What you really need to know about…MONEY…. DEBT…. & BANKS……

1) What is money... how is it created and who creates it?2) Why are we up to our eyeballs in debt - individuals, businesses and whole nations..?3) Why are most of us unable to provide our daily needs such as homes, transport and other

goods without going heavily into debt..?4) Why do we have cycles of boom and bust....? and why do banks profit from both!?5) What really causes inflation...?6) How much could prices fall and/or wages increase if businesses were not paying huge sums

in interest payments and adding them to the cost of goods and services they supply...?7) How much could taxation be reduced and spending on public projects and services be

increased if governments created money themselves instead of borrowing it at interest from private banks...?

“If you want to be the slaves of banks and pay the cost of your own slavery, then let the banks create money....” Lord Josiah Stamp, Governor of the Bank of England 1920

WHAT IS MONEY? It is the means to exchange goods and services. Without it, trade would be impossible except by direct exchange. I give you a bag of corn, in return you give me a bale of cloth, or work in my garden for 3 hours - the principle being that the person who wants what I can supply has to be able to supply me in return with something that I want. If that’s not the case, there’s no deal and we both have to look elsewhere, which is inconvenient and potentially very time consuming. How very much easier it becomes if we all agree that, in our dealings, we will accept instead, a particular medium that, although it may be virtually worthless in its own right, is light and easy to carry around, such as pieces of paper and little bits of metal. It doesn’t matter what we use provided we all agree to accept it. Although valuable metals such as gold and silver have been used in the past for making coins there is no underlying reason why this should be so. Once we have an agreed medium, which we call money, it is no longer necessary to haggle and barter so much - I tell you my bag of corn costs £2 instead of us arguing how much cloth you will give me in return, or me saying no deal because I don’t want any cloth.

Money is therefore the means of attaching and comparing value to the vast range of goods and services available - £10,000 for a car, 50p for a bag of potatoes, £100 an hour for a lawyer’s services, £5 an hour for a casual labourer’s services (which says something about the way we value different kinds of work!). It is ongoing and doesn’t have to be used immediately, thus becoming a store of wealth for those who acquire more than they spend - a means to purchase at some point in the future, to save up for something they cannot presently afford, or to provide purchasing power when they are no longer able to work and provide goods or services themselves. It also enables

someone to acquire goods and services in preparation to setting up their own means of providing goods or services in the future - building and equipping a factory, renting an office or whatever. A wonderfully flexible medium, which we couldn’t live without.

To keep all this economic activity going, it’s vital to have enough of this medium of exchange called money in existence to allow it all to take place. If there isn’t enough at a given time, there can only be a reduction in trading and economic activity generally. Take the Great Depression of the inter-war years. The reason why national economies collapsed was because there was far too little money in existence. People wanted to work, they wanted goods and services, all the raw materials for industry were available etc, so why wasn’t it happening? Answer - money, the means to allow exchange of goods and services to take place was in very short supply. The only difference between boom and bust, growth and recession is money supply - when there is plenty, economic activity booms because human beings are entrepreneurial by nature. War provides the best illustration - huge sums of money are created and the economy kicks into top gear to provide the vital needs of national defence. That of course is what ended the Great Depression world-wide.

Following on from the above, it is clear there needs to be a national central body responsible for ensuring that there is sufficient money in existence to cover all the exchanges of goods and services that are taking place and are anticipated. Each nation has given this task to a Central Bank. In Britain we have the Bank of England, in the United States, there is the Federal Reserve. So what’s wrong? Why do we constantly have problems with money supply? The answer lies in the fact that central banks (including the newly formed European Central Bank) and

the commercial lending banks closely linked to them are controlled not by elected governments but by PRIVATE INTERESTS who have been allowed to create a system which provides them with profits, power and control, and the rest of us with an increasing burden of debt… Let us look at this in more detail.

PROBLEMS WITH TODAY’S MONEY In Britain today, the notes and coins mentioned above (which are supplied interest free) account for only 3% of our total money stock. The rest is made up of CREDIT - personal and business loans, mortgages, overdrafts etc. created by banks etc. on which interest is payable - a pattern repeated world-wide.

Ever since money first came into existence, some people have always been a bit short of it, whilst others have had some to spare. Out of this came money lending. For example, to start a business that will IN THE FUTURE give you an income of money enabling you to acquire goods and services, you may need to borrow money. In the past, money was made available in return for a stake in the business and a share in the profits of the venture, and perhaps a single administrative charge for setting it up. Investment in this way could be risky sometimes, and it didn’t take long for lenders to realise there was a much easier and more profitable way of lending, namely usury, or repayment of the original sum together with an additional sum by way of interest. There is far less risk attached to usury - you are entitled to the interest payments regardless of the degree of success of the venture, and if it fails or cannot meet the repayments, you can seize the borrower’s assets, be they land, buildings, goods, machinery etc. A loan with a number of years allowed for its repayment may result in a sum 2 or 3 or more times the original sum borrowed ultimately being handed over to the lender. It was a system that enabled the rich to get richer with little or no effort - something for nothing - and usury in the middle ages was fiercely opposed and often forbidden. It remains contrary to the traditional teachings of Christianity and Islam. However, today it is universal in the form of the modern banking system, with few even venturing to question it.

Banks decide to whom they will lend, and in so doing, they effectively decide what is produced, where it is produced and who produces it. Their decisions are based on what is most profitable to the bank, rather than what is good or beneficial to the community as a whole. With bank loans etc. accounting for 97% of money in existence, this means that entire economies are now run for the profit of financial institutions. Control of the market lies not with the owners of the physical means of production, but rather with the creators of financial credit. This is the real power, rarely recognised or acknowledged, to which all of us including governments the world over are subject. This figure of 97% represents an enormous claim on the wealth of the nation. It has risen from 79% in 1963, and 50% in 1948. The banks are acquiring an ever increasing stake in our land, housing and other assets, through the indebtedness of individuals, industry, agriculture, services and government - to the extent

that Britain and the world are today effectively owned by them. Our money, instead of being supplied interest free as a means of exchange, now comes in the form of a debt owed to banks providing them with enormous profits, power and control, and an ever increasing burden of debt for the rest of us.

MONEY CREATED AS A DEBT We don’t distinguish between the £25 billion in circulation as notes and coins (issued by the government) and £680 billion in the form of loan accounts, overdrafts etc. (created by banks etc,). £100 cash in your wallet is treated no differently from £100 in your current account, or an overdraft facility allowing you to spend £100. You can still buy goods with it. In 1948 we had £1.1 billion of notes and coins and £1.2 billion of loans etc. created by banks – by 1963 it was £3 billion in cash and £14 billion bank created loans etc.The government has simply issued more notes and coins over the years to cover inflation, but today’s £680 billion of bank created loans etc. represents an enormous increase, even allowing for inflation. This new “money” in the form of loans etc, which ranks equally with notes and coins – how has it come into existence?

“The process by which banks create money is so simple that the mind is repelled.” Professor. J. K. Galbraith

This is how it’s done…. a simplified example... Let’s take a small hypothetical bank. It has ten

depositors/savers who have just deposited £500 each. The bank owes them £5000 and it has £5000 to pay out

what it owes. (It will keep that £5000 in an account at the Bank of England – what it has in this account are called its liquid assets).

Sid, an entrepreneur, now approaches the bank for a £5000 loan to help him to set up a business.

This is granted on the basis of repayment in 12 months - plus 10% interest – more on that later.

A new account is opened in Sid’s name. It has nothing in it, nevertheless the bank allows Sid to withdraw and spend £5000.

The depositors are not consulted about the loan. They are not told that their money is no longer available to them– The amounts shown in their accounts are not reduced and transferred to Sid’s account.

In granting this loan, the bank has increased its obligations to £10,000. Sid is entitled to £5000, but the depositors can still claim their £5000.

If the bank now has obligations of £10,000, then isn’t it insolvent, because it only had £5000 of deposits in the first place? Not exactly..

The bank treats the loan to Sid as an ASSET, not a liability, on the basis that Sid now owes the bank £5000.

The bank’s balance sheet will show that it owes its depositors £5000, and it is now owed £5000 by Sid. It has created for itself a new asset of £5000 in the form of a debt owed by Sid where nothing existed before - this on top of any of the original deposits still in its account

at the Bank of England. - it is solvent - at least for accounting purposes!

(At this stage the bank is gambling that as Sid is spending his loan, the depositors won’t all want to withdraw their deposits!)

The bank had a completely free hand in the creation of this £5000 loan which, as we shall see, represents new “money”, where nothing existed before. It was done at the stroke of a pen or the pressing of a computer key.

The idea that banks create something out of nothing and then charge interest on it for private profit might seem pretty repellent. Anyone else doing it would be guilty of fraud or counterfeiting!

New “money” into the economy... Sid’s loan effectively becomes new “money” as it is spent by him to pay for equipment, rent and wages etc. in connection with his new business. This new “money” is thus distributed to other people, who will in turn use it to pay for goods and services - soon it will be circulating throughout the economy. As it circulates, it inevitably ends up in other people’s bank accounts. When it is paid into someone’s account which is not overdrawn, it is a further deposit - Sid pays his secretary £100 and she opens an account at our hypothetical bank – it now has £5100 of deposits. If we assume for a moment that the remaining £4900 ends up in the accounts of the original depositors of our hypothetical bank, it now has another £4900 in deposits - £10000 in total if the depositors have not touched their original deposits. In practice much of it would end up in depositors accounts at other banks, but either way there is now £5000 of new “money” in circulation. Thus in reality, all deposits with banks and elsewhere actually come from “money” originally created as loans – (except where the deposits are made in cash – more on cash very shortly). If you have £500 in your bank account, the fact is someone else like Sid went into debt to provide it. The key to the whole thing is the fact that :- 1. Cash withdrawals account for only a tiny percentage

of a bank’s business.2. Bank customers today make almost all payments

between themselves by cheque, switch, direct debit or electronic transfer etc. Their individual accounts are adjusted accordingly by changing a few figures in computer databases – just book keeping entries. No actual money/cash changes hands. The whole thing is basically an accounting process that takes place within the banking system.

THE ROLE OF CASH The state is responsible for the production of cash in the form of notes and coins. These are then issued by the Bank of England to the high street banks - the banks buy them at face value from the government to meet their customers’ demands for cash. The banks must pay for this cash and they do so out of what they have in the accounts which they hold at the Bank of England – their liquid assets. Their accounts are debited accordingly.The state (through the Treasury) also keeps an account at the Bank of England which is credited with the face value of the

notes and coins as they are paid for by the banks. (This is now money in the public purse available for spending on public services etc.) This is how all banks acquire their stocks of notes and coins, but the cash a bank can buy is limited to the amount it holds in its account at the Bank of England – its liquid assets. As this cash is withdrawn by banks’ customers, it enters circulation in the economy. Unlike bank created loans etc, cash is interest free and can circulate indefinitely.

NON CASH PAYMENTS - Book keeping entries With so little cash being withdrawn, and from experience knowing that large amounts of deposits remain untouched by depositors for reasonable periods of time, banks just hope that their liquid assets will be sufficient to enable them to buy up the cash necessary to meet the relatively very small amounts of cash that are normally withdrawn. A bank has serious problems if demands for cash withdrawals by depositors, and indeed borrowers who want to draw some of their loans in cash, exceed what the bank holds in its account at the Bank of England.In practice it would probably try to get a loan itself from the Bank of England or another bank, to tide itself over. Failing that it would have to call in some loans and seize the property of borrowers unable to pay.

