Episode 5

A Bit of History; and a possible future



In this episode we look at some of the other ways that money has been created in the past.


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Transcript of the show


Welcome to Money Myths Episode 5 – A Bit of History; and a possible future

My name is Brian Leslie and I'm the editor of Sustainable Economics magazine.

Before we get started, I have a few things to mention.

This is part five of the series. If you haven't seen the Series Introduction and parts 1 to 4, I would suggest that you watch them first, in order, as we aim to build the series on the basis that viewers have seen these episodes.

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As in previous episodes, I am referring to the British Banking System for this series. However, the system in most countries is the same and has a similar history. I leave it up to you to substitute your own Central Bank, Government, Ruler, and so on.

So – now for a look at how the present system developed, against strong opposition, and at some successful breaks from it:

Since the start of the present ‘fractional reserve’ system, which is generally considered to be with the founding of the private Bank of England in 1694, there have been many examples of change back to more use of money spent into circulation, which clearly show the benefits.

Looking first at the conflict involved in the development of our own, British system:

Originally, the Bank’s charter gave it the privilege of note issue, which it lent out at 6% interest, soon reduced to 3%, and for most of its history, remaining at or below 5%.  From mid-1932 to mid-1939, and from late 1939 to late 1951, in fact it stood at 2%.  Inflation over most of this time was low, in contrast to the time after the mid-1970s, when the interest-rates soared.

At the time of the Bank’s founding, most money was in the form of coin – gold, silver and copper.

Over this period, the note-issue supplemented coins, but only slowly gained a greater share of the total money supply.

From the start, there was opposition to the Bank’s privileged position, despite the much-needed increase in the money supply its notes created, and a series of Acts of Parliament sought to control its effects.

The Bank’s notes were ‘gold-backed’.  That is, they could be exchanged on demand for gold coin.  From time to time, this led to problems when the bank’s reserves of coin were too small, and emergency legislation was needed to suspend this right of exchange for varying periods.

As other banks also issued their own notes, confidence in their value varied, and in 1844 the Bank Charter Act gave only the notes of the BoE the status of legal tender, and limited the amount it could issue, later adjusted from time to time, by further legislation. It took nearly 70 years before the other banks finally stopped issuing their own notes.

With the outbreak of the First World War, convertibility to gold was ended. An emergency issue of ‘Bradburys’ - £1 and 10/- (/- is Shilling) Treasury notes named after the then Treasury Secretary and spent into circulation by the Government – was issued to supplement the money supply.  Further issues followed later’ until 1928, when they ceased to be legal tender, to be replaced by Bank of England notes (which had till then only been issued in values of £5 and above).

From then on, the profit from the whole of the Bank’s note issue had to go to the Treasury, so from then on, the whole ‘seigniorage’ – the profit from creating legal tender money – went to the State, even before the Bank was finally nationalized in 1946.

By this time, though the growing use of cheques and bankers’ drafts, and so on, had added to the banks’ ability to create money, still about 46% of the total of money in circulation consisted of notes and coins, spent into circulation, and so, debt-free, by the government.  It has now dwindled to only about 3%!

Across the Atlantic, the early British American colonies were kept short of coin by the requirement for the imports they needed to be paid in it.  They had no banks, so the States’ administrations resorted to making their own paper money, in a variety of different ways, but all with great success, until the BoE persuaded the British Government to outlaw the practice.

Benjamin Franklin wrote: “The inability of the Colonists to get power to issue their own money permanently out of the hands of George III and the international bankers was the PRIME reason for the revolutionary war."

This led to great hardship in the Colonies, and led directly to the War of Independence.

The subsequent history of the United States clearly illustrates the struggle between banking interests and representatives of the people for the right to issue money, and the results of this.

“Whoever controls the volume of money in our country is absolute master of all industry and commerce...and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.” – James A. Garfield, president of the United States (1881) – two weeks before he was assassinated.

This history, and much more, is detailed in the American Monetary Institute’s book, The Lost Science of Money, and in a DVD, The Money Masters, available from www.themoneymasters.com

One particularly clear and well-known event is the issue by Abraham Lincoln of the ‘Greenback’ notes to fund the North’s war effort in the American Civil War, when the alternative would have been to borrow at high interest, from the banks.

This was a great success, much to the dismay of the bankers. The Southern States also issued their own paper currency, but greatly over-issued it, so causing huge inflation.

Another example:

In 1820 the Channel Island of Guernsey ended a long, severe state of poverty following the Napoleonic Wars, by issuing its own States Notes to the value of £4500, to fund the rebuilding of its market and other urgent projects, despite strong opposition from the banks.

This was quickly followed by further issues, soon increasing the total to £10,000, and by 1837, to over £55,000. This massively improved their circumstances, without creating any ‘national debt’, and this remains the case to this day.

Recent comment on the ‘credit crunch’ has noted the restrictions on banks and on interest-rates imposed after the 1929 financial collapse, and recommends re-imposition of these restrictions.

