Bill Totten's Weblog

Thursday, September 23, 2010

Time to Put the Horse before the Cart Again

Time to put the Economy before the Banking System

by Alistair McConnachie

Prosperity (January 2009)

A version of the following was delivered by Alistair McConnachie to the Islam Awareness Week function at the Sir Charles Wilson Building, Glasgow University on Thursday 4 December 2008, and to the Global Vision 2000 Conference at Lancaster Gate, London on Saturday 13 December 2008, with the aid of a PowerPoint presentation.

Let me begin by laying a quote on you! And I'm going to be repeating this quote several times today because it sums up my message to you.

The power to create money should be taken from the banks, and restored to the people to whom it properly belongs.

Let's hear it again:

The power to create money should be taken from the banks, and restored to the people to whom it properly belongs.

Now, it is reputed that the American President Thomas Jefferson may have said a version of those words back in the early 19th century. To be frank with you, I don't know if he did. They sound a little too good to be true! Perhaps that quote can't be authenticated. Perhaps it can't be stood up!

But you know what, that doesn't really matter, because if Thomas Jefferson didn't actually say those words, well ... I'm saying them, right now!

And it is within this quote: "The power to create money should be taken from the banks, and restored to the people to whom it properly belongs", that we find both the Cause of the global crisis and the Solution to the global crisis.

The Cause is that we are dependent upon the private, corporate banking system for our money supply ... and the Solution is that this power should be returned to the people - to our democratic control.

That's your take-home message!

But let me explain it in greater depth. Before, I do, though, I want to get some definitions clear, so that when I use certain words or phrases, you will know what I am meaning. I'll be talking about ...

"Commercial Banks"

These are the High Street banks - Royal Bank of Scotland, Clydesdale, Barclays. These are engaged in the taking of deposits and the making of loans.

These banks create money when they make loans. That is to say, they are able to lend money which they don't actually have!

When we ask it for a mortgage, the bank doesn't necessarily have GBP 100,000, but by pressing a few keys on a computer then it can effectively create this money out of nothing and put it in your account.

It is a risk to the bank. After all, we may not pay it back, and if we don't then it will be marked down on the bank's profit and loss account as a real loss to it ... of GBP 100,000.

But they are banking, literally, on us paying it back ... and we usually do!

So, that is to say, by the use of electronic digits they create money and lend it to you and I.

Around 97% of money in society is created by the private banking system in this way – the majority of it for mortgages. That's 97% - almost all of it! Money Reformers call this "privately-created money" - money created as a debt, by the private or "corporate" banking system. 97% of money in circulation today is privately-created money!

Commercial banks are different from ...

"Investment Banks"

These issue and underwrite "securities" - bonds - and engage in stock market trading and financial advice. They buy and sell all manner of "financial products" in the money markets, and they can make a lot of money that way. These are names like Goldman Sachs or Morgan Stanley. They don't create money, like commercial banks - rather they borrow money from commercial banks.

I'll be coming back to the relationship between commercial banks and investment banks shortly.


In line with the definition promoted by Stephen Zarlenga the Director of the American Monetary Institute - which can be researched at - we define this much more broadly than simply "the taking of interest".

We define this as "the misuse of the monetary system" {1}. That's a very broad, but helpful, definition: "The misuse of the monetary system".

Cause of the Crisis, Number 1:

Banks making Loans to People who can't Pay them Back

I mentioned that a commercial bank can create money out of nothing, and lend it to you. It can create GBP 100,000 out of nothing and lend it to you to buy a house.

The upside for the bank is that if you pay it all back, it gets back GBP 100,000 plus interest. But, as I said, there is a risk to that loan. There is a downside for the bank.

If you default - that is, if you don't pay the money back - then the bank has to consider that to be a real loss, and it will have to subtract a real GBP 100,000 of money from its profit that year.

Now, understandably, banks don't like the thought of that risk - all those potentially defaulting loans - sitting on their accounts.

So, some whizz-kids came up with the idea of removing the risk from the balance sheets via a financial product called a "credit derivative". How to do that?

The idea was that the risk - say your GBP 100,000 mortgage - well, that debt would be sold onto other people who would enjoy some of the profits if the loan went well, but who would take some of the hit, if the loan went pear-shaped.

The banks argued that by trading in these "credit derivatives", they had spread their risk elsewhere. Since they now appeared to have less risk on their balance sheets, they believed that they could now create more money out of nothing, and make more loans, than they might otherwise have been able to do if they hadn't spread their risk.

