Dr. Shann Turnbull

Modern banking has become one of the most unethical, exploitative and irresponsible features of capitalism. The government is responsible. No bank can exist without a government license.

Banks that are too big to fail are too big to be responsibly managed, governed or regulated. The government and their regulators have been asleep at the wheel in protecting the interest of citizens.

The unethical duplicity of banking was made legal by the formation of the Bank of England in the 17th century. The King gave a charter to investors to form the Bank in return for the King being able to borrow the silver procured by the bank. The bank procured the silver by issuing its shares to investors.

The bank then printed notes that could be used as hand-to-hand money that promised the owner of the note that the paper could be converted into one-pound weight of sterling silver on demand. This explains how the term pounds sterling arose.

The silver obtained from the investors was lent to the King at interest. To earn additional interest and profits the Bank also made loans to other parties with the notes it had printed. This was a fraud. The bank no longer held silver to redeem the notes it issued. But it was a practice also carried out by competing banks.

The King protected the duplicity of the Bank of England by giving it monopoly rights to issue notes that could be used as money within 50 miles of London. When the King wanted to borrow even more silver the monopoly was extended to all of England – but not Scotland. However, the Bank achieved the objective of the King by providing him silver to pay his army without taxing his rich subjects.

Hiding the fraud

Today the fraud is hidden because paper money no longer represents anything real. Money is now created out of thin air and official money remains a monopoly. So today we have official monopoly funny money.

When you go for a meal, worth say $100 and “pay” for it with a credit card from your bank, it checks to see that you are within your credit limit; if you are, a deposit is registered for $100 in the bank account of the restauranteur. This has created a deposit as the result of a loan your bank has made to you. $100 out of thin air! By contrast, when you “pay” for your meal with a debit card from your Credit Union, the Credit Union checks first to ensure that you have the funds in your account to pay for the bill. If the answer is yes, $100 is debited from your account and $100 is registered in the account of the restauranteur: money out, money in.

So banks today manufacture the monopoly money they lend out by a simple computer transaction.. Banks create deposits by making loans to finance them! Bank loans become assets and the deposits become liabilities so the two are kept in balance to balance the books of the banks. However, the process expands the size of the banks, their profits and the money supply. Building societies and the like only lend the money they have deposited with them.

It is indefensible for the government to license banks to add an interest cost to the money that banks create out of thin air! This is exploitation. It is exploitation not just of citizens but also of the government.

The only way to explain why governments borrow money and pay interest when they could create the money themselves without incurring interest is that they have been brained washed by bankers since the 17th century! It has become a habit of thinking and practice. A practice that is incomprehensible to those not educated in banking and economics. (Click here for a table of mysterious elements in the financial system.)

This state of affairs explains why a sweeping public inquiry is required into the financial system. The financial sector is growing like a cancer. The need for money should be like the need for oil in a car: vital for efficient and sustainable operations but only represent around say 3% of the systems they lubricate. Instead, the size of financial services has doubled since the last inquiry into the system and its profits have more than doubled.

Government exploited by banksters

Governments raise taxes to pay interest to bankers who have been licensed by the government to manufacture public credit for private profits. This practice is illogical and irresponsible. It should be the other way around with the government lending money to the banks.

The government only manufactures money that is interest free in the form of hand-to-hand paper money. Bankers probably do not mind the government manufacturing interest free hand-to-hand money since the cost of producing plastic notes to the government is much greater than the cost to the banks of a simple click of the mouse.

If the government provided the banks with money it would remove the risk of them failing from not being able to attract foreign deposits as occurred during the Global Financial Crisis (GFC). As Australian banks obtain around 40% of their funds from overseas with 25% borrowed on a short-term basis the government was forced to guarantee the refinancing of bank borrowing to avoid the risk of failure.

Irresponsible banksters

The GFC risk was one of liquidity but today the banks have an additional and even more dangerous risk of incurring losses and consequently bankruptcy from foreign exchange risks. Let us assume that the banks re-finance all their foreign borrowings over the next three years or so with the Australian dollar on parity with the US dollar. If the Australian dollar then were to decline back by only 20% to say $US0.80 cents per Australian dollar (not an unlikely scenario), the banks would then need to pay an additional $US0.20 or 25% more to pay off their maturing debts. Because foreign borrowings of the banks are only 40% of their total funds the 25% loss in value would only represent 10% of total banks assets. However, as regulators allow shareholder funds to be less than 10%, it would wipe out their value to bankrupt the banks. This makes the need for an inquiry into the financial system urgent and for the banks to publish daily their foreign exchange exposure as a percent of their equity.

Ethics reforms

The next time a GFC puts Australian banks at risk the government should not guarantee their borrowings but create the money to purchase their assets to provide them with liquidity. By substituting Australian money for foreign money there is no change in the volume of money. The Australian financial system would then become insulated from foreign turmoil and risks. More importantly all Australians become richer by not needing to export income to foreigners as interest payments.

The priority assets for the government to purchase from the banks in the next crisis would be home and personal loans that affect the most voters. The government could then aggregate these assets by postcode or electorate and resell them on time payment to human scale ethical, citizen controlled financial institutions located in each region. The post office could then become agents for locally established terminating and permanent building societies, credit unions, charities or any other non-profit deposit taking organisations. The staff employed by the banks in each region could also transfer their employment from their bank to be re-employed by the local assets managers to re-establish community relationship banking. Exploitation of borrowers could be avoided and the unethical and irresponsible practice of public money being manufactured for private gain would be eliminated.
Until the next crisis occurs the government could use the post office to introduce more competitive banking services. The government could also increase competition in core banking services by funding ethical non-profit organizations governed by local citizens.

Incentives could also be provided for the existing banks to sponsor non-profit human scale banking services by post office districts and/or electorates. Bank shareholders would then exert pressure on their directors to spin off their lending and deposit taking activities to such organizations. In this way the current big banks would not need to be broken-up. Their other business activities would then operate on a more level financial service playing field in competition with all the other non-bank licensed financial institutions.

The article is based on an academic paper by Dr Turnbull on ‘How would the invisible hand handle electronic money?’ available from: http://ssrn.com/abstract=1399224. The chart from this paper listing the indefensible illogical mysteries of the financial system has been published by Ethical Markets that have a link to it from their page at http://www.ethicalmarkets.com/2009/04/19/mysteries-of-the-financial-system/. A related article published is ‘How will electronic money change the financial system’ is in volume 30 of the Journal of Financial Transformation published in New York in November 2010, available at: http://papers.ssrn.com/abstract_id=1602323.

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