PAY THE BANK TO HOLD YOUR CASH
was the headline in the February 27 issue of City A.M.
That may not sound like an attractive proposition, nor may the suggestion that we should adopt negative interest rates, but there is a positive side to it.
On page 17, the overpaid so-called experts disagreed: Ross Walker, an economist with the Royal Bank of Scotland voted yes; Philip Booth of the Institute of Economic Affairs
voted no. We've been here before
, but imagine you were diagnosed with a serious illness and half the doctors recommended antibiotics while the other half said you needed no treatment at all. What would that do for your opinion of the medical profession?
Today, it was reported that the banks were lending less
, in spite of all the promises by Vince Cable
and others of funding for lending and yet more Quantitative Easing. So should we have negative interest rates? No, we should have no interest rates at all.
The propaganda that is still peddled by mainstream economists to this day in the face of overwhelming evidence to the contrary is that people deposit money in the bank, which then lends it. The bank pays depositors X%, lends at X+Y% and makes its profit by the difference - ie Y% plus fees and so on. The truth is very different.
What happens is the money stays in the bank, the bank then creates credit out of thin air, lends it at interest to a businessman, company or whatever, and when this new money is deposited in another bank, it increases the money supply. When the borrower repays the loan, this new money is cancelled out of existence, but any interest remains as new money and new debt. This can be proven mathematically, and was by the great Major Douglas
before any of you were born, but if you can't understand his equation (below), just remember this simple saying
: "Every bank loan creates a deposit; every repayment of a loan destroys a deposit".
It is this which was responsible for the so-called credit crunch, banks were creating credit and selling it at interest with gay abandon. If you were to do that - by printing banknotes - you'd end up in gaol, yet there is essentially no difference between the two.
So-called investment banking is no such thing, it is gambling pure and simple. Our politicians have finally acknowledged this because now they talk openly about separating retail banks from the casino operations
of investment banks.
Most people deposit their money in the bank not to earn interest but for convenience and safety. In short, the bank acts as a book-keeper and a strongroom. Its book-keeping facility entails transferring money in and out of your account; its strongroom facility is there because most of us don't like the idea of sleeping with our savings under the mattress.
As this money is clearly not used for lending and the bank is performing a service, then just as clearly it should be remunerated. In other words, you should pay the bank both to look after your money and to do the book-keeping for you. But what of investment banking?
This should be abolished as it exists; no bank should either pay interest to lenders or charge interest to borrowers. So what happens you ask if a business wants to borrow a substantial sum of money, say £1 million or £10 million, is the bank not entitled to a return on its capital?
We have already established that when a bank lends money it actually does no such thing; it creates credit.
Imagine instead a local business came to you as a wealthy person and asked you for a loan. There are three things you could do. Firstly, you could refuse. Secondly, you could lend it money. Unlike the bank, this would be a loan of real money. You would take it out of your pocket, your bank account or wherever you kept it, and give it to the business. Which might lose the lot. Because of this very real risk, you would be entitled to a higher rate of interest than the bank, perhaps a much higher rate.
There is a third alternative; you could give the business the money in return for a stake in its enterprise. This is the Islamic concept known as musharakah
- ie profit sharing - and it is a concept that is not exactly unknown in the non-Islamic world, because when you buy shares in a company, you become a shareholder. This means you share in both the profits and the losses. Normally this will not mean any further liability than your shareholding, but if the company goes belly up, you can use the lot. Even a company the size of HMV
If banks were to become shareholders - perhaps temporary shareholders - in companies, and if usury were to be banned, these perfidious institutions would be much more careful with their loans. Could this come about? One economist thinks we should go much further. Unlike the rest of this motley crew, John Tomlinson knows what he is talking about, and in his book Honest Money
, he advocates throwing out the whole system.
It is not enough though to stop banks creating credit, because the world economy needs new money constantly. Once we break what Major Douglas called the monopoly of credit, we can solve this problem. Purchasing power belongs to producers
, not to book-keepers; the government can create new credit and spend it into the economy debt-free, including for public works. If done responsibly, this need not lead to inflation. Who should receive this new money? Instead of giving it to the banks, the Internet companies - who generate enormous wealth - should receive a substantial share
which they can distribute to companies further down the food chain.
What about savers? They would be free to simply keep their money in the bank or invest on the same basis as the banks, perhaps through a government scheme. Even if they received a substantially smaller return on their savings, this would be more than offset by the positive benefits to the economy. There would be no more boom and bust, and the burden of taxation would be greatly reduced.
If we don't have a fully blown Islamic system of finance, we need something akin to it, because even without so-called austerity, the banks are syphoning off the wealth of nations. And this is something that can't go on for much longer without impoverishing us all.