Depositors face an onslaught from both banks and governments. As depositors, we put our money into a current or cheque account at our bank for safekeeping. Yet, we find our deposits are placed at risk and subject to loss rather than stored safely for us. Instead of protecting depositors, government ‘bail-in’ legislation has increased that risk. The banking system is no longer fit for purpose.
Throughout the world today many voices are being raised against the banking system. Few know what is wrong it and even fewer know what to do to fix it. More than any others, we depositors need to understand why our deposits are in this unsafe position. We need to know what needs to be done to return the banking system to being a safe place once again to store our money.
We must awaken and look clearly at two facts:
the money we place in the bank for safekeeping has been taken away from us – all quite legally;
the amount of purchasing power in our money is being stolen from us – also quite legally.
For far too long we have trusted an untrustworthy banking and financial system. Most of us have trusted it without question because our parents, grandparents and other people – whom we loved and respected – trusted it. This trust has been handed down – generation by generation. We have not critically examined the banking system. We have simply trusted and used it.
For centuries the banking system has put on a face of enormous respectability. We have been led to believe that money in our bank is safe. It is not. Let’s look at some basic truths:
1: The money in our bank account no longer belongs to us.
In England in 1811, a judge decided that the instant we deposit our money into our bank account ownership of that money is automatically transferred to the bank. It is no longer our money. It is the bank’s money and the bank is free to do with it as it sees fit. We may think we have money in our bank account, but we don’t. Instead we have a promise from our bank to pay us the amount of money we have deposited. Our deposit balance merely records the amount of money we have loaned to the bank and we can only collect that money or use it if our bank remains solvent. Banks do not safely store our money for us. Banks put the money we have loaned to them at risk – by lending it – to earn income for themselves. Those two court decisions have gifted our deposits to banks free of cost.
Why has the money we have worked so hard to earn been given to someone else and put at risk without our ever having knowingly given permission? The 1811 judgment was based on the view that money placed on deposit in a bank is not packaged separately from any other money in the bank. Judge Sir William Grant decided that money deposited cannot be a ‘bailment’. In law, a ‘bailment’ transfers possession of something – not its title.
Those judgments can now be seen as based on less than complete information. Drive through a farming community. Stop at a grain storage silo. Enquire as to who owns title of the grain deposited there. You will soon find that title to the stored grain belongs to the various farmers who have each deposited their grain there. Each farmer owns a specific amount of the total grain stored. Grain is homogeneous. All the grain stored is mixed together. None is stored in separate packages for each farmer. How is it possible for farmers to retain ownership of their grain, whilst depositors are not accorded the same right? If grain can be a ‘bailment’ so, too, can money.
Yet, Sir William Grant’s questionable judgment was confirmed in the British high court in 1848 by Lord Cottenham. Those judgments have not successfully been challenged since and remain law by precedent.
In the 1800’s the British Empire ruled much of the world. As a result, its political, legal and cultural legacy became widespread. Much of the rest of the world has also adopted these precedents without question. Today, banks throughout the world automatically assume immediate ownership of any money deposited in them – all quite legally.
If we wish to protect our deposits, we must challenge this transfer of title. Like grain stored in a silo, the money in our current or cheque account should legally belong to us – not to the bank. Banks should be storing that money safely for us and – like any other storage business – banks should be charging us an appropriate storage fee for that service. Auditors should ensure banks are held to a high level of fiduciary responsibility for the safe storage of the money we deposit into current accounts.
It’s time to return title of our deposits to us. These judgments can be overturned. The courts may not overturn them but our legislators can. Therefore, the safest way for us to regain our money is to insist that our legislators enact new legislation – legislation which will return title of our deposits to us.
2: The money in our bank account is not idle money.
There are two types of bank accounts: current accounts and saving accounts. These two judges in England in 1811 and 1848 failed to differentiate between the two distinct types of accounts.
When depositors place money into a savings account they intend the bank to invest it for them. Savings account depositors wish their bank to invest the money they deposit in an investment that will return a ‘guaranteed’ income to the depositors. For the bank to invest the money deposited and pay depositors an income, transfer of title allows the bank to ‘guarantee’ a minimum income whilst it seeks to earn a higher income and profit by the difference. Alternately, banks could seek licenses to act as brokers or investment advisors and help the depositor to invest the money in the depositor’s name. However, banks would then have no reason to ‘guarantee’ the rate of income.
