Plamen Ivanov reveals the strange origin of the Bank of England.

At the pinnacle of our capitalist system is perched the Bank of England which Dr Plamen Ivanov calls 'this key capitalist firm'. An apt phrase given that the Bank has seemed unquestionably authoritative and essential to the economic working of the UK for over 300 years. However, inequality under this system grows despite political efforts to the contrary, so given the premier role of the Bank can it be that it is a cause of the inequality? Or is it just a neutral, disinterested player in a democratic system run by others? Dr Ivanov reveals hidden and barely understood facts around the Bank's origins that befog the truth about the mechanism working our money system even today, and which he does blame for the disparities. He shows that what started in 1694 continues to this day, powerfully unabated through all banks which operate under what amounts to a marketing franchise which originated with the Bank and is regulated by it. The know-how and procedures of banks follow the model, with the result that the loans issued by them brings enrichment to their top managers and shareholders, even today, just as happened for the Bank itself after its formation in 1694 and for 250 years after. But Ivanov is hopeful that all is not lost for fairness, as there are benign banking ownership models for us to follow.   

Dr Ivanov's doctoral paper that explores these themes is The Bank of England: A Socio-Economic Inquiry into Private Money Creation, Public Debt Financing and the Long Run Implications for Inequality in Britain and beyond (Oct 2018) and he acknowledges the insights of Prof. Richard Werner's key credit creation work in the writing of it. It is about how the Bank made waging a long war more possible for the government of the day and facilitated that by taxing ordinary citizens to the huge financial benefit of a small group of Bank directors and shareholders. But he shows how national wealth creation might be made more sustainable and be better spread through logical and proven reforms. Whilst public (government) debt with its constant demand for interest payments is used to this day by politicians as a tactic to impose austerity for citizens, Ivanov questions the need for the national debt at all.

With the takeover of the throne of England by Prince William of Orange of The Netherlands in 1688 a new era of state finance began. For centuries the ancient 'dual policy purpose of a monetary and fiscal tool' - the tally stick system - was a: 'public credit system [which] allowed state bureaucrats to spend beyond the annual tax revenue by obtaining credit from the public via the issuance of receipts of future taxes paid' (p143). The earlier rulers had resorted, apart from this tally stick system, to funding by means including borrowing from goldsmiths, customs levies, other duties and land tax, all of which, contemporary sources acknowledged, had been sufficient to pay for wars. But the new Bank of England introduced a method for government funding through the new national debt specifically secured against new taxation. This relieved the king of money worries in a novel way, and bound the taxpaying people to the enrichment of the Bank's shareholders forever, especially if long wars ensued.

The pressing political scenario preceding Prince William and Mary's English adventure was that Louis XIV of France had been empire-building on the continent of Europe for over two decades. Due to murderous religious intolerance he had caused a mass exodus of Huguenot protestants in 1685 and many fled to The Netherlands and England. As Louis' campaigns grew, unfortunately the Dutch people themselves were losing the inclination to resist and might possibly withdraw from the conflict. William was in danger of becoming isolated from his people in this and engineered to unite his domain with the English so that opposition to Louis would be strengthened with the added clout of another nation in the fight. As it happened  the protestant English were becoming restive about King James II's catholic preferences. So William (conveniently married to his own cousin Mary who was also the current King James II's daughter) saw his chance and invaded Devon with a fleet four times larger than the Spanish Armada - this was to be a campaign for certain victory.  William was rapidly accepted and arrived in London within  a few weeks. James tried to retain his throne but gave up two years later after the Battle of the Boyne (1690). For William the regime change was now complete and within a few months of his arrival in November 1688 as King William had joined an anti-French Grand Alliance of nations on continental Europe that endured as the Nine Years War. England was now locked into the continental conflict.

Ivanov shows how the Bank of England was founded through the influence of the Huguenots behind a marketing frontman, William Paterson. The Houblon family were well established citizens and prime movers with other fellow church people who met in the French Church in Threadneedle Street (the same street as the existing B of E). Their anti-catholic feeling was such that radicals there had been calling for Charles I's head in a sermon in the church four years before the execution. They had been prominent in bringing William across as king, and now, using banking know-how from Amsterdam, they devised the new Bank for the purpose of creating a new national debt for the English to fight the war whilst also bringing benefit to themselves through their personal (merchant) interests: 
         'the state unilaterally appropriates part of the income and production of ordinary taxpaying citizens and reallocates such monetary gains to national debt creditors in order to satisfy interest payments on legal, contractually-binding debt contracts . More precisely, the religious cabal of the French Church at Threadneedle Street, led by the Houblon dynasty, managed to create suitable field characteristics for the erection of a privately-owned banking enterprise to underwrite national debt with the aim of self-enrichment.' p31   

So William secured his new throne, and within a few years, the funds to wage a long war with confidence; the populace were expected to support the idea that the war was a defence of their protestantism; taxpaying citizens paid the interest on the war debt through new taxes; and the Bank shareholders and associated city merchants grew exceedingly rich.  The national debt grew by the end of the Nine Years War to £17m, with taxation guaranteeing the Bank a very profitable future. In 1832 Sir Henry Parnell reported that the then £28m a year in dividends is: 'a transfer of so much money from the pockets of one part of the public into the pockets of another part of it' p107. At that time the interest on the national debt was above 50% of total government expenditure and had averaged nearly 40% since 1700.   Parnell observed the impoverishment of the populace through taxes coincident with the new debt (chart p116) just as Dr Ivanov is showing now. 

