Do Banks MAKE Money?
Gold-Production and currency.
Russia the second largest producer.
Who financed the Nazis?
By James Leatham.
The Elgin correspondent (Mr Jefferson) whose communication suggesting a return o the Gold Standard as a cure for Inflation set us discussing that subject, writes once more: -
You state: ‘Before Britain went off the Gold Standard in 1914 it was said that the Scots banks had a note issue of £90,000,000 on a total gold reserve of £4,000,000.’ Now, there is no doubt whatever that the banks all over the world issue on loan money that they have not got, nor, in fact, does it exist. This means that they lend (Nothing) for a payment (in gold), and in time they must get all the gold in existence.
What is Credit?
The truth is, of course, that gold does not figure in the transaction one way or the other. Minted gold once played in England the part that bank notes have always filled in Scotland. But a sovereign has for long had a curiosity rather than a currency value; you take it to the jeweller and get 70 to 80 per cent more than its face value for it. Instead of ‘all the gold in existence’ finding its last resting-place with the banks ,there never was a time when the banks held so little of it. They do not need it. The wealth of a bank lies in its investments, its interest-bearing advances, and the commission on cheques and bills discounted. A good draft or cheque is sound money, and more portable than gold sovereigns. A pound note is a certificate of value, and that is all that any currency need be.
It is said by the Social Creditors that the banks manufacture and also restrict credit. There is a certain amount of truth in that claim; but the banks cannot manufacture unlimited credit as the Douglasites suggest should be done. If the banks could call wealth into existence merely by giving an order to the lithographers to print notes irrespective of whether or not there were real assets behind them, then we should quickly have a repetition of all the phenomena of inflation as seen in Germany in the 1920’s. The banks themselves are anxious to avoid this.
Currency is being Hoarded.
In the second week of August a scarcity of so-called Treasury notes, now issued by the Bank of England under Parliamentary regulation, was reported. A fortnight later under the reflux of holiday spendings raised the supply of currency notes in the hands of the banks from 12 to only 14 millions still. Five months ago the fiduciary issue was raised by £50,000,000, and now stands at £680,000,000. This means that these notes are being hoarded by people who have no bank account. They are helping to cause inflation, apart from the risks they run of losing the money by bombing, fire or other mishap.
What the banker gives and gets is mostly credit. He gets and gives a certain amount of silver and copper currency; but the great bulk of the assets standing in his ledgers represents credit, of which only a small part has, or needs, cash cover. This should not require statement; but a school of currency theorists has arisen whose views are not inaptly stated in the following passage from our correspondent’s letter: -
The producer is often compelled to borrow (nothing) from the banks, on repayment of (gold) and interest (also in gold.)
Nothing of the kind really happens in this country nowadays, since gold has disappeared from currency. A bank’s paper is at least as good as the paper bought by the ‘producer’ whether it be notes, cheques or crossed postal orders. The Douglasite theory that the banks can literally make money is based on the experience acquired in the last war, when there was undoubted inflation, the great monument of which is the National Debt. Banks shareholders were not the only people who profited, and still profit, by large scale bonding of future earnings to meet a present emergency. The National Debt to all stockholders was increased two-fold. And when the rates of interest were reduced there were protests, in which Bernard Shaw and H.G.Wells joined. It is not enough that the banks and the Treasury take care of the saver’s money for him. He wasn’t to be paid by them in addition, for putting the money to a use which, apparently, he could not or did not put it himself.
In a capitalist system we are all less or more interested directly or indirectly in this taking of something for nothing. Even I, who have no investments apart from the Deveron press, receive dividend warrants for a number of charities whose funds are invested in war stocks.
Banks Sometimes Break.
If banks could create credit to an unconditional extent, why don’t they do it? Why should they occasionally fail? Wherever human nature enters into business practice there will always be variations between the very cautious bank manager who will take no risks and the good-natured enterprising man who will stretch a point to oblige a customer. The latter may sometimes get bit, and may or may not make good the losses out of his own resources. There are favoured industries. In textile towns manufacturers used to be allowed to overdraw, in farming areas both landlords and farmers got rope, and in the fishing towns one bank was nearly brought down by its advances its agents had given to herring-curers. When two northern banks were amalgamated it was found that the same men had overdrafts in both.
