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Issue 270
January/February 2012
A New Moral Compass

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Review

Laissez-Faire Capitalism
by

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Laissez-Faire Capitalism

James Bruges explores the ethics of bank-created money. Where Does Money Come From? A Guide to the UK Monetary and Banking System by Josh Ryan-Collins, Tony Greenham, Richard Werner & Andrew Jackson. nef, 2011. ISBN: 9781908506078

Spiralling inequality, chaos in the financial world, and the Occupy protests force us to engage with economics. Where Does Money Come From? is about money itself, a subject that has, surprisingly, received little attention and about which there is widespread misunderstanding. It says: “Central banks around the world support the same description of where money comes from. And yet many naturally resist the notion that private banks can really create money by simply making an entry in a ledger.” And J.K. Galbraith had said: “The process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent.”

The authors studied the implications of bank-created money through talking to key people in the City, including those on the Vickers Commission, and referring to 500 documents from central banks and regulators. On receiving a copy of the completed book, Professor David Miles of the Monetary Policy Committee, Bank of England said: “The way monetary economics and banking is taught in many – maybe most – universities is very misleading and what your book does is help people explain how the mechanics of the system work.”

But does it matter that the money we use is created by private institutions? A bit of history is revealing. At the beginning of the 19th century, gold, silver and coins were the only official currency, but banks were allowed to print notes saying “I promise to pay the bearer on demand the sum of £XX”. It cost them maybe five pence to print a £20 note, which they could sell for £20. The Tory government of Robert Peel realised the anomaly, and his 1844 Bank Charter Act made it illegal for anyone other than the Bank of England to print banknotes. It now costs banks and building societies maybe £100 in administrative costs to make a £100,000 loan attracting compound interest. The anomaly is the same: a business model for the ‘1%’ the ‘99%’ can’t match.

Banks charge interest on loans, necessitating that the amount of money in circulation increase each year in order to cover this interest. The choice is either growth or recession. It was a Quaker philosopher, Kenneth Boulding, who quipped, “Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist.” So the monetary system itself causes world resources to deplete.

Most people think that the money they deposit in the bank remains their own property. This is wrong. Legally, it becomes a debt that the bank has to pay on demand, but in the meantime the money belongs to the bank and it can do what it likes with it. RBS (The Royal Bank of Scotland), even after being bailed out by the government, invests in projects like Canadian tar sands that are directly contrary to government policy on climate change.

Our laws are biased in favour of the creditor, with bankruptcy the only way out for the debtor. However, if loans are underwritten, the creditor is divested of risk so can lend irresponsibly. Irresponsible loans were a major cause of third-world debt as well as of the sub-prime mortgages that contributed to the 2008 crash. Compound interest builds on debt without any cost to the creditor, contributing to the enslavement of nations and people. There is therefore a moral case for reneging on certain kinds of debt, or cancelling them as suggested by the biblical Jubilee.

The government wants banks to finance the productive sector, but “the government has in practice no involvement in the money creation and allocation process.” It is not surprising that few of the vast sums given to banks have been loaned to small businesses, which they regard as risky. The banks have invested most of their windfall in assets such as prime property, the value of which is enhanced by Russian oligarchs.

The book discusses “financial instruments” that “are increasingly traded in a money-like fashion, moving around the world at great speed and frequency by investment banks and hedge funds”. The financial elite, joined by African dictators and corporations, have salted away £6.6 trillion tax-free in secrecy locations, many – perhaps most – of which are UK protectorates or ‘British Overseas Territories’, the City of London itself being one of them. The value of trade in financial derivatives is 10 times the value of all goods and services in the world. No one knows what’s going on, but these activities cause global instability and deprive governments of funds to help those in need.

I will end with two quotations that are horribly predictive of our current situation now that banking technocrats are the main influence on, or even taking over, countries. In 1838 the banker Anselm Rothschild said: “Let me issue and control a Nation’s money and I care not who makes its laws.” And in 1863 the Rothschild brothers of London said, “The few who could understand the system will either be so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”

The monetary and banking system impacts directly on integrity, justice, equality, community and the environment. We need to develop an alternative to laissez-faire capitalism – one that relates to real life in all its local variety, provides social welfare, and encourages cooperation, creativity, relationship and play.

This is an edited version of a review originally prepared for the Quaker journal The Friend.

James Bruges is working with David Friese-Greene on the Soil Fertility Project: linking biochar with anaerobic digestion.

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