Another chart (p133) shows how 'infrequent wars' in centuries prior the late 17th century changed following the start of the Bank. King William's desire to tie England into his continental war adventures and the Bank as a means of funding it, faciliated an increasing numbers of wars since.   

A practice discovered by Ivanov 'this surprising revelation' p72 concerns: a) the amount of the shareholder funds and b) the amount of the loan to the government. Did they match up? The shareholders were to raise £1,200,000 which was to be paid over as a loan of £1,200,000. What Ivanov has discovered is that only 60% of the shareholder's funds were actually subscribed but the full loan was paid over, with the bank issuing banknotes to represent  the entire loan (p31,p72). Ivanov points out this was an act of private creation of credit at will, and out of nothing, authorised by the Crown through Parliament, with the Bank having its monopolistic status made unassailable through a Royal Charter in return for the loan. This monopoly endured for the Bank itself until nationalisation in 1946 and endures to this day for the remainder of the banking industry which grew out of it into the UK and across the globe. 

So part of the loan to the government was 'invented'; there was insufficient gold or silver or whatever stood for acceptable value deposited by shareholders in the Bank to back it entirely; so it was a pretence to the government that it was there. The Bank issued banknotes and did whatever was needed for foreign transfers for the war payments abroad, and the paper money was spent among merchants - some being shareholders of the Bank. Money circulated into general circulation buying food and supplies, guns, gunpowder, horses, bridles, etc, to fight the French. 

Dr Ivanov champions two reforms to start to correct the imbalances of wealth and income that have grown up as the national debt pile has been renewed and grown over 300 years. Prof. Michael Hudson is the leading authority on ancient debt forgiveness in Babylonia which has been shown to have been practised when a new king came to the throne. This was to free indebted peasants from crop debts and maintain a free citizenry for public duties attached to their land holdings.  The rulers recognised that debts needed periodically to be cancelled or perpetual debt-slavery would ensue. Moses stipulated debt cancellation every 7 years and a return to ancestral land every 50 years - the Jubilee, Leviticus 25. 
Ivanov quotes Michael Hudson: 
              'Indeed, what turns out to be ironic in studying the history of Near Eastern legal practices is that precisely those parts of the Biblical narratives that hitherto have been most in doubt – the laws of cancelling debts, freeing debt servants and redistributing the land to its traditional users – turn out to be the most clearly documented Bronze Age legacy.' p156

Ivanov says we must somehow eliminate the debt.  As  'two thirds of the national debt is now owned by commercial banks and firms.' p136 to achieve the ancient feature of debt forgiveness, he advocates:   
             'governments may issue usury-free money to repay those layers of national debt owed to banking concerns without the need to resort to a great public sacrifice.' p157.  
   
The other proposal from his paper is the formation of many local community-owned banks as have been existing in Germany for more than 150 years. 
           'all of these cooperatives strictly followed three fundamental principles: they were self-help institutions, relied on solidarity, and were self-administering small financial intermediaries … These cooperatives, which adopted the common name Volksbanken (people’s banks), mainly operated in urban areas’. p160
         'Since ...the 1970, no savings bank has ever been liquidated and no creditor has ever suffered lossess. Rioural and Dawson-Kropf, 2012 p162

 

Dr Ivanov credits local banks with the success of the Industrial Revolution in the UK:
           'The increasing number of local banks in this Industrial Revolution period were drawing on their knowledge of local customers and their creditworthiness, financing the expansion of entrepreneurial activities and as a result national output (Cottrell 1980). This decentralised industrial planning through the lending policies of the growing number of countryside bank concerns was lost with the commenced centralisation of banking in London-based headquarters towards the latter end of the 19th century. This process gave rise to the domineering transactional lending approach which still troubles the British trade performance' p167
The community bank model does not involve the nationalisation of banks - which introduces the dead hand of central decision making - but moving ownership to new local, community-profiting banks which would manage themselves independently, and create money to finance local businesses and needs.     


This paper is key to the understanding and resolving of economic problems as the wealth and income gap widens. Dr Ivanov's narrative style and his detailed research, convinces. The fundamental rip-off through taxing the people to finance the national debt which was owned by wealthy people (who even invented the money lent out), is almost past belief. Even at the time alternative ownership was proposed by William Paterson who wanted the debt to benefit orphans. But Dr Ivanov gives reasons for hope for us in our day that the slate can be wiped clean and money creation transformed into benign ways. 

The Bank of England at its birth and for centuries was efficient at financing war, so surely its managers can now inspire us all and enlighten the government to direct finance to make a fairer society? They have immense power to create money for the common  good.  

Do not withhold good from those to whom it is due, when it is in your power to act. Proverbs 3.27   

Posted by Charles Bazlinton. Author, The Free Lunch - Fairness with Freedom.
Charles Bazlinton is a director of Local First CIC which promotes local banks 
 

Alan Greenspan cold shouldered Richard Werner and set back economic progress for decades

Central bankers speak in very measured ways as they pronounce on important things such as the likely track of the national or global economy, Brexit or reading the runes about future interest rates, but what are they really up to? Are they truly working for the best interest of each of us? The Bank of England set its base rate at 0.5% in 2009 which lasted for years until a Brexit dip to 0.25% in 2016/17, and last week it went up to 0.75%. Well paid officials and back up teams deliberated over this inactivity for nearly a decade. But you might say democracy is expensive. But is it democracy? Are central banks answerable to us or anybody? Is there an agenda in central banking that we don't understand? 