DEPOSITORS’ CLAIMS AGAINST BANKS … Once you have made a deposit at the bank (in cash or by cheque), all you then have is a claim against the bank for the amount in your account. You are simply an unsecured creditor. Your bank statement is a record of how much the bank owes you. (If you are overdrawn, it is a record of what you owe the bank). It will pay you what it owes you by allowing you to withdraw cash, provided it has sufficient cash to do so. If customers are trying to withdraw too much cash, this is a run on the bank, which will soon refuse further withdrawals. So it’s first come first served! Should you want to make a payment by cheque, this is less likely to be a problem – you are simply transferring part of your claim against the bank to someone else – the person to whom your cheque is payable - just a book keeping entry. If the person to whom your cheque is payable has an account at the same bank as you do, the deposit stays with that bank – overall the bank is in exactly the same position as it was before. For example, I give you a cheque for £50 – we both have accounts in credit at Barclays – what Barclays owes me is reduced by £50, what Barclays owes you increases by £50 – but nothing has left Barclays – the total deposits or claims against Barclays remain the same…..

BANKS’ CLAIMS AGAINST EACH OTHER…. BUT if you keep your account at Lloyds, deposits at Barclays are reduced by £50, whilst deposits at Lloyds increase by £50. Millions of transactions like this take place every day between customers of the various banks, using switch cards, direct debits, electronic transfers as well as cheques – deposits are therefore constantly moving between

the banks. All these cheques and electronic transfers pass through a central clearing house (which is why we refer to a cheque being “cleared”). The transactions are set off against one another, but at the end of each day, a relatively small balance will always be owed by one bank to another. A bank must always be ready to settle such debts. To do this, it makes a payment from its account at the Bank of England to the creditor bank’s account at the Bank of England.

Thus a bank faces claims from two sources (which it meets out of its liquid assets) – its customers wanting cash, and other banks when it has a clearing house debt to settle. Unless all the banks are faced with big demands for cash at the same time, the banking system as a whole is safe, although an individual bank is vulnerable, should a large number of depositors for some reason withdraw their deposits in cash or transfer their deposits to other banks. We now see how today the whole system is basically a book keeping exercise where millions of claims pass between the banks and their borrowers and depositors every day with relatively very little real money or cash changing hands – backed by tiny reserves of liquid assets. The system is traditionally known as FRACTIONAL RESERVE BANKNG and banks are sometimes accurately referred to as dealers in debts. Barclays Bank’s 1999 accounts illustrate the whole thing very well - it had loans owing to it of £217 billion, it owed £191 billion to its depositors – backed by just £2.2 billion in liquid assets! A bank’s level of lending is geared to the amount of cash it has or can buy up – its liquid assets - rather than the amount of its customers’ deposits. But if a bank can attract customers deposits from other banks, it will add to its liquid assets, as other banks settle the resulting clearing house debts in its favour – hence there is tremendous competition between banks to attract deposits.

Interest …. Big Profits for the bank... Let’s now return to Sid – he has to pay our bank 10% interest on his loan - £500. These interest payments are money coming into the bank, they are profits and they end up in its account at the Bank of England - additional liquid assets for the bank. It now has an extra £500 to meet its depositors’ withdrawals. If Sid manages to repay the original loan as well, it will have an extra £5500. Our bank created for itself out of nothing an asset of £5000 in the form of a loan to Sid. It is no longer owed anything by Sid, but in repaying his loan with interest, Sid turned a mere debt into £5500 of liquid assets for the bank – a tidy profit for the bank…. and the basis on which more loans can be made. Banks today risk creating loans 100 times or more in excess of their liquid assets as Barclays Bank’s 1999 accounts show – (see above). Thus our bank will soon be making many more loans. The deposits it receives back will increase and so will interest payments and therefore profits. With more loans and more deposits, there will be a greater demand to withdraw cash – but increasing profits means more cash can bought by the bank. (This is how the amount

of cash in circulation has been increasing to reach £25 billion by 1997.) It is a myth to think that when you borrow money from a bank, you are borrowing money that other people have deposited – you are not – you are borrowing the bank’s money which it created and made available to you in the form of a loan.

More debt for the rest of us.... Sid’s interest payments and any repayment of the loan itself to the bank means however that this “money” is no longer circulating in the economy. Any payment into an overdrawn account reduces that overdraft. It operates as a repayment to the bank and the “money” is lost to the economy. More money must be lent out to keep the economy going. If people don’t borrow or banks don’t lend, there will be a fall in the amount of money circulating, resulting in a reduction in buying and selling - a recession, slump or total collapse will follow depending on how severe the shortage is. The increase in bank created loans over the years is additional conclusive proof that banks do create “money” out of nothing - £1.2 billion in 1948 up to £14 billion by 1963 up to £680 billion by 1997. Today’s supply of notes and coins after taking inflation into account, has similar buying power to the supply in 1948 (£1.1 billion) but since then, there has been a ten fold plus increase in real terms in money supply made up of credit created by banks. This has enabled the economy to expand enormously, and as a result living standards for many people have improved substantially.... but it has been done on borrowed money! What is credit to the bank is debt to the rest of us. The banks are acquiring an ever increasing stake in our land, housing and other assets through the indebtedness of individuals, industry, agriculture, services and government - to the extent that Britain and the world are today effectively owned by them

Let us look briefly at history to see how this system developed….

A LITTLE BIT OF HISTORY Up to the middle ages and even beyond, almost everyone had access to land. It might be through actual ownership, or more likely a form of tenancy requiring some work or services to the lord, or rights of access to common land available to all. This enabled people to supply their own basic needs - food, materials for shelter, fuel etc. They could barter amongst themselves in their local communities, as farmers, cobblers, weavers, bakers, builders etc. and had little or no need for money. Only the more wealthy and powerful relied on it, such as landowners and merchants, especially those involved in trading between communities, or abroad. It was always realised that money supply must seek to match the volume of trading going on - whereas too little stifles trade, too much money causes its value to fall, and prices to rise as the market tries to absorb the surplus (one cause of inflation). The monarch (the government of the day) therefor took control of the issue of money, with

gold and silver coins being the basis of currency - metals sufficiently rare and difficult to obtain to prevent just anyone making their own coins and flooding the market. (If they had been made of something like wood, forging would have been easy.)

The very scarcity of gold and silver meant that as trade expanded, by the 16th. century a shortage of money was apparent. European powers plundered and pillaged throughout the world, to increase their supplies, but it still wasn’t enough. With a shortage of money came an increasing demand by merchants and traders to BORROW. However, simply lending gold and silver coins even at interest (i.e. requiring repayment of more coins than was lent originally) did NOT increase money supply because there were only a fixed number of coins in existence. The supply was traditionally regulated on behalf of the crown by the goldsmiths (who also ensured the purity of the coins - that they were not “debased” with other metals).

The problem of shortage of money was overcome in a way that has formed the foundation of the modern privately controlled banking system. Merchants began to deposit their gold with the goldsmiths to earn some interest. In return for depositing his gold, the depositor received a note from the goldsmith promising to repay the gold on demand whenever he wanted it back. The depositor just produced the note to the goldsmith and the goldsmith gave him back his gold. However carrying gold around, particularly in large quantities was inconvenient and unsafe. A merchant, rather than withdrawing his gold to pay another merchant, might hand over the promissory note given to him by the goldsmith instead. The recipient could then claim the gold... or in turn he might pass the note on to someone else. In other words, the holder or bearer of the promissory note whoever he/she might be, would be the person entitled to reclaim the gold. This is the origin of the modern banknote - the goldsmith’s or banker’s promise to repay a certain amount in gold, and it still appears on our notes in Britain today. However, as will be explained later, it is meaningless now - you won’t get any gold out of the Bank of England today in return for a fiver or five million even!

The goldsmith’s promise to repay gold began to take over as money in place gold and gold coins. Thus when a merchant sought to borrow gold from a goldsmith, instead of receiving gold or gold coins (the gold that someone else had deposited), he accepted instead a promissory note from the goldsmith to pay gold, knowing that this would be accepted as money. However there is duplicity here, because the goldsmith has issued two promissory notes in respect of a single deposit of gold - one to the original depositor entitling him or anyone else to whom he may have passed the note, to demand repayment of the gold at any time - and another to the lender who could ask for gold or pass the note on to someone else who could ask for it. Should both notes be presented at the same time, the goldsmith would be unable to pay. But the goldsmiths could do this because they realised that their notes guaranteeing repayment of gold in practice circulated for long periods with only a small number coming in for repayment. Soon they found they could issue several notes, perhaps as many as ten, to a

number of borrowers, in respect of a single deposit or amount of gold. In so doing, they created money out of nothing, because with an original deposit of say £10 in gold coins, the goldsmith may have issued promissory notes to various borrowers totalling say £100. This will be used to buy £100 worth of goods. Thus £90 of “new” money has been created at the stroke of the goldsmith’s pen, in just the same way as new money in the form of loans is made today at the stroke of the bank manager’s pen or at the press of a computer key crediting the borrower’s account. Similarly our original depositor of gold was not told that his £10 deposit of gold was now subject to claims by other people totalling £100… nor was he consulted about the loans.

Thus the goldsmiths and others with large quantities of gold became the first bankers - taking deposits on which they paid low rates of interest and making loans on which they demanded much higher rates of interest. It doesn’t take much imagination to see how profitable this could be - the more loans you make, the more interest payments you get. These banker/goldsmiths might normally accept loan repayments in the form of the return of the promissory notes they themselves issued, but under the terms of the loan agreements, borrowers could be required to repay the loan in gold itself, if demanded. It would be demanded if there was a rush of people presenting notes and demanding gold, and the goldsmith found his gold stocks getting low. If the borrower was unable to pay in gold, he stood to have his property taken, be it stock, tools of his trade, house etc. which would then be sold by the goldsmith. A run on the banker/goldsmith might bankrupt him if his gold stocks were depleted. A sudden calling in of loans certainly bankrupted a lot of borrowers, and large quantities of assets were seized to be sold making further profits for those banker/goldsmiths who managed to stay afloat. Gradually a few became exceptionally wealthy as others fell by the wayside in a process that could be regarded as fraudulent - namely issuing pieces of paper, promising to pay out far more gold than you actually have, and being able to get gold or other property, from all those to whom you lend your pieces of paper, should they default.

That is the basis of the modern banking system which operates in precisely the same way - and you only have to look at the vast wealth of banking families such as the Rothschilds and Rockefellers to see how fabulously profitable it is. The problem of shortage of money, brought about by shortage of precious metals, might have been largely solved, but the solution has created a financial elite with enormous power who have been allowed to continue operating with no accountability to the population as a whole. The role of the crown or government to provide currency as the means of exchange, to enable the economy to function, has been totally overshadowed by private interests whose business is the creation of credit for their own profit - the same criteria applied by the early goldsmith/bankers. Next, we look at how central banks evolved and their relationship with the commercial banks, that most of us deal with in our daily lives.

THE CREATION OF THE BANK OF ENGLAND - the first Central Bank.

“The Bank of England hath the benefit of the interest on all monies which it creates out of nothing.”

William Patterson ( Banker) 1694

Throughout history, kings and rulers have fought wars to add to their prestige and power. Wars are expensive - money has to be found to pay for everything needed to fight them. Kings had to pay someone to raise and equip an army for them. With gold and silver in limited supply, and much of it in the hands of wealthy merchants or landowners, kings were soon hard pressed. One solution was to get their subjects to contribute by taxing them! Early taxes were raised specifically for fighting wars, but these could be very unpopular, and kings risked uprisings and revolts if they overstepped the mark. Sometimes they did go to extremes to grab wealth, such as when Henry VIII dissolved the monasteries. Land was seized, gold and silver were carried off to the exchequer, and other valuable commodities sold, with the proceeds going to the exchequer. The only alternative to tax and seizure by force, was to borrow from wealthy subjects, such as the goldsmiths and early bankers. Had kings not constantly been at war and needing huge amounts of money as a result, they might have been able to build up gold reserves themselves and become their nation’s banker, instead of private individuals (who engaged in profitable trade rather than spending money on wars) taking over this function. This must be a major reason why money creation got into private hands, rather than staying under royal or government control in the first place.

