The US Banking System

January 10th, 2008, 10:03 PM

The U.S. Banking System
A special word is in order for the U.S. banking system which has played such a dominant role in the economic events of recent decades. It is this system which forms the power base of the dictatorship of the financial elite.
Of course banks have existed for millennia. Because the history of banking and finance have been treated in several other articles by this author that have appeared during the last several months on Global Research and other websites, that information will not be repeated here.
It is important to note, however, that throughout history, banks have always operated under some kind of charter or license from the prevailing political authority—or have been owned by that authority—and that they have served a variety of purposes. Thus banking and politics have always gone hand-in-hand.
Overall, banks have served four main purposes—one legitimate, one dubious, one puzzling, and one deeply flawed.
The first purpose—a legitimate one—is to facilitate commerce. It is often cheaper for a business to borrow capital from a bank than to stockpile cash itself. This was the purpose of the state banking system in the U.S. prior to the Civil War. The state-chartered banks existed to provide working capital for commercial transactions, such as stocking inventory, or for business expansion. Use of banking for these purposes was tied to specific commercial activities—the “real bills” doctrine. Of course credit used for this purpose has a cost which is factored into prices. When these loans are repaid, they are canceled at the bank which thus removes purchasing power from the economy. This is another area, besides retained corporate earnings, that contributes to the gap between prices and purchasing power identified by C.H. Douglas. But lending for commerce itself remains a legitimate activity.
The second use of banking—the dubious one—is for capital formation in the creation of new businesses, a function which overlaps with capital markets such as the stock exchanges. But this use very easily turns into lending for speculation by permitting investors to borrow money in order to buy stock on margin or to “leverage” investing by borrowing money in order to purchase whole companies. The costs of this borrowing also show up in consumer prices without introducing any new purchasing power into the system.
This practice has mushroomed in recent decades starting with the buyout/merger/acquisition mania of the 1980s and has reached disastrous proportions through the creation and growth of equity and hedge funds. The use of bank borrowing for such speculative purposes is an obvious abuse that should not even be legal. It is actually a form of theft from the nation’s natural and normal store of credit that should be carefully administered by competent public authorities as a utility as critical to social health as the water supply.
The third use of banking—the puzzling one—is for consumer credit. This includes borrowing for big purchases such as buying houses and automobiles, or small ones such as items bought with credit cards. Increasingly it includes purchasing even the necessities of life such groceries.
Buying an object with a credit card often means that a person cannot afford to buy it at the present moment. So the person is gambling that he or she will be able to pay off this loan—including interest—at some point in the future. What is puzzling is that in the midst of what is claimed to be the most productive economy in the history of the world, why are most people so poor that they cannot buy what they need to live with the proceeds of their present earnings? This is the ultimate repudiation of Say’s Law and its derivatives—Libertarianism, supply-side economics, and the like.
The fourth use of banking—the one that is deeply flawed—is the financing of government inflation through purchase of public debt instruments which allow deficit financing of public activities, most particularly the waging of war. Banking for the purpose of financing war has a long pedigree, going back to the medieval times where kings were perpetually in hock to the money-lenders. Today we have the national debt, which has been used primarily for war, as well as for the Keynesian pump-priming described previously. A classic case of the use of banking for deficit financing of war is the borrowing by the federal government under the Bush/Cheney administration to raise the trillion dollars already spent on the Iraq and Afghanistan wars.
The use and misuse of private sector banking within the U.S. for these purposes has never been greater. By the late 19th century, banks had begun to own significant amounts of the stock in other industries, so were becoming key players in economic growth and development. But much more money became available for bank lending once the Federal Reserve System came into existence in 1913 and the Sixteenth Amendment to the Constitution was enacted which allowed the government to raise huge amounts of money through the income tax. It was these tax proceeds which enabled the government to borrow. The government debt in turn collateralized the massive bank lending which became characteristic of much of twentieth century economic growth. What really drove this growth has been technological innovation. The wealth from this growth has been skimmed by the financial elite.
The system allowed the U.S. to float the loans to the World War I combatants which effectively shifted world financial power to this country over the next decade. It allowed the explosion of speculative lending through the 1920s which led to the 1929 crash. At that point, banking took a back seat with respect to government policy, even though interest rates for bank borrowing were lowered. The trouble was that no one could afford to borrow any longer, so the cheap credit went unused. During the New Deal and continuing through World War II and beyond, the banks mainly played their traditional role as commercial lenders, because the government had taken over much of the issuance of credit for economic growth and investment.
Then starting in the 1950s and the 1960s, the banks gradually expanded their speculative lending activities until the inflation of the 1970s made lending unprofitable. At this time, the Federal Reserve took it upon itself to put on the brakes by plunging the nation into the worst economic decline since the Great Depression.
The recession of 1979-1983 was a totally lawless action by the banking industry. When Paul Volcker made his decision to act, he took President Jimmy Carter by surprise. As described in William Greider’s history of this era, Secrets of the Temple, even the conservative Reagan administration was nonplussed.
But the banks by now had seized the upper hand, a milestone that was built into the structure of the economic system and made permanent by the banking deregulation of the 1980s. The banks now were free to inflate and deflate economic bubbles as much as they liked. As stated earlier, we had the buyout/merger/acquisition bubble of the 1980s, ending in the Bush I recession, the dot.com bubble of the Clinton years, ending in the stock market collapse of 2000, and the housing, equity, hedge fund, derivative, and stock market bubbles of the 2000s engineered by Alan Greenspan in order to support the wars of the Bush/Cheney administration.
