Our World Balance on a Sea of Debt

Our World Balances on a Sea of Debt

The banks that control the world’s supply of money are no better than counterfeiters – and their system of juggling debt has left the global economy teetering on the brink of ruin. Convicted fraudster Darius Guppy offers a provocative personal view.

By Darius Guppy
March 06, 2010 "The Telegraph" –

In 1994, there resided in the cell next to mine a certain “Tommy”. He had been imprisoned for counterfeiting Dutch Guilders to such a high standard that he had fooled the banks themselves.

As was customary among prisoners who became friends, Tommy allowed me to read his legal papers and I became fascinated by the judge’s sentencing speech, the gist of which was that his activities had been parasitical. By creating money out of thin air he had reduced the purchasing power of more deserving members of society. What would happen if everyone behaved like him?

I thought of arguments used, in a different context, regarding inflation. Like counterfeiting, it dilutes the value of the community’s wealth and constitutes a social evil. Creating too much money – “real” or “fake” – can wreck an economy. Such was the Nazis’ reasoning when they planned to ruin Britain’s economy by flooding the country with near-perfect counterfeit bills.

A lot of nonsense has been written about the world’s current economic woes – about how the crash is the fault solely of the banks and, by implication, governments are blameless; and how it could all have been avoided, and can be put right, by greater financial regulation.

It is a classic example of what the philosopher Alasdair MacIntyre terms “the fallacy of managerial expertise”: an attempt by “experts” to blind us with science to justify their overpaid existences and mask their confusion. After all, not one of them was able to predict the current debacle.

These “experts” will tell you that the present difficulties are simply the result of abuses and excesses in a system that is basically sound. All that is required is for some faults to be corrected. Do not believe them. The reality is that the problem is systemic and a little tinkering here or there will achieve nothing in the long term.

What is needed is a root-and-branch re?evaluation of that most curious of cultural inventions, money: how it is created, how it circulates, and how it can best be used to serve the interests of the community.

To begin, the experts must explain in the simplest terms how money actually works. Were one to ask the man on the street – or, indeed, most politicians and bankers – who creates the money that rules our lives they would reply “the State”. They would be wrong. It is true that governments create legal tender – the physical notes and coins that circulate in an economy – but that represents, at its highest, only 3 per cent of the total money in circulation in the global economy. It is the commercial banks, largely unaccountable and privately owned, that create the world’s money.

Indeed, even if Tommy were responsible for printing every note in circulation throughout the world his power to dilute the rest of our wealth would amount to only a tiny fraction of that of the real manufacturers of money. His activities and the activities of the bankers are, in essence, identical: the creation of money out of nothing.

Without knowing it, therefore, Tommy’s judge punished him for usurping not so much the role of the State as the role of the banks. The same mistake – the mis-identification of where money truly originates – has been made by virtually all of our politicians, economists and financial commentators.

Consider the contradiction at the heart of neo-liberal, monetarist economics that has constituted the Western orthodoxy for the past few decades: to emphasise on the one hand that the money supply should be brought under control while simultaneously allowing banking – where the money is actually manufactured – to run riot.

To grasp how the global fraud works we need to step back in time and imagine ourselves next to the original goldsmith?banker.

In his vault, 10 of his customers each deposits a bar of gold weighing 1 kilogram – for safekeeping and in the hope of a return. Our banker lends the 10 gold bars to other customers, who embark on profitable ventures that generate a surplus. The vault now contains 11 gold bars, out of which our banker can pay his depositors and himself a reasonable return.

Our banker soon questions the wisdom of keeping all the gold bars in his vault. He creates a token that will represent a given quantity of the gold either in his own vault or held to his account at some giant, more secure vault. Such a token can then be exchanged within the economy. Historians credit one of the first examples of such an instrument – the cheque – to the Knights Templar, allowing a pilgrim to cash a cheque drawn on a European preceptory at a Templar branch in the Holy Land.

So far, so good – as long as, for the face value of each of the pieces of paper in circulation, there exists a corresponding amount of gold sitting in a vault somewhere in the real world.

However, it is at this point that something wondrous and diabolical occurs. For experience has taught our banker that the bearers of the pieces of paper that they have created rarely attempt en masse to claim the gold their paper represents.

Our banker reasons: “So long as the pieces of paper that my friends and I have put into circulation are not encashed simultaneously then it is academic how many we create.”

The crucial part of the scheme is to create a culture of confidence. The bearers of our pieces of paper must feel secure about our ability to convert their paper back into gold, or real wealth.

The beauty of the scheme is that instead of earning interest on a single piece of paper our banker can earn interest on 10 such pieces of paper. Moreover, while charging interest on these 10 pieces of paper, he has only to pay out a reduced rate of interest on the single gold bar that has been deposited with him.

And this is exactly what happens.

Currently, the average fractional reserve requirements for banks amount to under 10 per cent, which means that for every dollar the banks have on deposit they can lend out at least 10 such dollars – virtual dollars summoned from nowhere – on which they charge interest.