When depositors put money into their current accounts, however, it is money they have set aside to meet their family or business budgets. It is not idle money. It is there to be safely stored until depositors instruct the bank to use it – or some of it – to pay a bill for the depositor in order to meet some specific part of the depositor’s budget.
In this sense, putting money in a bank for storage is similar to putting some of your furniture into a warehouse for storage. When furniture is stored temporarily, only possession of the furniture transfers to the warehouse – not title to the furniture. The furniture remains the property of the people who place it in storage. Furniture warehousemen are not free to do what they wish with stored furniture.
We depositors also want our current account deposits to be stored safely for us. It should not be put at risk. It should be stored safely for us and we should pay appropriate storage fees for that safe storage – just as we do for storage of our furniture. Transfer of title to their money is not appropriate for current account depositors.
3: Depositors don’t have first claim on the money we put into our current account for safekeeping.
Unbelievably, when a bank fails, we depositors don’t have first claim on the money in our current account – even though we’ve put it there for safekeeping. These judgments of 1811 and 1848 determined that we are no more than unsecured lenders. Secured lenders have a prior claim on our deposits.
Most secured lenders are other banks. Banks lend to each other to maintain liquidity. Bankers – who gamble with the money we have asked them to keep safe for us – are protected at our expense. This cannot be right.
In Portugal some depositors discovered the truth about their lack of protection the hard way when Bank Espirito Santo failed. Their deposits disappeared. The same had previously happened to depositors both in Cyprus and in Iceland. Much – if not all – of the money depositors thought they had stored safely was lost when their banks failed. Who is next? Will it be your bank that fails?
4: Sometimes we don’t receive the money we earn.
Some people work only for cash. They receive the money they earn. For most of us, however, the money we earn is transferred from our employer’s bank to our bank account.
The instant the money we have earned is deposited into our bank, title to that money is transferred from our employer’s bank to our bank. Our bank does not transfer the title of our earnings to us. It does not become our money. Unless we withdraw it as cash, we never actually receive it.
Instead, what we receive is a promise from our bank to pay us the money in due course. We will only be able to use any of that money if our bank remains solvent. As long as our bank and the banking system remain solvent, we can instruct our bank to use some of what they owe us to pay some of our bills. Those instructions act as notice to our bank to repay the loan immediately and to pay it as we instruct. If banks are allowed to continue to lend money stored for safekeeping, our bank’s ability to repay its debt to us or to honour our instructions will remain suspect.
The number of threats to the banking system is increasing at an alarming rate. We cannot ensure that our bills will get paid or that our hard earned money is safe in our bank unless it is in our name and stored safely for us. Even then we cannot be assured unless banks are held to a high level of fiduciary responsibility.
To ensure our hard-earned money is safe, title to our pay needs to be transferred to us the instant our employer deposits into our account. Title must not be transferred to our bank. Then our bank cannot legally put it at risk.
5: Deposit guarantee programs do not protect depositors.
Deposit-guarantee programs have been established in many countries – ostensibly to protect depositors. Yet, only limited funds are ever available to these programs. The limited funds available cannot possibly meet a full banking collapse. The inadequacy of these deposit-guarantee programs was amply demonstrated in the U.S.A. and in the UK in 2009 when taxpayers had to be called upon to bail out their banking systems. The deposit guarantee programs in both countries could not – and did not – protect depositors. The taxpayers did.
We depositors are also the taxpayers. So, we pay either way. Instead of losing our deposits we lost our tax money. Some unfortunately lost both. Why do we end up paying for the failed risks bankers take? It’s the bankers who get bailed out – not depositors. Failed banks are kept alive. Their shareholders can regain their ownership. Depositors and taxpayers lose.
Bankers should not be in the legal position to take risks and transfer the liability for those risks to depositors or taxpayers. This practice makes the banking system a complete nonsense.
6: Governments do not protect depositors.
Following the economic downturn and threat to the banking system that began in 2007, the U.S.A., Canada, the UK and many other countries have now passed ‘bail-in’ legislation. ‘Bail-in’ legislation authorizes banking authorities to cancel or reduce the amount of money depositors are owed by their banks. This means governments can confiscate all or some of our deposits.
The purpose of ‘bail-in’ legislation is to return a bank facing financial difficulty to a financially stable position – without cost to taxpayers. This is an open threat to deposits – not a protection.
Rather than protecting depositors, governments have actually become a part of the threat. Under these new draconian laws, when a bank is in trouble the money depositors believe they have in their accounts can be either reduced or confiscated legally, quickly and without the depositors having any ability to contest the reduction or cancellation.
