Should private finance continue to create national money, a public good?Watch
A capital injection was urgently required but there were insufficient numbers willing to deposit specie in the bank (in fact there was a ‘run’ on the bank). The bank’s original and new investors had to deposit (not invest because the dividend was suspended) £200,000 in specie in order to invest £200,000 of debt that they held as creditors of the bank (which relieved the bank of a liability to pay out) then another £240,000 in specie (against £800,000 of government debt held by investors) to tide the BoE over. The BoE had to earn more money which meant increasing its ability to issue bills (lend). £200,000 of its own debt was turned into equity and £800,000 in government debt (more wood - at this time unredeemable - now formed 55% of the banks equity) was invested in the bank which allowed the BoE to issue an additional £1 million in bills against a loan to the government of £1 million (for which it paid 6% interest to the BoE). Payment of £1.28 million in government debt was deferred whilst it was invested the BoE, £200,000 of bank debt was similarly eliminated (the holders became investors in the bank by depositing a equivalent value of specie). The bank’s investors were the government’s major creditors holding tally sticks as proof of the debt they were encouraged to invest them in the bank for favour of a restored dividend if they had also deposited desperately needed specie. The BoE balance sheet now featured £1.28 million of government debt for which it was being paid £86,400 p.a. out of the total of £160,000 p.a. being paid for loans totalling £2.2 million the origin of our national debt and the start of the rentier economy that plagues us to this day. The people who ran the State (aristocrats and plutocrats) had now a perverse incentive to keep the government short of money because they could lend it theirs whilst opposing tax increases (which only they could afford to pay) that would eliminate government debt.
Sir Basil Blackett (another C20th Director of the BoE) pointed out, "When it is remembered that kings and governments have throughout the ages insisted with jealous care on their prerogative of issuing money and controlling currency within their jurisdiction it is somewhat strange to find ‘modern’ States accepting as axiomatic a limitation of their sovereignty in the sphere of money, so far-reaching in its effects on their own powers and on the daily lives of the citizens as is involved in their agreeing to conform in all circumstances to a standard of value over which they have no control."
The previous governor of the BoE Sir Mervyn King observed, "...it is hard to see why institutions whose failure cannot be contemplated should be in the private sector in the first place"- they remain solvent thanks to accountant’s alchemy and persist in their present form because national monetary policy is mobilised to support a nation’s wealthy not the wealth of the nation (astronomic private debt is accepted as a public liability). The case for a domestic financial power independent of international bankers to create national money has long been recognised by non-partisan bankers who have no friends in the political establishment (of whatever hue).
The Common Law recognised fully collateralised banking at the point of loan approval that is the bank transferring its fungible money borrowed or received from investors, bondholders, depositors, savers and earnings - fungible real bank money - that the majority of the world’s population erroneously believe usually happens when banks make a loan; C21st banking involves the creation of liabilities out of nothing but a promise then borrowing other peoples’ money to settle them. Bankers are involved in substantial intermediation between lenders in the money market and their borrowers’ creditors, not savers and borrowers; if they were it would restrict the securitisation and hypothecation practised by fractional reserve banks and induce a more circumspect level of lending because finite capitalisation (from investors and savers) would limit bankers ability to lend unless they borrow the public’s, corporates’ or the State’s money (if they couldn’t attract enough investors and savers) paying dividends to their investors and interest to the depositors (private or the State) - acting as an intermediary with finite funds (but extendable by a superior authority whose money they presently create out of nothing) instead of a speculator with minimal restrictions on credit issuance; the willingness of borrowers to allow banks to make money out of bank credit rather than bank money, and of capital lenders in the money market to meet the demand from borrower’s creditors in excess of banks total loan book repayments (which in C21st banking are already spoken for - they've been securitised against borrowing by the bank.).
A) No individual or financial institution or any affiliate of them trading inside or outside the national jurisdiction is allowed to create the nation’s money as credit uncollateralized by the individual or institution in order to ensure that the nation retains sovereignty over its stock of money. Individuals and institutions will source their funding from their industry or other private individuals or organisations or the State through the National Savings and Investment Bank (NSIB).
B) Domestic territorial and international financial institutions within the national jurisdiction are only allowed to lend out existing bank money (shareholders’, depositors’, bondholders’, borrowed and earned) while maintaining a minimum amount % reserve amount (fixed by the treasury) at the domestic central bank (NISB). Bank borrowing from the State could only be conducted through the NSIB (domestic) or the Bank of England (international), it would be on the basis of a running average of their reserve holdings held by themselves at the NSIB (domestic) or as determined by BoE MPC (international).
C) All institutions reserves at the NSIB would be deposited in the government consolidated account (the repository of all government income presently at the BoE) at the NSIB. The NSIB would be able to create interest bearing loans to institutions based on a fixed (but annually adjustable) % of the reserves they have held on deposit at the NSIB (the annualised average of reserves held at the NSIB will determine the banks entitlement) the interest from the loan being retained by the NSIB the principal being paid into the consolidated account. Institutions can draw down any amount of their reserves held at the NSIB that are greater than the minimum amount required to qualify for a licence to trade in national money.
D) The NSIB would become the conduit through which the national payment system operated. Everyone would have account which their bank could access and check its state before authorising a transaction (the NSIB would be a non- retail bank). All bank customers account details would remain at the customers’ bank (territorial or international) which would act as an agent for the customer by accessing a record of their balance at the NSIB and updating it as necessary.
E) The BoE would become the point of contact between domestic and international money system. It would licence international banks operations within the UK. To obtain a license they would have to maintain a fixed level of reserves at the BoE, deposited in a sovereign wealth fund which they could subsequently increase, the surplus funds being immediately redeemable and covered by an immediate loan to the BoE (chargeable to the sovereign wealth fund - SWF) from the NSIB. The surplus from the SWF would pay the BoE’s running costs and contribute to the consolidated account at the NSIB conversely any surpluses at the NSIB would be available to invest in the SWF.
Banks do not require savers except as an adjunct to earnings from the liabilities they create out of nothing, their business model is to borrow ‘short’ to lend ‘long’, that means they are vulnerable to the vagaries of interest rate fluctuations in the money/capital markets which they mitigate by holding reserves of cash or easily ‘liquidised’ securities and encouraging deposits from savers when the money/capital market is ‘tight‘. This system is known as fractional-reserve banking as the reserves they hold are only a fraction of their liabilities which is why the system is unstable.
Since its widespread adoption during the C18th it has delivered persistent boom/bust national and global economic development the miseries of which were disproportionately deposited on those least able to bear them, whether in boom or bust. The privilege enjoyed from this system were regularly abused by bankers and thousands over the past three centuries drove their institutions into bankruptcy in pursuit of the rewards obtainable from money created out of nothing. Over three centuries of banking history is evidence enough that the banks are presently incapable of regulating themselves and that the future of capitalism is not safe in their hands.
The ‘crash’ of 2009 resulted in bankers being bailed out with tax-payers money (after several bank bankruptcies threatened to destroy the entire fractional system through contagion; bank liabilities to each other) but since then nothing substantive has changed the politicians too supine to effect legislative change that would address the abuses of the fractional banking system that it has been prone to since its inception, by creating a 100% collateralised deposit banking system in which the creation of national money is the sole prerogative of an independent national bank.