11 October 2008

Hoist by their own petard?

The confusion over where exactly money comes from seems so widely shared that I wonder whether it is a conspiracy of silence, a conspiracy of ignorance, or maybe just ignorance plain and simple. The smoke-and-mirrors and creative use of jargon is deliberately intended to conceal a simple fact: the banking system, as opposed to any individual bank, has been able to make as much money as it can persuade us to borrow.

A bemused reader of today's Guardian asked, 'Why do banks need to borrow from each other?' and was greeted with the usual confusing and misleading account. The response begins, 'Banks do not have vaults stuffed with money', agreed, but the following sentence about how they 'trade on fairly thin margins' is confusing and irrelevant. Deborah Hargreaves then drivels on about Libor and other irrelevant and technical sounding nonsense for a while. No doubt the reader feels none the wiser.

This confusion is not necessary because the way money is created is simple. Essentially, the banks operate as a kind of closed club, within which small amounts of money are inflated many times over until, as in recent years, the only limit on money creation is the willingness of borrowers to get into debt. Hence the growth of debt-concealing activities that are now unravelling.

This process is explained very clearly in the film Money as Debt, which is available on Youtube and on Google video. A laudably clear written account is given by Richard Douthwaite in chapter 2 of The Ecology of Money. So why the confusion? We can only assume that, if the simplicity of this scam were to become more widely known, in J. K. Galbraith's famous words, 'the mind would be repelled'.

It might also undermine any lingering support for the policy of throwing money at the banks. Since the money they loaned never existed, there is not enough money in the world to actually pay back all the debts of the financial institutions. Our money is being used to attempt to crank the debt-money system back into an upward rather than downward spiral; nothing more.

It is interesting to speculate to what extent bankers, financiers and finance ministers have begun to believe their own fantasy. If the reality of the money creation system were clear to them I can't help thinking they would be following a different sort of policy altogether.

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