About this booklet
To most of us our bank is a necessary evil rather than a financial partner – but until you read this booklet few will have appreciated just how a bad banking system can cripple society. Can we put this genie back in the bottle?
Part One examines how the concept of ‘affordability’ has stunted our social and economic structures; Part Two suggests not only an alternative but also the practical considerations of introducing a fresh monetary policy into a newly independent Nation.
We have permitted banks and bankers to dominate the democratic process - creating obscure financial markets where vast sums of money are traded between banks and fortunes are made by others - but always lost by us. And all too often the money business doesn’t work properly - inflation takes off again, debt gets out of hand, the bond market jumps and the IMF pounces - cut backs and unemployment are back and the financial frighteners are applied. Our Parliaments retire to fret over the latest financial crisis, forgetting we elected them to look after our interests – not those of the bank.
Every few months - when it gets bad enough, the government holds an Inquiry to resolve these issues – except that they never do. Have you noticed how these Inquiries are always stuffed with the same bankers and financial experts – the ones responsible for the mess in the first place?It transpires that like us, very few MPs understand the banking business, and so they leave it to their senior colleagues.Of them, only a handful is any wiser however, they are in touch with some very clever people who know about these matters.....They live in the dark shadows of Westminster called the banking lobby and they have immense powers and they look after their disciples well.That is why nothing ever changes - it is institutionalised corruption.But are we brave enough to face down this white collar bogey-man?
This booklet is available online together with a video of the background leading up to the 2008/9 banking crisis - http://www.scottishmonetaryreform.org.uk
There’s No Independence -
Without Financial Independence
The Scots Merk - silver - 1677
The Case for Banking Reform Playinga Key Role
in the Scottish National Party Manifesto for Independence
R.F. Morrison
Second Edition February 2112 £1.00
Goodvbye democracy you've had your day,
Now it's bankers' rule - O.K?
Published by
Ronald Morrison,
29, Colquhoun Street,
Helensburgh,
G84 8UX.
Tel 01436 672592
E mail: ronnimor@o2.co.uk
Contents
Foreword by R.J. Rankin 1
Preface What this booklet is about - 4
Part 1 Why we need to fix the banking system 9
Public debt – the tail wagging the dog
Who’s in charge – Government or The City?
Why use someone else’s bankers?
Part 2 What’s involved in fixing it 19
Where do bank loans come from and
why should I guaranree them?
Public investment or asset bubbles?
Why the currency must be independent
A practical example
The National Debt bogey-man
Transition Day - and how to keep the
wreckers out
The Gold Card - 28
Does gold have a place in the 21st Century?
Appendices 29
FOREWORD
by R.J. Rankin MA (Hons) Political Economy
Alexander Del Mar medallist, American Monetary Institute of Chicago
The author has been a thoughtful money reformer for two decades and an ardent supporter of Independence. Now that the SNP has won an overwhelming victory for the Scottish Parliament this May 2011, he sees it as imperative that the ground rules for monetary independence must take precedence over any of the other issues.
The reader should be aware that Ronald Morrison is not talking about the narrow sphere of Euros or Pounds, but sees an opportunity for Scotland to break with the killing power of the global financiers. Why do we never hear this even mentioned by elected Governments world-wide? It is as though the financial elite have placed an “Omerta” upon our politicians. Why else, having gambled away the Citizens’ credit, would our MPs have agreed to reimburse the banks out of the Citizens’ pocket and crash the economy in the process? The reason given at the time by our then Chancellor of the Exchequer was that not to do so would have brought the whole financial system to collapse.
Ronald Morrison’s accountancy background allows him to say that if the banks were insolvent then they should have been placed into administration, the depositors’ money and the payments system would have been isolated and retail banking would have continued with minimal interruption. The other creditors in the financial markets would have been left to pick over the remains – just as in the real commercial world.
The other main point is that almost all of what we take for granted as money is created by the private banks in the form of debt to those who borrow from them. The irony here is that these banks just create this ‘money’ (they don’t actually have 90% of it as a reserve deposit) on their computerised book-keeping system. This created debt becomes the de facto currency which we use every day, on
which private and public bodies are charged interest over and above. The interest alone on this accumulation of National Debt has risen to almost £50
billion which must be paid every year before any hospital, school, or other public necessities can be considered.
This is why the Government keeps borrowing at interest each year, creating a deficit which is then sloughed out into the ever swelling National Debt. The first argument that must be settled in Scotland is who should issue our national currency, and control the quantity of money in the economy. The answer must be a body of the State – not the government and most certainly not the private banking system. This will establish for Scotland a debt-free money supply and bring down taxes to a reasonable level while investing debt free in infrastructure and essential public services.
We are currently witnessing the so-called ‘PIIGS ’ in Europe being slaughtered, one by one. They may have Political Independence but they do not have Financial Independence.
I leave you in the capable hands of the author to explain Scotland’s position.
Preface
This booklet explains how Scotland could achieve
• Steady, full & gainful private sector employment
• Decent housing for all
• A standard of living comparable to any
• Balance its domestic and international budget
• Cap the National Debt
• 21st Century Public Services & Infrastructure
And, most importantly, it explains where the money is to come from – by rescuing free enterprise from financial capitalism.
Financial independence comes in two halves –
Fiscal Policy: the ability to raise taxes like income and corporation tax and VAT and also to impose revenue duties on alcohol and road fuels and mineral extraction like oil.
Monetary Policy: which controls the issue of the currency, the banking system, interest and foreign exchange rates, the balance of payments, the National Debt and Regulation of Financial Services.