7: Central Banks do not protect depositors.
Private commercial banks were well established and making loans long before the first Central bank was established. Central Banks were initially created by private bankers to lend to governments – principally to finance wars.
However, bankers were also constantly aware that if too many of their loans failed and too many depositors became worried about their deposits, depositors might begin to withdraw their money and too many withdrawals could trigger a ‘run’. Their bank could then fail.
When bankers first set up Central banks to lend to governments, some could also see the possibility of these Central Banks acting as lenders of last resort – to provide the cash required to meet excessive withdrawals if a ‘run’ on a bank ever began. With this cash received, banks could then be seen to be meeting withdrawals and confidence in that bank could then return. The ‘run’ would stop – saving those bankers from losing their businesses.
Central Banks now lend to governments and protect bankers. Today many Central Banks – including the Federal Reserve in the U.S. – are still owned by private bankers. Central Banks act in the best interest of the bankers who own them– not in the best interest of depositors.
8: Purchasing power is being stolen from our money.
When gold coins were money, if you deposited your gold coin into your bank account, the bank would issue you with a receipt for it. They would then loan that coin to an acceptable borrower. The borrower would then spend it.
Whoever sold those goods or services to the borrower would then deposit the coin received into his or her own bank account. Their bank would issue them with a receipt. In this progression, the banking system will have issued two receipts against the same coin. The issuance of the second receipt will misrepresent the number of gold coins held by the banking system.
In any other business this misrepresentation would be considered a fraud. Issuing the second receipt makes it impossible for the banking system to meet all of the claims issued. There are not enough gold coins in the banking system to exchange each receipt issued for a gold coin.
If all claimants arrived at the same time to claim the gold coins for which they hold receipts, each will only be able to receive a portion of the gold coins for which the hold receipts. Their receipts will be worth less than the number of gold coins each promised. Depositors will have lost some of the purchasing power each had deposited for safekeeping.
However, all claimants don’t usually arrive at the same time. Banks will also be receiving new deposits of gold coins. These new deposits are then used to meet pre-existing claims. Any business in which new money is required to meet pre-existing claims is usually labelled a ‘pyramid’ or a ‘Ponzi’ scheme.
Pyramid or Ponzi schemes are not to be trusted. Yet, to maintain the flow of new deposits and keep banks solvent, trust in the banking system is an absolute necessity. Maintaining confidence in each bank is a necessary exercise simply because – as in any Pyramid or Ponzi scheme – there is nothing within each bank about which to be confident. Therefore a constant flow of incomplete information is fed to the public in order to maintain confidence.
To protect this dishonest banking system, bankers claimed that having to exchange the claims they issue for gold coins placed a restriction on their ability to lend. They based their arguments on the idea that bank lending brings positive economic activity to the marketplace. Their argument is correct. It is equally correct to say the Great Train Robbers would have brought economic activity to the marketplace had they been allowed to spend their ill-gotten gains.
The truth is that having to honour each of the claims they issued limited the ability of banks to misrepresent the amount of gold coins they actually held. This, in turn, limited the amount of profit bankers could earn for themselves by removing purchasing power from depositors and transferring it to borrowers.
Blinkered by the benefit brought to the economy by the spending of borrowers, economists support the bankers. They argue that bank lending plays the role of a financial intermediary.
Both bankers and economists claim that banks are merely re-directing idle money from depositors’ accounts to borrowers who then use it to create economic activity. Both ignore the fact that money deposited into a current account has been put there to meet each depositor’s family or business budget. It is not idle money. It is there to meet depositor’s obligations.
Most economists can see the lack of morality in the actions of the Great Train Robbers and few will argue that they should have been allowed to spend their ill-gotten gains to bring new economic activity to the marketplace. Yet, in their support of bankers, they seem to have given little thought to the lack of morality in the bankers’ actions.
It’s time economists saw bank lending for what it really is. By arguing that banks should take money from depositors’ accounts and use it for their own benefit, most economists are actually arguing that the end justifies the means – just as the bankers do.
9: Even without gold coins, bank lending remains the cause of inflation.
Receipts have now become paper money. Instead of two or more receipts being issued against each gold coin, new receipts are now being issued against the deposit of existing receipts. When the second receipt is issued, because receipts are now money, new money will have been created out of thin air.
The supply of money is calculated by adding the total of all deposits to ‘cash in circulation’. When a bank agrees to issue anyone a loan, it will deposit the loaned money into their account. Banks do not have deposit accounts themselves, so there will be no commensurate reduction in any deposit account. Total deposits will have increased by the amount of the loan. There is no related change to the amount of money in circulation. Therefore, the total amount of money in existence will have increased.