By the 17th. century the king was dependent on wealthy middlemen to collect the increasing taxes he needed to fight wars. They lent him money and reimbursed themselves of the taxes they collected. Reimbursement would always include a generous profit - the king might borrow £10,000, but the middleman would reimburse himself with £11000. At the end of the 17th. century with gold in short supply, King William couldn’t raise enough money through taxes for a war against France. In 1694, William Patterson, a banker, agreed to lend the king gold from his bank’s reserves plus paper money totalling £1.2 million at 8% interest, in return for becoming the sole banker for the Treasury. By royal charter this bank became known as the Bank of England - it was effectively the government’s banker, and its shareholders were the half dozen or so wealthy private bankers including Patterson, who put up the original loan. The population as a whole paid the interest on the loan, since taxes were immediately imposed on various goods to raise the £100,000 interest per year due on the initial loan. This marked the birth of national debt - the population as a whole being taxed to pay the cost of borrowing by government from private banking interests. Thus to this day, these private interests increase their wealth from the wealth WE create through OUR hard work and enterprise. The model of the Bank of England has been followed the world over - the U.S.A. has the Federal Reserve, but the name is misleading - it is actually owned by

the big private commercial banks, such as Citicorp, and Rockefeller’s Chase Manhattan Bank.

In the years following its establishment by royal charter in 1694, the Bank of England was able to accumulate vast wealth. The fact that the Bank was made up of a number of individuals with overall greater wealth and gold reserves compared to a single individual banker or goldsmith, gave borrowers and depositors greater confidence and calls for gold repayment became rarer. By 1704 the promissory notes themselves were made legal tender by law - the government was effectively backing the currency and thus the bank notes we are familiar with today were formally established.

Interest payments received by the Bank of England, paid from taxes raised by government, added to profits and liquid assets and became the basis, along with the increasingly less withdrawn gold stocks, for further money creation by lending on a massive scale.

Commercial mayhem followed in the 18th. century – over lending for dubious ventures against relatively tiny amounts of liquid assets in fact led to several major runs on gold which was in very short supply anyway, and many smaller bankers and goldsmiths went bankrupt. They desperately tried to increase their holdings of gold to meet demands for repayment, by calling in loans, but many failed. Since money was being brought into existence as credit by lending, the mass calling in of loans meant large quantities of money (in the form of gold and bank/promissory notes) were now being taken out of circulation. Economic activity was being drastically reduced with loss of wages, bankrupted merchants, farmers, landowners etc. Poverty became widespread amid harvests of plenty - but the produce could not be traded thanks to a shortage of the means of exchange. Those few banks that survived, including the Bank of England, seized the assets of defaulting lenders. Later, they were able to sell these assets, adding to their wealth. This would happen most readily when they started to lend again. Money supply, in the form of credit, increased and economic activity would pick up as a result. This illustrates how banks profit in a bust cycle. It also concentrated wealth and money in the hands of a smaller number of larger players, as the small fry fell by the wayside. (This pattern was repeated in the 1920’s in the U.S.A. - when the calling in of loans came in 1929 - the “crash”. Many small banks failed, but the big boys added enormously to their wealth and control.) Big collapses such as these actually represent a TRANSFER of wealth NOT a loss of it.

The Bank of England lent to British overseas enterprises such as the East India Company and the Hudson’s Bay Company - not to mention the slave traders, all of which brought in vast profits to both the bank and the entrepreneurs concerned. It also profited by lending to government to finance a series of costly wars. National debt increased dramatically as a result of increased borrowing by government, and taxation went up to pay the interest. Some of these wars, such as those in India and Canada were to protect British commercial ventures as they exploited and seized overseas territories, marking the beginnings of the British empire.

By the mid nineteenth century, as well as being the government’s sole banker, the Bank of England had become the bankers’ bank. It only made loans to government and to commercial banks. It held the nation’s gold reserves and regulated the flow of money in the form of the bank notes (still theoretically redeemable for gold at this time), which it sold to commercial banks, which now did the day to day lending to individuals and businesses etc. It also held the commercial banks’ cash reserves for them. It had become a modern Central Bank.

Today, operating as it does as the bankers, bank, it is to the commercial banks (i.e. the high street banks etc.) what the commercial banks are to the public. Just as we may deposit money with the commercial banks, so all commercial banks in turn keep deposits (which for example may be profits made from interest on the loans they make) with the Bank of England. As we have seen, the amount of cash that a commercial bank can buy up from the Bank of England to meet its customers’ withdrawals is limited to the amount of deposits it has in its account at the Bank of England and/or what it can borrow from the Bank of England. Commercial banks borrow from the Bank of England in exactly the same way that individuals etc. borrow from commercial banks. On the basis of a promise to pay (originally in gold), which it is confident it will not be asked to meet, the Bank of England at the stroke of a pen creates money out of nothing, by lending many times over to commercial banks the amount it has in the form of gold. These loans from the Bank of England to the commercial banks, are treated as deposits by the commercial banks and form the basis of commercial bank lending to individuals and businesses etc. which has already been described. Thus there is a big multiplier effect here. A rise or fall in interest rates decided by the Bank of England has a considerable knock on effect. The “base” rate fixed by the Bank of England is the rate at which it lends to the commercial banks. They in turn lend to us at much higher rates. What the Bank of England decides affects what all the other banks decide.

Nationalising the Bank of England in 1946, which might seem at first sight seem to be a far reaching socialist measure, made little difference in practice. The state did indeed acquire all the shares in the Bank of England . They now belong to the Treasury and are held in trust by the Treasury Solicitor. However, the government had no money to pay for the shares, so instead of receiving money for their shares, the shareholders were issued with government stocks. These are simply IOU’s issued by the government on which it pays interest, and are explained later. Although the state now received the operating profits of the bank in place of the former private shareholders, the government now had to pay large sums of interest on the new stocks it had issued to pay for the shares, so there was little or no benefit financially either to the government or the population as a whole. Furthermore and much more significantly, the Bank of England being state owned doesn’t alter the fact that our money supply is now almost entirely in private hands, with 97% in the form of interest bearing loans of one sort or another, created by private commercial banks. Indeed this is now where the real power resides – with commercial banking. The Bank of England has become more of a regulatory body that supports and oversees the existing system. It is sometimes referred to as “the lender of last resort” in so far as one of its functions as the bankers’ bank is to support any major financial institution that gets into difficulties and suffers a run on its liquid assets. However beyond that it is no longer a major player in the lending/ money creation market. Its loans and profits are only a fraction of those of a major commercial bank such as Barclays and it only holds a very small amount of government stocks, so it is no longer really lending to government either. Most of its profits come from what is known as the “issue department” – the department of the bank which is responsible for printing and distributing bank notes and coins as necessary – the profits of which as the high street banks buy them up, belong to the state and are transferred to the Treasury.

Although owned by the state, the bank is however largely controlled and run by those from the world of commercial banking and conventional economics. The members of the Court of Directors who set policy and oversee its functions are drawn almost entirely from the world of banks, insurance, economists and big business, whilst the responsibility for setting interest rates

and controlling money supply has always remained with bankers and economists through the Monetary Policy Committee headed by the Governor and the two deputy governors. The day to day management and running of the bank is in the hands of a team of professional managers headed by the Governor the deputy governors and 4 executive directors. The holders of economics masters degrees are particularly favoured to be recruited into the bank. No one else has any real say, even though all of us are dramatically affected by the decisions that are made - just how will be explained later. From 1946 to 1997 many decisions especially relating to interest rates were made jointly by the Treasury and the Bank, but Treasury officials and the Chancellor of the Exchequer and other treasury ministers frequently have close ties with the world of commercial banking. Since May 1997, the Bank’s Monetary Policy Committee has had exclusive control over interest rates - an essential step prior to incorporating the Bank of England into the European System of Central Banks under the control of European Central Bank, which is what would happen should Britain replace the Pound with the Euro. One result of this would be that no British government would be able exercise any influence or control over the central bank and its decisions.

In 1931, along with most other nations, Britain came off the gold standard - since then bank notes have not been redeemable by the Bank of England for gold. Our bank notes still carry the Bank of England’s promise to pay, but in practice there is not much that it could actually pay with! Most of the gold reserves were handed over to the U.S. Federal Reserve to pay for armaments in the last war. It is meaningless and illustrates that cash in the form of notes and coins has replaced gold as the ultimate tangible form of money. Having mentioned the gold standard, government stocks and national debt, let’s take a look at these.

THE GOLD STANDARD We saw how shortage of gold led to the need to devise a way of creating more money to keep the economy going - the method that evolved resulting in a wealthy private elite creating this extra money as credit out of nothing and lending it out as an interest bearing debt. However, because those early promissory notes issued were a promise to hand over gold, gold remained the basis of money. This became known as “the gold standard”. It came to be regarded as prudent, and later at times backed by law, that a banker would not create money by way of loan, more than 10 times the value of the gold that he held. For example I hold £100 in gold means I do not issue promissory notes by way of loan exceeding £1000 in total - in this way, the risk of too many notes being presented for repayment in gold at once - a run on the bank - is reduced. (Now that notes and coins have replaced gold as the ultimate form of money, a commercial bank must always retain a minimum amount of CASH in hand to meet its depositors’ or savers’ demands to withdraw. Often this 10% ratio has been abandoned - it no longer operates today – as Barclays Banks’ 1999 balance sheet shows, banks keep only relatively very small amounts of liquid assets now. In Russia and Indonesia in 1998, we saw the latest round of bank failures, when, with a mountain of debt due to them that could no longer be repaid, they hadn’t the cash reserves to meet a sudden rush of savers wanting to withdraw their money.

Adhering to the gold standard as mentioned above, still imposed restrictions on money creation - it was very risky creating more than £1000 if you only held £100 of gold in your vaults. Once again it was the need for more money to fight wars that led to the first “suspension of the gold standard” at the end of the 18th century in Britain’s war against France and its Emperor Napoleon. In other words, as much money in the form of credit, as was needed to finance the war, could be now be created by lending, and temporarily the Bank of England’s promise to pay gold in return for its bank notes was suspended. If no-one could claim gold, the bank no longer had to worry about how many of its promissory bank notes existed and there were huge increases to fund the war effort. National debt and bank profits rocketed, as they have done in every major war since then. Vast increases in borrowing makes war very profitable to bankers, so much so that the same international banking interests have funded both sides in numerous conflicts in the last 200 years, most notably the First and Second World Wars. A detailed examination of the facts, beyond the scope of this resume, shows that certain elements did a lot towards creating the very circumstances that led to two world wars. For example, loans to Germany were called in at a critical point which wrecked the economy and created conditions that led to the rise of Hitler. Subsequently they funded his rearmament programme, and later that of the allies. We now need to look at how governments borrow money, how this borrowing is increased in times of war, and as a result how all of us are saddled with the huge cost of it today.

NATIONAL DEBT When governments borrow money, in return, they issue to the lender, exchequer or treasury bonds - otherwise known as government stocks or securities. These are basically IOU’s - promises by government to repay the loan by a particular date together with interest in the meantime. They are taken up chiefly by banks, particularly the merchant banks such as Rothschilds and Hambros and others, rather than the high street banks. (The merchant banks specialise in funding governments and also big national and international projects – the high street banks deal more with individuals and businesses of all sizes.) Government securities are also taken up by individuals with money to spare and, in more recent years, pension and other investment funds. When government securities are bought by individuals, or investment funds into which individuals pay in their money, what is happening is that our savings are being borrowed by government - in other words our savings are actually going back into circulation to form part of the money supply driving the economy. When government securities are taken up by banks, this is money creation at the stroke of a pen by the banks out of nothing. The bank makes money as credit available out of nothing by lending it into existence to an individual or a company - it does just the same lending it to the government. The interest the government pays to the banks increases the banks’ profits and liquid assets. With increased liquid assets and deposits, banks can create yet more money as credit by lending to individuals and companies.