Thus a semblance of prosperity has been created by the banking system—accompanied by inflation, growing wealth disparities, consumerism, and the ultimate loss of assets by the middle class.
Finally, these bubbles would have been impossible without modern methods of electronic processing and cash management, whereby nightly deposits by businesses through use of “repos”—repossession agreements—created a huge boost in banking reserves that allowed them to turn on the lending like tap water. It was the data processing revolution which facilitated the current catastrophe.
The net results of the banking-based economy have been profits to the financial industry exceeding $500 billion a year, combined with total societal indebtedness—including personal, consumer, business, and government debt—approaching $50 trillion. No one in public or private life has any idea what to do about this debt except to keep borrowing to roll over the increasing payments until the dollar is blown away by inflation. Meanwhile, the amounts of money have been so great and the knowledge of how to manage it so small, the U.S. political system, traditionally ignorant of financial matters, has given up trying to cope.
Instead, all eyes are constantly riveted on the Federal Reserve and its chairman, currently Ben Bernanke. The idea that the central bank should be the controlling factor in economic decision-making and for these policies to be carried out through manipulation of interest rates is what is called “monetarism.”
Thus the Fed—an institution that calls itself “independent within the government” but whose branches are owned by the banks—has control over the entire economy. This control is, and should be, the most important function of national life. But the U.S. at its core can be called neither a democracy nor a republic, given any reasonable definition of those terms. The crash of 1979, for instance, was the most important economic event since World War II. But it was an extra-legal action by a revolutionary power. This revolutionary power was and is synonymous with the U.S. financial elite.
A Deeper Look at Credit
Where do the banks get the money—i.e., the credit—they lend? They do not get it from their depositors. Money held on deposit is part of a bank’s reserves, as is the federal debt instruments they hold in providing credit to the government. The money they lend is created, as John Maynard Keynes wrote, “out of thin air,” through the banks’ fractional reserve privileges.
But as this author has made clear in previous articles, it is really the nation’s natural store of credit which the banks are using. Credit is actually the ability of the nation to engage in productive economic activity aided by the powers of nature—sunshine, rain, the fecundity of the earth. The banks are allowed to monopolize this natural store of credit by the laws of the land. It’s a form of privatization which is much worse, much more egregious and destructive, than any other form of corporate welfare in existence.
The banks are granted by Congress and the state legislatures a monopoly on credit creation by which they control all of economic life. It’s a travesty which negates democracy at every step. In reality, this natural store of credit should belong to the public and be administered by the government in some equitable way. But the banks have stolen the privilege, and the politicians allow it to go on in the most negligent fashion.
Not only do the banks use this store of credit to lend as they please, they charge interest for its use. Again as noted in other articles, what we have in fact is a system of institutionalized usury, bringing up the age-old question of the morality of interest rates.
It has long been accepted by reasonable people that any charging of interest should reflect a normal level of profit plus risk in order for the practice to be ethically acceptable. The idea that interest is an end in and of itself to be used for financial policy, as is done by the Federal Reserve, is a deeply flawed result of monetarism and has no basis in legitimate economic theory.
What the Federal Reserve did in 1979 and continues to do today is simply to facilitate a system of loan-sharking—a form of racketeering. Particularly notable examples today are the high rates of interest charged for credit card use and exploitation of college students by lending money to them for higher education. Thus students are in thrall to the banks for much of their future with loans that may not even be liquidated through bankruptcy.
Now, today, the banking system has become so overextended by its illegitimate activities that it is crashing. This is naturally to be expected. No one should be surprised, and no one should expect a different outcome. Rotten fruit stinks and is harmful for us to eat. Even mainstream writers such as Martin Wolf of the Financial Times recognize that the financial industry is totally out of control. In a November 27, 2007, article entitled, “Why Banking is an Accident Waiting to Happen,” Wolf wrote, “What seems increasingly clear is that the combination of generous government guarantees with rampant profit-making in inadequately capitalized institutions is an accident waiting to happen – again and again and again. Either the banking industry should be treated as a utility, with regulated returns, or it should be viewed as a profit-seeking industry that operates in accordance with the laws of the market, including, if necessary, mass bankruptcies. Since we cannot accept the latter, I suspect we will be forced to move towards the former.”
But there is another reason the banks have become so powerful, one that few have recognized. There are underlying reasons for the present financial crisis that go well beyond a simplistic explanation based on the psychology of human greed or arguments pertaining to “the war between capital and labor.” The whole war may be unnecessary, just a red herring. Because in a system that creates abundance, why should people be fighting as though we are facing scarcity? There is something here that just doesn’t make sense. Modern industry produces abundance, not scarcity. Why then are so many people in the world poor and becoming poorer?
We return to the issue of prices being liquidated by purchasing power, the central dogma of classical economics, the critique of that dogma by Keynes and his supposed solution, which has proved not to be a solution at all, just a postponement of the inevitable collapse.
The issue pertains to facts referred to previously that were discovered by C.H. Douglas almost a century ago. As stated previously, Douglas was the founder of the British Social Credit movement. Returning to the error in classical economics and Say’s Law that prices charged for goods and services are completely self-liquidating by the generation of income, Douglas showed that for a variety of reasons, most notably the necessity of retained earnings and the inclusion in prices of the costs of borrowing, sufficient income is never returned to the producing economy in order for people to purchase what can be manufactured.
But again, Douglas did not say, as did Keynes, that the “gap” should be filled by government borrowing to increase aggregate demand. Instead, Douglas said that the gap should be viewed as a benefit accruing to all of society from having a highly-productive economy where everyone does not have to work all the time in order to prosper.
