LETTERS TO THE EDITOR: 30/01/18 Money Creation Through Fractional Reserve Banking.
Each time a bank mortgage is granted the amount is entered in the Bank’s credit column instead of the debit column. In most cases that means the bank has lent money it did not have and has created a sum on which the mortgagee will pay interest for many years. It is known as Fractional Reserve Banking.
You may remember the days of the Building Societies and before them, the Friendly Societies where the money granted as loans was done purely on the basis of deposits received. It was a self-funding and regulating system that existed for years problem free. But in order to allow public expenditure to run riot, the system of allowing the same pound to be lent several times over was invented and to which we now reap the whirlwind.
Probably the most obvious symptom of this practice is seen in the ever-escalating price of home ownership that could never have reached these heights without this fiscal arrangement. Unlimited credit has fuelled speculation in the housing market beyond all imagination and has created a bubble that may one day burst with dire effects.
The housing market has become the modern day gold standard and has created a massive level of personal debt upon which many would-be property owners have to spend an ever-increasing amount of their monthly income just to service the debt. The knock-on effect is reflected in the rental market to a similar level, although with housing benefit paid to tenants, landlords are able in many cases to benefit from a useful state subsidy.
Perhaps it’s now time to consider the role of the commercial banks and establish once and for all the primary responsibility for creating new money in the overall context of the money supply, particularly if interest rates begin to rise in the coming months to the detriment of both Government and individuals.
Of course, it’s necessary to have sufficient money ( cash ) in circulation for all trade to be transacted be it at the shops or elsewhere. But the money the banks create is solely on paper on a spreadsheet in a computer system and is passed around and injected into the monetary system unnoticed. It is the single greatest act of inflation as it continues to reduce the value of our savings and pensions whilst we all wonder why our spending power gets less with each passing year.
And now we learn that the Labour Party is proposing to increase wages if they win the next election. I wonder how they think they can do that for all those employed in the private sector. So where will the extra money come from let alone the impact it will have on the overall economy? I suppose their answer is to increase the phoney money that has been created by the Bank of England through Quantitative Easing or perhaps they have developed a magic tree upon which the money grows or do they intend to borrow it for future generations to repay?
It’s wealth we need to create and not just money. It is being productive rather than being speculative that we have to re-learn. Banks are nothing more than giant factory ships scooping up money whilst gambling and behaving more like spivs rather than pillars of society; their role is now so distorted and dangerous that we should all be fearful.
We have been promised a new broom but to no avail. The intention was to separate the two functions of banking into daily and casino activity to ensure 2008 could never happen again. And so we wait and wait and nothing of any consequence happens.
Perhaps it takes another crisis for things to change and we may see it happening shortly in the Eurozone particularly if one or two smaller member states default again on their massive loans. Let’s not forget that the UK has given guarantees to the tune of around £80 billion to support future bail-outs if we are still a member when it happens
We are so hooked on debt that it seems almost impossible to see where it will all end.
If a large part of our debt is foreign owned then the lender, as well as the borrower, are in trouble if one side defaults. If for example, we borrow money from China to buy their goods will it be us or they that suffer if the loan cannot be repaid?
We have through necessity to return to more balanced times and that is going to mean a painful reduction in spending overall but firstly in the public sector or taxation must rise.
The government has to lead the way although judging by both Conservative and Labour party thinking they both seem unable to acknowledge the causes or scale of the problem let alone have the answers.