The more they spread their risk, the more loans they dared to make.

Simply put, by claiming to spread the risk to other people, these "credit derivatives" allowed for the banks to create even more money than ever before and to extend even more loans to even more groups of risky borrowers, than ever before.

The banks were saying, "Hey, we can lend, and we don't have to be worried about the repayment risk. We can just enjoy the profits of the lending, without suffering the pain of any losses!"

This created a huge bubble of money - lots of loans were made, and lots of money came into the system, money which had been created out of nothing by the corporate banking system!

It was stupid and it was driven by greed, and it was bound to fail - and it was a classic example of usury - the misuse of the monetary system.

So, what happened? The chickens started coming home to roost.

People started defaulting on their loans - they couldn't pay!

And the banks very quickly found out that these "credit derivatives" didn't protect them from loss ... after all ... and the banks began to lose huge money on the loans which were not being paid back.

Like the house of cards they were building, Woof, and the walls came tumbling in!

The entire financial system was thrown into systemic crisis, and all because of its own stupid fault.

Banks making loans to people who can't pay them back ... that's one reason for the present crisis. Another big reason ...

Cause of the Crisis, Number 2:

Banks Lending Money for Gambling in the Global Casino

Remember I said that commercial banks were in the business of taking deposits and making loans while investment banks were in the business of buying and selling bonds in the money markets.

Well, commercial banking and investment banking used to be kept apart, by law, because, wisely it was realised that if you allow commercial banks to create and lend money to investment banks, then these investment banks will take that money onto the stock markets and create havoc with these mountains of money.

Literally, it is like lending huge amounts of money to a gambler to take to a casino!

As I say, this relationship used to be forbidden. For example, the Glass-Steagall Act of 1933, in the USA, was passed in the wake of the Wall Street Crash, where so much damage had been done by commercial banks playing the field of investment banking.

The bad news is that President Clinton repealed the Glass-Steagall Act in 1999!

This meant investment banks now had access to virtually unlimited sums which could be created by the commercial banks out of nothing, and which would allow both commercial banks and investment banks to play the markets for huge profits, and to cream off huge bonuses as a result of all the tens of billions of new money now sloshing around.

Of course, the investment banks loved that.

And the commercial banks, for their part, saw investment banking as a whole new field in which the profits - or the casino winnings - whatever way you want to look at it - were potentially unlimited.

The firewalls, which had been in place to prevent this destructive coming together of commercial banking and investment banking, were torn down - and they are still down.

They need to be put back up! What would that mean in practice?

If you forbid investment banks from borrowing from commercial banks, then it would mean that investment banks would have to use real money which actually existed, not money which had been created out of nothing and borrowed specifically for gambling on the markets.

The commercial banks, for their part, would have to concentrate on taking deposits and making loans.

That is something we could do straight away, without too much radical change to the system.

So let us just rehearse these two Causes of the Crisis:

1. The foolish use of "credit derivatives" which claimed to remove the risk of lending, encouraged the commercial banks to create more and more money to make more and more foolish loans, which are now coming back to bite them.

2. All of which was made worse by the second reason which is the removal of the firewalls between commercial and investment banking, which has enabled huge amounts of money to be created by the commercial banks and loaned for gambling with highly risky "financial products" such as these "credit derivatives" and other products which are now exposed as worthless - or "toxic" - and likely to lose the banks large amounts of money.

So really, the commercial and investment banking systems are the authors of their own downfall, and it is highly questionable why they should be supported in any way.

The Consequence for Us All is "A Credit Crunch"

The banks have over-extended themselves and are now in crisis. They realise now, too late, that they need to build up their capital reserves as much as possible, because they may need a large cushion of real funds to soak up the huge potential losses which are likely to hit them somewhere down the line.

So, Banks are doing two things:

1) They have stopped lending to each other for fear that their loans won't get paid back!

Banks lend to each other just as they lend to individuals - by creating money out of nothing.

But right now, they don't want to lend to each other because they're afraid that the other bank will have masses of these "toxic debts" on their balance sheets, which will prevent it being able to pay back the loan.

2) They are hoarding what real money they manage to acquire!

They are building up their capital reserves - their reserves of real money. They are doing this in case they need that money to cushion the losses which may be awaiting them somewhere down the line, as a result of their toxic debts.