Today, the “gap” is imperfectly filled by government borrowing and by consumer and business borrowing as well. In fact, the power and influence of the banking industry over society occurs because it is the banks, utilizing society’s store of credit, which fill the “gap” through lending, to their own profit.
In other words, Douglas showed how the industrial economy can be made to work for the benefit of all. The “gap,” which all post-Keynesian economists know—or should know—exists, should be filled by direct payments to individuals by the government, either in the form of a National Dividend or price subsidies. This is the real solution to the central problem of modern economics. A form of this dividend already exists in the U.S. through the Alaska Permanent Fund.
As stated earlier, the National Dividend solution has been known in the English-speaking world since Douglas published his epic work Economic Democracy in 1918. The Social Credit movement which eventually formed became a political force in Britain, Canada, Australia, and New Zealand and still exists.
But Douglas’s ideas were largely suppressed in the mainstream media and by orthodox economic teaching. The Times of London made a decision in the 1920s, for instance, that Douglas would never be mentioned in its pages. Douglas visited the U.S. in the 1930s and was told to his face by representatives of the financial elite that he would not be allowed to present his ideas in this country. Today, at long last, Douglas and Social Credit are finally beginning to be known. See, for instance, the new article on “Economic Democracy” in Wikipedia.
Following is an explanation of Social Credit by Wallace Klinck of Alberta, Canada, one of the world’s leading proponents of Douglas’s ideas. In his comments, Klinck explains the price-income mechanism that defines the National Dividend paradigm:
“Consumer prices include all allocated capital charges as additions to price which are necessary from an accountancy standpoint but which do not distribute equivalent incomes within the same cycle of production.
“Thus consumer prices include allocated charges which do not distribute incomes in respect of capital. That is, money is collected from consumers prematurely, and cancelled in repayment of bank debt incurred previously by loans issued to producers, as if to represent that our real capital is being consumed currently, whereas it is actually consumed or depreciated over a considerable period of time.
“The resultant disparity (i.e., the “gap”), growing increasingly as capital replaces labor as a factor of production, between final consumer prices and distributed effective consumer income, is currently ‘bridged’ by ever expanding issues of credit issued, or created, via repayable bank loans. Of course, this means that charges for financial costs in respect of one cycle of production are not fully liquidated within that cycle but merely passed on, or ‘carried over,’ as an inflationary charge to be recovered from future cycles of production. That is, one cannot liquidate, formally and finally, financial charges of today by issues of bank credit (i.e. debt) which become a further charge carried forward against future cycles of production. Such issues of credit may allow a large measure of consumer access to final consumer goods, at the expense of exponentially burgeoning debt and decreasing financial liquidity and progressive price inflation, but they do not cancel the financial costs of production as currently accounted—even though the real, i.e., physical, costs of production have been fully met when consumer goods take their finalized form and are ready for purchase.
“The essential problem is that the consumer is charged in prices, quite properly, with capital depreciation, but, quite wrongly, not credited with capital appreciation, which latter historically greatly exceeds the former. That is, realistically, we should have with passage of time a falling price-level with a growing source of income received independently of any incomes earned through paid work by participation in commerce or industry. The core mechanisms proposed by Douglas to rectify this revealed progressive error in national accountancy were the National Dividend and the Compensated Price (compensation of consumer prices at point of retail sale) financed by an issue of non- cost-creating consumer ‘credits’ issued, without being recorded as repayable debt, from outside the price-system to increase financial independence for the individual citizen and to effect a continuously falling price-level as the true physical cost of production falls over time.
“The true cost of production is the mean ratio, as measured in monetary units, of national consumption divided by that of production--always becoming increasingly less than a numerical value of one, as real efficiency increases with the use of new technology. Inflation of prices thus will be seen to be a fundamental violation of natural law. Money is essentially an information system. Inflation of prices is an indication of inefficiency or economic failure and is an abstract financial denial of the magnificent real advances which modern civilization has made in the realm of actual physical production efficiency.
“These new Social Credit consumption credits advocated by C.H. Douglas would as always already have previous debt claims against them in retail prices and will be cancelled, just as is money issued via consumer bank loans at present is cancelled, when businesses receive them via retail sales and use them to repay their issuing banks in settlement of their earlier commercial loans contracted in the usual manner for the facilitation of business operations. Money recovered by industry via price and replaced to capital reserve has a similar effect to its use for repayment of existing bank loans inasmuch as it is no longer available as consumer income and can only become so by reissue for a whole new cycle of production which creates a complete new and additional set of financial costs.
“Social Credit challenges the historic orthodox acceptance of Say’s Law which states axiomatically that for every financial cost of production incurred an equivalent amount of financial purchasing power is issued and no overall deficiency of income can exist. While it may be true that ‘at one time or another’ in the past an equivalent amount of financial payments may have been issued, this is of little help or consolation to consumers if an increasing proportion of such income has been permanently canceled as effective income and is no longer available for purchase of goods which are currently emanating from the production system.”
To conclude this section, we return to the late 1960s and the failure by the U.S. government to enact a basic income guarantee or a negative income tax.
We now see that what should have been proposed instead, and what would have introduced real economic democracy and given the capitalist system real human value was the National Dividend.
But it was never embraced, because the banks were making so much money off the system’s failures and social conservatives were unwilling to “pay people for doing nothing.” The banks were the ones financing the gap between prices and income, and they wanted things to stay that way. The social conservatives, led by Southern conservatives, were motivated in part by racism. But they were also content to perpetuate a system where only the rich who live off their investments can be idle. Everyone else is condemned by Adam’s curse to labor from cradle to grave.
Anhttp://www.globalresearch.ca/index.p...xt=va&aid=7762

