. were based on LIBOR. Buried somewhere in your home, you probably have a piece of paper that outlines the terms of your credit card, student loan, or auto loan, and if you peek in the fine print, you have a good chance of seeing that the rate you pay every month is based on LIBOR.

Years ago, we found out that the world's biggest banks were manipulating LIBOR.

That sucked.

Now, the news is worse: LIBOR is made up.
Actually it's worse even than that. LIBOR is probably both manipulated and made up. The basis for a substantial portion of the world's borrowing is a bent fairy tale.
The admission comes by way of Andrew Bailey, head of Britain's Financial Conduct Authority. He said recently (emphasis mine):

"The absence of active underlying markets raises a serious question about the sustainability of the LIBOR benchmarks. If an active market does not exist, how can even the best run benchmark measure it?"
As a few Wall Street analysts have quietly noted in the weeks since those comments, an "absence of underlying markets" is a fancy way of saying that LIBOR has not been based on real trading activity, which is a fancy way of saying that LIBOR is bullshit.

LIBOR is generally understood as a measure of market confidence. If LIBOR rates are high, it means bankers are nervous about the future and charging a lot to lend. If rates are low, worries are fewer and borrowing is cheaper.
It therefore makes sense in theory to use LIBOR as a benchmark for borrowing rates on car loans or mortgages or even credit cards. But that's only true if LIBOR is actually measuring something.

Here's how it's supposed to work. Every morning at 11 a.m. London time, twenty of the world's biggest banks tell a committee in London how much they estimate they'd have to pay to borrow cash unsecured from other banks.
The committee takes all 20 submissions, throws out the highest and lowest four numbers, and then averages out the remaining 12 to create LIBOR rates.
Theoretically, a fine system. Measuring how scared banks are to lend to each other should be a good way to gauge market stability. Except for one thing: banks haven't been lending to each other for decades.

Up through the Eighties and early Nineties, as global banks grew bigger and had greater demand for dollars, trading between banks was heavy. That robust interbank lending market was why LIBOR became such a popular benchmark in the first place.

But beginning in the mid-nineties, banks began to discover that other markets provided easier and cheaper sources of funding, like the commercial paper or treasury repurchase markets. Trading between banks fell off.
Ironically, as trading between banks declined, the use of LIBOR as a benchmark for mortgages, credit cards, swaps, etc. skyrocketed. So as LIBOR reflected reality less and less, it became more and more ubiquitous, burying itself, tick-like, into the core of the financial system.

The flaw in the system is that banks don't have to report to the LIBOR committee what they actually paid to borrow from each other. Instead, they only have to report what they estimate they'd have to pay.
The LIBOR scandal of a few years ago came about when it was discovered that the banks were intentionally lying about these estimates. In some cases, they were doing it with the assent of regulators.
In the most infamous instance, the Bank of England appeared to encourage Barclays to lower its LIBOR submissions, as a way to quell panic after the 2008 crash.

It later came out that banks had not only lied about their numbers during the crisis to make the financial system look safer, but had been doing it generally just to rip people off, pushing the number to and fro to help their other bets pay off.
Written exchanges between bank employees revealed hilariously monstrous activity, with traders promising champagne and sushi and even sex to LIBOR submitters if they fudged numbers.
"It's just amazing how LIBOR fixing can make you that much money!" one trader gushed. In writing.

Again, this was bad. But it paled in comparison to the fact that the numbers these nitwits were manipulating were fake to begin with. The banks were supposed to be estimating how much it would cost them to borrow cash. But they weren't borrowing cash from anyone.

For decades now, the world's biggest banks have been dutifully reporting a whole range of numbers every morning at 11 a.m. London time – the six-month Swiss franc rate, the three-month yen, the one-month dollar, etc. And none of it seems to have been real.

These numbers, even when sociopathic lunatics weren't fixing them, were arbitrary calculations based on previous, similarly arbitrary calculations – a rolling fantasy that has been gathering speed for decades.
When regulators dug into the LIBOR scandal of a few years ago, they realized that any interbank lending rate that depended upon the voluntary reports of rapacious/amoral banks was inherently problematic.
But these new revelations tell us forcing honesty won't work, either. There could be a team of regulators sitting in the laps of every LIBOR submitter in every bank, and it wouldn't help, because there is no way to honestly describe a nonexistent market.

The FCA's Bailey put it this way (emphasis mine):
"I don't rule out that you could have another benchmark that would measure what Libor is truly supposed to measure, which is bank credit risk in the funding market," he said. "But that would be – and I use this term carefully – a synthetic rate because there isn't a funding market."

There isn't a funding market! This is absurdity beyond satire. It's Chris Morris' "Cake is a made-up drug!" routine, only in life. LIBOR is a made-up number!
Think about this. Millions of people have been taking out mortgages and credit cards and auto loans, and countless towns and municipalities have all been buying swaps and other derivatives, all based on a promise buried in the fine print that the rate they will pay is based on reality.

Since we now know those rates are not based on reality – there isn't a funding market – that means hundreds of trillions of dollars of transactions have been based upon a fraud. Some canny law firm somewhere is going to figure this out, sooner rather than later, and devise the world's largest and most lucrative class-action lawsuit: Earth v. Banks.

In the meantime, there is the question of how this gets fixed. The Brits and Bailey have announced a plan to replace LIBOR with "viable risk-free alternatives by 2021."

This means that within five years, something has to be done to reconfigure a Nepalese mountain range of financial contracts – about $350 trillion worth, according to Bloomberg. A 28 Days Later style panic is not out of the question. At best, it's going to be a logistical nightmare.