Most people understand fiscal policy as deductions from earnings and additions to cost when purchasing goods and services. These taxes are levied primarily to cover the cost of public services provided by the State. These numbers are transparent and widely understood.
That is not so however with monetary policy which, for most people, is a world of smoke and mirrors. It might be likened to a game of Monopoly where the fiscal rules are for the players and the monetary ones are for the Bankers. The players compete with one another in an orderly fashion deciding how much they can afford to spend or invest and generally managing their money affairs responsibly. The bankers preside over the money system itself – where it comes from, how much will be available to the players and on what terms. The bank interfaces with the players at arm’s length, impersonally on the basis of rules set by the bank.
Now in Monopoly one of the players usually acts as banker and if s/he cheated and used his position of trust to take advantage of the other players they would soon notice because even if the banker were very clever he would always come out the winner and nobody would play the game. This is where Monopoly and real life part company.
Money nowadays is not bank notes as represented in Monopoly – only 3 pence in each pound is cash issued by the State – the money in our wallet. All the rest is born, lives and dies within the banking system. Its electronic life sparks off somewhere as a bank loan and is extinguished upon repayment. This is very convenient and no one will suggest it may not shortly become 100% electronic money – the problem is that this makes it even easier for the banks to cheat and even though the players know this perfectly well and the game is rapidly becoming unplayable, they are locked in and cannot just stop playing and walk away.
This booklet exists only because it is outside the mainstream media and behind the political frontlines, so it can afford to reveal that the banking system is thoroughly corrupted. It does not serve its customers properly, it is democratically unaccountable and it is destroying western societies as it destroys itself.
A sovereign State of Scotland could fix this through its monetary policy; it could provide an enlightened example to its neighbours who are presently in chaos.... or it could choose independence without financial independence - and jump from the frying pan into the fire.....
There are three fundamental elements to a sound monetary system – three legs which support a stable platform upon which any number of secondary public functions and private enterprises can be constructed – any or all of which may survive, prosper or collapse, but without threatening the stability of the platform. They are
1. The issue and integrity of the National currency – a Constitutional responsibility of the State.
2. The distribution of that currency and credit among the people and the management of their individual accounts and payments – the responsibility of the State chartered banking system.
3. Guarding the sovereignty of the currency against attack or corruption – the responsibility of the government.
A rational, stable and sustainable monetary system within a nation state is achievable, but not without first isolating these three functions. This dichotomy is often obscured by confusion between Monetary Policy - the legs of the platform and Fiscal Policy, one of the bricks above it. Thus matters of monetary stability remain stolidly in the dark ages. Monetary policy sets the National economic strategy; fiscal policy balances the tax books.
Monetary policy decides the rate of exchange which sets the price of exports and imports – whether the Nation stays independent by balancing its international payments or slides into debt; it decides the banking laws – whether banks exist to serve, or to exploit, the economy; it sets the base rates for borrowers and savers; it controls the amount of money in circulation and whether it enters circulation as debt or as public investment; it is the principle arbiter of inflation.
We understand the theory perfectly well, but virtually unique among mankind’s clever devices, money corrupts objective thinking. Pay some people enough and they will not worry about where it comes from; extend this aphorism to legitimise the process under the law of the land and you have institutionalised a corrupt money system.
This schematic represents the basic monetary elements supporting economic sovereignty and stability. Outside the virtuous circle are the main external influences which can subvert it – Fractional Reserve Banking and Sovereign Debt.
Within the ‘virtuous circle’ a nation state is captain of its own destiny. Its internal finances democratically accountable and its external position periodically adjusted through ithe rate of exchange – an automatic reality check. .It is a circle to be vigorously defended against self-interested speculators or the political ambition of currency unions..
This little booklet sets out the price we all pay for this corruption and the second part describes how reform might be approached. This is a matter of the utmost concern to everyone, but it is neither a technical nor a mathematical problem – it is a challenge to our political system – a system which, when it comes to money, refuses to differentiate between what is Constitutional and what is Political.
Governments do not argue about the length of an inch or a centimetre; we would scoff at a free market in the measurement of length – or of capacity or weight – but somehow a free market in money is acceptable – its value, its purpose, even its definition is flexible, yet this is how we measure the reward for all our work and enterprise and how we value the ‘things’ in our economy – except that it isn’t a measure – because it is constantly inflating - we have allowed it to become corrupted by a small but all powerful clique of self-interest.
The National Currency must be sacrosanct – unadulterated by misrepresentation. That is a serious crime whether perpetrated by a back street forger or a corporate body. It is even more serious when it occurs at the point of initial distribution i.e. within the chartered banking system. Yet we know this happens as an everyday occurrence; indeed we know the volatile nature of the entire economy is primarily down to an unstable financial platform.
We have permitted ‘above platform’ concepts to infest the supporting legs - highlighted when we endeavour to apply measurements of ‘financial viability’ to more abstract concepts such as the wellbeing of the community or the sustainability of the planet. Our legislators have pussy-footed around this cold fact for so long now that this corruption has become institutionalised.
We need to talk about this openly, hence this serious attempt to frame a concrete proposal as a basis for open debate – tailored to the emergence of a newly independent State.
In the end it is more about politics than money because it is the politicians who are ultimately responsible for the legislation. This is less than apparent to the man in the street so it is our challenge to present these anomalies to you here in a readable manner together with a practical resolution.
Part One
The Affordability of Common Sense
Historically there were always jobs for teenagers leaving school – for generations youth unemployment was virtually unknown. Certainly there were ups and downs – but a working life formed the core of a fairly structured family environment – disciplined partly by the need to earn a living and partly by the satisfaction derived from doing something useful. There was security and a sense of belonging. What happened?
