Banks have always been a problem. This is because of the business models that they use and the never ending difficulty of liquidity – that is, how easily can assets be converted in to cash. In more modern times that difficulty became less difficult when currency notes no longer had to be backed by gold. The original bankers trick was to persuade people to deposit their heavy precious metal coins and bullion with them and in return to accept promissory notes that were light and more convenient for transactions. When that link between paper money – which is no more than a token – and the actual amount of gold held at the bank was broken, the bankers had ample scope to run amok. Now, with the ability to create electronic credit, which is really debt, they have the ability and scope to do serious damage. To paraphrase; ‘to err is human, if you want to cause chaos use a computer’.
Banks rely on the trust and confidence of their customers to carry on with their business of savings and loans. Once that evaporates and customers believe that the bank cannot repay their savings, this results in a run on the bank. This remained as true in 2007 when Northern Rock collapsed as it did in1931 when over 2,000 small US banks closed due to their failure to return depositors money. Bank runs in the US go back as far as the creation of banking.
In 1939 John Ford directed the classic western film, Stagecoach, set in Arizona ten years after the American Civil War. The film throws a number of people together as they travel from Tonto to Lordsburgh and face a common foe, the Apache. The main plot features saloon gal Dallas and the Ringo Kid, on his way for a shoot out with the Plummer boys. There are sub plots, one in particular being Ford’s commentary on bankers and the years since the 1929 Wall Street Crash.
The Overland Stage Line’s coach arrives in Tonto and delivers a Wells Fargo box, containing the bank roll for the mining company, to the Miner’s and Cattleman’s Bank. Ford makes a point of lingering on the door to the Bank, which proclaims Capital of $50,000 and Assets of $250,000. Obviously there is a potential liquidity problem and can the Bank’s assets really be valued at five times the capital?
Halesworth H. Gatewood, the banker, receives $50,000 in the Wells Fargo box saying ever since he opened the bank he’s been telling these people to deposit the payroll six months in advance and “what’s good for the banks is good for the country”. Soon after, he puts the payroll in to his valise and boards the stagecoach to Lordsburgh. It is clearly a case of embezzlement. On board he complains about paying taxes and having bank examiners coming to inspect his books – “as if we bankers don’t know how to run our banks”. He then gives the rest of the passengers the benefit of his opinion. “The Country needs a businessman for President”. His slogan would be, “America for Americans; Government must not interfere with business; Reduce tax, our national debt is something shocking, $1 billion a year”.
On arrival in Lordsburgh, Gatewood is arrested and sent back to Tonto. The Ringo Kid survives the shootout and with Dallas on a buckboard heads off towards a sunrise and a future together on his ranch; ‘Safe from the blessings of civilisation’.
One hundred and fifty years later the world has shrunk and nowhere is safe from the blessings of bankers. The bank examiners have failed to regulate the banks who have grown and now hold governments to ransom. They have pleaded for and got ever lighter regulation while getting governments to act as their guarantors. They have gone global and become uncontrollable. Can anything be done to rein them in? Yes we can, but we need to look back at how this all came about.
You should all know this fictional story based on reality. The survivors of a shipwreck land on a deserted island and with no prospect of rescue set about making a life for themselves. They all have skills and talents which they use for the common good by bartering and sharing. With the added bounty of abundant fish in the sea, fruit and nuts to gather and wild animals and birds to hunt, all in a benign climate with fresh water, it feels like paradise. They not only survive, they create surpluses of produce and manufacture things that they need to make life easier. They prosper and are so isolated that they have no enemies to defend themselves against. All are equal and they give thanks to the creator and provider of this munificence. Then paradise is lost with the arrival of another survivor from a plane crash. The lone flyer announces that he is a banker and in the wreckage of his plane is a chest full of gold. Not being a practical person he resorts to his trade.
He buries the chest and makes paper notes to the value of the buried gold which he offers to lend on repayment of interest and at a fee. At first no one is tempted, but he explains that with development and investment they, or certain of them, can become rich and employ others to work for them while they become leaders. The bartering and sharing stops, to be replaced by buying and selling. Greed and envy takes hold. When bad weather causes crop failure and gathering diminishes, with over fishing and hunting, it leads to shortages and things look grim. The banker comes to the rescue with more loans but at a higher rate of interest. They are no longer equal. With failure to pay back loans, the banker seizes assets of produce and manufacture. The banker ends up owning everything and almost everyone ends up in bondage and slavery. Things look even grimmer.
Then a rescue ship appears over the horizon. They are all evacuated together with their possessions. The chest is dug up and the banker is forced to unlock it. To everyone’s amazement it is empty. The gold was never there. It was a confidence trick. The islanders angrily reflect. How could they have been so stupid; why hadn’t they looked in the chest before it was buried; why didn’t they question where all the extra bank notes were coming from? The banker is left alone on the island with his empty chest. They sail away to be reunited with family and friends, resolving that once home they will never let this happen again. But of course, human nature being what it is, nobody takes any notice of them. Truth is stranger than fiction.
Banking is about four hundred years old. The Bank of England was established in 1694 and is the second oldest central bank in the world after the Sveriges Riksbank, the Swedish National Bank, which is also the third oldest bank in the world still in business. It was preceded by Stockholms Banco founded in 1656, also known as the Bank of Palmstruch after its founder. This private bank collapsed after issuing too many notes. Johan Palmstruch was blamed for the bank’s losses and condemned to death, but later reprieved. In 1668 the privileges of Palmstruch to conduct bank business was transferred to Riksens Standers Bank under the control of Parliament. In 1866 the name of the bank was changed to Sveriges Riksbank.