"It's going to be a feast for financial lawyers," Bill Blain, head of capital markets and alternative assets at Mint Partners, told Bloomberg.
With Donald Trump in office, most other things are not worth worrying about. But global finance being a twenty-year psychedelic delusion is probably worth pondering for a few minutes. Man, do we live in crazy times.

California: the Cannabis Banking Working Group

California and L.A. Not Far Behind!

posted by Public Banking Inst | 0gb
August 08, 2017 

http://www.publicbankinginstitute.org/california_and_l_a_not_far_behind

Meanwhile, California State Treasurer John Chiang has formed a Cannabis Banking Working Group to determine what to do with the cannabis cash that will be rolling into "pot shops" in January, after Prop. 64 legalized the herb for popular use. It is expected to be a $7 billion business generating a potential $1 billion in tax revenues; but it is a business with nowhere to bank, due to the federal ban on the herb. On August 10, the Treasurer is holding a workshop open to the public, featuring public banking veterans Marc Armstrong, Matt Stannard and Gwen Hallsmith among others. It will be held at the Sheraton Gateway Hotel on Century Blvd. in Los Angeles and will run from 9:30 a.m. to 1:30 or 2 p.m. It should be good!
The LA City Council is on the move as well, also mobilized by the need to find a bank for the coming onslaught of cannabis cash. On July 26th, the City Council actually brought a motion to create a state-chartered public bank for the city! Besides solving the cannabis problem, Council President Herb Wesson said in a speech at City Hall that a municipal bank could provide financing to small businesses and developers of affordable housing, among other public uses. A major push for the bank came from a vibrant grassroots movement called RevolutionLA, which, as in Seattle, is an outgrowth of the push for divestiture from Wells Fargo. The city’s own bank is a natural alternative.

Core mission of central banks: lie but don't get caught

"None Of It Was True": 103 Years Later, The FT Admits It Lied And Colluded With The Bank of England

by Tyler Durden

Aug 9, 2017 4:13 AM
http://www.zerohedge.com/news/2017-08-08/none-it-was-true-103-years-later-ft-admits-it-lied-and-colluded-bank-england
 

When one strips away the lies about central banks' "inflation and employment" mandates and focuses on what they really do - which is to keep asset prices artificially supported and volatility suppressed - the motive behind virtually every central bank act becomes readily apparent: preserve (and increase, if possible) confidence in the market and economy, while saying anything and everything that helps achieve this, or in other words, lie but don't get caught.
Today, thanks to the FT, we have proof of precisely this, in what may be the first recorded instance of a central bank openly lying in an attempt to preserve market stability... and getting caught.

On Tuesday, the Bank of England admitted that the UK government failed to find enough investors to fully cover its its 1914 War Loan, and was forced to turn to the central bank to help plug a deficit of more than £100m in the fundraising. However, it did so only after it lied to the public that the bond was oversubscribed:
"Despite claims it was swamped with buyers, the 1914 War Loan raised less than a third of its £350m target, attracting a very narrow set of investors, according to BoE employees writing on the Bank Underground website today."  The bloggers uncovered the cover-up by trawling through the bank’s old ledgers.

As the FT notes, "the debt yielded 4.1 per cent, well above the 2.5 per cent payable on other government debt at the time, but it still failed to attract a wide enough pool of investors."

So why lie? For the same reason to this day central bankers around the world lie at every possibly opportunity: to preserve confidence in a fragile system, which can collapse the moment doubt spikes.

The government decided that news of a failed bond sale would have been “disastrous” to the general public, and so schemed with the Bank to plug the gap, the BoE now says. The central bank bought the outstanding securities on offer, and covered its tracks by purchasing the bonds in the name of its chief cashier, and listing them on its balance sheet as “other securities”.

Ironically, the FT which reported of the BOE's blog finding, was instrumental in publicizing and disseminating the lie on November 23, 1914, something which many have accused the paper of doing today.

The Financial Times played its role in convincing the public that the sale was a success, publishing a segment (which appears to be an advert) claiming that the debt was oversubscribed and offering “further particulars of this magnificent investment… upon request.”

It was all a lie. This is how the BOE's bloggers justify it:

For the Bank of England and economic policymakers more generally, this early failure led to the realisation that managing the national debt was a complex and, in war times, perhaps Herculean task. The episode marked an important step on the Bank’s transformation from private institution to a central bank. A decade after the Armistice, the altered role of the Bank prompted creation of a Parliamentary commission to examine its functions, ultimately setting it on a path to nationalisation.

Did this clear intention to mislead the public lead to any consequences? Here's the FT's take: "The BoE’s intervention uprooted the UK’s long-held laissez faire approach to capital, as the government prioritised the war effort over private investors. And although the hoodwink worked, the authors suggest that the failed sale prompted some soul-searching at the central bank:"
Unfortunately, over a century later, the soul-searching has led to zero tangible results, as lies in the name of preserving public confidence and avoiding "disastrous" - but true - news continue unabated, and those who dare to expose them are branded as "conspiracy theorists" and, more recently, Russian sympathizers.

As for the FT, the principal agent employed in propagating the central bank's lies, it had this to say:

Clarification: On 23 November 1914, a piece published in the Financial Times claimed the UK government’s War Loan was “oversubscribed”, with applications “pouring in”. The item described this as an “amazing result” that “proves how strong is the financial position of the British nation”. We are now happy to make clear that none of the above was true.

Well, thanks for "coming clean." We, for one, can't wait to find out what current stories and narratives the FT will admit some 103 years from today that it is "happy to make clear" were lies.