Now we have second, even third generations of families who have never worked. Governments spend fortunes inventing new training schemes, benefits and hand outs to mitigate the effects of unemployment. Drugs and alcohol fuel crime at an alarming rate – destroying lives on a daily basis and the list of social problems is as long as you care to make it. For many young people it all resolves to one word – despair, and the prognosis is not good.
It is of course perfectly normal to experience despair from time to time – that’s part of everyone’s life, but for an increasingly large swathe of the population this is not an occasional experience – it is permanent. They can see no way out and indeed for most there is no way out. As a builder working on the upgrading of slum council estates in some of Glasgow’s most deprived communities I have witnessed this at first hand. I have employed decent young men living in these slums and it has broken my heart to see their faces when the money runs out, the job ends and they return to the familiar dole queue; and I have seen respectable and responsible families living there in fear and deprivation. Of course there are malcontents and troublemakers – but as long as there are no jobs and no structure to their lives then we should expect exactly that. This is not about a lack of purpose or direction - it is about a lack of financial capital for social investment.
At the other end of our working lives we should recognise that growing old is as natural as growing up. More years in education and more years in retirement are good - both require to be funded but neither should be regarded as a burden or a liability – they simply require to be recognised and accommodated. If the dominant financial paradigm is unable to accommodate such progressive evolution then we change the paradigm to suit – not vice versa.
Human beings need a structure to their lives – and some boundaries between which they can bounce about a bit and occasionally jump beyond for a bit of excitement and joie de vivre. We also need an anchor, a base where, when it all gets a bit too much, we can return to a secure and familiar home to recuperate and re-assemble our lives. That fabric is what a community should provide, and it is missing for too many of us. It is missing because too many are excluded from the financial equation as ‘inconvenient numbers’- elements incompatible with the accountancy of free markets. That’s bad for all sectors of the society.
You may be beginning to wonder what all this has to do with banking reform and Independence but, when we start to analyse these social ills we consistently find that debt is the core problem – not personal debt but public debt, and this is a much more deadly and obscure malaise. It shackles government to a burden which renders it impotent to act with intelligence and humanity. There is no alternative – or so the banking system and its apologists would have us believe.
Every so often we go to the polls and vote for leaders who claim they will provide a suitable administration to meet our aspirations. Usually the Parties will compete with promises of how little of our money they will take in taxes and how much of it they will spend on our behalf - knowing perfectly well they are constrained by interest payments on an already massive public debt.
Writing at this time, there’s to be no more borrowing – it’s payback time and the public is to be force-fed an indigestible menu of cuts, unemployment and the continuing blight of communities - because the system can afford no other option. And so a substantial sector of the population which is willing to work but barred from doing so must stand idly by and watch their society and indeed, their whole country slide ever deeper into decline. That is the dividend of unregulated banking.
There is a mindset among too many politicians that if only ‘we’ can ‘borrow’ enough money ‘we’ can borrow our way out of public debt. That is a fantasy as daft as printing money to cure a recession – it is ‘financial policy’ peddled by bankers who care not one jot about social problems – or indeed anything other than their dividends and bonuses. It is a dogma reflected in the time spent by politicians agonising over budgets and affordability rather than devising practical solutions to improve the lot of their constituents – this is the tail wagging the dog. Our banking and money system is not designed to encourage equity, enterprise, useful work and socially responsible behaviour – it is a self-sustaining milchcow for those who control it Financial Independence is all about reversing this paradigm.
We elect government to make rules which are almost perfectly enshrined in the original American Constitution and there you will find among the Powers of Congress these precise words “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; To provide for the Punishment of counterfeiting the Securities and current Coin of the United States...” However in 1913 the already hugely rich banking communality, in very dubious circumstances, persuaded Congress to pass the Federal Reserve Act and two years later the long established European practice of private banks creating credit money independently of the State, also became law in the United States. This Act effectively circumvented the Constitution.
Nowhere in that Constitution will you find any reference to National Debt or a balanced budget – these are financial artifices spawned by the debt which bankers issue as money. They are the stuff of privilege and they are the source of our problem – the ‘affordability of common sense’. The graph Fig 1 of the appendix, becomes significant only after 1915 and follows the takeover of Constitutional money by bank credit – a process which has grown steadily until today when over 95% of all money in circulation is interest bearing debt generated by the banking system.
The affordability of common sense – it bears repeating that we elect government to exercise social responsibility dictated by common sense – not affordability. Affordability is the concern of individuals and families and businesses – not the over-arching constraint of government – yet this is what now conditions virtually all government decision making.
The West is a community in decline - obsessed with money to the exclusion of all other rational thought. Governments elected to encourage free enterprise have themselves become enterprises obsessed with avoiding deficits and rejoicing in surpluses – even the phrase ‘Great Britain Limited’ is commonplace. They perceive financial enterprises manipulating money and making obscene profits and executive bonuses as National Assets - and regard declining industry and public services as National Liabilities.
Money is a wonderful invention – devised to help exchange goods and services among ourselves. From its earliest days ‘legal tender’ was minted and issued by the sovereign power. Counterfeiters or anyone else who debased the coinage cheated not only the sovereign but the wider community – a capital if not a capitalist offence. The principle was clear – money only worked if everyone had confidence in it. That principle still applies - albeit our money today is simply a token of our – and other peoples’ – confidence in how we conduct our economic affairs as a Nation.