Yet this fact – the key to understanding how the international financial system operates and why the world is in such a mess – is discussed virtually nowhere in mainstream circles.

Governments do not control the single most important mechanism when it comes to their economies: the production and distribution of money. That role has been diverted to the banks, which manufacture money out of nothing and charge interest on that conjured-up money. Beyond an interest rate cut or a token change in VAT rates our politicians have no real power to direct their country’s economy.

The picture has become a great deal more complicated. Soon pieces of paper are no longer required and instead entries on a bank’s ledger will suffice. Eventually, a further layer of virtuality is added when computers emerge and with them credits in cyberspace. Likewise all sorts of financial instruments and “products” are devised by the experts – collateralised mortgage obligations, put and call options, floating rate notes, preference shares, convertible bonds, semi-convertible bonds and endless other “derivatives” – but in essence they are mere variations of the same basic three?card trick.

Moreover, the illusion becomes self-reinforcing. Those involved in the process, sitting behind their computer screens, no longer control the beast they have created.

Now, it may be argued that while it is true that money is manufactured in the manner I have described – in other words by creating loans to the banks’ clients – surely just as much money is destroyed every time a loan is repaid? This is true to an extent. However, the point to be grasped is that while money is indeed created and destroyed in vast amounts every second of the day, the interest on that money remains un-destroyed and accumulates within the system – and at a compounded rate, moreover.

The process is far more inflationary and parasitical than the activities of all the Tommys in the world put together. For while that money, which by now has mutated into a vast monster of mutual indebtedness, grows exponentially, the wealth it is supposed to represent cannot grow at the same pace for very long. While there is no limit to the number of zeros we can create on a computer, there is a limit to the amount of oil in the ground, the wheat in the fields and the livestock in our farms.

Capitalism, banking and growth become inseparable, but logic dictates that the virtual economy must eventually peel away from the real one and sooner or later the day of reckoning arrives – when the gulf separating these two economies is too large to be sustained – for no power on earth can match the power of compound interest in the ether.

Consider the tale of the Chinese emperor and his chess opponent. The emperor asks what reward would satisfy him if he wins; the opponent replies that a single grain of wheat, doubled for each of the 64 squares on the chess board, would suffice. The emperor, imagining that he has a good deal, loses, only to learn that he now owes his adversary the equivalent of 2,000 times the current annual worldwide production of wheat.

Such are the miracles of compound growth; and the reason why financiers have been able to award themselves astronomical sums. For their virtual printing presses are calibrated to an exponential production while no such calibration applies to Mother Earth.

Frederick Soddy, the 1921 winner of a Nobel Prize for chemistry (not economics), was among the first to articulate the mechanism by which money is created by the banks and how it mutates into debt. His arguments have been developed by thinkers such as Herman Daly and Richard Douthwaite.

The reasoning can be extended to cover the financial sector as a whole. A company makes a certain profit; a multiple of many times can be applied to that figure to arrive at a “value” for the company – based on the assumption of future growth. That value can then be leveraged yet further for it to raise debt against its share price and so on. Such super-ovulation can mean that a single company with nothing more than an idea to be applied to the internet can create yet more tokens – share certificates – worth several times the entire annual production of diamonds for the continent of Africa, a process known, retrospectively, as the dotcom bubble.

It constitutes a redistribution mechanism from the poor to the rich – which is precisely why the banks and Western governments are so desperate to ensure its survival.

Money breeds more money. Indeed, the banks never really want their loans to be repaid. So long as the interest is funded it is to their benefit for the capital to remain outstanding on their books as “assets” and for the debts to be rolled over. Every time the IMF or World Bank extends a line of credit to some impoverished nation, are they being “charitable” or simply perpetuating the enslavement?

But the system relies entirely, as do all Ponzi schemes, on the assumption of continued growth, hence its inherent instability. Once that growth is threatened the edifice collapses. Householders in Britain will appreciate such a phenomenon only too well: put up 10 per cent for a property and borrow the rest from the bank. That property’s value need rise by only 10 per cent and you have doubled your equity; if it falls by only 10 per cent you are wiped out.

This explains why a contraction of a mere 2 or 3 per cent in the global economy leads not to a correspondingly minute fall on international stock markets, but to financial Armageddon.

Likewise with the banks – lend 10 times more money than you possess and when the economy grows, or at least pretends to grow, it’s Porsches galore, but when the lack of growth is exposed it requires only 11 per cent of the loans on your books (in value terms) to be bad and you are bust. The truth is not that these institutions have suddenly become insolvent but that they were never really solvent in the first place. By rolling over their debts they have been able to keep them on their books as “assets” rather than losses and forestall the evil hour.

There is a name for this – “usury” – and our predecessors from the ancient and medieval worlds appear to have appreciated much better than us its ultimate destination: ruin.

It is a simple and devastatingly effective swindle, but largely invisible because it has become so deeply embedded in our culture. The consequences of that swindle – the desperate need for economic growth; the environmental and cultural despoliation it engenders – require some radical thinking one encounters nowhere in any of today’s political parties.