I cannot understand the feeling entertained against banks by people who are not politicians and who are not even in favour of nationalising of banks. What seems to be wanted in a bank is philanthropy. As it is, the banks do a lot of work for nothing, such as cashing crossed postal orders. The Post Office has drawn poundage on them, but will not cash them to the payee. The bank cashes them (something missing … the deal) For the rest, I have been swindled by individuals , but never lost a penny by a bank.
Not the Medium, but its Sharing.
So far as currency is concerned, what is important is not the medium, but the share of it one gets, whether in paper, cows, cowries, or coins, all of which have served as currency. Gold itself is not what it pretends to be. Even a new sovereign had an alloy, and after eighteen years in circulation it was under weight. It is not, too, as if there were any fixity or permanence about the value of gold bullion. Under the Soviets immense quantities of gold are mined, and it belongs to the state. Russia’s gold production is said to be the second largest in the world. The Transvaal is the largest, with an output in one recent year of 10 ½ million ounces of pure gold, being rather less than a third of the world’s output. There are, I find, thirty-one gold-mining companies combined into four groups, with offices in Johannesberg. Their published Declarations Dividend for the past year show profits running up to 91 per cent. So that there is still plenty of demand for this metal.
With the price around 166s an ounce – it used to be 34s – we are still a long way from the state of affairs described in More’s Commonwealth of Utopia, where ‘of gold and silver they make chamber pots and… great chains, fetter, and gyves wherein they tie their bondmen. Finally, whosoever for any offence be infamed, by their ears hand rings of gold, upon their fingers they wear rings of gold, and about their necks chains of gold and … their head be tied about with gold.’
Real Wealth and Credit.
Credit is normally a genuine entity, not a book-keeping figment. The bank makes an advance to a farmer on the value of his live stock and growing crops, to the trader on good book debts for work done or goods supplied, to the proprietor of lands or houses having a rental revenue, even to the hard-up salaried man whose only portable property is an insurance policy. A bank will normally take any ‘good risk.’ It is not interested in speculative finance; there are only too many gilt-edged securities, as the taxpayer knows to his cost. But the spoil from the public is well spread over a large rentier class. I would have banking nationalised; but if it were there would be an end of bank loans. As in the case of our only existing State Bank, the Post Office, you could only draw out what you had put in, plus a little interest, and that only for a time, until socialisation was complete. I have never had an overdraft.
Who Financed the Nazis?
What I have written as to credit is true of normal times. In war time there may be deliberate inflation, the creation of a paper currency which has no present material value behind it. In the last war people in some business standing lent their names to the floatation of War Loan Stock who could not have put down cash or cashable assets for it. For the redemption of this stock (if it is ever to be redeemed) the earnings of the whole body of the nation’s workers were pledged to an unknown future. The standing memorial of it is the National Debt, multiplied tenfold in four years and now rising much faster than ever. That Debt is a liability to the nation that pays interest on it, but an asset to the millions who draw dividends on it. There have been wholesale repudiations of external debts, as in the case of the debts to America, and the rates of interest have been reduced to our own stockholders. There will be repetitions of both repudiation and the scaling down of interest payments. The capitalist system is impossibly top heavy. In real wealth – heavy industry, cultivated fields, and usefully employed people, Germany and Russia are far richer than plutological Britain, with her stocks and shares in concerns situated all over the world. Germany has spent too much money on guns, but even in this she has been helped by American and European investors to the extent of 16,623 million reichmarks. It is no wonder if Fritz scoffs at the pluto-democracies as he wrecks their citiies with bombs they have themselves paid for.
By much the heaviest contributors to German re-armament have been the capitalists of the United States, who weighed in with 8,391,9000,000 reichmarks. After them came the moneylenders of the Netherlands who provided 3,575,000,000, for which they could find no more tempting use. Little Switzerland was third on the list. Britain, in the fourth place for enormity, contributed 2,415,000,000. It is a necessity of the capitalist system that the fleecings should be invested somewhere!
This article was originally published in Gateway in the 1940's.
To find past articles please use monthly archives.