Since it was invented however, clever men have invested huge effort into manipulating the system for personal advantage and governments have failed to protect their people from this exploitation. The Federal Reserve Act alluded to earlier is a clear example and although commercial banks remain technically answerable to governments, in practice they make their own law. As self-regulating entities they have created worldwide monopolies to consolidate that influence. Too big to fail - and with bankers running the Treasuries of all the major Nations, money is the King Maker.
Bankers are of course human and can make mistakes – as in 2008/9 when the latest banking crisis shook the financial world. Many thought that would be a fatal blow to their monopoly of money and that governments would join together to grasp the opportunity to put the genie back in the bottle. There was much talk, much sleight of hand, many meetings of toothless Treasury Committees and several official ‘inquiries’- all chaired by prominent bankers from the City of London, but of meaningful reform - not a jot.
The affordability of common sense began to restrain governments with the advent of mercantilism and the industrial revolution – economic events which spawned the banking industry. Politicians recognised the need for a system of credit – business could not be conducted efficiently on a cash basis. Thus the founding of the Bank of England in 1694 in the UK was just like 1913 in the United States – the bankers manipulated the politicians and the Banking Acts legitimised the creation of private credit as money. All money remained guaranteed by the State – the National Credit - but few noticed that the exclusive right of the sovereign power to create money was passing to a cartel of private enterprises. There were rules of course – there was to be a reserve of real or cash money to cover any sudden runs on the bank and various ratios of depositors’ money to loans made -, but the principle was established that banks could create their own credit without reference to the sovereign power. That ratio of real money to credit was steadily reduced as demand for credit expanded – particularly to finance wars – until now when less than 5% of all money in circulation is sovereign cash – everything else is debt, ultimately owed to the banking system.
That means the take-over is near complete – whether it is the result of a sinister conspiracy or whether it’s the natural evolution of our obsession with money, the fact is it has happened. To some extent we are all victims of the banking juggernaut - some enjoying the immediate gratifications of debt in reasonable comfort, others constantly living on the edge – but all part of a community governed by debt management rather than the pursuit of life, liberty and happiness. That’s how it is for most families, individuals and businesses – but to extend that constraint to government is to defeat the purpose for which it is elected. The State has failed in its constitutional duty to issue the Nation’s currency free of debt and for the benefit of all. It is now abundantly clear that no amount of additional taxation will ever be enough - the National Debt just keeps ratcheting ever upwards as deficits become an annual occurrence.
This condition has prevailed for so long now that most people accept it as inevitable. It is not inevitable, because we can still have an efficient credit system with that credit being issued as money by the State to the banks. It is no more than procedural – the banks would still make loans and we would still have to pay interest and repay these loans – but the government would not be in debt and beholden to the banking system – and that alone makes common sense affordable. From this simple accounting change flows much public benefit. The National Credit which is the backing to our entire money system would be issued free of debt to the banks – just as the small remaining amount of cash is issued to them. This is the long established principle of seigniorage whereby the State issues money (or credit) to the banks; the banks then credit the government’s account and the banks are then ‘in funds’ to issue that money/credit to their customers - just as at present.
Whereas the banks currently create their own credit (underwritten by the State) and loaned out as debt – under the new accountancy there would now be a credit account at the bank for these amounts - upon which the government can draw to invest directly in public assets and infrastructure. That completely turns PFI and government borrowing on its head and opens up a whole bunch of options to government including the capping of the National Debt. Common sense becomes affordable.
Equally important, whereas bank credit enters circulation unattached to any increase in National Wealth – currently at the rate of some four times the rate of growth of GDP – Fig 2 of the Appendix – so under the new accountancy as the government draws on its seigniorage credit to pay for a physical investment in the wellbeing of the community, so all new money will enter circulation pound for pound attached to that value added. This would make a huge difference to inflation and price stability. It addresses the current problem of recession via the ability to order and pay the private sector directly for building labour intensive Public Assets.
Compare that with the nonsense of Quantitative Easing whereby the government ‘prints’ electronic money – buys back the bonds held by the banks as reserves and the banks receive billions of ‘new’ public cash supposedly to lend out and stimulate the economy. Except that that they don’t –it has served only to enable the banks to recover their profitability and rebuild their balance sheets. It is public finance sustaining private finance – a complete reversal of economic logic, a sheer abuse of the fiat money system. To permit banks to leverage a fiat money system in the first place is stupid – to reduce their already minute reserve ratio in this manner must surely oblige us to ask who is running this asylum?
All this should be obvious to the people we vote to represent us in Parliament. The truth is however that most politicians see no votes in a lonely crusade for banking reform, no career prospects in facing down the huge vested interests of the banking lobby. So we live with derisory rates of interest offered to savers and pension funds, high rates of interest charged to businesses – particularly the smaller ones, more unemployment and inflation and political messages about how profligate ‘we’ have been and how we will now have suffer before it will ‘somehow’ get better – don’t hold your breath...
Many politicians holding high office know that stepping out of line will certainly scupper their chance of a comfortable seat on the board of some City financial institution. Nor does the popular media offer much encouragement to investigative journalists seeking to unravel the public fraud which is the banking industry – it is itself either a cosy private or public monopoly or their directors are too deeply beholden to their bankers. Most discouraging of all is that the general public is fully aware that the money system is corrupted and needs to be fixed, but how on earth can Joe Public do anything about it?
There is no cure to be found within the great European Union experiment - when the Treaty of Maastricht was signed in 1992 it devoted a whole complex chapter to the Independence of the European Central Bank which in turn imposed binding rules about National Debts, Budgetary Deficits and of course endorsed the virtually unregulated issue of bank credit. There is no basic difference between the European Central Bank, the U.S. Federal Reserve, the Bank of England, or the IMF – they are all creatures of the bankers, created by the bankers and for the bankers.