Professor Richard Werner who revealed the hidden workings of the Bank of Japan in his best selling book Princes of the Yen published in 2001 in Japan, has just re-published the book in a new English edition which includes a chapter that was missing from the 2003 US, English language edition. Before that US publication he became aware of a problem over one chapter in the original Japanese language edition. It related an interesting story about the US Federal Reserve's then chairman Alan Greenspan. 

Werner is renowned for his clarity on banking and he explains these for the non-expert - and for the uninformed expert - in a series of short videos.  A key banking fact is that ordinary banks create by themselves most of the money we use in society, out of nothing. They don't wait for deposits to arrive before being able to lend. They create the money, lend it to their customers then it goes into general circulation - a new deposit arises in the borrower's account at the point of loan creation so everything balances. In the UK, only notes and coins come from the Bank of England itself the rest of the money is from private banks. It has taken a lot of Werner's career so far to get acknowledgement of this money creation fact officially stated and it is only belatedly, in 2014, that a UK chancellor of the exchequer George Osborne admitted it.    

The offending chapter was that Alan Greenspan had discovered the bad effects promoted by the Fed central bank in the 1920s, which had encouraged excessive and unwise credit creation by ordinary banks. He published his findings in a 1967 paper: 'Gold and economic freedom'. And this is just what Werner discovered about Japan in the 1990s! Werner relates how Greenspan in his paper, had shown how the US Fed both allowed the 1920s bubble to arise though unwise bank lending; and then failed to prevent the Great Recession of the 1930s 'the lost decade' when it could have kept banks solvent and encouraged the flow of money into the economy. What happened then was that the political understanding grew that the banking system was powerless (wrong, it was just malfunctional) and that the government needed to take more control to get the economy moving (only needed because the banking system wasn't working benignly). This led to new federal taxes and the growth of centralised control through the New Deal the effects of which endure.      

Werner relates about his personal dealings with Fed officials and a brief encounter with Alan Greenspan when Greenspan fully acknowledged Werner's precise findings which he had studied for himself. He then embarrassingly blanked him and moved away from further conversation. 'I received the cold shoulder. I began to realise that central bankers did not like my work. I was spilling the beans on their actions'.

Werner considers Greenspan's embarrassment arose because since the 1960s he had been captured by the same power at the heart of central banking he had observed in Japan and recounts so tellingly in Princes of The Yen. For, in his time as Fed chairman 1987-2006 Greenspan behaved as the 1920s Fed had done earlier. He frequently majored on interest rates, which as Werner says are not the determinant for economic growth whilst the quantity of productive credit creation is. Soon after he retired the world economy suffered the financial crisis of 2007/08  'triggered by Greenspan's policies'  (see Foreword in Princes of the Yen). 

Werner has much to show in the new Foreword and in the missing chapter about how central banks should operate and also how they should not operate. One of his key ideas is that many local banks should be encouraged to form and supply credit to local businesses and local institutions. Central banks should encourage the growth of lending to productive businesses and employment and discourage lending to the speculative buying of assets.

See my and other reviews of Princes of the Yen, the book is very readable and insightful. Every politician bothered enough to want to bring a better life for their voters should absorb this story which needs to affect future economic policies.       

Greenspan knew what went wrong in central banking in the US in the 1920s and 1930s and failed to practice his insights when he was able to do so. Nearly 100 years of less than optimal economic and financial policy with crashes have ensued from those times. Are central banks democratic? Do they work for the interests of all? 

Posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom. Director, Local First CIC , Promoting Local Banks
     

8 June 2017 Election Surprises?

Party manifestos, according to Free Lunch principles, should tackle the monopolistic tendencies arising in society.  The moral basis for this is from common threads found in biblical, enlightenment and liberal values and concern human rights, equality and freedom. As the political parties ply for our votes in June how do they measure up to the implied 'fairness with freedom' ? 

The core aim of The Free Lunch - Fairness with Freedom is the common good. The book suggests ways to move towards a society where each citizen is a beneficiary of the resources of nature and those arising from community-inspired schemes. The book is anti-monopoly and what is termed rent-seeking: meaning the hunt for gain sought by monopolists. Extreme disparities of wealth and poverty are the outcome in a society where control of monopolies is lax. Enlightened politics will reduce rent-seeking outcomes. 

• How are the current political parties matching up with the aims of reformers who desire the sharing of monopoly resources via a universal income for all?  
• What do they prescribe to redress the unfairness of the land monopoly: For example what about the land value gains of home owners compared with none for renters?
• What about the resource of further education now being charged for through student fees when it used to be provided free as a common provision from the public purse?
• What about the huge credit-creating monopoly of banking which neglects small business loans as too small and unprofitable to bother with? 
• What about the ability of government to create its own money to fund public expenses for public services, safely and without inflation?
• What about extending the voting franchise to younger people?

It is natural to want monopoly rights. It makes for an easy life. Owners of homes share in the land monopoly through the valuable nest-egg that builds up over the decades associated with the underlying land value of their home.  Fred Harrison points out that:

'... owners of high-value homes are able to recoup what they pay in taxes through rising property prices. ...enjoy tax-free use of schools and hospitals... Low income earners and families that rent their homes...carry the cost of the infrastructure investments and public services that enhance the value of the homes of the rich.' 