Why Should This Matter to US?

Now, why should any of that matter to us? What does it matter to us that some private banks go to the wall, or some investment companies hit hard times and collapse?

Well, you know what? It shouldn't matter! And it should have very little bearing on our lives, and under the reform which I will propose shortly, it would not matter!

But it does matter to us all today because it is through the corporate banking system that almost all our money - almost all of our means of exchange - almost all of the necessary tokens which we need to exchange just to stay alive - comes into circulation.

It matters to us all today because it is through the corporate banking system that - as I said at the start - 97% of our money comes into society - through the mechanism of the banking system ... making loans.

When banks start hoarding their money and stop making loans - then the supply of money into society drys up. We all suffer!

And we get headlines like this one in The Scotsman of 5 December, "Start lending or else, Darling tells banks" {2}.

That is a blatant admission from the Chancellor that the banks are the principal supplier of money into our economy, and that the health of our economy is utterly dependent upon bank-lending - utterly dependent upon the privately-created, debt-based money system which the banks operate!

So, What Should Be Done?

What did I say at the start of this talk? Let's hear it again!

The power to create money should be taken from the banks, and restored to the people to whom it properly belongs.

This crisis demonstrates the extent to which we are dependent upon the corporate banking system not only for our means of exchange, but for the entire health of our economy and everything that implies for our very day-to-day existence!

That is back-to-front!

Let us use an analogy: The horse and cart.

The horse should be the economy. The cart should be the banking system.

Normally, the horse should be pulling the cart - up hills, down dales.

A healthy economy should be pulling a healthy banking system.

Yet, when you put the cart before the horse, when you put the banking system before the economy, you have the banking system trying to pull the economy - and that can only be for the worse.

It can't go up a hill, and it will clatter down one, pulling the poor horse, our economy, behind it!

Yet, that is the way we try to run our economy!

The health of our public economy is being made to depend upon the health of our corporate, privately-owned banking system!

We need to put the economic horse before the banking cart again!

So Let's Get to the Solution!

We need to switch from a money supply dependent upon the corporate banking system for its creation, to a money supply based upon the good credit of our society - that is, upon the abundant wealth found inherently in the people, skills and materials which make up our country. This requires public ownership of the money supply.

Now what was that phrase again ...

The power to create money should be taken from the banks, and restored to the people to whom it properly belongs.

At present - as I said at the start - we have a "privately-created money supply". We need to switch to a "publicly-created money supply".

In practice, this means an independent and accountable public body must be tasked with the ability to create and supply money to the economy.

Here is the four-point reform, which has been promoted by Joseph Huber and James Robertson in the UK, in this book Creating New Money {3} - which can be downloaded at - and by Stephen Zarlenga, in his book, The Lost Science of Money {4}. It goes like this:

1. Forbid private banks to create money. They will still exist and will still make loans, but like building societies or credit unions, they will only lend that which they actually possess.

2. An independent public body - a branch of the Central Bank - creates all the money on a regular basis. The amount it would create would be determined in accord with the monetary objectives set by the government, and the Committee would be accountable directly to Parliament.

3. Government spends this money into society via its spending projects in the public or private spheres.

4. Private banks will now compete to attract this money into their savings accounts, in order to lend out this real money to their customers.

This reform seeks to effect the full public ownership of the money creation power - the full social ownership of the power to create money.

It answers the democratic question: To whom does the power to create money belong? It answers it by saying, "It belongs to the people".

Now couple this reform with a re-imposition of firewalls between commercial and investment banking - in order to starve the investment firms of the borrowed money that allows them to abuse usuriously the money markets - and we will get back to an economy which is less vulnerable to those who would exploit it for their own gain.

We'd find:

The power to create money has been taken from the banks, and is now restored to the people to whom it properly belongs.


{1} Alistair McConnachie, "An interview with Stephen Zarlenga", Prosperity (April 2008), at page 6.

{2} Ross Lydall, "Start lending or else, Darling tells banks", The Scotsman (December 05 2008) at page 1.

(3) Joseph Huber and James Robertson, Creating New Money: A monetary reform for the information age (London: New Economics Foundation, 2000). Available for free download at

(4) Stephen Zarlenga, The Lost Science of Money: The Mythology of Money - the Story of Power (Valatie, New York: American Monetary Institute, 2002). Available to buy from Prosperity at GBP 50. Also see

Bill Totten