Given all this background, why would the First Minister of a newly independent country wish to saddle his people with a euro already self-destructing and which has been a disaster for all participants? Why would any rational leader wish to take on the pound sterling which is next in line to collapse under the weight of its corrupted banking system? What would drive any honest man to hand responsibility for the National Currency over to a private consortium whose sole objective is to generate notional debt for all and profit their shareholders and directors? If you were in this position would you not welcome this unique opportunity to create a 21st century sovereign currency free of debt and only then issue it to the banks to distribute as loans?
The prospect of finally achieving a fair monetary system should be the foundation of Independence. Money should be universally understandable to politicians and electors alike. The smoke and mirrors of the City is a game played at the expense of everyone else – producing nothing which is not first stolen from the real economy. This should be the hottest debate in town – not hidden away like witchcraft.
In Part Two an effective and transparent banking system is described and we should all campaign for its adoption. But even that’s not where to start because many reformers have gone before - expecting their work to be perceived as a Damascene revelation and that politicians would rush to enact the appropriate reform. No, the biggest hurdle is the powerful vested interest which is the banking lobby – and there is no more powerful organisation on the planet.
Independence is a Norwegian or a Danish krone, a Swiss franc or a Swedish krona; financial independence is keeping everyone honest; enlightened monetary policy is creating real wealth and staying out of debt. Together they makes up affordable common sense which will come not from the top down, but from the grass roots of democracy.
Our money system is the single most important tool of government. We have witnessed what happens when it is corrupted and regulation is abandoned to the marketplace. We all need to know about the alternative and with this background in mind you are invited to join an imaginary journey to a better place. It is an old, once sovereign Nation absorbed by its larger neighbour and now a backwater of this larger Union. The ungrateful people had become thoroughly fed up with being constantly perceived as the poor relations, benefit junkies, subsidised malcontents and a general burden upon their harder working and more affluent neighbours. Determined to reorganise their own affairs more effectively, they dared to contemplate Independence.
The achievement of Independence was a political goal and it was no surprise that the popular movement was run by a new generation of politicians. There was significant popular support, and in a relatively short time these politicians called Nationalists, secured considerable devolved power from the Union government. They got their own Parliament and administered several domestic functions. They gained some long forgotten experience about how governments work and as a matter of course, with even this modest degree of Power, came an equally modest share of the trappings of power – in effect they became exposed to the blandishments of the Great and the Good - and the God of Vested Interest gorged deep upon their human frailties.
Always on top of this lobbyist heap are the bankers, for it is well known that if you run the money business you run the country. The business of the political lobbyist is to use every tool at his disposal to protect his employer’s interests and if, as in the case of banks and bankers those tools include virtually unlimited money, then you can buy all the patronage you need, not necessarily with bribes but with the best advice that money can buy – and that advice can be pretty convincing for any politician wishing to get to the top of his profession. There is after all, plenty to think about without being sidetracked by complex matters of high finance and how to stay afloat in the stormy waters of international finance and global influences.
So even at this early stage of devolution, and even though stumbling among the ruins of two once great banking institutions and a serious depression, the politician sought advice from his new banking friends. He was told not to worry – here are some taxes you can raise locally, and perhaps you could even have some borrowing rights - why not cut your teeth on these and if the people ever get around to voting for real independence in a referendum, then we can talk about shadowing the pound or joining the euro – don’t you worry your pretty little heads – we’ll keep you right they said.
Now that sounded familiar to some of the older grey heads at the grass roots of this young political party, because they could see that the single greatest advantage of Independence - financial independence –looked like slipping from their grasp. They determined that this opportunity to start from scratch would not be missed and that their newly reborn Nation should start life unburdened with the bankers’ baggage. So they published a pamphlet called “No Independence without Financial Independence”.
Slowly but steadily more and more people read this and came to realise what real independence could mean for them. Even some of the more progressive Unionists who were opposed to Independence began to take notice. Here was a blueprint for a 21st Century inclusive society, a community where a better life could actually happen.
Part 2
The Return to Constitutional Money
restoring democratic accountability to the banking system
Since the late 17th Century banks have been chartered by the State to create credit money beyond the amount of their capital and customer deposits. This privilege was granted by an English parliament of the privileged for the benefit of the privileged back in 1695. Promises of money (credit) became as good as gold – provided the State guaranteed the system. By 1950 bank credit had grown to 50% of all money in circulation and to 97% by the year 2000 . Private banking interests therefore assumed the role of supplying virtually the entire National Currency other than the three pence of cash used for everyday purchases, which still remains the only Constitutional money issued by the State.
The logic of a private monopoly of the money supply guaranteed by the State has never been sustainable. Even with stringent regulation and fractional reserve ratios, any credit creation by private interests beyond that needed for the monthly settlement of accounts has been destabilising in terms of diluting the currency and causing inflation. With the post war ascent of credit and in particular the later deregulation of the banks, a steady trickle of inflation has become a deluge measured not only in the purchasing power of money but in the distortion of the balance of payments and international exchange rates, This has led to gross economic imbalances as financial ‘innovation’ replaced the inter-trading of productive industries.