Commentators tend to see the immediate post-WW2 decades as a ‘golden era’, but advocates of monetary reform at that time were well aware of the damage continuing to be done to society even in those times by the money system.

A good example of this recent comment is in ‘The Green New Deal’ proposed by the New Economics Foundation, which can be viewed on its website, www.neweconomics.org.

The changes it advocates are mostly needed, but do not go to the root of the problem, which is the banks’ creation of money by loaning it into circulation at interest, however low.

‘The Green New Deal’ argues for instance for keeping interest rates low, elimination of tax havens and tax-dodging accountancy rules, a ‘revival of the Bretton Woods agreement’ and reconsideration of J M Keynes’ proposal for an International Clearing Union, and the introduction of an international ‘Tobin Tax’ on currency exchanges.

It also argues for massive spending on ‘Green’ projects – wind energy, solar water-heating and electricity generation, insulation of all houses, etc.

I should make it quite clear at this point that I do not regard the monetary reform I am advocating as a ‘panacea’ – a cure-all; but I do regard it as key to the success of all the other reforms being advocated, most of which, such as those in ‘The Green New Deal’, would still be needed and should be pursued.

As I have argued, banks’ creation of money by loaning it into circulation at interest draws wealth from the productive economy into the parasitic financial one.

This is by the nature of the system, but deregulation of it made matters much worse, expanding the opportunities for gambling as well as for massive, outright fraud.

We need an adequate supply of money spent into circulation, debt-free (and so, necessarily free of interest charges).

“There should exist among the citizens neither extreme poverty nor excessive wealth, for both are productive of great evil.” - Plato

Recent research confirms that, above a quite modest level of secure income, increasing wealth does not increase happiness and wellbeing; in fact, it can increase anxiety, stress and insecurity.

Research also confirms that the greater the extremes of wealth and poverty in a society, the greater the levels of conflict and anti-social behaviour.

This supports the arguments for the campaign for Basic Incomes, or Citizens’ Incomes. This proposal has been around for more than a century – and at one time was appropriately called ‘National Dividends’.  It recognizes the fact that we all need and should be entitled to a claim on the resources provided free by Nature, and that modern productive potential can supply all the goods needed with ever-less work; we should long ago have been enjoying a ‘leisure society’ – worldwide.

“If the American people ever allow private banks to control the issuance of their currencies, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered.” - Thomas Jefferson – third President of the United States (1801–1809) and principal author of the Declaration of Independence (1776).

If every citizen is given an unconditional income additional to any earnings, and sufficient for a modest standard of living, this would have widely beneficial effects on individuals and society.

If the reform I advocate is adopted, in the period of change from bank-debt-based money to state-created money the State will have adequate new money to spend, to fund generous Basic Incomes as well as a ‘Green New Deal’; but once the changeover is complete, it will again be dependent on tax-receipts and user fees for income.

However, with no interest to pay out on the National Debt, and with the savings on administration and spending on Social Security and Child Benefit which Basic Incomes would replace, the extra burden that the funding of Basic Incomes would impose should be easily covered by tax-receipts and user fees.

With a money supply circulating without the debt which accompanies its creation under the present system, people in general would be far better off, and able to pay tax. The ‘financial industry’ would be severely restricted in its ability to milk the productive industries.

This would tend to reduce the extremes of wealth; and it would be greatly assisted in this by the issue of Basic Incomes.

The nature of taxation, however, should change. This will be covered in the next episode.

Once all the bank-debt-based money had been replaced by money spent into circulation by the Government, few debts would by left. With Basic Incomes in place and an adequate supply of money circulating, few people would need to go into debt to survive, and repayment of borrowings should generally be easily afforded.

My lifelong view of ‘the economy’ has been based on the conviction that ‘what is physically possible and socially desirable must be financially possible’. Orthodox economics denies this.

With proper use of modern technology to produce the goods needed by society, and without the gross waste involved in the present competitive system, we could not only quickly reduce or eliminate use of fossil fuels, but, after a transition period, we could relieve most people of the need to earn more, to seek paid employment or to work long hours.

The present system occupies most people in work that, with these changes, would no longer be needed: persuasive advertising; telephone ‘cold-calling’; surveillance; most policing work; dealing with the mountains of paper waste caused by the system; churning out an endless stream of deliberately short-life goods instead of long-lasting, good quality and easily repaired goods; and so on.

We are fast exhausting the supply of various natural resources, causing growing levels of toxic pollution, and causing climate change by gross over-use of fossil fuels.

In a reformed system, we would need more work in such occupations as organic food growing, repair of goods and infrastructure, research,  parenting, education, politics, etc. – but with so much unnecessary and destructive ‘employment’ eliminated in a new, basically co-operative productive system, the total of work needed to supply all the real needs of society should be only a small fraction of what is now demanded.

Coming shortly: how taxation should change!





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