How fair is that? What do our political gurus recommend about this particular inequality which creates a constant welfare burden?  

Universal Basic Income (Citizen's Income / Citizen's Royalty)

• The only party wanting to introduce this is the Green Party.  They would create a pilot to test the idea. 

The land monopoly: home owning or renting

• Labour and the Liberal Democrats both mention land value tax as a tax reform measure. This would retrieve the gains accruing to the land values in property prices for the public purse and allow lower taxes on income and goods or as a substitute for council tax.  
• The Greens and Labour would introduce rent controls. This would be a protection for renters as a useful half-way measure until a full land value taxation scheme was implemented payable by landlords.
• The Tory manifesto policy for care in later life was to be paid from a home sale without limit above a £100k house value. The enforced U-turn, in days, shows the political danger of taking land value gains. Whilst not having the universality of land value tax for all land, the idea that property gains should fund the care is a reasonable quid pro quo, but to have to individually account for each care package and each property is probably a bureaucratic path best not travelled, besides introducing a variable charge/cost (aka 'taxation') for every case.      
• Bedroom tax aboliton (now a liablity of council house renters)  is proposed by the Greens, Labour, the Lib-Dems and UKIP.

Student tuition fees  

• The Greens, Labour and UKIP plan to abolish student tuition fees and would introduce maintenance grants (UKIP for poor students). 
• The Lib-Dems, the original champions of the abolition of tuition fees who reneged to their great downfall after being in coalition, propose bursaries for nurses and grants for poor students.
• The Tory proposal is: forgive loan repayments for teachers; provide access to grants for technology students & 'financial support that offers value for money'. This one looks 'interesting' with the news that student debt interest rates will rise from 4.6% to 6.1% this year. Andrew Greenwood (FT letter 19 April) wonders why the Swedish model is not followed with the cost of student loans as per the cost of government borrowing at 0.34%?     

Voting age to 16 

• The Green Party, Labour, the Lib-Dems and UKIP all want this. 

Local Banks 

• Labour will get the Post Office to establish a Post Bank with full banking services in every community. They also propose regional development banks. 
• The Lib-Dems will 'Require the major banks to fund the creation of a local banking sector dedicated to meeting the needs of local SMEs'. 
• The Tories propose British Business Bank branches in several major cities for SME lending needs.

Monetary reform  No parties make any suggestion about using government money creation powers to fund some public expenses. Instead the arguments are about balancing the books for borrowing, taxing and spending. Labour suggests borrowing for extra infrastructure investment because interest rates are so low - it is bound to pay off. But no one makes the case for creating the money as an extension of the QE creation process to pay for such expense without debt or interest to repay to banks. 

Lord Turner is an exponent of this e.g. deficit financing (Book: Between Debt and The Devil) as is Prof Richard Werner e.g. broadband investment.  There is no reason why just as quantitative easing is used to create money to buy back government debt or to buy commercial bonds, that it could not be used to nationalise the water companies (a Labour Party idea but bought through bonds) or to fund general government spending. The Monetary Policy Committee of the Bank of England would need to take note of any money supply implications and outcomes and act as necessary to prevent adverse economic effects - as they do now with QE. Student education could be a modern case for debt free, interest free government money creation. No more student tuition fees.  This would be a monetary reform which only hurt the big banks.  Where are the far sighted politicians to start controlling this monopoly power? 

With the early solid Tory lead appearing to slip the contest may be more open than we ever thought. World wide electors surprise us. Will June 2017 UK be yet another one? 

Posted by Charles Bazlinton author The Free Lunch - Fairness with Freedom. Director of Local First CIC 'Promoting Local Banks' 

Michael Hudson reviews James Galbraith's: 'Welcome to the Poisoned Chalice'

Michael Hudson in a review of James Galbraith’s new book: 'Welcome to the Poisoned Chalice’ says of current solutions to the post-financial crisis world that: 

‘financial interests override sovereign  self-determination  and national referendums on economic and social policy…[and] impose austerity and force privatisation selloffs that are basically foreclosures on indebted economies. Galbraith rightly calls this financial colonialism.’

Real-world economics review issue 76 carries the review.

It points out that resolutions to the current situation have been available since the 1920s. The book covers the economic traumas that the Greek nation is going through.  The prospect is that similar measures across the Eurozone will turn it into a dead zone along the lines of Latvia’s... 

‘disastrous ‘’success’’ story involving drastic emigration and declining after-tax wages’.

The solutions imposed through bond holders involve widening fiscal deficits, with countries being forced to sell off their land and mineral rights, public buildings, electric utilities, phone and communications systems, et al, at distress prices.

The problem is that the EU’S central bank (ECB) does not finance deficit spending to revive employment and economic growth. Additionally the German constitution imposes austerity by blocking funding of other countries budget deficits (except for quantitative easing to save bankers).  The 2010 bailout by banks is likened to the unpayably high German reparations imposed in the 1920s. The hope of the lenders is that deep austerity and privatisation will enable the repayments, when what is really needed is bad debt writeoffs and an expansionary fiscal policy.  

Lord Turner back at ECOBATE 2011 spoke on 'managing credit creation to deliver social optimality' See this Blog link.  

And (same blog) Chris Giles of the FT in 2013 has: 'Turner defends permanent printing of money'.