The underlying philosophy of these proposals is a recognition that productive capitalism and free enterprise have been effectively stunted by the parasitic domination of financial capitalism – the unbridled creation of money and artificial financial structures. Constitutional Money observes the basic principle that money may no longer be loaned unless the lender forgoes the use of that money until it is repaid. Thus only genuine money in circulation – principally money saved in the past and invested in the future, will provide the bulk of the working capital of the banking system and lending institutions. That will also establish a rational, stable and secure focus for private pension investment . The policy affirms the National Currency as a Constitutional monopoly. It is the facilitator of all genuine enterprise and the common wellbeing.
Having re-established the principle of the National Credit, banks will no longer be permitted to create credit beyond the amount of their reserves. Full Reserve Banking requires that banks attract and hold an amount from their saving customers and investors equivalent to their lending contracts. These reserves are therefore effectively out of circulation – held in an ‘electronic vault’ - effectively preventing ‘new’ credit being added to the money supply - the primary cause of inflation with fiat currencies. Their purpose is not to cover the risk of the bank losing money on loans, so these risks must be minimal and borne by the bank’s shareholders. Customers are not investing in the bank for profit – they invest for a modest return on savings and bonds. Chartered Banks should provide the basic money system and not investment capital which carries inherent risk – that is the business of Merchant Banking and Venture Capital which are activities above the ‘stability’ platform described in the Preface.
This arrangement precludes any risk of a run on the bank thus relieving the Central Bank of any need to act as a lender of last resort - or more accurately, the taxpayer being required to bail out a failed bank. Should a bank fail, the depositors and investors would be fully covered and the loans sold off to another bank by the administrators.
Banks would be free to charge customers for running their current accounts but this would be much less than the present indirect cost of ‘free banking’ - currently covered by inflation at 5% - i.e. £500 per £10,000 of personal incomes. Credit card companies do not charge their ‘in credit’ customers for a similar service - banks should be able to do so equally well.
The rate at which new money or seigniorage will be added to the money supply by the government, via the Trustees of the Central Bank, will be governed by considerations of optimizing economic capacity. If performance falls off then it can be directly stimulated by the commissioning of public asset creation and as it rises towards optimum that stimulus would be withdrawn.
The profusion of bank credit in the past has created an illusion of prosperity whilst the real wealth and creativity of the Nation has declined. That illusion has been stage managed on an unlimited budget and excluded from public accountability. That this is indeed nothing but illusion is witnessed by the collapse and public bail-out of the banking system in 2008. Banks do not take in and re-lend their depositors’ money - they use these deposits to speculate on their own account. The loans, credit cards and overdrafts which finance the domestic economy are ‘credit contracts’ only remotely related to the banks’ own capital and reserves. The deception has been building for some time - measured by the graph (appendix Fig 2) showing bank credit being consistently generated at four times the actual rate of economic growth. Constitutional Money Policy acknowledges the social and business cost exacted from the real economy by this private monopoly and extends its focus to the subtle threat it presents to the entire democratic process,
There is only one guarantor of a National Currency and that is the State. Within that State the confidence, credibility and credit worthiness of its money resides in the integrity of its management and the vibrancy of its economy. To the trading world at large the Balance of Payments should be reflected directly in the exchange rates of the currency. These are the proper concerns of all sovereign States and in particular of those individuals appointed as the trustees of its Constitutional money. It may be impossible to effectively outlaw the trading of these sovereign responsibilities in financial markets but it can be reduced to manageable proportions by eliminating the National Credit as the primary source of finance for the speculators.
To achieve that integrity all money, be it coin or credit, must source solely and exclusively from the State. It will be unlawful for any private interest or individual to coin money or create a money substitute. All bank loans will be matched by physical resources i.e. depositors’ funds or tranches of the National Credit provided by the State Central Bank. Any new money required by the banks beyond that which they can attract as deposits and investment will enter the commercial banking system as seigniorage (just as cash does), credited to the government’s account. Once all bank credit has been replaced by the National Credit all basic deposits will be automatically guaranteed. The National Credit will not have a debt component but will enter circulation as money earned by the private sector in the creation of National Infrastructure and Public Assets. This process will be controlled by the Central Bank Trustees – a body having a constitutional status similar to the judiciary and which will also fix a basic interest rate.
Critics of Constitutional money claim that the Trustees will authorise too much money and create inflation. That is indeed the pot calling the kettle black – as quantified in the appendix the banks have regularly expanded the credit supply many times faster than GDP growth - and created nothing but asset bubbles and inflation. Interest rates have been assiduously promoted as controlling inflation – they have never done so. Under Constitutional money interest rates would not be used to cool an overheated economy – that is far more effectively regulated via credit agreement terms, the amount of deposits required, the period of repayment and the like. The primary function of setting basic interest rates will be to encourage and manage the level of private savings invested in the banking system.
Government will no longer borrow money from the banking system and no new money will enter circulation which is not earned by productive activity contributing directly to Gross National Product. Thus the National Debt will be capped and eventually repaid. Never again will government be held hostage to a private financial monopoly and require to beg private banks to lend to business and industry – the Central Bank would be able, if required, to issue credit directly to the private sector in direct payment for public assets created.
Fiscal policy is independent of monetary policy but it is related. In 2008 taxation had grown to almost 40% of National incomes of which a miserable £38 bn (less than 1%) was invested in public assets yet still the National Debt continued to soar to unrepayable levels adding £31 bn per annum in interest charges to the tax bill. In 2011 this interest is approaching £50 bn or some 30% of standard income tax – that’s where your wages go.....
Constitutional money offers the only rational means of reducing public debt and thus the burden of taxation required to service the interest. Thus future taxation would become available to provide basic state pensions and welfare and cover the day to day running costs of the administration and public services.
