“This money comes into existence every time the banks ‘lend’ and disappears every time the debt is repaid to them. So that if industry tries to repay, the money of the nation disappears. This is what makes prosperity so ‘dangerous’ as it destroys money just when it is most needed and precipitates a slump.”

“There is nothing left now for us but to get ever deeper and deeper into debt to the banking system in order to provide the increasing amounts of money the nation requires for its expansion and growth. An honest money system is the only alternative.”

Frederick Soddy, M.A., F.R.S., Nobel Prize Winner, 1921.

So, we cannot say we were not warned. Ever since I first heard of fractional reserve banking, when studying A level Economics in that fateful year, 1979, I have never understood how it could be sustainable. For years I gave up trying to understand it assuming I was missing something or simply not smart enough to fully understand it.

I was doing myself a disservice.

For those that still have no idea how fractional reserve banking works, I know of no better clear and simple explanation of it than the Money As Debt video:

The most sinister and immoral aspect of the system is that banks are lending money that they do not have. You and I cannot get away with that, can we?

They do not ‘make’ money; they ‘create’ money out of thin air! A carpenter does not create a chair; he makes it from wood, thereby enhancing the wood’s usefulness and value. The value he adds by his skill is him ‘making’ a living.

Bankers, on the other hand simply credit your account, or give a cheque, against nothing more than your promise to pay it back. Central banks simply issue more money – it is known these days as ‘quantitative easing’

The only real money banks hold is savers’ deposits. They tempt people to place and keep their money with them by the paying of interest. They rely on depositors not all want their money back at the same time because they lend it out many times over and rake in multiple loads of interest on the loans.

The system works so long as loan interest is paid. It does not really matter if the principal is repaid most of the time because all that interest collected is way in excess of interest paid out to savers/depositors. It only ever gets scary for the banks if too many depositors want their money back at the same time – because they haven’t got it to hand having lent it out many times over. This is the infamous ‘run on the bank’ scenario that triggers economic depressions.

It is all built on sand – as we are currently witnessing.

Allowing banks to create money by issuing loans against thin air is pretty obviously inflationary. This is why everything costs more over time. This has been particularly obvious in the housing market. The bankers’ greed lead to them fueling house price inflation by lending out ever larger income multiples, over longer terms, and to higher percentages of the property value (over 100% even) in the belief that property values will continue to rise. This was patently stupid and unsustainable but was allowed to happen. Hence the inevitable sub-prime mortgage fiascoes that have seen mortgage defaults, people thrown out of their homes and their homes devalued through the bankers’ greed. To try and put a cap on this human disaster, interest rates get forced down to record lows and savers start to see little point in keeping their money with the banks. Banks start getting twitchy about lending, loans are called in and, as a direct consequence, the money supply starts drying up and everything starts unravelling.

The government response? Instead of abolishing the unsustainable system that has created this debt pandemic, and punishing the bankers whose insatiable greed has triggered the meltdown, what do they do? They bail out the banks with taxpayers’ money, they ‘quantitatively ease’ the situation by pumping new money into the bankers’ coffers to encourage them to start lending again and, the final slap of the public’s face, they impose austerity measures to try and control their own reckless borrowing.

Utter madness.

This is why greed is regarded as deadly sin in Catholicism and usury is regarded as a deadly sin in Islam. There is no religious reasoning here; it is simple, common human morality (that also says ‘do not kill’ and ‘treat others as you would yourself like to be treated’, for example) that dictates the merit of these declarations.

Usury is the ‘sin’ of charging interest on loaned money. Christians, in the past, and Muslims, even today, have seen the charging of any interest as sinful. Any moral human can certainly agree that the practice of charging excessive, unreasonably high, and often illegal interest rates is exploitative and indefensible.

Take a look at these supposed ‘Best Buy’ payday loan deals: http://www.moneysupermarket.com/payday-loans/

APRs of 1734% and upwards!! On loans of £100!

Only the desperate and/or the stupid would succumb to such usury. Is it not the role of a decent society, through the rule of law where needed, to protect people from exploitation? A civilised society would not allow the poverty that drives such desperation, and would crack down on the immoral exploitation of the desperate in such ways. Payday loans are the legal end of the loan shark spectrum. Something like 200,000 people in the UK are embroiled with illegal loan sharks. One million per cent APR is not unheard of in this realm.