In the You-Tube film 'Debt-Free and Interest-Free money' Richard Werner exposes the false notion that debt alone is the only solution for government expenditure:  'The government can spend money into circulation, money it has issued'.

Galbraith's book highlights the rule in Europe by the dictats of finance and banking favouring right wing governments, along with opposition to any left wing alternatives to austerity. They won in Greece.

The UK has a different Conservative government from 3 months ago that looks to be setting policy ideals derived from left, right and centre. How radical will its economic changes prove to be? Chancellor Philip Hammond is soon to make an Autumn Statement on the economy. Does he realise the powers he has to invest for the common good without increasing debt? 

QE: easy for the rich. Kaletsky's QE: easier for the poor. Corbynomics? Bank of England independence.

Last week's blog had Natalie Bennett at Making Money Work, asking: Could monetary policy do anything about inequality? Steve Keen said that dealing with private debt would address inequality and it was his suggestion that one-off payments to everyone could tackle this, on the condition that debts be repaid first. Lord Turner didn't think there is a 'magic...costless way' of addressing inequality - the way to do this is progressive taxation.

Philip Aldrick (The Times 19 Sept) QE spared Britain a recession...  is particularly clear that monetary policy increased inequality by creating asset price bubbles such as in gilts, bonds and house prices. Inflation is rocketing in these assets, leading, for example, to fading hopes for first-time homeowners.  Low interest rate funding and high demand from UK and non-UK owners buying to let inflates this bubble. [ Private Eye has a searchable map of such overseas owned properties using Land Registry data. Check your area! Whole streets in London are foreign owned].

Clearly monetary policy as carried out since QE in 2009 has increased inequality in housing. But Anatole Kaletsky in Prospect Magazine: How Corbynomics could work  has a neat solution. Instead of QE's £375bn spent to prop up financial markets ('making the rich richer') he proposes that this could have been spent by being given via a weekly £20 payment, to every 'man, woman and child in the UK' until UK growth returned to pre-crisis levels. He proposed this back in 2012. The Free Lunch Blog mentions it here.

So monetary policy could reduce inequality - since equal payments to all inevitably raises living standards proportionally more for the less well off. As long as conditions are strictly adhered to as to the eventual termination of the payment no harm would be done.

That would be a temporary remedy for a sluggish economy. (NB: temporary QE has lasted 6 years so far). But politicians would be wary of the dangers of launching such a citizen-based policy because it would be difficult to stop politically when the monetary need was over. What would be needed to take over would be a similar payment to all but funded by reform of the welfare/tax balanced budget. Such a Citizen's Dividend / Basic Income would need to be established by the end of the monetary booster to avoid the pressure on politicians to extend the  monetary policy dangerously beyond its period of monetary need. Basic Income UK and Citizen's Income Trust have the details of an unconditional non-withdrawable payment to all, as of right.and it is broadly affordable within current budgets. That is the policy that would establish a new citizen's right, like voting, education and a health service.

Another use of monetary policy to promote sustainable growth is suggested by Prof Richard Werner: that credit creating institutions could provide monetary incentives for education purposes '$100,000 for each child born...such a policy would not be inflationary: among all inputs into the production function, human resources are by far the most important.' (New Paradigm in Macroeconomics p340).
To ensure good education for all must be among the most effective ways of poverty reduction and thereby inequality.

Inequality reduction by monetary means would not be magic - merely an effective policy against poverty and as a means of growing the economy.

But QE is magic - for wealthy people. From early 2009 when QE started the UK FTSE 100 share index to date has gained over 60% & UK house prices have risen 67%.

Strange how central bankers and governments fail to take easy steps to help the poor but so easily open doors for the rich to garner greater riches. The Monetary Policy Committee at the Bank of England has met dozens of times since QE started and resolved every time to keep interest rates at 0.5%. Their learned deliberations have now blown up another asset price bubble. Is the BoE really so partisan that it cannot think beyond top layer wealth creation as the sole answer to the crisis? Is it really there for the good of all - as might expected in a democracy? Presumably our government in meekly acquiescing to a measure that has achieved so little for so long, wholly agrees with it.

Bank of England independence is strongly defended. The question to be put is: How dependent on central bank policies ought the government to be?        

Making Money Work: Lord Turner, Steve Keen, Chris Giles & Richard Spencer on Corbynonmics and money creation.

Lord Adair Turner has learnt a bit on the practicalities of speechmaking since we last reported (see ECOBATE 2014, 11 Nov 2014). In Winchester his PowerPoint slides were lost en route and but he did a brilliant job improvising. At the Positive Money event Making Money Work at Central Hall, Westminster on Monday 7th Sept he safely had 2 paper copies of his slides for each of the 200 or so attendees. His talk developed his ECOBATE 2014 theme and gave much detail as to how he thinks government economic and monetary policy technically could, and politically should, develop. 

He said that he did not agree with the extreme radical Positive Money view for the abolition of fractional reserve banking and its replacement with 100% reserve banking. But the 2008 crisis and slow recovery since cannot be understood without a clear understanding of the nature of debt, money and credit. Pre-crisis and for many decades we were far too relaxed about the private credit creation by banks. Post-crisis we are too terrified of the potential of what he termed 'overt money finance' (OMF) of government deficits -another name for this is 'helicopter money'. 