Richard C. Cook is a retired U.S. federal government analyst, whose career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, and NASA, followed by twenty-one years with the U.S. Treasury Department. His articles on economics, politics, and space policy have appeared on numerous websites, and he is cited in the Wikipedia article on “Economic Democracy” as one of the world’s leading monetary reformers. His book on monetary reform entitled We Hold These Truths is in preparation. He is also the author of Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age, called by one reviewer, “the most important spaceflight book of the last twenty years.” His website is at www.richardccook.com.

January 10th, 2008, 11:02 PM

That's a beefy article but his conclusion reminds me of the video "The Story of Stuff", it's out there on google and is kind of interesting in a simpler way.

"As indicated earlier, Big Finance is in fact a protection and loan-sharking racket that has been stolen from “We the People” through the agency of weak, ignorant, and dishonest politicians."

It sure looks that way. The scariest aspect of central banking to me is the fact they seem to profit in the good times and the bad. Can they make money while inflating an economy and then 'reap the harvest' when it crashes?

I suspect like the 30's we are about to see very big banks buying up smaller banks and all of their assets, well more than ever anyway. We may just witness the largest transfer of wealth in the history of the world over the next 10 or so years.

Like George Carlin says."It's a big club, and your not in it!"

January 11th, 2008, 05:23 PM

On the Toro Rating Scale of Economic Accuracy and Sanity, aka "TRS-ASS," out of 10, I rate this article

2.0

- It gives a few tidbits of accurate information but veers into strange conspiracy theories.
- It references social credit, a discredited theory in economics.
- It comes from Globalresearch.ca, which automatically knocks it down 7 TRS-ASS rating points.

January 11th, 2008, 06:11 PM

Thanks for the link to that stimulating refutation Toro,we were in danger of getting sucked in by that bogus article, you managed to rate the OP like the ratings institutions do, with absolutely no proof or reason, why should we invest in your stock eh. When you offer a cheeseburger it should have some beef in it. Where's the damn beef? Come on Toro, one chart,just one little chart.

January 11th, 2008, 06:43 PM

January 11th, 2008, 07:02 PM

A beautifully coloured torus, sweet I'll have my decryption team get right to work on it.