Facts and Theories of Finance

Facts and Theories of Finance 
by Frank Anstey (1930)
http://digital.slv.vic.gov.au/view/action/singleViewer.do?dvs=1502231774690~336&locale=en_US&metadata_object_ratio=10&show_metadata=true&VIEWER_URL=/view/action/singleViewer.do?&preferred_usage_type=VIEW_MAIN&DELIVERY_RULE_ID=10&frameId=1&usePid1=true&usePid2=true

Financiers are the Dictators of Policies - the Unseen Power in Democracies

The Economists. 

In industry there are no perpetual fixed facts; there is constant mobility, change, transformation. The efforts to base a science upon this ever moving, changing panorama of economic life are repeatedly frustrated by the passing away of the facts upon which the science stood and by the influx of new facts and forces creating entirely new conditions.

The economists of the 18th and 19th centuries were dabblers in definitions. They existed to prove that rent and interest were not charges upon production—that the wage- earner was economically on the same plane as a pig or a cow— that he was a commodity—that his existence and his subsistence were determined by the contents of a tank known as a "wages fund."

In Parliament, on the platform, in the Press, their books and their doctrines were quoted as Holy Writ to prove that the worker was the predestined victim of forces over which he had no control. He was economically damned—a commodity and nothing more.

To-day, for a variety of reasons, those books are no longer quoted. Their doctrines, definitions, theories, and assumptions have passed into the dustbin of discarded and forgotten things. A few years before the war a new school of economists appeared. They discarded the old phraseology, put on a human guise, and served up the old theories in a more digestible form under new names. At the same time, they noted the new factors and forces appearing in industry, and, in the name of science, justified their social and economic consequences— alleged to be as natural as the rising and setting of the sun. This new school and all its alleged science was shattered by the first blast of war, by the economic necessities of nations created by the war. The theories were disproved by facts, and what was alleged would happen under a given set of circumstances did not happen.

The pre-war economists were discredited; the post-war economists coined new phrases, and gave their attention, not to a new force, but to an old force that had become more massive. They gave to banking, to currency, to the monetary system of exchange an attention never previously given, because those factors had become the predominant agents in the economic life of nations.

But the old impulse dominates the study. The new experts are to the banking power what the old economists were to the landed and commercial powers. They surround the subject with a shelter of mysterious words—make it a Holy of Holies, into which the masses may not enter except with bated breath, with unsandalled feet, to accept with reverence and without question the dictum,s of the new economic priesthood. The late Sir Denison Miller, in a lecture, said that the experts dealt with banking- and currency questions in a language not meant to be understood by the public; and Frank Hirst, when editor of the "London Economist," said that the experts "not only mystified the public, but obfuscated themselves with obsolete terms." Moreover, they built their theories, not only upon facts that Had ceased to exist, but on assumptions that never were facts. Sir Felix Schuster, when president of the Smith and Union Bank of England, said:—

"The theory of banking is one thing—the practice is quite another. Banking has evolved far beyond the theory on which it is supposed to he conducted."

Quantity Theory. 

The fundamental theory of modem monetary science is known as "The Quantity Theory of Money." The theory is that prices of commodities rise and fall with the rise and fall of the quantity of money—that if money doubles, the price of commodities doubles—that if the quantity of money diminishes, the price level of commodities falls to the same extent.

The theory presents itself under several aliases. An increase in money is presented as "Inflation"; an increase in anything else is just an increase—nothing more. A decrease in money is "Deflation"; a decrease in anything else is simply a decline—a falling off. Around these surnames of "Inflation" and "Deflation" the experts build their mysteries.

The Quantity Theory also presents itself in the name of ."Purchasing Power of Money"; but, no matter what the name, the object is to teach that prices rise and fall with the money volume—that two shillings in wages is no better than one shilling, and that threepence will buy as much as either. This gospel is specially directed to wages and productive costs.
 It is never mentioned as having any application to money-lenders, money-lending institutions, or the charges they impose upon production. 

Doctors Differ.

The experts are not agreed as to what is meant by "Purchasing Power." Some say it means cash deposits in cheque-paying banks, plus notes in circulation. Some say it should include deposits in Savings Banks; others deny it. Others say all the foregoing is wrong—that the real measure of purchasing power consists of bank advances multiplied by their velocity of turnover, as shown by clearing-house returns. There is no agreement as to what is meant by deflation or inflation. Some say it refers to a Government note issue; others say it refers to Government borrowings; others say it refers to expansion and contraction of bank credit. The Encyclopaedia Britannica says: "The controversies to which this theory has given rise are amongst the most celebrated in political economy," and concludes by saying:—
"The Quantity Theory cannot be established by any appeal to facts." 

This is so because, not only the volume of money, but a dozen other factors enter into the determination of price levels. In its issue of May 3rd of this year the London "Times" points out that from 1919 to 1928 money facilities increased by 60 per cent., trade by 25 per cent., and the "Times" adds,
"according to the quantity theory, the wholesale price index should have risen by 28 1/2 per cent.; it actually fell 30 per cent." 

The United States presents similar illustrations; so does Australia. The Australian banks during the last five years have issued 80 millions, and during the last ten years, 1920 to 1930, 140 millions additional bank credits upon smaller cash reserves; yet wholesale prices have fallen. The facts disprove the theories. The facts prove that increased bank credits do not necessarily mean a corresponding, or any, increase in the price of commodities. Yet this exploded Quantity Theory is the main buttress for the existing system.

"Cash Reserves" 

The theory is that banks must keep a "proper proportion" between their "cash reserves" and—
(a) total liabilities;
(b) liabilities at call;
(c) advances.