The government now has new money in the form of credit to spend either in funding war or, as was increasingly the case in the 20th century, to help fund an increasing range of public services such as health, education, road building etc. etc. If this money was not borrowed into existence as credit in this way, there would be that much less economic activity as a result. Government would have less to spend, meaning fewer jobs in the public sector. It would also mean less contracting of private companies on government construction and other projects, so fewer jobs in the private sector as well. Less employment means people’s spending power is down, leading to less demand for goods and services, thus a lower level of economic activity all round. Under this present system therefore, NATIONAL DEBT IS CREDIT ISSUED TO THE GOVERNMENT AND AS SUCH IS A VITAL PART OF THE TOTAL MONEY SUPPLY OF ANY MODERN NATION.

The other major method by which governments raise money is through taxes. However, in most years our government will need to spend much more than it can raise through taxation, so it has to borrow the difference! This is referred to as the public sector borrowing requirement (PSBR) - and is calculated for each year. The government constantly issues government securities to cover this borrowing - new issues are regularly advertised in the financial pages of the newspapers. PSBR is also a vital part of the nation’s money supply. However, the government, like anyone else, doesn’t like to borrow more than it has to, because of having to pay interest. This is why we constantly hear government whining that there isn’t enough money for this that and the other, with cutbacks in services all round - more of that later. Yet when the government tries to reduce or eliminate PSBR by borrowing less, then money supply and economic activity are reduced as a result.

Government securities are usually repayable around a particular time e.g. 6% Treasury Stock 2005-2007 means it will be repaid sometime in the period 2005 to 2007, with interest paid at 6% in the meantime. It is only through taxation, or the issue of further government securities, that money can be found to pay this interest. When the time for repayment comes, the government raises the money it needs for repayment by borrowing more money. But it can only do this by issuing more government securities. (The only other way to meet repayment would be by big increases in taxes and/or big reductions in public spending. This would take large amounts of money out of circulation and would cripple the economy in the process.) Instead, in the post war period we’ve had this never ending process of repaying borrowed money by borrowing more money! Over the years, this has maintained the governments money supply in the form of national debt, largely postponing repayment indefinitely. However, national debt is increasing almost all the time. It was £26 billion in 1960, £90 billion in 1980, and £380 billion by 1996. The population as a whole is burdened with the interest payments which are now around £25 to £30 billion per year. Tax levels are set accordingly, and public spending kept under “tight control.”

When attempts to pay back government loans en masse have taken place, the results have been catastrophic. A

return to the gold standard in 1815 after the final defeat of Napoleon, meant no more government borrowing and, through taxation, vast sums of money were simply taken out of circulation as government sought to reduce national debt. The total amount of money in circulation fell from £48 million to £16 million in just seven years. Prices, wages and incomes collapsed - they had to with so much less money circulating. This was DEFLATION on a massive scale. However debts, along with the interest on them, remained at the same level, and those who had borrowed now found they could no longer service their loans because of so much less money circulating. Farms, estates and businessmen went bankrupt, and bankers took over their assets. There was poverty on a scale never seen before, with people starving and scavenging round the countryside for anything that was edible. The situation eased in subsequent years, as limited lending was undertaken again, increasing money supply.

In 1866, Thorold Rogers catalogued the rise in poverty, illustrating that in 1495 before any money in England was created as credit, an average labourer needed to work only 15 weeks a year to provide the needs of himself and his family - by 1560 it was 40 weeks as usury took a hold in the 16th century - by 1685 he needed his entire annual wage, by 1725 he was 25% short, and by 1825 he was starving. In contrast, by about 1840, international banker and speculator Nathan Rothschild could boast a personal fortune of £50 million.

The gold standard was suspended again in 1914, and again when the war was over, it was re-imposed with another massive slump and deflation, brought about as governments were forced to reduce national debt. All this, when the raw materials for industry were readily available, businessmen willing to undertake enterprises, the population wanting paid jobs, and willing to spend money if they had any, the land capable of producing abundant crops - in other words poverty and depression in a world of plenty. It has been claimed that the reason for the depression was because people had tied up their money in savings and weren’t spending. This is nonsense - overall, people had far too little income out of which to save anything in the first place, and savings were at very low levels.

The need to borrow money for war resulted in the banks creating credit through lending again - the gold standard had finally been scrapped permanently throughout Europe and the U.S.A. in 1931 so there was no longer any artificial constraint on credit creation by lending, dictated by gold scarcity. Money supply rose dramatically, first in the form of increased national debt through much more government borrowing, and secondly, through increased lending to industry and commerce to provide the materials for war. The depression ended virtually overnight.

After 1945 no nation tried to reduce national debt - the banks did not call in the loans, so there was no slump. Indeed those nations notably Germany, Japan and the U.S.A., who maintained the highest levels of government borrowing in the post war years, sustained the highest levels of growth because of the much greater amount of money in their economies as a result - their industries and public

service infrastructures boomed. Britain on the other hand, although apparently victorious in the field had been crippled financially by the two world wars. Examining national debt in relation to gross domestic product (GDP) illustrates the point. A nation’s GDP is simply the total amount of money that changes hands in a given year - all the money that is spent by everyone - individuals, companies, government etc. all added up - the total turnover in the economy. In Britain in 1996 GDP was £730 billion - national debt in 1996 at £380 billion was 52% of GDP. (Expressing the figures as percentages avoids having to take inflation over the years into account when looking at the figures). In 1938, national debt stood at 143% of GDP, by 1945 it was a staggering 250%, by 1960 it was down to 105% thanks to very little increase in national debt between 1945 and 1960. Contrast this over the 1960 to 1996 period to Germany - 17% up to 64%; USA - 30% to 82% and Japan 11% to 97%, and one can see the burden under which Britain operated in the post war period. Defeated shattered nations like Germany and Japan, which were given special treatment and easy terms with their debts after 1945, were able to make a fresh start - they could run up big deficits increasing their money supply in the form of credit through high levels of borrowing. Britain, was left with the full burden of debt it had incurred to fight two world wars, and had to adopt a restrictive financial policy. As a result our industries were not supported and declined in the face of well supported foreign competition, our social services constantly under pressure through lack of funds. Things are tighter than ever today as the government declares that in future people will be expected to fund their own private pension schemes, to supplement or even replace state pensions.

However one result of this restrictive policy may be no accident - Britain now meets the requirements for joining economic and monetary union and the single currency within the European Union. Recently Germany among others has had to reduce its national debt to comply, and the resultant fall in money supply has led to bankruptcies and unemployment there and elsewhere in Europe since 1990.

In real terms, more than other western nations, through this restrictive policy and shortage of money in the British economy, we have been forced to repay debts to the private banking system. The interest of £30 billion per year on current national debt has to be found by government out of taxes. It begs the question, if a government needs to inject money into the economy to boost the level of activity, or to fight a war even, why does it get private bankers to create the money out of nothing, which it then borrows at interest. If banks can create money out of nothing so can the state. The government can then spend it into the economy on public services and projects such hospitals, transport and much more. After all, as explained at the beginning, money is simply a medium to facilitate the exchange of goods and services. The answer may lie in the fact that the present system gives enormous power and control primarily to the bankers who create the money as credit through lending. Secondly, those in government then have considerable power over our lives in deciding how the available money will be spent and what the priorities are going to be. An

unholy alliance that will not willingly relinquish that power and it explains why it makes very little difference which political party is in government in almost any country in the world today.

A FINAL WORD ON GOLD Back in the middle ages, gold was an international currency. Generally goods purchased from abroad had to be paid for in gold. Promissory notes from English goldsmiths could only be cashed for gold with the relevant goldsmith or bank in England. However, a foreign merchant might accept them sometimes knowing they were redeemable for gold which he knew he could claim if his trading activities took him to London, and in the meantime he might be able to use them to buy from other English merchants. As these promissory notes later became bank notes and as such, currency in their own right, this principle was carried through the centuries, such that, in a modern context, the holdings by one nation of the currency of another nation could be exchanged for gold. By 1971, with the dollar developing as an international currency, the United States knew that huge quantities of dollars were held abroad, and it had insufficient gold reserves to meet demand should demand be made. It unilaterally cancelled the right of any nation to call on its gold reserves. Within weeks every other nation did the same. (This removed a major barrier to the mass movement of currencies. This has led to speculation and profiteering in currencies on a huge scale that nowadays can undermine an entire national economy as we have seen in the Far East and Russia in recent years.) Gold reserves mean little today - gold was only used as money for the historical reasons mentioned - its scarcity was bound to result in a shortage of money sooner or later. Its irrelevance today shows that any medium such as pieces of paper, bits of metal, numbers printed on a statement or ledger, or stored in a computer can operate as money. Today, the problem is that almost all of it is in the form of credit issued by banks and, as such, is a debt owing to them on which interest is payable. This has massive far reaching consequences as we shall now see.

MORTGAGES - A SUBJECT CLOSE TO HOME.The word ” mortgage” derives from the French words “mort” meaning death, and “gage” meaning to pledge. Mortgage = pledge to death.

Mortgages, as a means of home buying, was a 20th century development. Originally taking out a mortgage was a last ditch measure for someone in serious financial difficulty in a period of hard times (when money was in particularly short supply). In desperate need of money, he would offer his land, which probably included his home, as security for a loan knowing that if he failed to keep up the repayments, he risked losing this most precious asset, and becoming destitute. The situation is similar today - fail to keep up the mortgage repayments on your house, and the bank or building society can repossess it and you’ll be out. It is in periods of recession, when money is in short supply that repossessions are at their highest - for example in the early 90’s. Interest rates were high - lots of money being

taken out of circulation as a result - people less able to afford to borrow new money into existence as credit, leading to recession and reduced incomes out of which to pay the high interest rates.

Borrowing to buy homes is a major way of bringing money into existence and has become vital to keep the economy going. The total amount of mortgage debt in Britain in 1996 at £409 billion, represented 63% of total money stock. It is new money, because when a house changes hands, the purchase price, which includes the newly created credit made available to the buyer, is handed over to the seller. The seller then spends it in the economy - often towards buying a bigger more expensive house, but on many other things as well.

Building societies, the big lenders in the housing market, operate in a very similar way to banks. You might think that savers put their money in, and that this money is simply lent out to those who take out mortgages. The big property price increases of the early 70’s and the late 80’s in particular should have laid that myth to rest. Our savings could never have covered those increases. Building societies create money in very much the same way as banks. As a saver, when money is lent by way of mortgage to someone else, you are not told that your money is no longer available - the amount shown in your account is NOT reduced. You have a claim against the society for the amount in your account, which it will meet provided it has sufficient cash reserves to do so.

This time, the loan is made at the stroke of the building society manager’s pen, and money in the form of credit is created out of nothing is made available for spending by the borrower on a home. The excess of interest payments received from borrowers over that paid to savers provides profits, which are the liquid assets/cash reserves forming a basis for greater lending. However as with banks, building societies must ensure they maintain sufficient liquid assets which they can convert into cash to meet savers anticipated withdrawals - they too hope they won’t have too many withdrawals at once, otherwise they are in trouble as happened a few years ago with one or two of the small societies. However, an important difference between banks and building societies is that building societies must keep proportionally much higher liquid asset/cash reserves than banks, to meet savers withdrawals. Yorkshire Building Society’s 2000 balance sheet shows loans a little over 4 times its liquid assets, compared to 100 times for Barclays Bank.

There is simply not enough money in the economy for people to buy their homes outright. Money shortage is most acutely felt here, so money creation by borrowing becomes essential to maintain high prices. The idea that Britain became a property owning democracy under Margaret Thatcher another myth that needs to be dispelled. If a bank or building society lends up to 90% or more of the price of your home, you don’t really own it. At best it is a form of co-ownership. It is true you can sell without their consent, provided you repay the loan in full out of the proceeds - but they can sell as well, and kick you out without your consent

if you fall behind with the repayments - and they keep the deeds to prove the point. Should you ever get to the point of repaying the loan in full over 25 years or more, (assuming you haven’t died in the meantime!) you will have repaid double or triple the amount you borrowed in the first place - making it a very expensive transaction.