In summary Constitutional Money means that
• the State reverts to being the sole source and issuing authority of the National Currency
• public investment nationally and locally is removed from taxation and is funded from seigniorage – PFI without repayment or interest charges
• No more unemployment – all of working age will be gainfully employed
• Equity and democracy restored as the banking sector loses political power and is rehabilitated into the normal economic community
• The National Debt will be capped; savings & pensions are protected; structural inflation eliminated
• merchant banking will form an entirely separate part of the Financial Sector – retail banks will no longer be able to use depositors’ money for speculation.
A Theoretical Example
Let us consider the case of Scotia – previously part of a larger Union but now contemplating Independence – and determined to secure financial as well as political independence. So the new State will require to establish its own currency – the Merk, to be managed by the Trustees of its own Central Bank – The National Bank of Scotia – NatBoS. The last truly Scotian coin was the Merk – last minted in 1681 and before the Union of the Parliaments. The old Merk was a silver coin valued at about fourteen shillings sterling; the word Merk also derives from ‘a mark of silver’. The name is reintroduced here to symbolise a new Currency to be introduced with Independence. It will be introduced at a rate of one Merk equals one pound sterling and each Merk will be divided into 100 cents.
NatBoS policy is to keep tight control of the Constitutional currency and prevent it being speculatively traded, exploited and abused by private interests. The primary purpose of currency management is the well-being of the population within the domestic economy while also ensuring the free trade of goods and non-financial services between friendly Nations. The function of domestic banks will be to concentrate upon retail banking. No single chartered bank will be permitted to conduct more than 20% of the Nation’s business. No chartered bank may be effectively owned by foreign nationals. Banks will no longer be permitted to create their own credit and will therefore require to attract deposits from their customers for re-lending. NatBoS will operate a payments clearing service for the chartered banks. Where needed, banks may also obtain supplies of the National Credit from NatBoS. Basic interest rates will be fixed by NatBoS wherein a dedicated and quite separate division will license and regulate all financial service businesses.
The Merk will be the only legal tender in Scotia and in order to assert sovereignty over its currency it will be convertible only through the agency of NatBoS which will also fix the foreign exchange rates for the Merk in relation to the National Balance of Payments. All commercial bank accounts denominated in currencies other than the Merk will require to be registered at NatBoS. Residents may hold unrestricted forex accounts abroad but convertibility to the Merk will be restricted to legitimate trading and personal transactions and any transaction deemed to be speculative or damaging to the integrity of the Merk will risk not being recognised.
NatBoS will fix basic interest rates to encourage savers to deposit money with the banks but actual rates offered will be a matter for the banks. It is recognised that private banks cannot be obliged to lend at any particular rate and if insufficient liquidity is provided by banks NatBoS will commission state asset creation by the private sector to be paid for directly with NatBoS cheques drawn on Seigniorage accounts held in credit at the retail clearing banks. There will be no requirement for domestic State Borrowing. Any foreign currency required over and above that earned and held in normal course, will be borrowed against bonds serviced and repayable in that currency.
The existing Union currency will remain interchangeable with the Merk and be legal tender in Scotia for only 30 days after promulgation of the new currency and thereafter will be withdrawn from circulation. Clearing banks in Scotia may hold foreign currency accounts at NatBoS for the purpose of servicing the business of their importing and exporting customers. Facilities for hedging and forward buying and selling of foreign currency will be provided by NatBoS to the extent deemed appropriate to the actual levels of foreign trade conducted. Banks will not normally hold foreign currency (including Union currency) accounts for residents because all forex dealing other than through NatBoS will be illegal. NatBoS will hold foreign currency reserves adequate to fund its overseas commitments. Forex rates will be fixed by NatBoS to maintain an even and transparent balance of payments. Residents may transfer capital and hold forex balances in overseas accounts but not in Merks.
NatBoS will be fully accountable to Parliament through the NatBoS Trustees – a body constitutionally appointed by the State and enjoying an independent status similar to that of the Judiciary. NatBoS will negotiate with the Institute of Chartered Accountants to agree an audit and reporting regime for chartered banks operating in Scotia. This would include a ‘registered deposits’ system or similar arrangement to preclude illegal credit creation. Chartered banks may not accept loans in foreign currencies. Foreign owned banks will not be permitted to trade in Scotia but the non-banking financial sector will be largely unaffected and the Stock Exchange may well be revitalised. The economic management of the economy will be aimed towards full employment and productive activity.
Currency controls were common in the UK and many other countries prior to ‘the deregulation and globalization of banking. Malaysia re-introduced similar controls during the Asian crisis after the IMF described it as a basket case because it rejected their loans and financial reconstruction package. It is now a small, strong and successful independent country without debt. Perhaps certain other ‘debtor’ countries should think about this today…
The National Debt
The National Debt is a bogey-man. It arises from the kind of monetary theory we are committed here to confound. We know that all money (bar 3% cash) is bank credit, so when government can’t raise enough in taxes to pay its expenses it borrows and issues IOUs called ‘Gilts’ which are bought by the groups shown here. All these IOUs are bought and sold in Sterling and are thus an internal liability- unlike the more serious balance of trade deficit (if you want to buy foreign goods then you have to buy foreign currency first). An independent State assuming it share of a National Debt would therefore assume an equal share of the assets and liabilities and so the matter is largely academic. Japan has a National Debt of 200% of GDP, and so the UK is not exceptional at 60%. The concern over the National Debt is not repayment but the ever growing annual payment of interest – now approaching 10% of government revenues. A dividend of a reformed monetary system is the capping of the debt and rescheduling much of it into the reserves of the banking system.