At the same time, the new money will have been created without having created any new matching value. When the supply of money is increased against an unchanged value, the amount of value represented by each unit of money will become less than it was before the increase. This is how purchasing power is removed from each previously existing unit of money.
As each new loan is created, the purchasing power it represents is stolen from the money everybody already has and from any fixed term contract – including those for wages and salaries. As a result, any money we have or are due to receive will not purchase as much as it would have when we received it or when we agreed to work for it. Bank lending redistributes this stolen purchasing power. It takes purchasing power from those who deposit money, hold money or otherwise have agreed to receive a fixed amount of money and gives it to those who already have assets – sufficient assets to provide acceptable collateral and borrow. This is precisely why the rich get richer and the poor get poorer.
The progression of inflation can be followed by looking at the spending pattern of borrowers. The spending of borrowers creates demand which would otherwise not exist. They can only spend because a bank has created new money out of thin air. This extra spending increases demand and prices rise. Bank lending is the root cause of inflation. It is the principle thief of purchasing power.
10: Central Banks do not authorize commercial banks to create money.
Central Banks can and do issue and withdraw banking licenses. Control of banking licenses gives Central Banks the authority to examine the suitability of bankers to be licensed as deposit takers – not as lenders.
Central Banks can limit the amount of lending a particular bank can make. This was done originally through requiring a portion of each bank’s loan portfolio to be held as ‘reserve assets’. “Reserve Assets’ were loans to borrowers deemed least likely to default. For the most part reserve assets were loans to governments. However, bank-endorsed bills were also accepted as reserve assets. These bank-endorsed bills allowed banks to create their own reserve assets. In this manner, they could lend beyond the limits a Central Banks set. Today, bank lending is limited by BIS Tier requirements. These requirements limit the amount a bank can lend to a multiple of its shareholder equity.
Central Banks do not authorize banks to create money. The English court decisions of 1811 and 1848 gave title of all deposits to the banks. Banks can do with it as they see fit. Banks lend deposited money against which they have already issued a receipt solely to make profits for themselves. The very mechanics of Bank lending itself creates new money without any need for legal authorization.
We depositors re now issuing a clarion call:
We all need your help.
· Two centuries ago judges removed our deposits from us.
Our money was given to bankers.
With clear hindsight, we can now see that those judges were mistaken:
They gave bankers a monopolistic control of over 95% of the money supply.
They gave banks the legal right to steal purchasing power from our money.
They gave banks the legal right to re-distribute purchasing power from the poor to the rich.
They led bankers to become gamblers.
They removed safety from our deposits.
Our corrupt banking system needs urgently to be corrected. We need to join together to present the authorities with such pressure from us – not just as depositors but as voters and as taxpayers – to ensure they pass legislation to return title of our deposits to us: where it rightfully belongs.
We must remember that many of the politicians and bureaucrats who govern us have no reason to change a system that serves their needs well – bankers are among the biggest contributors to their political campaigns. They will only change course if they see their own interests being threatened. When they see enough of us demanding change, they will begin to see their own positions are under threat. Then they will they consider the radical change the banking system needs. The statesmen and women among them will see the need for change much earlier. Together, we can win.
by John Tomlinson
Our voices need to be loud enough. Please join us.
HELP US TO TAKE ACTION
Share and discuss this with your friends.
Form your own depositor protection groups.
Communicate with other groups.
Organize nation-wide assemblies.
Then, together we can form a powerful International Association for the Protection of Bank Depositors
Let’s get together and build a network that cannot be stopped – a network dedicated to returning to us depositors the title and control of our own money.
Let’s build a network strong enough to remove the bankers’ monopoly.
Let’s build a network that puts us depositors back in the drivers’ seat!
More Hidden Truths About Banks
In the first 10 points, we looked at what needed to be done to protect depositors. In these next points, we will look at:
· how the missing money can be returned to depositors’ accounts,
· how banks can survive as businesses without lending depositors’ money and
· some of the bad economic effects produced by the current banking system.
11: We can get cash back into depositors’ accounts even while most of it is out on loan.
Most banks are required to hold a substantial proportion of their investments in government bonds. These bonds are formal loans to governments by each bank. Taxpayers must repay these loans and taxpayers must also pay the interest due.