Outright ownership (those who do not have a mortgage) fell from 51% of owner occupied housing in 1960 to 33% in 1996. In the same period, the number of homes under mortgage has more than doubled, the cost of housing as a percentage of household income has almost doubled, and house price increases in real terms have outstripped everything else. In the early years of the century, mortgages were rare - the vast majority of housing was owned outright, albeit largely by private landlords. Although since then, a lot more people have gained a stake in home ownership, what has really happened is that an ever increasing proportion of the value of the housing stock has been transferred from private individuals to banks and financial institutions, by virtue of increased borrowing. In 1960 money lent on mortgages equalled 19% of the total value of our housing stock - by 1996 it was up to 37%, and the rate of increase is going up all the time.

Mortgage lending first began to establish itself in the 1920’s and 30’s. Those early mortgages were much smaller in relation to income and were for much shorter periods - 10 to 15 years. People stood a good chance of paying them off during their working lives, and many did so. Today on the other hand, people are taking out second or even third mortgages on their homes.

The increasing indebtedness of those people and companies who actually build new houses and/or supply the materials required, has certainly been a major factor in pushing up house prices. They pass on the costs of their loans in the price of their products. Additionally, the removal in 1980 of the need for banks to keep meaningful cash reserves or liquid asset ratios, led to an unprecedented boom in the creation of credit - masses of new money being created out of nothing by lending. Many new financial institutions entered the home mortgage market, and banks successfully competed with building societies. In the 80’s competition to lend was frenzied. Loan size rose to as much as 4 times a borrower’s annual income, from a more prudent 2 times annual income. House prices rocketed with so much money in the form of credit being made available to buyers.

A lot of people saw the value of their homes rocket and some cashed in on it and made big profits. However, the overall effect has been to increase the total burden of debt enormously, fuelling inflation and making it more expensive than ever for first time buyers to get a foothold. Many of those who profited from the price increases went “upmarket”, saddling themselves with ever bigger mortgages in the process. In so doing they gambled that their future income would be enough to keep up the repayments. This often proved not to be the case in a debt based system where shortage of money is the heart of the problem. Let us now take a look at that, and other associated problems.

THE FAR REACHING EFFECTS OF A DEBT BASED MONEY SYSTEM. 1) Ever Increasing Indebtedness. When banks create money as credit by making loans, no extra money is created at the same time and fed into the economy to pay the interest on those loans. Interest payments must therefore come from the existing money supply made up of loans which have not yet been repaid, plus the tiny amount that is issued interest free, namely notes and coins. Going back to Sid (page 3) who borrowed £5000, he would have paid the £500 interest out of payments he received from his customers out of money already circulating in the economy.

Any loan repayment back to a bank, as already indicated, represents money being taken out of circulation. Interest payments made to a bank also represent money being taken out circulation. Both bring about a reduction in total money supply. If this process went on unchecked, very soon there would be nothing but a few notes and coins left, and even those theoretically would end in the banks vaults because with 97% of money supply being in the form of interest bearing loans, the interest due on those loans is well in excess of the value of the notes and coins that exist. In other words, we have reached a situation in Britain (and the pattern is similar the world over) where the total value of debts with interest is greater than total money supply in existence. The banks and financial institutions have a claim on the entire money supply and more. The figures prove it - money supply in 1997 was £680 billion - outstanding debt plus interest was £780 billion. The cross-over when total debt plus interest had risen to equal total money supply was about 1984, when notes and coins amounted to around 7% of total money supply. Before then it was less, since then it has been more, and it continues to grow.

This staggering figure of £780 billion in Britain owing to the banks represents their claim on OUR economy, OUR homes, OUR farms, OUR businesses, OUR factories and everything else we have built up ourselves which all comes about through OUR work, skills, innovation and enterprise. In addition there is £400 billion of national debt created by government borrowing... the banks effectively own Britain... and probably the world.

However if my bank account shows me £500 in credit - that is mine surely, not the bank’s? Not exactly – as indicated already (page 4), all I actually have is a claim against the bank for that amount. If I ask to withdraw cash, what I am doing is demanding that the bank honour my claim against it by giving me cash. It will always do so, provided it has sufficient cash in hand. However in practice I will have acquired my £500 from elsewhere perhaps as wages, or as payment for supplying goods or services, or as rent on a house or as dividends on shares I own in a company. But whoever I got it from, ultimately it will have been borrowed into existence previously when someone or some company or organisation took out a loan or was granted an overdraft facility by a bank or other financial

institution. My £500 at the bank means someone else took on a debt of £500 to cover it - for example, if I received it as wages, my employer’s overdraft increased by £500 to pay me. All those savings accounts and other deposits at banks and building societies come from credit originally created by banks etc. The banks ultimately have a claim over the entire money supply, because, apart from cash, they created it in the first place! This dispels the myth that many people hang onto, that when you borrow from a bank, you are borrowing the money other people have deposited there. You are NOT, you are borrowing the bank’s money - money it has created and made available to you as a loan. The depositors or savers merely have a claim against the bank for the amount they have deposited – as indicated, there is no problem withdrawing it in cash... provided the bank has sufficient cash to meet demand.

With no extra money specifically created to cover interest payments, the extra money needed has to come from somewhere. The only way it can be done is for more money to be created by more borrowing. Although some individuals and businesses may pay off their debts or get by without further borrowing, OVERALL people and industry must keep borrowing MORE AND MORE to create the money in the economy required to pay the interest on overall level of debt. However more borrowing means yet MORE interest payments are required. And so it goes on. In short individuals, businesses and governments can only service their debts and keep the economy going by ever increasing levels of borrowing. This explains why we are all bombarded with mail etc. from banks and other financial institutions urging us to take out new loans - the whole system depends on it.

Thus the system contains the seeds of its own destruction, because there will come a point when the debt burden becomes so great that we can’t take on any more. Look at the figures - industrial debt in 1963 was 11% of gross domestic product and personal debt (which includes mortgages) was 14% of GDP. By 1997 these figures were up to 28% and 70% respectively. Debt is constantly growing in relation to incomes. National debt in Britain rose sharply from a low of 35% of GDP in 1990 to 52% by 1997, making greater demands on our taxes to pay the interest. Public services suffer, but the real drive now is to cut benefits - family allowances, housing benefit etc. Reducing benefits is less likely to lead to job losses in the public sector, than cutting back on public sector works and projects. Job losses means those affected losing most of their purchasing power and having insufficient income to pay interest on loans, so they stop borrowing. This is serious - it starves the economy of money. It is the middle wage earners who undertake the bulk of borrowing, not old people on a basic pension or others reliant on basic benefits. Their income is so small that they could never afford to take out a loan in the first place. No wonder they get left at the bottom of the heap - their contribution to the debt based money economy is minimal.

Whenever interest rates go up, individuals and industry borrow less, which means less economic activity. Some people lose their jobs and their purchasing power - recession sets in. Incomes all round are down - individuals and

companies are now less able to keep up loan repayments, especially the higher interest charges. Some default, and the banks seize their assets, repossess homes etc. With such a massive level of debt as now exists, how near is the situation to breaking point? Interest rates must now remain relatively low. A ¼ % increase at a time in base rate is all the Bank of England risks nowadays. A big RISE would be catastrophic. Much MORE money would then be withdrawn from circulation. That in turn would necessitate so much MORE borrowing by a seriously debt burdened population, in order to maintain money supply and to try to pay the higher interest charges. The point has been reached where they could not do this. A serious economic collapse, with huge asset seizures and repossessions, would be inevitable if interest rates were to rise sharply.

However, there remains the need to increase borrowing all the time, as we have seen. Even with relatively low interest rates, people and businesses cannot undertake more debt indefinitely... the system itself reduces their ability to do so, by creating pressures to reduce people’s incomes through lower pay, redundancy, unemployment etc. Let’s look at this in more detail.

2) Lack of Purchasing Power. When calculating the selling price of the goods or services he produces, the supplier takes into account the interest he has to pay on his loans and overdraft. In other words, the cost of goods and services are increased as a result of the interest the supplier is obliged to pay. That can get magnified many times over. For example, if you buy a TV set... built into the cost of it, is the interest that the manufacturer, wholesaler, retailer, haulage company that transported it, manufacturers of all the component parts etc. etc. all had to pay to a bank on their loans and overdrafts. To a greater or lesser extent that applies to anything you buy, be it a new house or a bag of potatoes!

Conventional economic theory says “out of the process of production comes sufficient money for consumption” - or total prices equal total incomes. This theory is based on the fact that industry etc. provides both income for people, in the form of wages, salaries and profits, and also the goods and services on which people then spend that income. It claims that the incomes people receive are enough to enable them to buy all the goods and services produced. This would probably be so, but for the fact that almost everyone has a personal loan, mortgage, hire purchase agreement or overdraft on which they have to pay interest... which the theory completely ignores. This sacred cow of conventional economic theory is fundamentally flawed. The fact that industry pays interest on its borrowings means it has to charge higher prices. The fact that individuals pay interest on their borrowings reduces the money that they have available for buying the goods and services that industry has produced. So the money needed to buy all the goods and services on offer, is much more than the money available in the hands of consumers to buy them. Put simply, there is a shortage of purchasing power caused by industry and consumers having to pay the cost of borrowing. The result is that there is a surplus of goods and services in existence

because there isn’t enough money available to buy them all. Conventional economists say the problem is overproduction by industry, but it isn’t - it is insufficient purchasing power in the hands of consumers.

3) The Business Cycle Industry is faced with a dilemma. If it can’t sell all its products, it will cut production. If it cuts production, it must cut production costs. Wages are the first target and will be reduced through overtime bans, short time working, lay-offs and redundancies. BUT this means people now have lower incomes and less purchasing power - they are now less able than before to buy the surplus goods that exist. Rather than solving the problem, these cutbacks add to it. There will be even more surplus goods than before.

Why not increase production instead? That would immediately create more jobs, increase working hours and immediately increase people’s purchasing power. However increased production means increased production costs. To cover these you will probably have to BORROW MORE initially, before increased sales bring more money in. Industry’s attempts to solve this dilemma results in an ever repeating cycle known as the “business cycle”.

When interest rates are LOW, businesses will INVEST in new production (new factory, plant, machinery, materials, office equipment etc.) by BORROWING. This immediately creates more jobs, overtime etc. providing more people with more buying power. Their buying power will be further increased because of lower interest rates on their mortgages etc. However, they use this to buy THE SURPLUS GOODS ALREADY IN EXISTENCE. Nevertheless, we now have “consumer confidence” - demand looks pretty good. The economy is booming. However, as we’ve seen already, people don’t have enough disposable income to buy them all up. In due course the new goods produced as a result of the new investment, get onto the market. However, to cover the additional cost of the new borrowing, they will generally be more expensive than those produced previously, and because of this, people are less able to afford to buy them. Sales start to fall. Furthermore, when one company invests, competitors will do the same, in order to maintain their share of the market. This leads to an even bigger glut of more expensive goods. At this point production and production costs are cut - with the effects on jobs and buying power mentioned above. Sales drop even further. Recession sets in. Those new more expensive goods will have fuelled inflation, so now adding insult to injury, the Bank of England, supported by government, raises interest rates - claiming this is to control inflation! Money supply falls, with everyone now paying more interest on their loans. Their purchasing power is further reduced, adding to the recession that has already started. Industry now finds it increasingly difficult to repay its borrowings - businesses fail - bankruptcies rise - mortgage repossessions rise with people out of work etc. etc. Throwing their hands up in horror, the captains of industry demand a reduction in interest rates, the Bank of England ultimately obliges and the whole process starts all over again. If ever there was a Catch 22 situation, this is it. Consumers and producers are

caught up in a situation over which they have no control whatsoever.