Lord T said there is no reason whatsoever against helicopter money, it was all a question of how much you do. A small amount will stimulate a little with no excessive inflation. He thought it would however be excessive to fund 10% of the fiscal deficit this way as it would bring hyperinflation and destroy the economy. 

In discussion  - Chair: Fran Boait (Positive Money) ; Prof Steve Keen (Univ of Kingston) & Chris Giles (Financial Times) - the matter of the doubtful effectiveness of Quantitative Easing (QE) so far was discussed in contrast to OMF. Chris Giles thought that whilst he would never rule any new idea out (e.g. Jeremy Corbyn's 'Peoples QE') he was sceptical that it is seen as a sort of magic solution which has no cost. He was cautious of using OMF as a monetary tool.  If it was used simply to put new money in everyone's bank account, good, but to use it to spend on infrastructure was fraught with problems - you might have to halt the construction of the HS2 railway unfinished, due to monetary rules.  Money is not the only driver of the economy, in addition there is housing and planning policy and new macroeconomic tools as to how banks should lend; however in the future QE might be seen to have been OMF.  Here Lord T agreed that QE, as started in 2009, might become post-facto OMF. He illustrated this with his view that with the Bank of Japan owning 60% of GDP in Japanese Government Bonds he thought it highly improbable that these would be repaid or sold off by the BoJ. He thinks it will become helicopter money and be shown to be a permanent monetisation of government debt. ''That is going to happen and I would place a bet on it'.

He thinks that we should consider a 2009 UK scenario where a 4% of GDP fiscal deficit was planned and £350bn 'reversible' QE issued. He put it that it might have been announced that 5% would be planned with the extra 1% being OMF money creation and non-reversible. He said that this would send an important signal and be much clearer than the current scenario of whether QE really is reversible.   

Currently the Bank of England is apparently doing two things: 1.Managing interest rates and QE for inflation targeting. 2. Managing bank lending through loan requirements and bank capital requirements, for economic safety and stability all without managing demand.  What he sees as actually happening is that the BoE is starting to manage the allocation capital as seen in the Funding for Lending Scheme to be directed to SME loans.  Five years ago such government allocation of capital was unthinkable! 

The cause of the crisis had been the mis-allocation of capital through private credit creation by banks.  Too much credit chased existing assets rather than to finance productive investment, which Richard Werner calls 'credit for GDP transactions'.   This caused a debt overhang with the danger of deflation.  Beyond the supply of consumer goods to most households,  housing becomes another way to compete between members of society to gain a more attractive home or stay at a hotel. As locations offer varying benefits this competition encourages more debt. Banks encourage this, being biased towards property lending due to the collateral available. Steve Keen pointed out the reverse case of lending to entrepreneurs where, maybe,  four out of five loans might fail with loss of principal. This shows the difficulties that banks can have in lending to productive ventures. 

Lord Turner questioned how widely we might be able to spread a new understanding of the monetary issues being discussed.  In confessional mode, in his new book 'Between Debt and the Devil' he has a chapter 'The crisis I did not see coming'. He had to embark on an intellectual journey to understand themes ignored in his earlier economics education - a frank admission in mid-career from a very high-flying player. He said the very essence of the insight of macroeconomics is that governments and states are not the sum of households. In the personal household economy, books have to be balanced, but the state economy is different. Steve Keen said whilst he was impressed by the new openness at the Bank of England but in contrast the political class think the government should be running a surplus. 'They vie with each other: 'My surplus is bigger than your surplus' ' which is the equivalent of banks believing they should be receiving more loan repayments than they put out in loans. Governments ought to be running a deficit with money creation financing a large part of that.  Clearly from the view of the panel, economics education should be transformed so that these things are understood in universities, but beyond that how easily can the ordinary voter understand it? As to conventional economics theory, the efficient market theory is clearly wrong as no financial trader would get up in the morning if it was, since they would not be able to make any money! But the public needs to know that economics will never give as clear answers in its field as for instance an engineer can give in designing a bridge.

In Q&A I said I was involved in helping to establish a local community bank - Hampshire Community Bank which would lend locally and give its profits to local good causes. Was this a good foil to the problems being discussed that had arisen through centralised, international banks?  By their strong applause the audience clearly appreciated the idea.
Steve Keen thought it was an excellent idea as local knowledge would inform bank decisions on loans. Centralised banking is essentially 'collateral banking' which is dangerous, but as Richard Werner emphasises local banks are the strength of German banking. 

Chris Giles said local banks are obviously good, but that a weakness might be that local firms gain loans merely by being local and not through normal due diligence and good banking practice. (Note: If I had been able to respond a comment could have been that this danger is just as likely with non-local banks! Just look at what happened leading up to the 2008 crisis. Where was careful banking practice by national /international banks then?)  

Richard Spencer, an economist whom Jeremy Corbyn uses to inform his People's QE, said that 5 weeks ago he hadn't heard of Corbynomics but since then he has been credited with writing it!  Jeremy Corbyn asks what does the economy need?  He thinks we need investment in public infrastructure and this needs money and if needed a deficit, and this if fine because people want to buy bonds. However he thinks the banking system is too powerful and People's QE would mean that the bond route would not always be wholly used and banks not needed for some fraction of the money. Corbyn has said that if the economy is booming People's QE would not be needed as the bond route might be wholly enough.  He (RS) largely agrees with Lord Turner's views apart from central bank independence. He said that for politicians to be told by the central bank the amount of OMF needed is not democracy, it would be rather like being told by bankers how much tax is needed. Politician should listen to able technocrats, such as at the Bank of England. But let's not have bankers in charge, let's have democracy in charge. Strong applause.