The banks are the judges of "proper proportion," and even on that they are not agreed. It varies, not only between countries and periods, but between banks in the one country at the same period. What was "unsafe" and "unsound" before ' the war is now regarded as "safe and sound," and the same variation exists between banks. In Australia there is not among bankers any binding rule, except the common rule as to what shall be charged to the public. The average cash reserves to liabilities at call is 40 per cent.; but the variation between banks is from 25 to 70 per cent. The average advance of credit to the public is £7 of book credit to every £1 of cash reserve; but the variation between banks is from five to nine times per £1 of cash reserve. If the average be taken as the so-called "proper proportion" or the so-called "safety limit," then it is evident that at one end of the banking scale there is reckless lending upon diminishing reserves, and at the other end improper restrictions of credits upon valid securities. Against neither extreme has the industrial life of the country any protection. 

Finally, "cash reserves" has changed its character. Before the war it meant gold. Next it meant notes and gold. Later on it meant notes without a claim on gold as in England at the present time, or payment in "lawful money" as in the United States, which means notes. Finally, "cash in reserve" includes "cash at call" —a book entry in some central bank, as in most countries of the world, including Australia. So "cash reserves" to-day and 25 years ago are two entirely different things. 

Gold. 

The theory is that the banking system is based upon gold, and that the banker charges interest for the right to use the gold commodity in his vaults.

The Answer: Before the war the theory had ceased to be a fact, but it had the appearance of fact. Gold circulated freely among the public, and notes issued were not in excess of gold in the vaults. To-day gold has disappeared as internal currency, and notes issued are far in excess of gold stocks. Gold is no longer internal money. It is a stored product for international use. In most countries the facts have been faced, and the pretence of redemption in gold no longer exists. The first clause of the British Gold Standard Act of 1925 declares that "Any Act which provides that a currency note shall be redeemed in gold is null and void," and that "The Bank of England shall not be bound to pay any note of the bank in legal coin." Clause 1 of the Currency Act of 1928 declares that "holders of £5 notes and upwards may change into £1 or 10/- notes," and "£1 or 10/- notes shall be legal tender by the Bank of England or any branch of the bank." These enactments were part of the well-considered policy of a British Tory Government driven by the force of economic necessity to to do what before the war would have been regarded as revolutionary.

Ratio of Credits to "Cash Reserves 

The theory that obligations must, or can, be redeemable in gold having been destroyed, the economic experts retire to a new position. They affirm that the whole credit structure rests upon the notes in the bank vaults as well as the gold, and that the volume of credits which a bank can issue must diminish with the decrease of the bank reserves. The very reverse has been operating in Australia for years —bank credits have increased and reserves diminished. If that is unsound and unsafe, the banking corporations stand condemned. In this, as in other cases, the theories and the facts do not coincide.

The Bank Rate. 

This is another theory connected with gold.
The theory is that if the bank rate is raised high enough it will be cheaper to bring in gold. During 1929 the Bank of England raised the bank rate 5 - 5 1/2 - 6 - 6 1/2, but gold went out in violation of all theory, and continued until the collapse of the American boom. Mr. Snowden informed the House of Commons that "the increased bank rate had not achieved the object it was supposed to achieve." He pointed out that France and Germany, instead of taking the products of British factories, were taking payment for their goods in gold, in spite of the bank rate. Reginald McKenna, ex-Chancellor of the Exchequer, said, "The theory worked all right before the war, but to-day the Government is the principal debtor and convertor or borrower. It must have money, whatever the rate. To raise the rate is to penalise the Government and the country." The bank rate was reduced, and British newspapers announced that the theory had collapsed beneath the pressure of new economic facts. 

Loans and Deposits. 

The theory is that deposits are the basis of loans—that if there are no deposits there can be no loans. On August 23rd, 1929, Mr. Davidson, General Manager of the Bank of New South Wales, put the theory thus:—
"The Banker's business is founded on deposits. Bankers cannot lend in excess of deposits—NOT NEARLY SO MUCH." 
The answer is that, at the time Mr. Davidson was speaking, bank loans in Australia were in excess of deposits. Five weeks later they were 13 millions, and, by the end of March, 1930, 30 millions in excess of deposits. By the end of June the disparity had increased. In this, as in other cases, the facts and the theories do not fit.

Loans from Bank Capital. 

The theory is that banks draw interest and make profits by the loan of their actual subscribed capital.
The fact is that all bank capital and all accumulated undivided profits massed as "reserves" are held in forms not on loan. They are held in land and buildings, in gold commodity, and Commonwealth notes that are to the banks as gold in reserve. The totality of these cold-storage assets in vaults and buildings in London and Australia equals the totality of capital and accumulated reserves. In this, as in all other cases, the facts and the theories are far apart.

That a bank can come into being, can exist, operate, and develop into power without capital is evidenced by the history of the Commonwealth Bank, and it does not stand alone.
A bank does not lend capital. On the contrary, it is the owners of capital and wealth who pledge their capital—their property, products, and plants—their homes, farms, and factories—and pay interest to secure from the banks circulating symbols of securities deposited by the owners of material wealth. 
In all these cases there is a rush to explain away the facts. If the explorer permits himself to be red-herringed off the main question, he is bushed in a maze of subsidiary issues —exactly where the defenders of the existing system want him, and where they leave him. But the statement of Sir Felix Schuster, himself an eminent banker, stands un- shattered:— "Banking has evolved far beyond the theory on which it is supposed to be conducted." 

What is Modern Banking? 

If we want to know in plain and simple language what modern banking and modern money really are, we can gather our information from the foremost bankers in the world. We gather it from a man like Sir Edward Holden—selected by the British Government in 1915 to raise the 500 million dollars loan in New York. He was then president of one of the great banking companies of Britain. lie said:—
"Banking is little more than a matter of book-keeping. It is a transfer of credit from one person to another. Credits are based on securities lodged by depositors. The transfer is by means of cheques. The cheques are currency. Currency is money. MONEY IS REDEEMED EVERY TIME IT IS EXCHANGED FOR COMMODITIES OR SERVICES." 