When governments are themselves authorized to create money at no cost to taxpayers, why do governments borrow from banks at a cost to taxpayers? Instead of governments creating the money, banks create it – at no cost to themselves. Then taxpayers have to pay to the bank both the interest costs and they must repay to the bank the amount borrowed.
This means taxpayers have to pay costs which are unnecessary. Why should taxpayers have to pay either interest costs or loan repayments to banks, when they are authorized themselves to print the money they need without any of these costs? Borrowing to finance excess government expenditure is an expensive nonsense.
To remove this government debt to the banks, governments can use their authority and print all of the money needed to buy back all of the bonds held by banks. By re-purchasing all of the bonds held by banks, governments will put much of the missing money back into banks at no cost. Banks can then return their depositors’ money to their depositors’ current accounts. This ‘printing’ of new money to return to depositors’ accounts will simply replace one form of money with another. It will not cause any further inflation.
At the same time, it will substantially reduce both the level of government debt and the cost of interest payments for the taxpayers.
Nevertheless, this alone will not provide sufficient money to replace all of the depositors’ money that banks have removed and issued as loans. To replace the remaining missing depositor funds, governments can print sufficient additional new money to purchase enough of the remaining better quality loans from each bank to completely replace any and all of the money transferred to them when deposited. This will complete the return to depositors of the money they have each deposited into their current accounts.
As an added bonus, governments will have an income stream from their newly acquired loan portfolios. This will help further to reduce the cost of government to taxpayers.
The banking system will then be fully replenished with the cash it should have been storing for its current account depositors. Once title to their own money has been returned to depositors, their current account funds will again be fully available for depositors to use at any time. Banks can then be held to a fiduciary level of responsibility for the safekeeping of depositors’ current account deposits. There will never again need to be another ‘run’ on a bank. Depositors can then remain assured that their money is available to meet their budgets.
Following this return to depositors of their deposits, banking will be a different kind of business. Current or cheque accounts will have been returned to their original purpose: safely storing and distributing depositors’ funds. For this safe-storage service, banks will have to charge storage fees. Having to compete with one and other for the business of storing deposits will lead to less expensive storage charges. They can also compete by continuing to improve their payment systems and by improving the level of service each provides to depositors. They will then need to meet depositors’ requirements as and when depositors see fit – not the way it is today: as and when bankers see fit. So long as title remains with depositors, depositors’ funds need never be put at risk again.
12: Banks can survive without lending.
For the sake of clarity, banks offering safe storage and distribution services to their depositors will need a separate division which does precisely that – and only that. Banks will need to charge a fee for storage and a fee for each type and level of payment they offer. That’s nothing new. We already pay fees for the various types of payment we use.
Some will not like having to pay a storage fee. They are used to having either free banking or receiving a modest rate of interest on their current account deposits. Why do some expect this service for free? Can you imagine a warehouse paying you to store your furniture for you?
On the other hand, once commercial banks can no longer lend current account deposits and central banks no longer lend to governments, there will be no inflation. When we remove the cost of inflation, the overall cost to depositors will be much less than we currently pay.
Banks will have to compete against one and other on the basis of safety and storage fees. This competition should reduce these fees from the levels we now pay. To help to ensure competition, depositors will be free to withdraw their deposits at any time they wish and deposit it into another bank.
Some depositors will also wish their bank to invest their savings for them. To ensure there is no conflict of interests, banks will need a separate investment division. This investment division can offer depositors the opportunity to invest locally, regionally, nationally and world-wide. An investment division should also be able to offer debt or equity investments in each of these markets.
These investment opportunities might be made through the banks offering their own managed funds. They can also be offered by arranging direct investments in enterprises seeking to raise capital. This can lead to investment divisions establishing their own exchanges where those who wish to make investments in their local market can be brought together with those seeking capital for local enterprises.
For each of these services, the investment division of a bank will need to charge appropriate fees. The investment division of each bank will compete with the investment division of each other bank as well as with all other brokers and investment advisors who operate in the same markets.
Depositors wishing to make investments will then need to withdraw funds from their current account and exchange the money for a portion of the ownership in whichever investment they choose. The money will leave the depositor’s current account and be deposited into the current account of the investment chosen. As money merely moves from one deposit account to another, there will be no increase in the money supply.
When these investors wish to convert their investments back to money once again, they will need to sell, redeem or otherwise exchange their investments for money. Banks which provide efficient local markets for these acquisitions and disposals can earn successfully from providing these services.