From the panel: When politicians had control of interest-rate-setting, public opinion (or party opinion) was often targeted very obviously and the high inflation of the 1970's might be seen as a warning that sole political control was dangerous.  'Commitment devices' (e.g. Committee on Climate Change/ Bank of England) agreed by politicians in order to keep a steady course over time ahead even when it hurts, are useful.  However the ECB has been given far too much control as it defines its own terms for price stability, for instance.      

Natalie Bennett the Green MP asked what the money system would look like if consideration for the environment and for addressing inequality (where everyone has enough) were both addressed. Chris Giles thought a monetary system could not create a better society. Lord Turner thinks that money systems are not an appropriate answer to carbon issues - there are enough devices around already.  Progressive taxation is the device to address inequality, not OMF. Steve Keen thinks that money creation is needed to redirect spending to carbon reduction, no-one will do this for a profit.    

Barb Jacobson for the Basic Income Trust asked about the idea of using money creation for cash payments to everyone?  

The panel agreed with the idea: There should be no problem with ensuring a single payment to each person through NI numbers and tax numbers / It should be directed to paying off personal debt first for those who have it / Alastair Darling tried to do it in 2009 but was told it would take 9 months, so he reduced VAT instead / Australia did the same thing in 2 weeks.

Note: 

Chancellor George Osborne understands the subject of the Making Money Work event, as reported in  this blog   Nov 13 2013:
 ' It is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. This would allow governments to increase spending or reduce taxation without raising corresponding finance from the private sector.'   See Treasury document quoted para 3.34:  Here 

See the Positive Money official post for the event Making Money Work: HERE

Posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom      

Helena Kennedy, Oliver Kamm and what banks actually do

Helena Kennedy in the New Statesman 5 June on Magna Carta says banks rely on complexity which foxes law prosecutors and befuddles politicians. Surely complexity does not automatically imply illegality? So where does the power come from that Baroness Kennedy says is wielded by financial institutions, which in her opinion shows that Magna Carta lacks bite?  It is derived from a very simple, non-complex but fully legal right to create the money supply by banks. See this short video which explains the process:  Banking and the Economy  

From this process - the ability to create money - the banks, et al, engineer the complex financial products that rattle HK, which are the source of the profits. If this power was not available and banks had to make do with their own funds, there wouldn't  be any point in making complex products - it would be too much bother given the small margins. The profits arise for banks from the huge leverage gained by multiplying small margins on a huge base of their specially created money. See also on the ignorance of politicians from Positive Money.  The answer for politicians such as Baroness Kennedy  is not 'going head to head against large banks', but to take away their right to create money - or at least encourage the formation of independent  local community banks, owned by local trusts which don't make complex products and which channel profits back to the community.    

Oliver Kamm in The Times 11 June writes:
' the role of banks and capital markets in matching owners of capital with businesses that need it' 

This new paper by Jakab and Kumhof will enlighten:  Bank of England paper No 529 
Extract:
Mervyn King (2012), former Governor of the Bank of England: “When banks extend loans to their customers, they create money by crediting their customers’ accounts.” Lord Adair Turner (2013), former head of the UK Financial Services Authority: “Banks do not, as many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo — extending a loan to the borrower and simultaneously crediting the borrower’s money account.”

Or see this blogpost 'Bank of England concurs with Prof Richard Werner's view on creation of money by banks'
posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom. 

Richard Werner on broadband investment

Promises, promises. Electioneering by George Osborne (The Times, March 16, 2015) has him saying that 'Remote homes will be first on ultrafast broadband'. A new invention, 'G.Fast' will be x4 the speed of the ordinary variety and enable easier access for more consumers.  And the government will be able to concentrate subsidies on the remote areas because of new technological developments by BT.  New subsidies are going to be available for suburban areas too. 

The background assumption of all this is that the government has had to hold back on subsidies (until election time) because of the austerity regime following the financial crisis.    

Prof Richard Werner (Chair of International Banking at the University of Southampton) has it that infrastructure investment which promotes the sustainable economy, can readily be funded with money created by the government. That is: debt-free and interest-free money.
Yes read that slowly:  D E B T - F R E E  AND  I N T E R E S T- F R E E.

In an article about this written in 2010:

It is therefore possible to finance the Broadband Initiative with the creation of government money, without anyone incurring any costs or debts, and without any interest burden.

One day a government, hopefully, will wake up and grasp powers for the common good that are currently controlled by banks. Why don't political parties champion this as they head for the election? Are they so in thrall to banks who would be by-passed for credit creation?
Posted by Charles Bazlinton. 

Clarity amidst muddlement. Richard Werner proves credit creation. PLUS - New YouTube documentary: Princes of the Yen

Has you ever done this? Asked your bank manager for a €200,000 loan 'for research purposes'. That is just what Professor Richard Werner did last year to prove a point that has been absorbing eminent economists since the mid-19th century. An academic battle has been raging for well over 150 years about what exactly banks do when they lend money to customers. It has involved economists of high international standing including Macleod, Wicksell, Withers, Marshall, Keynes, Crick, Phillips, Stamp, Mints, Schumpeter, Stiglitz, Samuelson, Tobin, Klein, Gurley and Shaw and many, many more.