It is patently obvious how this should be dealt with. These debts are immoral – plain wrong. They should be legally cancelled and the victims refunded everything they have paid over the loan principal. The only people that will suffer by such a policy are the greedy, exploitative, immoral bastards behind these practices.

Would you not agree? If so, hold on to that thought.

The same logic and morality has been behind the campaign to cancel Third World debt.

At the end of the ’70’s, many oil-exporting countries had large amounts of extra money. They put this money into Western banks. The banks then loaned a lot of money to Third World countries for big development projects. However, several factors (a rise in world interest rates, a global recession, and low commodity prices) caused the size of these debts to start growing very fast; several countries began to fall behind in their payments.

The amount of money owed by developing countries has increased dramatically since the early 1980’s. These countries now owe money to commercial banks and also to organisations like the World Bank, the International Monetary Fund, and to First World governments. Trying to pay off the debt (debt service) has become a serious problem for these countries, and it causes great hardship for their people. Take the region of Sub-Saharan Africa, for example. This region pays $10 billion every year in debt service. That is about 4 times as much money as the countries in the region spend on health care and education.

What would happen if we simply cancelled these debts. Quite simply, the debts would no longer exist. The developing countries would not have to repay the loans and they would not have to pay the interest. After all, what do the developing countries really owe the developed world? They have repaid their loans many times over in interest payments. In addition, in many cases, developing countries have paid the First World more (in debt-servicing) than the Northern countries have given in aid, loans and investment. From 1983-1989 a surplus of $165 billion went FROM countries receiving aid TO the countries who were ‘giving’ it. Again in 1994, the less developed countries paid out $112 billion more than they received. Of course, cancelling Third World debts now will not solve the problem in the future. To do that, we must change the present financial system, which is based on debt and interest payments; a system that keeps control in the hands of those who are rich and powerful.

So how does this line of thinking work on the current Eurozone crisis?

There is no doubt that we are at a key moment in history with regards to banking systems across Europe. There is going to be a lot of pain as we reap what we have sown for decades. The Greeks are the focus of attention at the moment but we are all in the same mire to varying degrees. The UK is on schedule to reach £10 trillion of national debt by 2015, with interest payments of £70 billion a year. With a predicted 24 million household by then, that computes to approximately £415,000 of national debt per household and annual interest of just under £3000 per household on that!!

It was Benjamin Franklin who said ” Who goeth a borrowing goeth a sorrowing”.

The capitalist system that our governments have encouraged and become beholden to has produced a system whereby the bankers, who produce nothing, slowly but surely gain a death grip over the land, buildings and labour of the nation. The borrowers have become the servants of the lenders and placed themselves, and future generations, on the treadmill of debt.

We continue to fall headlong into their vice-like grip on our futures. The steady march towards a cashless society is a utopian dream of the bankers that is almost upon us. It is a dream shared by capitalist governments as it offers the prospect of extraordinary social control: no tax evasion, no ‘black’ market, no existence outside of the system.

We are at a tipping point in history and we have the opportunity to tip the balance away from the banks and capitalist control of our lives.

There has to be some sort of revolution to change things as it is clear that our governments are intent on propping up the system as best they can, because it is the system that controls them, rather than the other way round. How that revolution will manifest itself is hard to predict at this point in time.

It it could be calm and orderly and done through the ballot box, but I am not sure there are signs to encourage that prognosis. It could get violent and nasty. There have been signs of this in Greece, especially as they been bullied out of allowing democratic input their decision making process.

Greece may become the first toppling domino precipitating economic revolution across Europe, just as Egypt was the initial toppling domino precipitating democratic revolution across the Arab world.

Even if we can dodge these rather dystopian visions, we can all do our bit to bring change and control back into our lives. Co-operatives and green economics based on localism provide alternative means of raising funds and supporting economic activity, independent of the old, decrepit, morally and financially bankrupt establishment. We have seen these sorts of new community structures begin to flourish in isolated pockets. It shows that we do not have to sit back and accept the consequences of our participation in the capitalist society that is coming apart at the seams.

If we are brave enough, we can opt out and forge a future that is truly sustainable, in every sense of that word. It is an optimistic note on which to end, although there is much work to be done in selling this vision (even to my nearest and dearest).

One final thought, pinched from Andy Parsons stand up show, we will know when we are getting somewhere when, instead of teachers and students marching the streets worried about their futures, we see bankers out there instead!!