4) Inflation.... and Deflation. When businesses put up the prices of their goods and services naturally we get inflation, so isn’t it odd that when the moneylenders hike their prices by putting up interest rates, this is supposed to reduce inflation! What rubbish - when the cost of borrowing goes up, industry can only recover this by putting up its prices, as we saw in the business cycle. However there is a DELAY in this happening. Initially industry is forced to HOLD or even REDUCE prices, in a desperate bid to sell its products in a period of recession when money supply is very limited. Profits fall and losses may have to be sustained. However, as a result inflation is TEMPORARILY held in check or reduced. Great everyone says - government targets on reducing inflation are being met. However, eventually industry must put its prices UP in order to recover first, the costs of those higher interest payments, and secondly to cover the losses it sustained whilst it held its prices in check. This most readily happens when interest rates come down, more people borrow, and money supply increases. Inflation then races ahead.

People then complain about rising prices and demand pay increases to cover them. This fuels yet higher prices. The result is the upward wages/prices spiral that has been so much a feature of the post war economy - not to mention strikes and industrial disputes that so often went with it. If this features less today, a major reason is that the overall level of debt is so great now that interest rates have to be kept much lower, as already indicated, if industry and individuals are to be able to pay them. Nevertheless, the demand for wage increases will always be with us for so long as people are short of money and have to borrow.

Inflation and increasing levels of debt go hand in hand - first because industry must always look to put up prices to cover its ever increasing levels of borrowing - and secondly because individuals must always look to higher pay or profits from business to cover their ever increasing personal loans and mortgages etc.- not to mention the higher prices they have to pay for goods and services. This guarantees that inflation will always be with us, for so long as we have an economy based on an increasing burden of debt. Governments and economists unfairly blame industry and wage earners for inflation, ignoring the underlying cause namely INTEREST PAYMENTS ON BORROWED MONEY.

Conventional economists say too much money chasing too few goods triggers inflation - suppliers put up prices since there is supposedly a surplus of money to pay for them. Certainly if a particular commodity is in short supply, the price will tend to rise - building land and housing is a case in point (see later) but overall, as we have seen already, the opposite is the case - a surplus of goods exists with not enough money to buy them all. There has never been too much money. Look at all the goods in the shops and the fact that, to get people to buy them, retailers and finance

companies have to go to enormous lengths to advertise and offer such enticements as “no payments for a year” or “0% interest for the first 2 years”. Some shops seem to have “sales” on all the year round. People can’t buy them all without constantly borrowing more money. No-one borrows unless they are short of money. The idea that abundant money is soaked up by industry putting up prices is a fallacy - but economists, governments and bankers rely on it when they announce that interest rates have to go up “to control inflation”.

Unlike in previous periods, overall levels of debt in the post war period have risen CONTINUOUSLY. With the abolition of the gold standard, and later the big relaxation of the liquid asset/lending ratio that banks must observe, there has been little or no restriction on money creation through lending. It is this that has enabled a continuous rise in debt to take place and, at the same time inflation has been a constant feature of post war economies. This was not always so in the past. During the Middle Ages, when there was a permanent stock of coins circulating debt free, before money began to be created through lending, inflation was non –existent for long periods.

Up until the 1930’s, deflation was part and parcel of the cycles of boom and bust. It came about when money was in very short supply, when lending by banks was minimal, and governments sought to make big reductions in national debt. Money became so scarce - people’s buying power so limited that producers had to cut prices dramatically to secure sales. As prices were forced down, employers had to cut wages to stay in business. As we’ve seen, deflation occurred particularly after 1815. It occurred again in the 1920’s. In fact it occurred at regular intervals throughout the 19th century. It coincided with periods when overall levels of debt were REDUCED.

There is evidence of it creeping back into some areas of the economy today, for the first time in years. As already indicated, people are getting to the point that they cannot take on much more debt. The desperate attempts to maintain sales with offers of interest free credit along with near permanent “sales” in the high street, show that many businesses are cutting prices to the bone. For some commodities, prices are lower than a year or two ago. In many areas of the economy, overall wage levels are falling as employers desperately try to cut costs. However the loans, mortgages and overdrafts that individuals and businesses have taken out remain the same - and have to be repaid out of reduced wages and sales revenues. In cases where this is not possible bankruptcy etc. follows. As the Great Depression showed, the consequences of deflation can be much worse than those of inflation.

5) Economic Slavery What has been described is nothing less than economic slavery - neither producers nor consumers can control the situation and the cycles of boom and bust that flow from it - they can only respond to it. Wage earners will try to maximise income in order to service their mortgages and other loans, and to maintain a reasonable standard of living,

provide for the family etc. They may work long and/or anti-social hours, in spite of the pressures this may cause at home. They stick a lousy boring job they don’t like, or may find ethically repugnant such as the arms industry - anything to survive and keep the money flowing in. In such a survival situation, personal ethics, job satisfaction etc. can end up on the sidelines. Competition for better paid positions in companies becomes cut-throat. People put up with humiliation and mistreatment from bosses and managers in the workplace, for the sake of hanging on to a job.

For the businesses and companies that provide goods and services, they are thrust into desperate competition with others providing the same goods and services to grab as large a share as possible of that inadequate purchasing power that consumers have at their disposal. This is what drives industry - yet if there wasn’t a shortage of purchasing power there would be less need to compete. As it is, products are constantly being adapted, modified, altered in appearance - anything to appeal to consumers to keep them buying, even though the basic product is probably little different overall. New gimmicky products are offered that people don’t really need. Massive advertising campaigns are undertaken - image becomes all important. A whole industry of advertising agencies and P.R. firms etc., contributing nothing to real wealth, has grown up around the desperate need to compete for sales. If you allow a competitor to gain an edge in the market, you risk losing sales with possible bankruptcy and all that that entails. Cost cutting is vital to gain an advantage - as we’ve seen already the usual way of doing this is to hold wages down and cut the work force. But of course you cut your own throat as well with the reduced ability of people to buy your goods and services.

Another way of cost cutting is through take-overs and amalgamations - these tend to reduce costs and overheads because functions can be centralised and duplication avoided - but JOBS are almost invariably shed when this occurs. The bigger you are, the bigger market share you can grab, and the larger and more extensive the area over which you seek to grab market share. Bigger companies expand and diversify the range of goods and services they offer, especially in the retail sector (look at the supermarkets). This creates even more competition. This has fuelled the growth of national and trans-national corporations. There is a built-in bias in favour of big business over smaller enterprises, many of which go to the wall. And with ever greater centralisation of manufacturing and distribution etc, comes the need for more transport to move goods around, creating the need for environmentally damaging road schemes. Most vehicles now are bought for commercial purposes, and private mileage for leisure has accounted for by far the lowest increase in road traffic over the last 30 years. With so many companies now producing virtually identical goods and competing over the same large areas to sell them, this means more transportation and environmental degradation.

Lack of purchasing power and consequent cost cutting leads to another problem of the so called consumer age - cheap shoddy goods that don’t last. There have been countless improvements through technical innovation, but

quality and durability are down. People are less able to afford the higher initial cost of quality goods, although in the long term they represent better value. Most people will usually go for the cheaper options, even though they will need to replace them more often. Because they don’t last, cheap poor quality goods fuel the whole system. More goods have to be produced and more money borrowed to produce them and to buy them, not to mention more transport to shift them around.

Transport itself has become a vast industry requiring huge amounts of transport to keep IT supplied. It has wrecked large areas of our cities, making people move to the countryside, putting greater distances between them and their work, adding to the transport problem with a big increase in commuting. People are told “leave your cars at home” but in this debt driven economy over which they have so little control, how much real choice do they have?

In the food industry lack of purchasing power fuels demand for the cheapest possible produce. Quality is sacrificed, in favour of low cost ingredients - this encourages bad husbandry in farming such as battery hens, growth hormones in cattle, offal feed, excessive use of chemicals and pesticides to raise yields etc. Farming debt is a big problem now, having risen by 44% from 1978 to 1992, with incomes down 50% over the same period. The most recent falls in income in livestock farming means bankruptcies are soaring - the tragically high suicide rate amongst farmers is largely overlooked. Wages traditionally formed a higher part of the costs of running a farm compared to other businesses. To cut costs meant shedding most of the labour force. Instead lots of expensive machinery had to be purchased - using LOANS secured on land and buildings. This was not so difficult in the days of big subsidies, but in many sectors those are a thing of the past.

Large scale mechanisation encourages specialisation, but specialisation results in mono-cultures, large livestock farms etc. all capable of being managed by a handful of people. These require more intensive use of chemicals and pesticides etc. Although efficient in harvesting grain crops, mechanisation used to harvest vegetables is appallingly wasteful. The old mixed farm, efficient in its use of resources, in the way it could use for example straw as food for animals, and animal manure for the crops, has largely gone, and those resources now generally end up as waste products. With governments constantly trying to limit national debt/public spending, they now cut subsidies, contributing to the reduction in farmers’ incomes. Many smaller ones are just giving up. However, as the prices farmers receive for their produce falls, prices in the shops have risen thanks to the cost of a complex centralised network of buyers, distributors, processors, packagers, wholesalers and supermarkets all requiring transport in addition. Thirty five years ago, farmers received half the retail cost of a pint of milk, today they receive only one fifth.

When you look at all this - big debts, shortage of money - you have to ask what degree of choice are people really

exercising when they make purchases? The whole economy depends on people, who are basically short of money, being persuaded by whatever means possible, to borrow more in order to then spend as much as possible often on things they don’t really want or don’t really need. We are constantly being told that it is consumers who rule in the market place which then responds to them as they exercise “freedom” of choice - but isn’t this something of a myth?

Socialists have traditionally sought to solve the problem by redistributing wealth/purchasing power - tax the rich to pay for public services, benefits etc. It is true that a minority of people are grossly overpaid. The fat cats of industry and finance pay themselves huge salaries backed by bonuses and share options in their companies etc. Actors, sports and TV personalities, are paid well in excess of any real contribution they make to the economy and society generally. Many of them are regarded as parasites who have become vastly wealthy, and much more so in recent years as the gap between the haves and the have-nots has widened. There will always be a strong case for taxing this kind of extreme wealth to bring about a fairer distribution of wealth, but the difference it makes overall is very little… and to think that this will solve the problem is a big mistake - YOU CAN REDISTRIBUTE WHAT THERE IS AS MUCH AS YOU LIKE, BUT THAT DOES NOTHING TO SOLVE THE BASIC PROBLEM WHICH IS THE OVERALL SHORTAGE OF MONEY IN A DEBT BASED ECONOMY. The real parasites are the banks. If they are really serious about redistributing wealth, socialists must take note of this basic fact and seek fundamental changes to the money system itself. Let’s now turn to the international implications and manifestations of debt based economies.

6) The Drive to Increase Exports and Reduce Imports. Having seen how a shortage of purchasing power in the national economy leads to a surplus of unsold goods, the obvious solution might seem to be to try to export the surplus. The problem is that every nation is trying to do this, because of the same fundamental problem at home. Businesses therefore constantly seek out new and more distant markets for the surplus products they can’t sell at home. This results in a massive drive to export, and yet more competition. It generates more transport as well - a train load of British cars is sent to Germany - a train load of German cars comes back destined for Britain. Apples all the way from South Africa compete with English apples even though the latter are still in season. Instead of international trade being based on reciprocal mutually beneficial arrangements where nations supply each others’ genuine needs and wants, the whole thing becomes a cut-throat competition to grab market share. The massive increase in the volume of trade in recent years is a reflection of this as much as anything else, with huge quantities of near identical goods and produce criss-crossing the globe in a desperate attempt to find a market.

When exported goods are paid for, this brings money into the exporting nation’s economy free of debt, because the money being used to pay for them was borrowed into

existence in the importing nation. The money is paid over, but the debt that brought it into existence is left behind. For example company A in the USA buys goods from company B in Britain - to pay for them, A’s bank overdraft increases - new money is created on which A must pay interest. A will continue to have to pay that interest after A has paid B for the goods - B doesn’t pay it - in fact what B has received is some new money interest free from an outside source, a bonus for the British economy - an increase in money supply interest free. On the other hand, the American economy, through A’s payment, has parted with some money, but the obligation to repay the debt that created it remains with A in America - the interest on it still has to be paid and found by A from the remaining money supply in the American economy. No wonder every nation wants to boost exports and reduce imports!

