RSS
 


Understanding the Global Financial Crisis: Ellen Brown Explains How the Crisis Happened and How to End It

28 May

If every person suffering the adverse effects of the global financial crisis would read and understand this excellent article by Ellen Brown, it might be possible to create the change necessary to solve the ‘financial crisis’ forever. Not only to stop the stripping of public assets and property from the sovereign nations and peoples of the world but to put a stop to the enslavement of the many by the few through elite-controlled private banking elite.

 

The Global Debt Crisis: How We Got in It and How to Get Out

Countries everywhere are facing debt crises today, precipitated by the credit collapse of 2008.  Public services are being slashed and public assets are being sold off, in a futile attempt to balance budgets that can’t be balanced because the money supply itself has shrunk.  Governments usually get the blame for excessive spending, but governments did not initiate the crisis.  The collapse was in the banking system, and in the credit that it is responsible for creating and sustaining.

Contrary to popular belief, most of our money today is not created by governments.  It is created by private banks as loans.  The private system of money creation has grown so powerful over the centuries that it has come to dominate governments globally.  But the system contains the seeds of its own destruction.  The source of its power is also a fatal design flaw.

The flaw is that banks advance “bank credit” that must be paid back with interest, while having no obligation to spend the interest they collect so that borrowers can earn it again and again, as they must in order to retire the debt.  Instead, this money is invested in various casinos beyond the borrowers’ reach. This leads to a continual systemic need for more new bank credit money, more debt with more interest attached, to prevent widespread defaults and deflationary collapse.

Today this problem is particularly evident in the EU.  The Euro is a fixed currency system that does not allow for expansion to meet the demands of the private lending casino.  The result is that EU member nations collectively are being crippled by debt.

There are more sustainable ways to run a banking and credit system, as will be shown.

How Banks Create Money

The process by which banks create money was explained by the Chicago Federal Reserve in a booklet called “Modern Money Mechanics.”  It states:

“The actual process of money creation takes place primarily in banks.” [p3]

“[Banks] do not really pay out loans from the money they receive as deposits.  If they did this, no additional money would be created.  What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.  Loans (assets) and deposits (liabilities) both rise [by the same amount].” [p6]

“With a uniform 10 percent reserve requirement, a $1 increase in reserves would support $10 of additional transaction accounts.”  [p49]

 A $100 deposit supports a $90 loan, which becomes a $90 deposit in another bank, which supports an $81 loan, etc.

That’s the conventional model, but banks actually create the loans FIRST.  (Picture how a credit card works.)  Banks need deposits to clear their outgoing checks, but they find the deposits later.  Banks create money as loans, which become checks, which go into other banks.  Then, if needed to clear the checks, they borrow the money back from the other banks.  In effect, they borrow back the money they just created, pocketing the spread between the interest rates as their profit.  The rate at which banks can borrow from each other in the U.S. today (the Fed funds rate) is an extremely low 0.2%.

How the System Evolved

The current system of privately-issued money is traced in “Modern Money Mechanics” to the 17th century goldsmiths.  People who left gold with the goldsmiths for safekeeping would be issued paper receipts for it called “banknotes.”  Other people who wanted to borrow money were also happy to accept paper banknotes in place of gold, since the notes were safer and more convenient to carry around.  The sleight of hand came in when the goldsmiths discovered that people would come for their gold only about 10% of the time.  That meant that up to ten times as many notes could be printed and lent as the goldsmiths had gold.  Ninety percent of the notes were basically counterfeited.

This system was called “fractional reserve” banking and was institutionalized when the Bank of England was founded in 1694.  The bank was allowed to lend its own banknotes to the government, forming the national money supply. Only the interest on the loans had to be paid. The debt was rolled over indefinitely.

That is still true today. The U.S. federal debt is never paid off but just continues to grow, forming the basis of the U.S. money supply.

The Public Banking Alternative

There are other ways to create a banking system, ways that would eliminate its ponzi-scheme elements and make the system sustainable.  One solution is to make the loans interest-free; but for Western economies today, that transition could be difficult.

Another alternative is for banks to be publicly-owned.  If the people collectively own the bank, the interest and profits go back to the government and the people, who benefit from decreased taxes, increased public services, and cheaper public infrastructure.  Cutting out interest has been shown to reduce the cost of public projects by 30-50%.

In the United States, this system of publicly-owned banks goes back to the American colonists.  The best of the colonial models was in Benjamin Franklin’s colony of Pennsylvania, where the government operated a “land bank.”  Money was printed and lent into the community.  It recycled back to the government and could be lent and relent.  The system was mathematically sound because the interest and profits were returned to the government, which then spent the money back into the economy in place of taxes.  Private banks, by contrast, generally lend their profits back into the economy, or invest in private money-making ventures in which more is always expected back than was originally invested.

During the period that the Pennsylvania system was in place, the colonists paid no taxes except excise taxes, prices did not inflate, and there was no government debt.

How Private Banknotes Became the National U.S. Currency

The Pennsylvania system was sustainable, but some early American colonial governments just printed and spent, inflating the money supply and devaluing the currency.  The British merchants complained, prompting King George II to forbid the colonists to issue their own money.  Taxes had to be paid to England in gold.  That meant going into debt to the English bankers.  The result was a massive depression.  The colonists finally rebelled and went back to issuing their own money, precipitating the American Revolution.

In an international first, the colonists funded a war against a major power with mere paper receipts, and won.  But the British counterattacked by waging a currency war.  They massively counterfeited the colonists’ paper money, at a time when this was easy to do.  By the end of the war, the paper scrip was virtually worthless.  After it lost its value, the colonists were so disillusioned with paper money that they left the power to issue it out of the U.S. Constitution.

Meanwhile, Alexander Hamilton, the first U.S. Treasury Secretary, was faced with huge war debts, and he had no money to pay them.  He therefore resorted to the ruse used in England known as fractional reserve banking.  In 1791, Hamilton set up the First U.S. Bank, a largely private bank that would print banknotes “backed” by gold and lend them to the government.

The ruse worked: the paper banknotes expanded the money supply, the debts were paid, and the economy thrived.  But it was the beginning of a system of government funded by debt to private bankers, who lent banknotes only nominally backed by gold.

During the American Civil War, President Lincoln avoided a crippling war debt by returning to the system of government-issued money of the American colonists.  He issued U.S. Notes from the Treasury called “Greenbacks” rather than borrowing at usurious interest rates.  But Lincoln was assassinated, and Greenback issuance was halted.

In 1913, the privately-owned Federal Reserve was authorized to issue its own Federal Reserve Notes as the national currency. These notes were then lent to the government, eliminating the government’s own power to issue money (except for coins).  The Federal Reserve was set up to prevent bank runs, but twenty years later we had the Great Depression, the greatest bank run in history.  Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, wrote in 1934:

“We are completely dependent on the commercial Banks.  Someone has to borrow every dollar we have in circulation, cash or credit.  If the Banks create ample synthetic money we are prosperous; if not, we starve.”

For the bankers, however, it was a good system.  It put them in control.

Setting the Global Debt Trap

Prof. Carroll Quigley was an insider groomed by the international bankers.  He wrote in Tragedy and Hope in 1966:

“The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.  

“The apex of the system was to be the Bank for International Settlements [BIS] in Basle, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.  Each central bank… sought to dominate its government by its ability to control Treasury loans….”   

The debt trap was set in stages.  In 1971, the dollar went off the gold standard internationally. Currencies were unpegged from gold and allowed to “float” in currency markets, competing with other currencies, making them vulnerable to speculation and manipulation.

Read the rest of the article

 

Tags: , , , , ,

Leave a Reply