How Banks and the State print Money to steal from You
Updated: Oct 28, 2020
In the nearly free Victorian era consumer prices in Britain fell steadily as technology cut costs. But over the last century Democratic Socialist states and their banker and crony corporate allies have created inflation deliberately to help themselves to your money.
In 1914 the British government went off the gold standard for good as it turned out.. It took away your legal right to get your cash out of the bank in gold. Before then if you asked to withdraw, say, £5 (then two weeks wages for a skilled man) you would automatically be offered either a Bank of England five-pound note or five gold sovereigns. But the government wanted the bankers to create a vast amount of new money out of thin air. It wanted to borrow money to waste on WWI, arguably Britain’s stupidest war, and certainly its most damaging.
Contrary to popular belief Britain never went back on the gold standard. There was a brief gold exchange standard arrangement with European governments, which Britain welched on in 1931. Later the 1944 Bretton Woods agreement brought an increasingly implausible indirect link to gold via the dollar. Tricky Dicky Nixon finally ended that in 1971.
Since then there has been no real constraint on the banking system’s ability to create money out of thin air. We have so-called ‘paper money’. Infinite amounts can be created. Bankers prosper by collecting more interest and commission income on money that they just fabricate when they lend. When they overdo it and create bad loans, government central banks create still more to bail them out. Naturally they bail out the state’s other crony corporate mates. But the small and medium enterprises where most people work – not so much.
The best way to understand modern commercial banking money creation is as a lending-led system creating money out of nothing. Imagine you go to the bank and get a £1m loan to buy a house. This money did not exist anywhere at all before the bank processed your loan. This is key. The new money and your new debt are the same thing. In its balance sheet the bank just writes up its Assets by a £1m loan to you. It adds to its Liabilities a balancing chequeing account deposit of £1m. Your solicitor then draws on this new money to buy your house and pay his fees.
When more money is loaned out by the banks, money and debt are both created out of nothing. And when debt is repaid faster than new loans are made, the corresponding money is also destroyed. This destabilising whipsaw effect is pernicious. It intensifies the downward lurch into each depression. And it would not happen in a free society which would have sound money, much less and honestly incurred debt, and no fraudulent money creation. There could be no banker or crony corporate bail–outs in a free society.
Right now, bankers worldwide in these early stages of a classic slump are trying to rein in their borrowing at the same time that central banks are exponentially ‘printing’ more money to offset the looming contraction. In the short term there will be deflationary spasms of falling financial and property asset prices, before rapidly rising general price increases kick in to dislocate economies worldwide.
Today’s post looks at the effect of the deliberate long-term fall in the purchasing power of our money. The result has not been good. When my grandmother was a child that crispy pre-1914 fiver was a lot of money. Now it might get you two cups of coffee. The rest has been stolen. Why do I say stolen? Well, stolen means that somebody has taken money against the owner’s will by acting in a way that would normally be illegal (and wrong). That is what has been happening in this case. The banks have the state-granted privilege of creating new money from nothing without any legal recourse against them. The state stands ready, via Central Banks, to create yet more money to bail out bankers and other crony corporates. Yet if ordinary folk act as bankers do and ‘create money’, they get jailed for forgery or counterfeiting.
Cui bono? Who benefits? It is always a good question. Money printing leads inevitably and unfairly to rises in the cost of living for savers and workers. Governments and banks know it and yet they go on doing it for their own profit. The politicians intentionally borrow money from savers to buy votes. They know that they will not have to repay anything like the original full value. The banking system will have pushed up prices and reduced the value of money in the interim. For example, say the state borrows £1m to be repaid in twenty years by selling a 20-year bond. Its real purchasing power twenty years later will have been deliberately pushed down to less than half the original value. (No wonder Gordon Brown had to make private pension finds buy UK bonds.)
All this money creation is at the expense of productive savers and workers. Their incomes lose value as the new money pushes up prices in the shops. We take it for granted that prices always go up over the years. But it was not always the case. In The Shambles in the medieval quarter of York there is a plaque on a building describing its history. There were two sales about a century apart in the 17th and 18th century. Both occurred at pretty much the same price of around £600 - £800. Whatever our forebears were doing, they were not worrying about spiralling prices for property or anything else. At the time of the Spithead Mutiny in 1797 naval pay for sailors had been unchanged for a century and a half without – until then - serious consequences.