Redemption. 

Thus redemption is not done by a bank—it is done by the public. A cheque or note is redeemed every time it is accepted by a member of the public for goods or services. When the cheque or note goes to the bank, it goes for registration to the credit of the depositor. It is redeemed when drawn upon and passed to some other member of the public for goods and services.

Bank Notes and Cheques. 

Forty years ago Sir Robert Giffen, Controller-General of the Statistical Departments of Great Britain, said that, until consideration of gold was put out of the mind, "correct conclusions upon currency questions are impossible." To-day that statement is equally true of Commonwealth notes. They constitute an insignificant fraction of the total currency of the country—mere specks upon the ocean of bank-created money. To-day the currency consists of what Mr. Earle Page in 1924, in his place as Commonwealth Treasurer, described as—
"Bank manufactured cheque currency." 

Last year (1929) cheques passing through the clearing- houses of the capital cities of Australia totalled 2,350,000,000. Add the vast volume of clearances between branches of the one bank and between banks in towns and cities outside the capitals, the grand total is around 4,000,000,000, representing rapid turnovers of bank-manufactured money—all based upon the securities lodged by the people who paid the interest to secure a circulating symbol of their own property, plant, and products.

During the last ten years the banks increased their "advances" upon deposited securities 140 millions.
According to the theorists, prices should have risen, yet we are told they have fallen. We are told that an increase of bank credit means an increase of the Note Issue—yet it is less. We are told than an expansion of bank credit means an increase of notes among the general public—the facts are otherwise: it has decreased. Modern banking is therefore something very different to what the theorists would have the mass believe. How, then, can any man who lives in a world of defunct theories do anything to enable his country to adapt itself to the new facts which thrust themselves upon his race and generation? 

Before the War and Now. 

In 1914, when the war came, our debts totalled 300 millions—at an average interest rate of 3 1/2 per cent.—invested in railways, post offices, water works, and other public utilities. During three years prior to the war, railways not only paid working expenses and interest—they contributed to the reduction of taxation.

Since the outbreak of war, Federal, State, and Local Governments, Boards, and Commissions acting on behalf of those Governments have added 1000 millions to the public debts. Those debts are loaded with the higher interest rates created by the war—those increased rates make the difference between profit and loss on all public services. Production has increased twofold—interest fivefold.

Secondly, all pre-war loans as they fall due are converted into the higher rates. These and the higher rates upon new loans have transformed railways and other public services from profit-making into losing propositions. These deficiencies have to be made up by higher charges and additional taxation.

Thirdly, all forms of private enterprise are afflicted by the higher interest rates created by the war. Every new factory, farm, and home, every new industrial process is loaded with the higher rate, increasing the cost of production and the cost of living.

These higher costs react as higher prices for all material required for public utilities—railways, post offices, water works, lighting, sewerage, road-making—higher costs upon all public services.

The financial consequences of the war impose a burden of not less than 100 millions per annum upon the costs of production, and every increase in the interest bill increases the processes of taxation—national and local.
To all producers, primary or secondary, it must be evident that the more prices fall the more products must they sell to pay the interest bill—that the more incomes diminish the greater must be the percental taxation to raise the same revenue to pay interest—that the efforts to raise wages, to reduce hours, to improve social conditions must be a fruitless task while increasing interest (and taxation to meet the bill) consumes more and more of the substance of human toil. WHAT GOES TO THE PAWN- BROKER CANNOT GO INTO THE HOME. 

Fluctuating Credits. 

For years there has been what is academically known as an inflation of currency— not of Government-created currency, but of "bank-manufactured currency." Under this impetus speculation and development have been encouraged, values have risen, bank profits increased, and the surplus of bank assets over liabilities augmented by many millions.

Suddenly, as at a word of command, the policy is reversed —credits are suspended, refused, or withdrawn. There is not a business man in the land who does not know that the depression is intensified, unemployment increased, values diminished, the home market destroyed, not merely by oversea fall in the price of primary products, but by the refusal of bank facilities to men whose securities are beyond question. There is deflation in work and in production values. There is inflation in poverty, inflation in the values of bonds and bondage, inflation in the purchasing power of interest.

The other day an Australian journal stated that increasing interest bills and increasing taxation were severe blows to industry, and it asked:—
"How can industries be stimulated by increases of this nature?" And it might be asked: How can it be avoided or altered while a nation stands for obsolete processes and defunct theories? How can it solve post-war problems with pre-war methods? As well might it try to win a modern war with Napoleonic weapons. 

"Reorientation." 

Ex-Prime Minister Bruce, speaking in Adelaide last year, said:—
"It may be necessary to reorientate the whole of our national life." 

So far as industry and industrial conditions are concerned, the reorientation has already occurred— what is needed is a reorientation of the financial system to meet the new conditions. 

To-day banking has become a titanic monopoly. It can give or refuse credit, increase or decrease values, raise or ruin men. It has jurisdiction over the livelihood, the savings, the future of the nation. Such vital processes, decisive of the progress of the people and of the safety of the State, should not be committed to the dividend interests of private corporations.

And if anyone imagines this language extreme, I would remind him that on the Banking Bill of 1924 the then Treasurer, Mr. Earle Page, said:—
"The Banks, mindful of their own interests, have no such regard for the public welfare as is undoubtedly required. Their individual outlook and interests render them unsuitable for the exercise of that prevision necessary for the construction of a sound policy." 

Mr. Earle Page was not the advocate of a nation-owned banking system, but he unconsciously furnished arguments for its application and marshalled facts for its support.

The Left Wing. 

