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Austerity 6: A conspiracy of silence?

 The IMF said that austerity theory is based on a faulty monetary system that can and should be changed, but vested interest prefers the status quo . . .


James Bruges 14.3.2013

james bruges2My bank failed to send statements for three months so, after finals, I visited the manager to ask why. He thought the overdraft might have taken my mind off studies at a critical period. He was a man who understood the needs of his clients and handled money in a way I thought was sensible but must make for a rather boring occupation. I was deeply grateful for his concern.

I can now no longer think about banks without fury. Maybe it’s only the 80 or so directors that should be locked away, but why do their subordinates tolerate these parasites whose driving principle was articulated in the 1987 film, Wall Street: “Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit”?

Their claim to provide benefit to the nation is clearly a lie if you take into account the recessions and crashes – caused by the banking system – that seriously damage our economy on a regular basis.

And the £375 billion of quantitative easing that, for some inexplicable reason, was money created by the state to benefit banks rather than the productive economy. Also the bailouts and, less widely appreciated, the huge too-big-to-fail subsidies. Fines for their criminal activities, like the Libor scandal, indicate that these banks are also too-big-to-manage and will continue to cause havoc. The biggest scandal and loss to the exchequer, however, is the role the banks continue to play in funnelling money to tax havens.

The five mega-banks are a liability to the country. It would be better if they took their headquarters abroad for another country to bail them out when in trouble (if another country would accept them). It’s only the gullibility of our politicians on both the right and the left that allows their lies to carry any weight.

The pay and bonuses of bankers have sunk the country into obscene levels of inequality. When banks receive money, they invest over 90% in assets like prime property that do nothing for the productive economy. The rich benefit as the value of their assets rises, so 12% of the population now own half the country’s wealth. Might our future resemble Syria? Syria was a peaceful yet divided country under the authoritarian Alawite regime that represented 12% of their country. Then the Arab Spring lit a spark that led to its disintegration.

In Britain, the 12% are exceptionally well housed, have gold-plated pensions, bulging share portfolios, fine art, luxury yachts and shrinking taxes. There is a chasm opening between them and the majority of society who are mostly in debt, suffering reduced welfare and tax benefits, unable to afford a home, increasingly forced to relocate away from their community of friends and travel for hours in order to pick up menial work for the rich. Those in a run-down area lucky enough to own a flat pay eight times as much council tax proportionally as the rich.

A spark will again ignite rioting in the streets — might it escalate to violence on the Syrian scale? We are not immune. Edwardian levels of inequality led to the Great Depression. Austerity measures under chancellor Hindenburg led to Hitler. The drop in household income in Japan between 1929 and 1931 led to a wave of assassinations of government officials and bankers. Social policies after WW2 turned the tables and brought peace, with inequality steadily dropping in Britain until the 1970s. But inequality is now returning to pre-war levels. Be afraid.

How have banks escaped onto a planet of their own? The following little conversation is part of the answer, though it does not explain why society tolerates their pernicious practices.

Imagine a game of Monopoly where John is the bank and Ann wants to buy a house:

Ann    The price is £250,000.

John   OK. Give me £50,000 as a deposit.

Ann    Here you are.

John   Thanks.

Ann    Now lend me £200,000.

John   OK.

Ann    Wait a minute, I can see your hand. You don’t have the money!

John   No.

Ann   So how can you give me a loan?

John  I’ll show you. I open my computer. I type £200,000. Hey presto. Here’s the money.

Ann  You mean you are going to lend me money you don’t have, have never had, which you conjure out of nothing, just figures typed into a computer, and you expect me to treat it as real money?

John  Yes.

Ann   But …

John  Now we come to the part that matters, you start paying me interest on £200,000.

Ann:  ! ! !

You may find it hard to believe but that’s how money is created – out of thin air – not for the needs of the country, but for the benefit of banks. It’s so cynical, when I first heard it I could scarcely believe my ears. However, the governor of the Bank of England has confirmed it. Martin Wolf, chief economics commentator of the Financial Times, put it like this in 2010. “The essence of the modern banking system is the creation of money, out of nothing, by private banks’ often foolish lending.”

