The latest Harry Potter book by JK Rowling, was beaten into 2nd place by Professor Richard Werner's first book The Princes of The Yen, for several weeks in 2001 in Japan when it was first published. The Japanese nation was intrigued by Werner's insider revelations of Japanese banking policy. At the IU conference last week, Why is so much wealth in the hands of so few, (see previous Blog No:1) he gave an eyeopening view of what credit is from its earliest traceable origin in ancient Babylon.
He said that a financial system overall cannot cope with the unrestrained growth of credit and the accompanying interest payments. Interest grows exponentially, but production cannot bring income growth to cover it and this accounts for the recurring financial crises of history. The Babylonians had a solution for it - all debts were wiped out at the accession of a new king - the clean slate. Our current economic crisis is the modern 'resolution' of similar credit excesses. Through credit creation and loans for property deals, commercial banks in Japan in the late 1980s created a price bubble. It burst - prices falling 80% - with the shock transmitted to the wider economy and Japan has been economically moribund for much of the 20 years since. The wider world economy cracked in 2007, when debt was wiped out as poor borrowers with sub-prime property loans defaulted.
Whilst Keynes accurately predicted the amount average incomes would grow, why are so many people working as many hours as they do? (Keynes had predicted weekly hours would be around 15 hours work a week - see previous Blog No:1). So why such enduring inequalities? For example those with income from working, are quite unequal to those earning the same from rent, dividends and interest. Werner said that the mechanism that maintained these inequalities, ignored by Keynes, is the way credit creation is arranged almost entirely through banks and the charging of interest.
Marco Polo reported of the credit creation used through paper money by the Great Khan in China (C13). Forceably acquiring treasure from his subjects he did not then need to borrow from banks, but created all the money he needed by writing it on paper notes. Thus: no debt and no compounding interest payments. Meanwhile Europe tried desperately to create gold for credit backing. Alchemy was a serious research project - without success with gold but actually the foundation of chemical science. Kings in Europe rather than follow the Chinese Emperor's draconian credit creation methods, were forced to go to goldsmiths for the credit they needed, whose secret was to lend out more gold than they had in their vaults. But (now pay attention - this is conjuring), instead of handing over the yellow stuff, they gave out paper 'deposits of receipt' to the amount of the 'gold' they (pretended) they had lent. This paperwork was enough to be credit-worthy for the king (until a bank run). Thus was the fractional reserve banking system of today born - founded in fraud, and growing and prospering on the interest charged on the credit created out of thin air in an empty vault (or nowadays on thin computer screens). In 1694 the Bank of England (a privately owned central bank) was created to oversee this to: 'have benefit of interest on all moneys which it creates out of nothing' as declared Wm Paterson its founder. Thus: In China the emperor was the top dog, in Europe it was/is the bankers.
Werner said that to remedy the instability and to promote a more equal society, governments should create or at least control the allocation of credit and direct it into productive purposes, but not into: consumption; nor assets such as the land content of real estate; nor financial deals. Credit allocated thus will not cause inflation or 'crowd out' productive business from the economy, thus letting industry thrive. Currently it is the banks who are allowed to determine the money supply of the nation through their credit creation, as they make their own profit-motivated decisions, bringing inflation, boom and bust and the continuing impoverishment of ordinary people... for as long as we allow them to do so.
Coming soon - No:3 Fred Harrison on Keynes; on monetary reform; on his ignored property price predictions.