Once the system has been changed, there is no reason why banks cannot compete fairly, openly and honestly and survive well providing services in both divisions. Banks will no longer have the license to gamble that they now have and, therefore, will be unlikely to be able to pay the level of salaries and bonuses they currently pay. Nevertheless, by providing excellent service in these areas they can earn well for their shareholders and pay decent wages and salaries to their employees. It will not be the end of banking. It will be the beginning of a much improved and much more stable banking and financial system.
13: These changes will end the bankers’ monopoly and return freedom to our financial markets.
The amount of money in any country’s economy is measured by adding together the total of all money on deposit and the cash in circulation (in someone’s pocket or cash-register). As a rule, less than 5% of money is in circulation. The remaining 95% or more is on deposit. As a direct result of the judgments of 1811 and 1848, banks now legally own 95% or more of all money in existence. Owning 95% of the money in any economy gives bankers a monopolistic economic and financial control of that economy.
Bankers decide to whom they will lend. Bankers decide which projects and businesses will get financed. As many small businesses and individuals have learned over the past seven years, governments cannot force bankers to lend to anyone. If there are 5 major banks in a country then, it will be the directors of each of these banks and the 5 senior lending officers who will ultimately determine who and which parts of that country’s economy are to be financed. When these officers focus their own bank’s lending toward the financial institutions and businesses whose corporate financial officers they personally know and trust – provided these businesses and institutions have acceptable collateral – the rest of us will find it difficult to obtain bank finance for our projects and our businesses. There is currently no free market for bank funds.
Once these changes are implemented, however, interest rate manipulation will no longer be needed to encourage borrowers. Those who seek funding will have a multitude of other options to get the investment they need. There can be a free market for both investing and for obtaining funding. Equity investment can once again compete at all levels with debt finance.
Without Central Banks setting interest rates or the ability to borrow as freely as they now do, governments will have to either balance their budgets, increase the level of taxes every year or print new money. Political pressure will limit the amount they can raise taxes or print new money. This political pressure may be able to force governments to live within their means.
It’s time to return title of our deposits to depositors. Then it will be millions of depositors who make investment decisions. The bankers’ monopoly will be broken and new, wider and freer financial markets can be developed.
14: Small enterprises can grow without bank lending.
Bank lending is the source of today’s world-wide growing burden of debt. That growing burden of debt is now counterproductive. It is slowing economic growth.
When title of our money is returned to depositors, banks will no longer control 95% of the money in any economy and investments will no longer depend on the amount of collateral available. Instead, the merit of each project will be of much greater importance.
This will free equity investments to compete with debt investments. For most, there are better ways than debt to raise money. The placement of both ordinary and preference shares, for instance, can provide capital without any of the burden that comes with debt. If someone requires $10,000 to open a shop, for instance, there is wisdom in selling 100 shares of $1.00 each to 100 different people. The new shop can then open with no debt, no interest costs and 100 interested clients – each of whom will tell their friends.
By mixing ordinary and preference shares, voting and non-voting shares and participating and non-participating shares or by offering limited partnerships, entrepreneurs with sound business programs can raise the funds necessary to open new businesses while retaining the level of control they need. Investors can also invest and receive decent returns with the minimum of risk.
New markets for funding can begin to arise – markets which can be located in each and every community – serving that community. Through these markets, local people will be able to invest in their own communities. This is already beginning to happen. Since 2009, banks have substantially reduced their lending to small and medium sized businesses. To fill the gap, peer to peer lending has begun. Often this is lending within local communities. Perhaps local stock markets might open through which local people can provide local funding by investing in the equity of businesses in their communities.
Once title of their deposits is returned to depositors, investment and spending decisions will be made by each of the owners of the money – many millions of individual depositors. Those millions of depositors are spread throughout the entire country.
Just as some bank managers do now, many will feel more comfortable investing with and supporting people they know in the local community. Then they will be trusting their savings to people whom they know well enough to have confidence in both their business abilities and their willingness and ability to honour and respect any investment entrusted to them.
A much wider geographical spread of investments will then be able to be made by a much wider spread of smaller investors. The country as a whole can benefit – not just those whom the bankers choose.
For individuals who wish to purchase on credit, properly financed shops and businesses can offer both ‘lay-by’ facilities and credit to those whom they know well enough to trust. Without the cost of debt finance, shops, businesses and governments will be able to afford to pay higher levels of wages and salaries. Those who earn more can then spend more. The economy can grow.
The practice of building a collection of assets for the benefit of future generations can once again become normal. It will replace the current practice of leaving future generations with an unsustainable ever increasing burden of debt.