If a nation can become a big net exporter, for a time its economy will boom with all the interest free money coming in - a trade surplus will exist. Germany and Japan were exceptionally successful in this respect, over the post war period. But every export by one nation is an import for another. If some nations are building up trade surpluses in this way, others must be net importers and building up trade deficits - Britain certainly did in the 70’s. Ultimately, those with big deficits can no longer afford to import, since too much money is sucked out of their economies leaving a proportionally increasing burden of debt behind. A nation with a large trade surplus is not obliged to allow a nation with a large deficit to export to it in order to redress the balance.

7) Third World Debt and the International Monetary Fund (IMF) At this point, enter the IMF, originally set up in 1944, to provide an international reserve of money supposedly to help nations out of the difficulty described above. This reserve is provided by subscribing nations either out of the taxes paid by their citizens and/or by their governments borrowing from commercial banks. However the IMF doesn’t just hand this reserve over. Rather the cash reserves are treated as deposits for making LOANS. Like loans from a commercial bank, IMF loans are money created out of nothing, based on deposits, and they are repayable with INTEREST.

For the poorest nations the IMF makes matters worse. A nation with a big deficit ends up being forced to seek a bail out from the IMF. The IMF makes a loan repayable with interest, and the nation with the deficit ends up even more heavily in debt than it was before. However for a time, it can carry on trading and importing goods from wealthier nations, using this IMF supplied credit. As poor nations continue to import goods, they use this borrowed IMF loan money to pay for them – thus it flows into the economies of wealthier nations. However, the repayment obligation including the obligation to pay interest remains with the debtor nation. This is the true horror of what is known as third world debt - it is the poorest nations borrowing money into existence to bolster the money supply of the richer nations.

There is much talk these days of the debt owed to wealthier nations by the poorest nations being cancelled. In the first instance, bear in mind much of that loaned money flows back to the wealthier nations anyway, through the trading process described in the previous paragraph - so to go on to demand the repayment of the loan itself and interest is pretty immoral. Secondly as the wealthier nations including Britain and America who “lend” so to speak do so by increasing their own borrowings from the banks i.e. increasing their national debts. So the debt owed by third world nations to wealthier nations is ultimately owed to the banks.

These poorest nations end up exploiting every possible resource in a desperate drive to increase exports in order to try to pay the interest on their debts and redress the trade balance. They do it increasingly at the expense of local needs and the environment - stripping forests for timber, mining, giving over their best agricultural land to providing luxury foodstuffs for the west - “out of season” vegetables, cut flowers, rice paddies turned into shrimp farms etc. The situation is made worse because frequently, the means of production will be in the hands of western trans-national corporations. As a result, much of the profit generated from these operations is repatriated back to the west and lost to the host nation’s economy.

Today, for nations in Africa, Central and South America and elsewhere, the revenue from their exports cannot even meet the interest payments on their loans. The sums paid in interest over the years to the IMF, the World Bank etc. far exceed the amounts of the original loans themselves. The result is a desperate shortage of money in their economies - cutbacks in basic health and education programmes etc. - grinding poverty in nations whose wealth in terms of natural resources is considerable. This is international debt slavery, as third world nations are forced to keep labouring to supply international markets at the expense of their own people. In turn, wealthier nations and trans-national corporations continue to do everything possible to bolster their own basic shortage of money, inherent in a debt based world economy where everyone - individuals, businesses and nations - are driven by the need to service an ever increasing burden of debt.

8) A Word on the World Bank The World Bank is an agency for the commercial banks. When a so called “developing” nation takes out a World Bank loan, the World Bank itself doesn’t lend any new money into existence. Instead it acts as a middleman. It raises the money from commercial banks and passes it on to the borrowing nation. It is the commercial banks who actually create the new money. In return for this the World Bank issues bonds to the commercial banks - a promise to repay with interest very much like that which a government gives to commercial banks in return for loans to fund government spending. The borrowing nation is obliged to repay the loan plus interest to the World Bank which in turn repays the commercial banks under the terms of the bonds or promises to repay that it issued to the commercial banks. To ensure that it can meet its obligations to the commercial

banks in the event of default by borrowing nations, it keeps a reserve contributed by wealthier nations. In other words, the taxpayers of the developed world take the risk rather than the commercial banks, who can be bailed out at public expense!

9) Hyper-inflation Over the years some nations have suffered very high rates of inflation (50%, 100%, or even 1000% or more per year). This is referred to as hyper-inflation. IT OCCURS WHEN A NATION’S INDEBTEDNESS IS EXTREMELY HIGH, usually to the IMF, the World Bank or the big commercial banks. Brazil, Argentina, Uganda and Tanzania have been good examples over the last 30 years or so. Very high levels of debt mean the country concerned, in order to pay the interest on its loans, is flooding the international market with large amounts of its currency - far more than investors or anyone else wants to buy up and far in excess of any interest free money it can earn from its exports. Thus with a growing surplus of that currency, its value falls - often catastrophically, against other currencies. Imports for that country then become very expensive, fuelling big price rises at home. Exports however, now attract much less foreign income. This means the price of them in local currency must be increased/inflated to attract more foreign income. The result is a high level of inflation.

The situation gets worse because commercial banks, the World Bank, the IMF etc. continue to insist on debt repayment. This causes yet more of an already devalued currency to flood the international markets. The constant pressure of reduced income from exports also means less money to pay interest. This is basically what happened to the German economy in the 1920’s - only instead of interest payments, it was war reparations that Germany was forced to pay under a policy of “squeeze Germany until the pips squeak”.

10) Transnational Corporations (TNC’s). These are the ultimate creation of the drive to cut costs and extend markets to every corner of the globe. They are out to grab as much as possible of the limited purchasing power in a debt based world economy. They are the ultimate in terms of mass production, employment shedding, cheap labour and the production of goods that don’t last. On top of that, they compete with each other to grab market share, resulting in take-overs and mergers producing ever larger conglomerates. They too have high levels of borrowing. To cut costs, they dispense with senior management as readily as production workers. If the top executives in the world of big business seem ruthless, perhaps it is because only the most ruthless can survive and get to the top in such a hostile competitive climate.

TNCs now straddle state boundaries. They are only nominally based in a particular nation - the location of head office where top decisions are made. There is often little or no sense of national loyalty - their manufacturing operations may be spread across numerous countries. In the western world, on the basis of providing jobs, they play one nation

or region off against another, to secure the most generous subsidies which come in various forms - providing sites at knocked down prices, tax free incentives, freedom from local business rates etc. This has been widespread in Britain lately, especially with TNCs based in the Far East setting up here.

In third world countries, TNCs locate where the labour is cheapest, backed by weak or non existent trade unions - where employment, safety and environmental laws are either non-existent, inadequate or not enforced. In poor countries, people including children, work long hours for a pittance, often in dangerous, unhealthy conditions. Their purchasing power is so minimal, that the goods they produce have to be exported elsewhere to use up someone else’s scarce purchasing power. Nevertheless, in these circumstances, with very low wages bills to pay, TNC’s can produce a mass of cheap goods and successfully dump them in the wealthier countries, where local industries, which pay much higher wages, may be forced out of business or have to relocate where labour is cheaper. This causes big job losses in wealthier countries, so people there don’t benefit either.

In recent years, this has happened on a large scale in the USA where dozens of manufacturing operations have moved into northern Mexico close to the U.S. border where these cheaper conditions are found. This was largely made possible by the North American Free Trade Agreement (NAFTA), which turned the USA, Canada and Mexico into a free trade zone. Plans are afoot to expand it ultimately to take in all the Americas, north and south. We now need to look at so called “free trade” and what it really means.

11) Free Trade. Whatever free trade is, it is NOT fair trade. In the past, nations have discouraged imports by imposing tariffs on goods entering the country. This has a dual advantage. First it makes the imported goods more expensive and therefore less likely to compete with local products, thus protecting local businesses. Secondly, scarce money is prevented from going abroad. However, a nation seeking to protect its home market and money supply by setting up tariff barriers on imported goods, operates against every other nation which is seeking export markets abroad in order to dispose of the surplus goods which the home economy has insufficient purchasing power to absorb. These are two utterly irreconcilable objectives. On the one hand, is a nation’s desire to set up tariff barriers to reduce the outflow of money and to protect its own producers - on the other hand is the need of many of its producers to expand their markets by exporting. This is much easier if other nations don’t have tariff barriers. Conventional wisdom says you cannot have your cake and eat it - if you want other nations to open up their markets to your goods, then you have to open up your market to their goods - all tariffs must ultimately go. However, Japan and other far eastern nations were permitted to build up their industries protected from foreign competition by tariffs on imported goods, yet at the same time, they exported to nations who had much lower tariffs or none at all.

Open and fair trade is both beneficial and desirable, yet in the past there have been “trade wars” as nations have tried to protect their own producers and their limited money supply. One nation sets up or increases tariffs and others then do the same in retaliation - even essential trade has been stifled. This was known as “protectionism” and was universal in the Great Depression. Money was in particularly short supply, so nations sought desperately to hold on to what little they had. Since 1945 the pendulum has been swinging violently to the opposite extreme - unrestricted free trade. Ever bigger companies need access to ever greater areas in which to market their products and increase sales - they are compelled by the overall shortage of money in a debt based money system to demand unfettered access to world markets. Tariff barriers stand in the way of this, they say, and must be removed creating so called free trade areas. This is essentially what is meant by free trade - unrestricted access to world markets for TNCs which, because of their size and infra-structures, are best equipped to take advantage of it.

However, for free trade to operate as fair trade between nations, participating nations should have comparable levels of wages, comparable safety and environmental regulations, and trade between them must be balanced to avoid trade surpluses and deficits. Until this is the case across the globe (and it certainly won’t be under the current debt based economy and money system) there needs to be a balance between free trade and protectionism.

When tariffs are suddenly removed, the results can be devastating for a nation’s economy, as it is suddenly exposed to a mass of competition from abroad and its home industries and agriculture can collapse. The USA and the European Union in particular dump surplus agricultural produce at rock bottom prices in third world countries. One might argue - well these local industries must have been inefficient, and look - the population now has access to cheaper products! That totally ignores the fact that the decline or collapse of local industry or agriculture destroys peoples’ livelihoods, their sources of income and their jobs. Their ability to purchase and trade is drastically reduced, and the local economy ceases to function. That benefits no-one except the TNCs who come in offering “investment” or, more correctly jobs at slave labour rates of pay which, against a background of poverty and high unemployment, people grab in desperation since little else is available.

IMF loans now have conditions attached to them that recipient countries will reduce or remove tariff barriers and “open up their markets to foreign competition” - in other words take surplus goods off another country that can’t be sold at home.

For so long as there are gross inequalities of wealth between nations, a major cause of which is debt, the removal of tariff barriers world-wide can only serve the aggressive policies of exporting surplus goods, through which TNCs and money power prosper at the expense of almost everyone else. Unrestricted free trade is basically the unrestricted freedom of the rich and powerful to exploit the poor and weak. It is enshrined in the World Trade

Organisation, a body set up by wealthier nations at the behest of big business, which, in the words of its president is “writing the constitution of a single world economy”. The plan is to remove ALL tariff barriers by 2020. It is elites who favour free trade because it is they who benefit financially. (Whether having masses of money is truly beneficial to someone and is likely to make them happy is another story!.... and beyond the scope of this resume). These elites are made up of politicians of the strongest nations, bankers, financiers and the top executives of big business. Their agencies are the World Trade Organisation, the IMF, the World Bank, the Organisation for Economic Co-operation & Development (OECD) etc. They also meet in private highly secretive much less well known forums and gatherings such as the World Economic Forum, the Bilderberg Group and the Tri-lateral Commission.