The Transition
Here we address broad principles only as detail is for individual banks to negotiate.
A set of new banking laws will have been previously enacted providing inter alia that on Transition Day One all existing banks would be taken over by the State as going concerns on a pre-arranged formula, and with fair compensation. As early as feasible thereafter they would be refloated as Mutuals with a golden member (The State) empowered to block any corporate reconstruction or manipulation. Account holders would become members automatically, the end result being a bank constituted like a Building Society but dealing with both residential and business lending. All the new Mutuals would be members of the NatBoS clearing system.
Following the takeover the first phase of conversion from the existing Fractional Reserve to a Full Reserve System will commence. All existing, sound private bank loans will cease to be liabilities of the bank itself and become its liabilities in the bank’s State Seigniorage Transition Account - banks become intermediaries . As old loans are repaid this liability will progressively reduce. Transition Day Two will mark the first new generation of loans being made and the banks will have 60 days to attract new funds from investors & savers to match these. When this process completes the SST Account will have a nil balance and will close - Full Reserve Banking will have arrived in Scotia. A new permanent seigniorage account will open to accept tranches of the National Credit from NatBoS which will be available to bridge any temporary shortfalls in reserve ratios and clearing balances etc., and for the purpose of funding State Investment as and when required.
To assert the sovereignty and integrity of the new currency it will be necessary to hold the free convertibility of the Merk in suspension. Changes of this nature act as a magnet for international speculation and measures must therefore be put in place to minimize disruption and protect the new State from currency traders...
It may be noted that there is no significant cash involved in currency trading – balances move electronically. The actual money is of course legal tender only in the issuing country and when held in its own banks. A foreign hank can only make settlement by asking its counterparty – a clearing bank in the new State - to credit the money to its client’s account. To stop the trade in currency, banks will be instructed by NatBoS not to transfer any Merks abroad other than in the normal course of trade. Any transactions deemed to be potentially speculative will risk not being recognised.
The foregoing is no more than an outline of the transition process but the preparation and process is well documented from the conversion of National currencies to the euro which commenced some ten years ago.
The Gold Card – Ace or Knave?
This is written at a time of serious inflation and an unprecedented rise in the value of commodities – in particular gold and silver. There is a substantial body of opinion among monetary reformers which believes that a return to a gold standard is the only basis upon which currencies can be stabilised.
No National currencies are presently linked to Gold Reserves – unofficially the Swiss Franc approaches this with perhaps 20% of its value matched to official gold holdings. A reconstituted IMF might call upon its 187 member States to maintain a minimum deposit with it of say 20% of the value of their issued currency in gold, there being an automatic sanction of obligatory devaluation upon default. Certainly the current international bankers’ club will not.
There is certainly sufficient gold in the world to facilitate this, and such an agreement has much to commend it. However it would certainly require significant political regime change considering the present hegemony of the banking industry.
Any effective link to gold would of course automatically spell the end of privately issued bank credit just as suggested under Constitutional Money, and if for no other reason a gold link is a serious contender in the reformers’ arsenal. Obviously no monetary authority could maintain a gold reserve ratio if banks were free to create unrelated credit.
If the issue of the new currency were voluntarily declared fixed to say 20% of Scotia’s gold reserves it would be held in the highest of international esteem. Scotia might purchase sufficient gold for this purpose by issuing gold bonds to Scotia
Reverting f to a commodity linked currency is of course of course the original excuse for fractional reserve banking but without relevance within a fiat currency regime. Nowadays it would be an intellectual defeat – an admission that no one can be trusted in matters of money. A fiat currency should be about optimising real wealth and wellbeing so linking all new money to the creation and maintenance of public assets is surely the way to go. New money born in this way cannot be inflationary because it is directly related to a matching increase in GDP.
Appendix 
Fig 1 
Fig 2
End Note
The theoretical case of Scotia suggests there are alternatives to the present banking system and highlights the implications of change. The story will be rubbished by the banking establishment but everyone else should liken it to zipping up your pocket in a crowd, or being angry when you have been conned out of your hard earned money. It’s worth thinking about.
Statistics for Scotland as an independent entity do not exist in the form of a National Balance Sheet or Profit & Loss account, nor for a balance of trade statement on imports & exports – as a branch economy these were not needed. That however does not preclude comparing the effect of alternative monetary policies and there are certain numbers relative to Scotland which provide some indicators. As at 2010 total annual payments for generic PFI over the next 20/30 years amount to £897 million excluding several Scottish Futures Trust projects still in the pipeline. These would not exist under Constitutional Money.
Scottish capital investment averages about 10% of its total devolved annual budget of £30 bn i.e. approx £3 bn pa (estimated to reduce to £2 bn over next 4/5 years). Under independence and with the addition of the reserved areas - Defence, Foreign Relations & Trade, fiscal, monetary and regulatory policy etc. this should be at least doubled and probably trebled before the construction, shipbuilding, and general industry approach potential capacity. It is therefore
realistic to suggest that some £5 bn of public assets could be created annually in Scotia. These assets would be paid for not by taxation or debt, but as physical backing for the new currency, The day to day operation and maintenance of these assets are of course properly funded from taxation.
That should be the dividend of near full employment in a 21st century economy; it is Keynes without debt. Unfortunately the banking lobby has generated what most honest politicians perceive as insurmountable barriers to reform whilst others see their interests better served by fostering the illusion. The latter are therefore complicit in closing out the voices of progress – it is also the easy option, but it is not democracy.
A newly independent State presents a unique opportunity to start over.
End.