OK, it’s a bad system, but it’s what we have and to change it would be difficult. Or would it?

I went to a talk given by Michael Kumhof of the International Monetary Fund (IMF). He said the system can and must be changed. Conflict could develop due to 10% in society who are ‘investors’ (those with money to lend at interest) and 90% who are ‘workers’ (who are in debt – many as debt-slaves – to the investors). He outlined three key measures that should be introduced. First, a state body, independent of government, should be charged with increasing or reducing the amount of money in circulation in order to keep inflation at 2%. Second, commercial banking must be separated from investment banking. Third, banks must keep 100% reserves on deposits, which would prevent them from creating money in the way described above. His department’s modelling of the changes indicated that they “would reduce business cycle fluctuations, eliminate bank runs, dramatically reduce both public and private debt, and reduce net inflation to zero.” And, “To summarise, our analysis finds that the government is left with a much lower, in fact negative, net debt burden.” The government would then be able to concentrate on the real issues relating to our future on the planet — global warming, depletion of non-renewable resources and loss of biodiversity –- and banking would become a boring but useful occupation.

Shortly after Kumhof’s talk, I attended a seminar with members from the Bank of England, the London School of Economics, and a number of economics editors and authors. I asked for the panel’s views on the IMF paper, The Chicago Plan Revisited, published three months earlier, and was staggered to be told that none of them had heard of it, let alone read it! What the hell is going on? When the top authority with responsibility for the global economy is saying that the austerity theory sweeping Britain, Europe and the USA is based on a faulty monetary system that can and should be changed, you would expect anyone interested in the national economy to take notice.

There is obviously a conspiracy of silence. The 10% investors intend to retain their privileges at whatever cost to the 90%.

The campaign for monetary reform has set out in detail how the change would take place. A Money Creation Committee would increase or reduce the money supply on a monthly basis to keep inflation at 2%, making sterling the most stable currency in the world. How would it affect you and me? Household debt – yours and mine – stands at a staggering £1,500 billion, equivalent to ten-years’ worth of income tax revenue. It is the nation’s money, which the banks have been allowed to create out of nothing, so it belongs to the nation. Premiums would return to the government, which would use this revenue for welfare, schools and hospitals. Half of it would be distributed as a citizen’s dividend with the requirement that you must first eliminate your remaining debts. Household debt would drop dramatically, austerity measures would no longer be necessary and your mortgage would diminish. Banks would, once again, provide us with a useful service and my fury would evaporate.

The New Economics Foundation has published “Where Does Money Come From?” which is now a university textbook. James Robertson has written “Future Money”. Positive Money has an engaging website with videos and has published “Modernising Money”.


Ahead of his time: MP Austin Mitchell in 2006

Sabine McNeill comments on the last post that Professor Werner’s Green New Deal proposal is similar to the Green Credit for Green Purposes EDM put before parliament in 2006, adding: “Except that QE is still interest-bearing ‘credit’ rather than interest-free ‘cash’!” 

MP Austin Mitchell calls on the Government to use the power of public credit for public purposes

Early day motion 408: – spaced clauses for easier reading: 


Session: 2006-07

Date tabled: 05.12.2006

Primary sponsor: Mitchell, Austin 


Campbell, Ronnie 

Cryer, Ann 

Meale, Alan 

Riordan, Linda 

Taylor, David 

That this House, knowing that enormous sums of money are necessary to improve public services, build a better infrastructure and provide for the well-being of the people, 

and recognising that further huge additional expenditure will now be necessary to combat global warming, reduce carbon emissions and make public buildings, housing and transport carbon neutral,

points out that there is no prospect of raising such huge but necessary sums through normal channels of taxation and borrowing;

therefore suggests that the time has come to supplement these by using the power of public credit to increase the amount of publicly-funded money,

particularly since this has fallen from 20% of the money supply in 1964 to 3% today because the banks have largely taken the issue of credit and taken the seigneurage arising from credit creation for themselves;

and calls on the Government to use the power of public credit for public purposes, particularly for the huge expenditure necessary to finance the development of carbon neutrality in a good society.


Time for change!