The men who stand for a "reorientation" of the financial system do not believe that a nation can grind out wealth with a printing machine. They do not stand for a fiduciary note issue —its utility is overshadowed by the cheque. They do not allege that credit is wealth or capital, or production or the machinery of production; but they do allege that it is a vital essential of the productive and distributive processes of the modern State—that it should be available to all who have the necessary security—that "the limit of credit is the volume of actual wealth available as security"—that a Commonwealth-owned banking system, if it is to really function as an instrument of national safety and progress, must make credit available to all who have cover to offer—that it shall function in reality as a bank of the nation—as an instrument of reconstruction and recovery—and not as a buttress of predatory interests.

Internal Debt. 

Sir Basil Blackett, ex-Controller of Finance in Britain, was asked by a Commission on Taxation if the country could carry the burden of interest without injury to its industries. Sir Basil replied:—
"The burden of interest must be reduced or industry will break beneath the strain."
In Australia the reduction of the annual interest burden and of the taxation which results from it are fundamental to the task of reconstruction. 

We are told that there is an alternative. Cut down all public and private expenditure. Cut wages, cut spendings. Stimulate production by consuming less. Cut old-age pensions, cut soldier pensions. Cut everything and everybody except the bankers and the bondholders. By these means, we are told, our financial credits and conditions will be improved.

If you ask upon what their hope of recovery rests, you are told that they look for an increase of exportable products and an improvement in oversea prices. The last is not a policy—it is only a hope. It is not exclusive to Australia. It is reiterated in every land where millions are destitute and underfed. This year the Australian market for Australian products will be reduced by at least £30,000,000. The financial expert of the Melbourne "Herald" estimates £100,000,000. This equals the income and purchasing power of 400,000 families. To this extent the home market is destroyed. The products our own people cannot buy must be sold overseas or not at all. Thus our export trade is to be reinforced by the inability of our people to buy the things they need. This, we are told, is the way to recover. We are to feed the oversea bondholder by the semi-starvation of our own people.

The internal indebtedness of Australia runs into hundreds of millions. That has been represented as so much fluid capital drawn from industrial processes. If that is so, it no longer fructifies in the field of industry. It is tied up in bonds, hangs as a millstone around existing industry, drives up the rate of interest, augments taxation, makes economic recovery more difficult. It should, therefore, be the mission of a Commonwealth-owned banking system to furnish means for the re-transformation of those bonds into fluid forms of capital.

In 1919, the Melbourne "Argus" said that the banks "made liquid" private property by creating credits in their books against property to enable the owners to take up war bonds. The same thing can now be done with the bonds as they fall due. They are "property" and can be "made liquid" so that credits flow once more into the channels of productive enterprise.

A "banking expert" (Professor Copland), speaking before the Melbourne Chamber of Commerce, stated that if the Commonwealth Bank purchased Commonwealth securities it would increase the supply of floating capital and ease the position.

A Commonwealth Bond in private hands is regarded by private banks in normal times as sound security upon which to advance "bank-manufactured cheque currency." It is equally sound security if taken over by the Commonwealth Bank at date of redemption by the methods and processes of private banks. The interest upon the bonds, instead of going into private hands, will go to the Commonwealth Bank, materialising as bank profits available for annual redemption of the general debt. The debt, to the extent taken over by the bank of a nation, is transformed from interest-bearing, non- circulating- bonds—frozen credits—into non-interest-bearing, liquid credits, redeemed every time they pass from hand to hand in exchange for commodities or services—redeemed by the Government every time accepted in payment of taxes and service of public utilities. The credit frozen in bonds will be "made liquid" to fertilise the fields of industry.

Oversea Obligations. 

One of the causes of the present critical position of Australia overseas—whereby Australia finds itself without sufficient credits in London to meets its foreign obligations—arises not only from the sudden cutting-off of oversea loans, but from the lack of co-ordination between the banks, the lack of any common knowledge of their combined London resources, the lack of any provision for reserves of credit to meet emergencies or to provide an equalisation fund to meet fluctuating circumstances of oversea trade or prices.

A Commonwealth-owned banking system should be made to function for the exclusive handling of foreign obligations. This bank of the nation should be the sole operator in foreign bills, and all international financial operations should be in its hands. It should be the sole collector of all bills payable in foreign States, and by these means sustain Australia's national credit in the country of its principal obligations. Against general exports it should issue internal credits. The private banks, with the aid of Commonwealth notes, financed wheat, meat, and metal pools during the war. The bank of the nation, with its own credit instruments, can perform a similar task to-day, and make a profit for the nation in the process.

New Loans. 

If it be true, as put by Sir Edward Holden, that banking is little more than a matter of book-keeping, that good securities make good credit, that a cheque or note is redeemed every time it is accepted by a citizen in exchange for goods or services, then there is no need for a Commonwealth Government in its future borrowings to drain the resources of private industry. A Commonwealth Bank can do for a Government what the private banks do for their clients—issue book credits against lodged securities, and what previously went in perpetual interest can go in annual liquidation of the principal. In this there is nothing novel. It is the application for national purposes of policies every day applied by private banks for their own profit. If a Government security is good enough security upon which a private bank can build book credits, issue cheques, and draw profits, it is sound for a Commonwealth Bank.

It is alleged that a private bank, in addition to advancing upon public securities, issues upon deeds that represent actual property, or bills representing goods in transit or process of manufacture. That is true—so can the Commonwealth Bank.

But it is said that the totality of goods and property sets the limits upon the credits that can be issued, but that upon the issue of Government securities there is no limit. That is true. It is also not true. There is no limit to the issue. There is a very definite limit to successful flotation. The British banking corporations have already put their limit upon Australian borrowing. They will only renew upon conditions they prescribe. The Australian financial corporations will do likewise when they think the capacity to pay 6 per cent, is gone.