Whilst these notables discoursed around the matter of how banks produce a loan, the banks themselves carried on regardless of academically discerned niceties. The trouble is that over that period many financial crises stemming from bad banking practices have taken place with the most recent one possibly the worst and...is it over yet? Clearly whatever goes for economic policy that has flowed from universities to governments since the mid-C19 has not been very effective in controlling banks which regularly create asset bubbles which burst causing financial disruption. 

So we have high confusion. Bankers seems to know just what they are doing, having made between the crises, extraordinarily powerful and profitable businesses. Meanwhile politicians guided by academics have been chasing around trying to understand what the banks are doing in order to prevent the next crisis.

Into this steps Richard Werner wanting to get to the heart of the problem. Having proved to his academic satisfaction that individual banks create credit, he resolved that a good way to convince others of this particular economics conundrum was to observe it happening in an ordinary bank branch. So with some panache he embarked on an experiment to do just that and to find out which of three historical theories stands up to scrutiny. He was assisted by helpful bank officials, a photographer to capture screen shots and BBC reporter Alastair Fee with a cameraman to record it all. Werner's aim was to cut through the 'hypothetico-deductive' method of the economic establishment where ''unproven 'axioms' are 'posed' and unrealistic assumptions added''. He just wanted to see what happens in a bank's internal accounts when it lends money and so hopefully trace the birth of a loan. This was in Germany on 7th August 2013, when the directors and staff of a small bank enabled him to borrow the €200,000, and the next day when he paid the cash into another account at another bank, just to show it was real money.

You can study the theme and the experiment in a new academic paper just published by Elsevier and the International Review of Financial Analysis. In this Werner (with K.Voutsinas and S.Dhanda) gives the history of how banking as a function has been viewed over the last 170 years by the leading economists of their day. Title: Can banks individual create money out of nothing? The theories and the empirical evidence.  [Feb 2016 NOTE: This is a 'corrected proof' see note at head of the paper] Starting with Henry Macleod (1855) Werner explains three theories of what banks do in passing loans to customers, here generally described: 
Theory 1. They do actually create credit out of thin air and lend it on. 
Theory 2. They do not as individual banks create credit themselves, but the whole banking system 'somehow' does create credit utilising the fractional reserve system, according to the ascertained central bank reserves of the individual bank. The mysteriousness of the 'somehow' problem was acknowledged by eminent economist Mints (1945) who said it 'proved to be one of the most baffling for writers on banking theory'. 
Theory 3.  From two pre-existing sources of money - their equity and deposits of various types - banks lend out only from what they already have. The process being known as 'financial intermediation'.

From the mid-C19 Theory 1 prevailed and now Theory 3 is top. Keynes moved from Theory 1 through 2 to 3.  In very recent years there has been a shift back towards Theory 1. Even the Bank of England acknowledged in March 2014 that individual banks create credit out of nothing.  However as academics seem largely ignorant of this simple fact, Werner wanted through his experiment to prevent a toilsome debate for yet another century about the three theories, with the possibility of reaching no conclusion even then. After all, long ago in 1927 economist Sir Josiah Stamp (Bank of England director) said: 'there is a fair amount of muddlement ...on the apparently simple question : 'Can the banks create credit, and if so, how, and how much?' '.

To Werner's satisfaction the German bank in August 2013 created credit out of nothing which accords with Theory 1. In the paper Werner explains how Theory 2 ( based on pre-existing fractional reserves) and Theory 3 (intermediation of existing money) cannot hold for the loan the bank created for him. He explains that the fractional reserve theory is a half-truth but that the financial intermediation theory now prevalent is quite false.  Werner claims that his experiment  to prove that banks create credit out of nothing is likely to have been the first such in 5000 years of banking history. Its outcome has huge implications as economists and politicians grapple with how to direct this money supply created by banks for productive purposes. 

Over many years holders of the theory of credit creation by banks have been denigrated as 'cranks' and 'agitators' by scoffers who have never bothered to examine it for its scientific veracity. Werner has it that grand economists have brushed aside real truth whilst peddling their own inadequate explanations. Meanwhile banks have done their credit creation work beneath the radar of public gaze, thereby amassing fortunes and leading to the crashing of the financial system from time to time as their bubbles burst. Werner's researches have over many years led him to expect that there is a way to a 'fair, effective, accountable, stable, sustainable and democratic creation and allocation of money' and hopes that 'the awesome power to create money is returned directly to those to whom it belongs: ordinary people, not technocrats.'  Read the paper for his ideas on how. 
        
Werner has also just launched a film version of his 2003 book Princes of the Yen as a full length YouTube video Princes of the Yen: Central Banks and the Transformation of the Economy.  The theme of this 90 minute documentary is about the power of central banks, in particular the Bank of Japan from WW2 and the post war period to date. There is a terse commentary with historic news clips resulting in a documentary of high forensic quality. It illustrates how US-centred institutions influenced events in Japan and the Far East over a long period and 'how crises can be re-engineered to facilitate redistribution of economic ownership and facilitate legal, structural and political changes' with  a suggestion that the Eurozone crisis is similarly being used to centralise power. The film was issued in November and now has over 30,000 hits. The book was reviewed on this blog in 2009.   
Posted by Charles Bazlinton.
http://www.the-free-lunch.com/