15: The money banks create out of thin air does not disappear when the loan is repaid.
Basic economics courses teach us that when a new loan is issued the money-supply increases by the amount of the loan and when the loan is repaid the money supply decreases by the amount of the repayment. This makes it appear that the newly created money somehow disappears and that bank lending is a zero-sum game in terms of the money-supply.
That is a false picture. It is inaccurate because of the way we measure the money-supply. To measure the money supply we add all of the money deposited in bank deposits to the total cash in circulation.
When banks issue a new loan, the amount loaned is deposited into the borrower’s account. This increases the total of all deposits without reducing the cash in circulation and the money-supply will increase. When the loan is repaid it will come out of a deposit account and will not enter cash in circulation. Thus deposits are reduced without any change in cash in circulation and the money-supply is reduced by the amount of the repayment. First the money-supply is increased by the issuance of a loan and then it is reduced by the repayment. This we are told means bank lending does not affect the money supply in the long run.
What we are not told is that banks do not have their own deposit accounts. Any money a bank receives is not counted. When a borrower pays interest, when a loan is repaid or when a bank sells an asset the money goes into a cash account on the bank’s balance sheet. This account is not part of the money-supply measurement.
This makes the measurement less than complete. This measurement leads us to believe the money supply has been reduced. It hasn’t. The repaid money has been hidden in the bank’s accounts. Similarly, the money-supply will also appear to be reduced when a borrower pays interest costs or bank charges or when a bank sells an asset. Funds will leave the deposit account of the depositor paying bank charges or interest payments. Funds will leave the deposit account of the purchaser of the bank’s asset. By the current measurement, the money supply will appear to be reduced. That is a mirage.
On the other hand, what does happen? The money is transferred directly into the assets of the bank and held there under the heading ‘cash’. While deposits decrease, the assets of the bank increase without any balancing increase in the obligations of the bank. Bank profits increase. Bank shareholders benefit at the expense of the economy. So, too, do bank executive’s bonuses.
Every time a bank issues a new loan, the ultimate beneficiary of that newly created money will always be the issuing bank itself, its shareholders and its executives. It is not immediately seen because most loans are repaid over a period of time and the increase in the bank’s assets in each incremental repayment is small. They creep up on the balance sheet over the period of the loan.
If this money actually disappeared – as we are taught – banks would be unable to pay their bills, meet their payrolls or issue dividends. These funds – cash on the bank’s balance sheet – are the funds banks use to pay their obligations. When the bank makes these payments the money will be deposited into the recipients’ accounts – increasing the amount of deposits in the receiving bank and the measurement of the money-supply will return to its previous level – or more in the case of bank charges, interest payments or the sale of assets.
Total deposits in the banking system will have increased and the money supply will increase once again. This is why the money supply continues to grow at such a pace.
The increase in the bank’s balance sheet comes to the bank as pure profit – at no cost to the bank. These excessive profits allow banks to absorb any losses they might incur from bad loans, to build marble offices, and to pay high salaries and obscenely high bonuses. Together, they encourage a gambling mentality within the banking fraternity.
Until recently, this gambling mentality has been hidden by a veil of respectability. Recently this veil has been lifted. The gambling has become more obvious. So, too, has the level of fraud. The banking system needs to be fixed.
When loans fail, banks can use these losses to reduce the amount of taxes they pay. The rest of us taxpayers will then have to pay more. It’s not the shareholders who suffer the losses banks incur. It’s the taxpayers. Depositors are also taxpayers. Once again, we seem to pay either way.
16: The continued loss of value from money affects our daily lives.
Money which continually loses value is dishonest. It steals purchasing power from all who hold it for future use and from all who enter into contracts to receive fixed amounts of money in the future. It steals from those who save, from those on fixed income, and from those who enter long-term contracts.
We rely on money to be a valid medium of exchange. We price the value of our individual human energy against all other commodities in terms of units of money. We use it as a unit of measurement. It is the standard we use for measuring the value of exchanges between the energy we expend and the commodities or goods and services for which we exchange the value of our expenditure – both domestically and internationally. Society needs to trust money or the whole basis of our present monetary and financial system collapses. For money to be trustworthy, it needs to both accurate and constant.
This is not possible under the current banking and monetary system. Whenever a bank issues a new loan, all of the money already in the marketplace loses value. All of the calculations we have previously made and stored in our minds for reference will need to be re-calculated every time a bank loan is issued. Without these re-calculations, use of this information will misguide us. Is it any wonder that so many well thought through projects fail?