Mr. Buckland, chairman of the Bank of New South Wales, speaking at the last annual meeting, stated that the validity of a loan was dependent upon whether it could meet the annual charges and redemption within an assigned period. That applies not only to private individuals, but to public bodies. It is the principle that must be applied by the administration of a nation-owned bank to applicant Governments for credit. Is there revenue sufficient to meet the annual charges, annual reduction of the principal, and ultimate redemption within an assigned period ?—that is the deciding factor. A real bank of that nation is not only a provider of the instruments of credit, it is the custodian of the national solvency. It alone can say, in the honest application of the principles of banking, where the applicant's capacity to meet his or its obligation is reaching the limit.

If a nation is sufficiently solvent to pay 6 per cent, it is sufficiently solvent to secure goods and services from the public and provide the means for annual redemption. The instruments of re-construction are in its own hands if it cares to use them. 

A nation-owned banking system utilised for national purposes—based upon the principle that security is the key to credit, that the security, whether public or private, if sold, can restore to the bank the medium of payment advanced—is the most powerful agent a nation can possess. It is the most powerful bulwark for the credit, the security, and the industries of its people—for the stability of its internal affairs and international financial relations. It speaks, not in the discordant voices of rival banking companies, but as one nation to another. It is not the all-solvent, but it is one of the essential steps to recovery from the bruises and burdens of war.

If the nation will not take a new road—if it will not adopt new principles and policies—if it will not have "audacity by new ways and methods"—then it must continue to subject itself to processes of self- torture, to increasing loads of interest and taxation until industry crumbles beneath the strain. 

There is a demand that wages be reduced. It is a policy applied in Japan, in India, in the West Indies, upon the same pretence of ultimate benefit. In no country in the world are wages low enough, or labor cheap enough, to satisfy the demands of the "Financiers" who control the destinies of nations, and dictate the policy of their Governments.

France and "Inflation." 

Before the war, during the war, and until March, 1919, the exchange value of the French franc was 25 per £1 sterling. The note issue of France at the outbreak of war in August, 1914, was 240 millions sterling. Between that and March, 1919, the issue was increased fourfold, but the exchange value of the franc remained stationary at 25 per £1 sterling.

From March, 1919, the exchange value of the franc steadily declined. In France this was alleged to be due to a conspiracy of London and New York bankers. By June, 1926, the franc was 175, and on the 28th July, 240, per £1 sterling. France was, in technical terms, internationally bankrupt, and within her own borders faced the largest deficit in her history.

President Poincare did not curtail credits and augment his destitute. By arrangement with the Bank of France, the note issue was increased 280 millions sterling. Part was expended in the purchase of export bills, payable overseas, collected, and utilised in the liquidation of the oversea obligations of France. A portion of the new note issue was utilised in buying up French bonds, thus increasing in France floating capital searching for fresh sources of investment—seeking industrial investment when it could no longer find it in bonds.

According to the theorists, the enormous increase in the note issue should have enormously depreciated the exchange value of the franc. On the contrary, its value increased. By the end of August, 1926, the £1 sterling could only buy 170 francs; October, 160; November, 135; December, 125. Around this figure the Bank of France purchased on the market or at redemption millions of Government bonds, and pushed into the pool of industrial activity corresponding millions of non- interest bearing currency.

By this and allied methods, France has emerged from the bankrupt state of 1926 as the richest country in Europe. Instead of a country with a horde of unemployed, she is now combing Europe for workers to keep her industries going.

Since July, 1929, there has been a remission of taxation of 25 millions. The Bank of France rates have been reduced from 3 2/3 to 3. Existing loans falling due for conversion are standardised at 4 1/2 per cent. During 1929, France imported 80 millions of sterling gold instead of consumable goods. She increased her total gold reserves to 350 millions sterling—200 millions in excess of the gold reserves of the Bank of England.

To explain the prosperity of France, the London "Financial Times" (December 28th, 1929) stated that:—
"France has built up her formidable gold reserves by buying foreign currency with her depreciated paper currency."
If this statement were true, it would be the most potent argument for a depreciated currency. In actual fact, France exported commodities, and took her payments mainly in the commodity gold.

The allegation made by the "Financial Times" against France was, a few years ago, made against Germany—that she undersold Britain on oversea markets by an inflated depreciated currency. If in any country it be true that an inflated depreciated currency sets free the productive forces of a nation, increases products, stimulates exports, builds up over- sea credits—then who could wish more? If, on the contrary, by reason of a deflated appreciated currency the economic life of a nation be shackled, which road shall a man take?

The "Financial Times" (December 28th, 1929) stated that France reduced her internal interest charges, her internal production costs, and increased her hold upon oversea markets by the purchase of a large portion of her bonded debt with inflated depreciated currency. It is stated that, by this policy, French investors lost four-fifths of their capital and income, and that this policy was, in brief, a policy of confiscation. There are two answers.

First. Nowhere in the world are Government securities so widely held by the peasant and artisan classes as in France. Investment in these securities is the popular method of "saving." Any Government confiscating the savings of the masses would have perished, whereas the policy of the French Government saved the masses from the forced sale imposed by unemployment and mass hunger. Under the policy now operating in British territories, thousands of small bondholders will be compelled to sacrifice their holdings in order to exist.

Second. Taking the cost of living in July, 1914, at 100, the cost of living in France was 511 in 1927, and is now below 500. The bonds were re-bought on the basis of 124. The purchasing power was, therefore, the same, even if bought at pre-war price levels.

