Dysfunctional Banking

Professor Richard Werner, an economist and academic, asked a London taxi driver one day, ‘who do think creates and allocates the money supply in the UK?’ The taxi driver rubbed his chin for a while then said, ‘the Bank of England.’

Reasonable answer you might think.

‘But,’ said Werner, ‘the Bank of England only supplies 3% of the money supply in this country. Who do you think creates and allocates the other 97%?  The taxi driver didn’t know. Do you?

The truth is shocking. 97% of our money supply is created and allocated by private banking corporations – profit oriented enterprises. Banks can choose who to give it to and for what purpose. With such power banks can direct the economy of a nation for their own profit.

The popular misconception about banks, and one we were all taught in school, is that they invest money from people who want to use the bank as a store of wealth. The money is recycled in the short term for working capital, then some of the interest gained is given back to the saver.

This assessment is wildly inaccurate.  Banks actually create money by issuing credit, loans, overdrafts and mortgages. The revenue is created when you sign on the dotted line of your loan contract, or when you use your credit card. Your signature, your action, creates the money.  

This is how the system works.

A bank loans £10000 to Fred. This “money” is created out of thin air at the touch of a button.  There are no corresponding notes or coins.

Bank notes and coins actually represent around 3% of the total money supply in the UK.

Clearly, if everyone wanted to take their money out of the bank at the same time, the bank would be unable to do this.

The vast majority (around 80%) of “money” in the UK is created by banks as debt.

Banks cannot create infinite amounts of this “money”.  They are limited by their capital reserves and the riskiness of their investments, and the amount of “money” that can be created varies from bank to bank.

The entire banking sector as a whole must have 13.5% of capital reserves.

This is loosely equivalent to a homeowner having a £100k mortgage on a house worth £13500.  Banks’ liabilities far outweigh their assets. This is called insolvency, which is terrifying for ordinary folk, but since banks are too big to fail, they don’t need to worry about it.  The taxpayer simply bails them out.

There is far too much debt in the monetary system.

Some economists have likened the financial system of the UK to a giant vampire squid, constituting a huge challenge facing our democracy.  The entire banking system is nothing short of a mass deception.

People don’t understand what is happening to their money.  

Josh Ryan Collins of the New Economics Foundation says of the UK: “This is a dysfunctional financial system. It is not working for society, or for the economy; it is a highly inefficient allocation of capital.”

It is only when you look at the big picture – how this kind of banking contributes to increasing poverty - that the reality gets bleak.

Britain has the largest share of private debt in the world. By 2007 the UK had become the most highly leveraged industry of any major economy. During the inevitable ‘credit crunch’ the government largely ignored private debt and only focused on the much smaller public sector debt.

The truth is public sector debt only accounted for around 10% of all debt, and this percentage is shrinking year on year. 90% of UK debt is in secured or unsecured loans, real estate and business loans, and speculative investments or ‘Finance Intermediation’.  

This percentage is still on the increase. Since the crash of 2008 nothing has really changed. The taxpayer bailed out the banks, and after a bit of hand-wringing they went back to business as usual. And why not? The UK is also one of the most deregulated countries in the world in terms of finance.

A high percentage of loans are made not for projects that benefit society or increase wealth on the ground through job creation, but for assets like houses.  

Consider this: Mr Smith wants to buy a house for £250k, and applies to the bank for a mortgage.  The bank creates the money out of thin air, and deposits it in Mr Smith’s account.

Mr Smith loses his job, fails to make the mortgage repayments, and the bank repossess the house.

So the bank, having created “money” out of nothing, has ended up with a house worth £250k!

This can and needs to change. What we have now is unsustainable and morally corrupt.

A quote often attributed to the banking family of Rothschild says, "Give me control of a nation's money supply, and I care not who makes the laws." The saying is apocryphal.

William Pitt made this statement in 1791, at the inauguration of the first National Bank of the United States: "Let the American people go into their debt-funding schemes and banking systems, and from that hour their boasted independence will be a mere phantom."  

Unfortunately Britain’s banks have followed this example, inveigling their customers into debt-slavery, while a small handful of corporate banking directors became wealthier than the wildest imaginings of Croesus.