Because of earlier experience the Riksens was not permitted to issue bank notes, but in 1701 it was granted the right to issue credit notes. During the 18th century counterfeit notes started to be circulated, resulting in the bank producing its own paper for the notes manufactured from its own paper mill. These notes were in effect a claim on the bank, without payment of interest, from which the bank profiteered. However, security was required in the form of a deposit at the bank to cover the value of all issued notes. Despite the founding of some commercial note issuing banks the Riksbank became the dominant issuer of notes and credit provider to the general public while also managing national trade transactions. In 1897 the Riksbank was made the central bank with exclusive rights to issue bank notes because of popular opinion that private banks should not issue notes, and any profit resulting should belong to the general public. With that exclusivity came the responsibility to defend the value of the currency and conduct monetary policy. In 1993 the Riksbank introduced a monetary policy of floating exchange rates and an inflation target.
Up until 1931 this Swedish currency was backed by gold and the paper notes could be exchanged for gold coins. In 1931 a temporary law, renewable annually, freed the bank from this obligation. This was made permanent in 1975 when the bank split from government and was freed from the obligation to exchange notes for gold. Following the millennium the Riksbank closed all its branches and outsourced the handling of coins and notes to a private company. In 2009 the Riksbank became the first central bank to set a negative interest rate.
The Swedes have been trend setters and much copied, for better or mostly worse. The Bank of England came in to existence for very different reasons and was founded on the basis of a debt. It has become the model for most modern central banks and debt based monetary systems. It started with a confidence trick that has resulted in a continuous and upward growth in national debt. England suffered crushing defeats by France in naval battles which reached a high point off Beachy Head in 1690. Britannia did not rule the waves, even in its back yard. This proved to be the catalyst that set England on a course to being a global power resulting from its control and mastery of the high seas and oceans.
William III ordained the necessity to build a powerful navy, but the funds were not available and his government had an appalling credit rating. The architect for a strategy to make this happen was William Patterson who in 1691 proposed that lenders should give the government gold bullion in return for government bonds which could be lent against. London financiers were not willing to lend the £1,200,000 that the government needed, even at the generous interest rate of 8%. This did not take place, but three years later the Earl of Halifax (Charles Montagu) acted on this and devised the establishment by Royal Charter of the Bank of England with long term banking privileges. To encourage subscription to the loan the subscribers were to be incorporated as the Governor and Company of the Bank of England, given exclusive possession of the government’s balances and allowed to be the sole issuer of bank notes. This attracted international financiers from Amsterdam. The £1.2 million was raised in twelve days with half being used to rebuild the Royal Navy. The cost to be paid was high due to the poor state of public finances. In addition to the 8% interest there was an annual service charge of £4,000 to manage the loan.
The first Governor was Sir John Houblon who oversaw the immediate doubling of the loan. It has been suggested that all these persons who created what was to become the National Debt were Free Masons. Put simply, William III’s government received £1.2m in gold which was never repaid (due to roll over of debt) and paid the subscribers, via the B of E, 8% interest each year together with the service charge to the B of E of £4,000 per annum. Also, the B of E was allowed to create £1.2m in paper notes to lend to the public at 8% interest. So they lent it but kept it and received twice the interest. Derivatives and creative accounting are nothing new. The arrangement led to the National Debt which was managed by the B of E who also became the banker’s bank charged with keeping enough gold reserves to pay its notes on demand. That is until 1797 when gold reserves diminished due to the cost of war. The government stopped the B of E from paying out in gold until 1821, which was a long recovery. The UK remained on the gold standard until 1931 when the gold and foreign exchange reserves were transferred to the Treasury. From 1920 to 1944 the B of E moved from commercial banking to become a central bank. It was nationalised in 1946 to become the public’s bank. In reality it is owned by the Treasury. In 1998 it was granted operational independence to set interest rates in order to keep inflation under control. It also has responsibility for monetary stability and financial stability. These three functions are not always mutually compatible. At times of stress something has to give.
The B of E is one of the largest custodians of gold reserves, holding 310 tonnes valued at £156,000,000,000. Its total assets amount to £229,599,000,000 with £7,334,000,000 in gold. What are those other assets and are they a true valuation? Does this total figure correspond to the amount of paper notes issued? If we knew the answers we might not have confidence in the financial system.
There is a flaw in the system as demonstrated by this example. Between 1980 and 1985 the money supply doubled. On 27th November 1985 Lord Beswick asked the government a question in the House of Lords. How did that happen? Lord Gowrie replied, In the ordinary course of banking business. Lord Beswick responded, If anyone else had done it, it would be called counterfeiting. The money supply doubled because of people borrowing from the banks. The basic activity of banks is savings and loans. If there is £12 billion of deposits you would expect there to be less than £12 billion in loans. When you find out that there is £120 billion in loans it makes you think. Figure out how credit card companies seem to have an unlimited amount of money to lend.
Under the new world order the bankers get richer while the rest of us get poorer. Paying off loans at high interest rates is a modern form of slavery – working for the lender. It has been suggested that it is all part of a Masonic plot to use central banking to create world money supply through loans. Does anyone know if a group of Free Masons have an agenda, or is it another secret organisation like the Bilderberg Group? The world’s bankers really did think that they were masters of the universe. National governments are powerless and democracy counts for nothing. Globalisation is a tool that is a threat to social justice and sustainable economics. We really need to get our heads around this based on objective fact.
What is the truth? As a political party that has an aim to be the representatives of the people we can legitimately ask these questions. Indeed, that should be the main role of elected politicians. Keep on asking the difficult questions and never stop scrutinising.