The London "Spectator" (June 18, 1930) summed up the situation thus:—"The economic situation of France is one of prosperity . . . industry active—almost total absence of unemployed."

 It is alleged that this prosperity is based upon low-paid labor. If this is so, it is evidence that industrial activity and high wages do not go side by side, unless labor power is there to enforce it. Secondly, labor is cheaper in Japan and the West Indies than in France, yet it does not spell prosperity. In both countries industry is stagnant. It is alleged that there is more unemployment in Germany than in England. The German Savings Bank returns are as follow:—

1926: 160 millions sterling
1927: 235    "  "  "
1928: 350    "  "  "
1929: 454    "  "  "

It is, therefore, evident that, however extensive unemployment may be in Germany, the social results are very different to those in Britain and Australia, where increasing unemploy- ment means the increasing drainage upon the resources of the savings banks, and increasing sales of a mass of little assets finally massed in possession of the few.

The Right to Draw and the 1924 Crisis

The War Governments gave the Associated Banks the "Right to Draw" Commonwealth notes without any gold payment or any deposited security. The mechanism of this scheme, and the way it operated, were set forth in detail on June 13, 1924, by the then Treasurer, Earle Page.
For all notes drawn under the schemes, the banks had to pay interest at rates varying between 3 and 4 per cent. Under the Sixth War Loan (1918), 3 per cent. Under Soldiers' Gratuities Scheme, 4 per cent.

For instance, six millions of the War Gratuities had to be paid in "cash." The Government arranged with the banks to pay out and charge to the Government on a 5 per cent, loan basis. For this the banks had "Right to Draw" Commonwealth notes to an amount paid to ex-soldiers. Thus the banks were out nothing, and scooped the difference between the 4 per cent, notes and the 5 per cent. "Loan."

But the banks did not draw notes —they traded on their "Right to Draw" as if the notes were actually in their own vaults. Thereby they avoided interest payments to the Government, but upon these "Rights" they issued credits, and drew interest from the Government and general public.

In 1920, the note issue passed from the Treasury to the "Note Issue Board." The banks continued in exercise of their "Rights," and, on the basis of these "Rights," increased their "bank-manufactured cheque currency."

On June 23, 1923, these "Rights to Draw" totalled £8,000,000. The Board made a demand that the banks should exercise their "Rights"—draw the notes, and pay interest thereon—the banks refused.

Early in 1924, the banks made a demand that these "Rights" should be extended by another £3,000.000. The Chairman of the Board, Mr. John Garvan, stated that these "Rights" were equivalent to an issue of notes to the banks without interest. He described the proposition as "madness." The Treasurer, Mr. Earle Page, upheld the view, but the bank demand was conceded.

Later in the year the banks made a demand for another £5,000,000. It was refused. Thereupon the banks pulled in overdrafts, restricted credits, imposed increased charges on exports, placed a banking boycott on industrial and commercial expansion, and caused a general economic slow-down— unemployment doubled.

In August, 1924, the Associated Banks notified the Wool Councils that sales would not be financed without additional notes or "Rights" to same. They promised released credits and reduced rates. The Note Issue Board capitulated. In September, the "Right to Draw" another £5,000,000 was con- ceded. Credits were not released—they were tightened. Rates were not lowered—they were raised. The newspapers announced that, at the Adelaide sales, "the price of wool dropped, because buyers could not obtain bank credits, no matter on what security." The Sydney "Telegraph" described the situation as— "A Financial Hold Up."

The banks responded to the outcries by a demand for an additional £10,000,000, promising abundant credits and lower rates if conceded.

On October 10, 1924, the Bruce-Page Government "proclaimed" the Commonwealth Bank Act. Under this, the Bank and the Note Issue were combined, under the chairmanship of John Garvan.

Next day, the Bank Board, the Bruce-Page Government, and the Associated Banks went into secret session.

On October 14, the newspapers announced that the Associated Banks had delivered their "Ultimatum," and "won on every point." They announced the terms imposed by the banks:—

1st—Associated Banks to have the "Right to Draw" another £10,000,000.

2nd—No interest to be paid for the "Right to Draw." Four per cent, to be paid on notes actually drawn. On this date (October 14, 1924), the Melbourne "Herald" stated that trades and others were— "Unable to obtain credit, on the most adequate security, at any rate of interest." The apologists for the Associated Banks announced that— "The Associated Banks will now release credit to the public at reduced rates."

The day after securing the £10,000.000 concession, the banks increased their rates by another 10 per cent. This meant an additional levy upon Australian exports of £750,000 per year. The Melbourne "Sun" of October 17 said:
"The demand rate on London is now 77/6 per £100. That is to say, a bank advances money here at that rate, and receives it in London in 30 days' time. The charge, therefore, works out at 46 1/2 per cent, per annum." 

The "Industrial Australian" of November 20, 1924, said the primary producers "for a long time past have been, and still are being, mercilessly exploited . . . and victimised of millions sterling." 

The late Mr. Pratten, Minister for Customs in the Bruce- Page Government, told the Sydney manufacturers (October 27, 1924) that the banks would not part with oversea money arising from exports. Therefore, Australia's oversea interest bill could only be paid from fresh oversea loans. This left the banks with their oversea money to finance the flood of imports.

This accusation of Mr. Pratten's amounted to an indictment of the Associated Banks, as conspirators against the public interest. When the question was put to Mr. Bruce at Lithgow (November 14, 1924), he replied, "I have yet to hear a satisfactory answer." It has never been answered.

In 1924 the banks restricted credit on the allegation that they had too much money overseas. To-day, the restrictions are imposed because the position is reversed.

Wholly Set up and Printed In Australia by Fraser & Jenklnson Pty. Ltd.. Queen St., Melb.