Because Britain became a classical liberal society, especially in economic terms, it pioneered the wonderful Industrial Revolution. This was basically the first ever general improvement in mass living standards in history. The good it is still doing around the globe in lifting people out of absolute poverty is arguably the key fact of our times.
In the nineteenth century heyday of British leadership from the end of the Napoleonic War in 1815 to the South African Gold rush in the 1890s, with gold as money, the general level of prices in Britain roughly halved. In another example, between the end of the American Civil War in 1865 and America formally joining the Gold Standard 15 years later, the US economy pretty much doubled in size whilst consumer prices nearly halved.
This ought not to be a surprise. In any reasonably free society, there is a constant improvement in products and reduction in costs of production – in other words economic progress. The real cost of goods and services naturally fell constantly. They fell, relative to the cost of mining additional gold (until the 1890s). Britain had a steady, gentle fall in money prices in the 19th century. We all should have had more of the same throughout the 20th century (but didn’t thanks to the Democratic Socialist state and its hangers on).
A steadily falling price level is a desirable way of sharing in economic progress. Even people on fixed incomes get better off, not worse as now. Living standards would increase for employees without the need for the confrontational politicking of annual pay rounds. Savers too could sleep more soundly at night knowing that their nest eggs tend to increase in value.
But instead we have been subjected to the opposite. We have had a constant, demoralising assault on money’s purchasing power.
You can start to see the cumulative cost we have borne by looking at official inflation figures. According to the Office for National Statistics general retail price inflation in Britain since 1914 has been on average about 4.7% per year. £1 in 1914 is supposed to be equivalent to over £110 now, implying that the pound has lost over 99% of its 1914 value. So, even according to Government statistics, a £5 note in 1914 had a purchasing power equivalent to £550 now.
But governments understate inflation. It is a measure of how much they, the bankers and the banks’ favoured customers have benefited at the expense of productive people. They don’t want people to understand that the ‘fight against inflation’ has always been a sham. Reality is worse than official inflation figures suggest.
For a better idea of the loss, one could compare gold equivalent prices then and now. Gold has been the preferred form of proper money for millennia. It is the one most likely to keep its value. Therefore, it is worth using it to gauge how much has been taken from us. As we have seen, a five-pound note was convertible in 1914 into five gold sovereigns in any shop or bank. That Bank of England UK fiver would now have a purchasing power of over £1,500 at the current gold price. On the basis of gold values, the pound has lost more than 99.5% of its 1914 value. Practically all the value of the five-pound note has been taken away from people by government and the banking system since then.
And real loss there has been. Take the admittedly fictional character of Ernest from the play ‘The Importance of being Ernest’. In the famous exchange with Lady Bracknell he explains he has the means to maintain his beloved in suitable style. He explains that he has nearly £120,000 in ‘the funds’, i.e. invested in UK government bonds, which doesn’t seem very much. Surely, he does not mean he is too poor to buy more than a small flat somewhere? No, in current gold price terms, Ernest is actually saying the opposite. He is worth about £40 million in today’s ‘money’. (The calculation is 120,000 £1 pound coins, i.e. sovereigns, divided by 4.25 sovereigns to the Troy Ounce gives 28,235 ounces, worth over £39m in April 2020.)
I can see in my mind’s eye the descendants of real Ernests. I suspect I have met some and you may have too. They are the kind of upstanding, respectable people who would believe in Britain and the probity of the British state which has so comprehensively shafted them. They would trust professionals’ best advice that government bonds are ‘safe’. Now. because of inflation deliberately caused by that same state, they would have practically nothing. Remember the UK government has not paid down its debt overall since then. Somewhere, someone is still holding that £120,000 of bonds or their reissued successors, from which some £40m of value has been siphoned off. Is Britain really a better, more prosperous place because so many once wealthy families have been wiped out?
And it is not just the Ernests of this world. Everybody who has tried to save in cash or in a bank account - as poorer people tend to save - or bought a bond or insurance policy, or extended credit at any time over the last century has been pilfered from at around 5 pence per pound of principal every year.,