In the European Union, we see how a free trade bloc has been expanded and turned over to a grossly undemocratic supra-national government whose institutions promote trade, legislation and massive bureaucratic interference in the lives of everyone, based on the wishes and whims of big business and banks. Fifteen nations compete across a vast tariff free zone (described as “the single market”) playing havoc with small businesses and local economies throughout the whole region.

It is a combination of the debt based money system and the drive for global free trade arising from it, that is creating centralised global political control, destroying or rendering powerless such democratic institutions as may exist. World government is spoken of openly in the corridors of power of the European Union in Brussels. It is through a single global economy based on “free trade” that this could ultimately come about. What form would it take and in whose interests would it operate? The indicators are not good. To avoid it, some big changes are needed and an obvious place to start is the debt based money system that drives the whole machine. That is explored in the supplement. But first……

WHERE DOES ALL THE MONEY GO? The global money system gives a small elite enormous power and wealth, whilst the rest of us pay the enormous cost. Remember everyone who is involved in providing goods and services adds the cost of borrowing to the price you pay for those goods and services - the government adds the cost of its borrowing to your taxes - your local council adds the cost its borrowing to your council tax. And if that’s not enough you’re probably already paying interest on a mortgage, credit card, overdraft or some other personal loan of your own. This is the extent to which the wealth that we create is siphoned off by the banking system. So where is all this money going? Bank profits are taxed so some of it comes back to the public purse, but there are crafty tax avoidance schemes galore in operation. So who exactly reaps the profits of all this interest we are paying and where do they stack it all away?

Of course a certain amount of it returns into the economy as the banks pay for a variety of goods and

services for their own use – they pay employees and acquire and fit out offices and branches etc etc.

After that, first there are the shareholders in the commercial banks to whom profits are distributed in the form of dividends. A handful of us will get a bit back through being shareholders in the high street banks, which are public companies whose shares are traded on the stock market and can therefore be bought and sold by anyone. However some individuals have huge share holdings, although often they will be in the names of nominees or private investment companies which they own and control, rather than the individuals themselves. Then there are the merchant banks such as Rothschilds, Morgan Grenfell, Goldman Sachs, Hambros, Warburg Dillon Read and others. These are private companies – their shares not bought and sold on the stock exchange, but often held by super wealthy individuals including descendants of the original founders. Again the share holdings may often be in the names of nominees etc.

Secondly, in today’s money markets, enormous sums of money in various currencies are simply traded against each other, with profit taking based on fluctuating exchange and interest rates. Exchange control regulations whereby nations restricted the amount of their currencies that could be bought up and exchanged into other currencies, have been largely dropped in the last 30 years. Since then enormous sums of money have been sucked out of national economies by speculators buying up currencies in ever increasing quantities. The leading speculators are the merchant banks and also some of the high street banks including Nat West, and HSBC (Hong Kong & Shanghai Banking Corporation), which took over the Midland Bank. This is an international merry-go-round where currencies and money are traded for profit, rather than being invested in production and enterprise. Those of us who invest, or whose pension funds etc. invest in the funds set up by these speculators will get a small share in the profits, but it should be clear by now that we are paying a very big price for this return, and that, globally, only a very small number share in these profits.

Thirdly, vast amounts of the profits of all this wheeler dealing gets stacked away in secret so called “offshore” accounts. Enclaves such as Monaco, Gibraltar, the Channel Islands, the Isle of Man, the Cayman Islands, Hong Kong, and Bermuda all offer extremely low rates of tax or no tax at all, for super wealthy individuals who deposit their money within these territories. Again, these individuals usually operate behind “front” companies they own and control, but with directors and shareholders who are nominees provided by banks, accountants or lawyers. The banks will provide guarantees of “confidentiality” so that the individuals concerned cannot be identified. Nowhere is this more widespread than in Switzerland with the strictest laws providing for secrecy and non-disclosure surrounding the operations of banks and their very wealthy clients! Luxembourg is similar.

SUMMARY AND CONCLUSIONS “Let me issue and control a nation’s money, and I care not who writes it’s laws”

- Mayer Amschel Rothschild 1790.

For the vast majority of us this system imposes a terrible drain on our incomes, severely restricting the choices we can make in our lives. How many extra hours do we have to work to compensate for this? More and more people are driven to work all hours, to maintain income and living standards, with ever decreasing time for rest and recreation. Health and family life suffer as a result. Others struggle to get by on a pittance - either way, for increasing numbers of people, life is little more than a battle to survive. And what some of us have to do to survive can be an assault on our very decency and humanity. In the third world the drain on money and resources is so great that poverty, and malnourishment are widespread - one billion plus people below the poverty line with outright starvation in the worst instances.

It makes little difference anywhere which political party is governing - politicians are no more than stewards or administrators of a system over which they exercise no control. Most of them almost certainly do not even understand how it works. They collude with it, pretending to the rest of us that they are in control, in a breathtaking combination of ignorance and arrogance quite unique to politics. Bankers call the shots, and governments tinker around making a few adjustments here and there.

The few who really understand and sustain this system will do everything in their power to retain it, relying heavily on the ignorance of the majority as to how it really works. That majority includes not only many politicians, but also many so called economists, even many if nor most people in the banking world itself, not to mention the media. Don’t be too hard on your local bank manager - he or she is a salaried employee who has had conventional education and training. How the system really operates is not taught in schools, colleges or universities.

When the penny drops in the business community, trade unions, voluntary organisations, environmental groups etc. etc. the clamour for change will become deafening, since everyone will realise that they stand to benefit. We could then seek to incorporate the humanitarian principles of a fair distribution of wealth that underlies socialism, with the dynamic benefits of a free enterprise economy that lies at the heart of capitalism.

WE, not the banks, create the actual wealth - the economy is OUR economy based on OUR skills, labour, ingenuity and enterprise, and we should therefore be able to exercise control over the supply of money and credit required to keep it going. Bankers and economists may claim such power should not be trusted to elected politicians, but from the point of view of democracy and, as all the evidence shows, it is NOT acceptable for it to be trusted to the self interest of private bankers.

One problem is that no nation today has an interest free money system. There is nothing currently in operation to compare the present system with. We know that there are lots of problems and some of us realise it is likely to collapse in the not too distant future unless fundamental changes are made. For democratic control of economies and politics, eliminating poverty, resolving environmental problems, curbing forced economic growth, creating a sustainable future, bringing social responsibility and co-operation into business as opposed to cut-throat competition, the present system has to be phased out.

This resume has looked briefly at the history of money in an English context over 600 years or so, but usury is almost as old as money itself. The early Jews, the Romans, the Babylonians all knew of the power, wealth and control that could be gained through creating and lending money repayable with interest. Has there been a top level conspiracy to impose and maintain the present system? Certainly there is no limit to wealth that some people would try to amass, and the power and control they want to wield. Real power in the world has always been exercised behind the scenes out of the public gaze. Whoever controls the money supply controls depression and prosperity. National economies and governments can be supported or undermined by the banking fraternity - they make credit available to those they approve of.... whilst denying it to those they disapprove of. It is almost impossible for any regime anywhere to remain in power unless it has that support.

Today there are the closest links between banks, big business, top politicians and media. Media corporations ARE big business! Top executives in banks often have directorships in big companies and TNCs and vice versa. They may end up on the BBC Board of Governors. Government ministers have been drawn from big business and banks and often return there when no longer holding office. Government “advisors” of all sorts, “think tanks” and foundations are all made up of the same sorts of people, the latter usually funded by big corporations. The younger politician of the New Labour variety has often been exposed to a mass of political and economic theory in college or university and then gone on to be a professional politician, having had little or no experience in any form of business or work in the community.

In theory there is no restriction legal or otherwise preventing a government from taking the initiative to create the currency and credit required to keep the economy going, and setting up the appropriate state institutions. Abraham Lincoln always believed this was a primary duty of any government. Indeed this could be regarded as a most

compelling argument against economic and monetary union within the European Union. Article 107 of the Maastricht Treaty states that the European Central Bank shall not seek or take instructions from any government, member state, EU body or institution, all of which undertake to respect the “independence” of the Bank and not to seek to influence it or any of its officers in carrying their duties. Since the ECB will be responsible for setting interest rates and ultimately regulating the supply of money and credit throughout all those states which join the single currency, it is clear that this represents absolute power in the hands of bankers and would make it impossible for the elected government of any member state to exercise any influence or control over its money supply. To bring about monetary reform in Britain with the state taking democratic responsibility for money supply, Britain should not join the single currency. Otherwise reform could only take place on an EU wide basis, which might be more difficult to achieve.

Most people take the present system so much for granted that no alternative seems possible. We’ve all been brought up to believe in it. Livelihoods, professional status or reputations seem to depend on it. Point out the fundamental flaws and people will rush to defend it no matter how persuasive the case is that is being put forward against it. The system has provided rich pickings for a significant section of the population, and they are likely therefore continue to defend and promote it. They may see any challenge as a threat to their livelihood, and everything they’ve been taught and come to believe in. But how much longer will people remain in ignorance, as to how the system really works? You can’t go on forever hoping to fool people by extolling the virtues of a system that sooner seems destined to collapse.

FINAL REMARKS I have tried to keep this relatively short and to the point, leaving out a lot of detail arising from the complexities of modern economies. I have also not gone into the largely hidden power of individual big names in international banking, such as Rockefeller and especially Rothschild - probably the wealthiest and most powerful name in banking in the world. My sources are listed below - I claim nothing original in this resume - other than an attempt to combine the research, experience, and knowledge of others in an abbreviated form that I hope can be read in a couple of hours giving anyone who reads it an idea of how the current money system operates along with its serious shortcomings. PLEASE FEEL FREE TO COPY AND CIRCULATE ALL OR ANY OF IT. Comments and criticism are welcome.

Richard Greaves, “The Old Stables”, Cusop, Herefordshire HR3 5RQ E-mail rgreaves@supanet.comTel: 01497 821406 May 2000 (revised with corrections Jan 2002)

SOURCES AND FURTHER READING:

Rowbotham, Michael - The Grip of Death - a study of modern money, debt slavery and destructive economics. Outstanding, and my major source of information. My statistics are from Bank of England and other official sources quoted in this book. 326 pages £15 - Jon Carpenter Publishing, 2 The Spendlove Centre, Charlbury, Oxon, OX7 3PQ. 1998.

Hutchinson, Frances - What Everybody Really Wants to Know About Money - a fascinating study into the historical relationship between money and our traditional relationships with the land, as labourers, hunters, and farmers etc. The shortcomings of economies based solely on profit and money creation are clearly highlighted. 192 pages £12 - Jon Carpenter 1998.

Crowther, Geoffrey - An Outline of Money - useful reading for the traditional view of money and economics including several pages criticising social credit! Informative also on the structure of banks, and the different kinds of banks - merchant banks, the High Street banks, investment banks etc. and their relationship to the Central Bank. Also good on the history of banking. Nelson & Sons, 2nd. Edition 1948.

Bank of England - Annual Report 2001 – for more information on the bank refer to its website at www.bankofengland.co.uk

Nexus Magazine - runs good articles and extracts from other books on money and banks, such as War Cycles, Peace Cycles by Richard Kelly Hoskins (Issues 2/15, 16, 17 & 18) and The Money Masters - How International Bankers Gained Control of America by Patrick Carmack (Issues 6/1 & 2). Bi-monthly £2.50 - 55 Queens Road, East Grinstead, West Sussex, RH19 1BG.

The Social Crediter - bi-monthly magazine £2.00 – P.O. Box 322, Silsden, Keighley, West Yorks. BD20 0YE. www.douglassocialcredit.com.

Prosperity - Freedom from Debt Slavery - Monthly 4 page news-sheet from 268 Bath Street, Glasgow G2 4JR. E-mail: admcc@freeserve.co.uk Tel: 0141 332 2214