The effects of this continuing loss of value from their money turn people against people and nation against nation. Those who do not understand why money loses value will blame someone or something else. Employees ask their bosses for more when their income no longer provides the purchasing power it did. If their boss is unable to pay more at the time, their boss is at fault. Bosses blame employees when their employees demand more, increase their costs and cause them to need to raise prices. The reality is that neither is to blame. The banking system is.
The current banking system makes money no longer fit to use as a valid unit of measurement. To see this failing more clearly, consider what would happen if the unit of measurement of distance continually diminished in size? Suppose the meter shrunk by a millimeter each day. Then suppose you want to build a house. You hire an architect to design the house for you. The architect then draws plans for the house and provides precise specifications for every detail of the house. These details will be specified in meters centimeters and millimeters.
The plans will then be sent to your builder. The builder will forward copies to various suppliers. The suppliers may or may not receive the plans on the same day. In any event, they are unlikely to produce their products on the same day. Most of those suppliers will be likely to use a different size of meter, centimeter and millimeter when producing their part.
Each may produce their component with focused and precise accuracy. Yet, when assembled, your house will be smaller and – unless some subscribers diminished the size of the meter at precisely the same time – some of the components will not fit together as intended. Windows may not fit into the space left for them by the masons. Roof trusses may not fully fit onto the walls meant to support them. The completed house is unlikely to be sound. Your house will not provide the space, the safety or the comfort for you and your family that you or the architect had intended.
Shrinking measurements of distance will have stolen the safety and the utility of your house from you. The meter will have become dishonest. You will feel the builder has let you down. The builder will feel his suppliers have let him down. Each will blame each other. Yet, each may have produced their particular component with precise measurements to the exact specifications stipulated by the architect. Nevertheless, nothing will fit as intended. While each is blaming each other, it will be the unseen shrinking meter which will be at fault.
It is the same with money. Money, like the meter, is one of the units of measurement which we use regularly. We use it to measure the exchange value our own time and energy and we use these measurements to plan our budgets and our future. Where the size of a monetary unit continually diminishes, similar effects will occur. The purchasing power of our income shrinks. The prices of our purchases increase. We will soon find our income can no longer support our budget and we can no longer meet our plans as intended. Employees will blame price increases and hold their bosses to account for not keeping their pay levels high enough for them to maintain the same level of lifestyle. Bosses blame employees for having to raise prices. We now call it the wage-price spiral!
But, the real culprit is bank lending. Bank lending is stealing purchasing power from each. It is the mechanics of bank lending which has squeezed the margins of comfort and safety from our incomes. It has reduced many on ‘middle class’ incomes to lower incomes. Families can no longer survive on one income. The standard of living of pensioners has been reduced to virtually “subsistence”. How much longer are we going to allow this to continue?
To stop this continued theft of purchasing power we need to stop the business of money-lending by the banking system. Banks must not be allowed to lend money entrusted to them for safekeeping. Safekeeping should mean just that: safekeeping.
The theft occurs when banks lend current account deposits. The judicial precedent that transfers title of our deposits to the banks must be overturned. Without this transfer of title banks can be held to a fiduciary level of responsibility for the safekeeping of depositors’ funds. Banks will then never have a ‘run’ and there will be no need to call for a ‘bail-in’ to reduce or confiscate depositors’ funds.
It’s time to return title of our deposits to us depositors.
· It’s time to change the current banking and financial system.
· It’s time to provide real protection for depositors.
· It’s time to return cash to our current accounts and hold banks to a fiduciary level of responsibility for its safe storage.
· It’s time to remove the banks’ monopoly on the control of our money.
· It’s time to free our financial markets from debt and give equity investments an opportunity to compete in a fair marketplace.
· It’s time to make our money, our banks and our financial system honest once again.
by John Tomlinson
Bank depositors are now issuing a clarion call:
We need your help.
Our corrupt banking system needs urgently to be corrected. The politicians and bureaucrats that govern us have no reason to change a system that serves their needs so well. They will only change course when they see their own interests being threatened. Only when enough of us demand change, will they begin to see their own positions being under threat. Only then will they consider making the radical change our banking and financial system needs.
We can to join together – not just as depositors but as voters and as taxpayers – and present the authorities with such pressure from us that we can ensure they pass legislation to return title of our deposits to us – where it rightfully belongs.
The views expressed are those of the author, and not necessarily those of NassauInstitute.org (which has no corporate view) or its Authors.