modern banking

The following figures for 1996 are from the Bank of Canada Review, Spring 1997, and Statistics Canada.  In 1996 the GDP (gross domestic product) was $797.8 billion.  The federal debt was $469.4 billion or 58.1 percent of the GDP.  Interest payments on the federal debt—mostly financed with interest-bearing bank created money (BCM) rather than interest-free government created money (GCM)—amounted to $45.3 billion.  The interest on the 6.7 percent of the federal debt held by The Bank of Canada and other government agencies flows back to government on our behalf.  The approximately $42.2 billion in interest on the remaining 93.2 percent of the federal debt held by private banks and other members of the financial elite, domestic and foreign, is basically a subsidy to the wealthy.  For reasons that have nothing to do with economic sense and everything to do with the fact that money buys political influence our government taxes ordinary citizens to pay for that subsidy.  Assuming 15 million taxpayers (children and poor people don’t pay taxes) we divide $42.2 billion of interest by 15 million and get an average of $2813 per taxpayer.  But when you add provincial and other public debt to the federal debt you get a total of approximately $650 billion.  So let’s say about $3500 per taxpayer.

Now what about private debt?  If you have a $160,000 mortgage or small business loan at 7 percent, and it is amortized over 25 years, then your average annual interest will be $7242.  (Over the 25 year period you’ll pay $181,050 in interest, which is more than the principal.)  Yet there’s no economic reason why a government agency couldn’t create and lend you that $160,000 at just enough to cover the cost of administering the loan, say 0.25 percent.  Now your annual interest would be $206.

Here’s another way of looking at the folly of BCM.  In 1999 bank credit amounted to $557 billion, almost 95 percent of our money supply. Real interest (i.e. nominal interest minus inflation) on this bank credit was at least 5 percent, or $28 billion. But where is this interest to come from since banks create credit, but not the interest they charge on that credit? It can’t come from the approximately $32 billion in cash (GCM) that circulates in public hands. It can only come from more bank credit with more interest attached. But for all existing bank credit to be paid without anyone defaulting on their loans, the economy must expand by 2.9 percent ($28 billion of interest divided by the GDP, $953 billion). Since the average annual real GDP growth from 1960 to 1995 was only 2.3 percent, the economy is going to repeatedly stumble in its effort to keep up with the interest payments on all that bank credit. This is the root cause of what is known as the business cycle, and there’s nothing inevitable about it. A lot of economic weather is man made. It is tolerated because it is the consequence of a system designed to provide investment income to those with financial assets. The cost to the community is increasing public and private debt with all the economic failure and misery that goes with it when the economy slows. What we have in a debt money system is cruelty motivated by self-interest and rationalized under the guise of economic law.

BCM should be abolished just as slavery was abolished.  But it won’t happen until the public understands the magnitude of this hidden injustice and screams blue murder.  But better scream soon.  With weapons like NAFTA and the MAI international banking fraternities, such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS), will soon have the middle class in their gun sights.  They may use a crashing stock market as a smoke screen to contract the money supply as did the Fed in 1929.  (In a radio interview in 1996 free-market champion and economic advisor to Nixon and Reagan, Milton Friedman said, “The Federal Reserve [the privately owned U.S. central bank] definitely caused The Great Depression by contracting the amount of currency in circulation by one third from 1929 to 1933”.)  Then the screams will be deafening.  But it’s better to cry out before you are hurt than after you are hurt, especially after you are critically hurt.

Do you want to take some action?  First discuss this with family and friends.  Then send a few emails containing the link to this webpage.  For the really committed ask your local bank manager just how much truth there is in the claim that banks siphon off wealth from the community through their unjust privilege of creating interest-bearing money.  (Government created money is interest-free.)  You can be fairly sure he or she will resort to their much feared weapon—impenetrable economic jargon.  Some bankers will actually deny that banks create any money!  This is an example of what Marshall McLuhan called motivated ignorance.

Opinion about this article : Modern Banking focuses on the theory and practice of banking, and its prospects in the new millennium. The book is written for courses in banking and finance at Masters/MBA level, or undergraduate degrees specialising in this area. Bank practitioners wishing to deepen and broaden their understanding of banking issues may also be attracted to this book. While they often have exceptional and detailed knowledge of the areas they have worked in, busy bankers may be all too unaware of the key broader issues. Consider the fundamental questions: What is unique about a bank?and What differentiates it from other financial institutions? Answering these questions begins to show how banks should evolve and adapt - or fail. If bankers know the underlying reasons for why profitable banks exist, it will help them to devise strategies for sustained growth.

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