Chapter 7. The kingdom of darkness.

The features of the different forms of historic (metallist) currency are: anonymity, uniformity and mobility.

The anonymity of metal-money or of paper-money (it does not inform on who is buying or selling) allows all sorts of monetary activities to be carried out without leaving any personalized and responsibilized trace. The uniformity of these monetary instruments is almost complete (except for the of monetary units represented by each), as they do not provide any information on the details of the transactions. They do not inform on what, how, when, or where a sale-purchase has been carried out. They therefore prevent any attempt of exact analysis of the complex and flowing trade reality. The mobility of this sort of currency (that can be used indefinitely in lots of exchanges) prevents the identification of each sale-purchase operation and, therefore, prevents the partial or total accumulation of their values.

It would be interesting, as a literary recourse to describe a given society, to tell the story of a bank note. Let us suppose that it carried recorded on it the places where it has been, who has used it, and what for. This would be an exciting story which each of us can try to build up, using imagination, a story full of surprises. But if instead of being somebody who tries to have a good time making recourse to fiction, the interested party were an economist, he would like to know not only what one bank note has been doing, but all the bank notes. It would be fantastic! He could know the monetary flow of real economy, of financial economy and of underground economy! All in a direct way, without creating indexes nor trusting declarations, all of them biased and manipulated. If it were a judge, instead of an economist, he might go mad, because he could compare the declarations of the defendant with the actual story recorded on, or told by, the bank notes which have taken part in the murder, in the bribery or in the robbery.

This is then one of the disappointments in our civilization: that bank-notes do not record anything and do not speak. They leave no trace and are dumb. The economist and the judge will have to play the novelists, whether they like it or not. They must construe real stories with partial or false documents. The lack of evidence therefore acquits both the defendants and those judging them, and leaves those who have been wronged in the greatest defenselessness. All immersed in the kingdom of darkness, of shadows, of the lack of transparency. Everybody becomes responsible before «God and History». The politicians promise and don't honour their promises; the economists forecast again and again, and almost never get it right; the judges must acquit convicts for lack of formal evidence...

We are so used to cohabiting with money, to love it and to hate it, that possibly we have seldom looked at a bank note long enough to see its features beyond its practical function of paying or saving. Let us do it, then, at least once. Let us take one, for its value does not matter.

We have a special kind paper. Some faces or drawings are to be seen, while others, invisible, can only be looked at against the light. And finally we see figures, several figures.

All the notes of the same value are practically the same. To be the owner depends on the actual physical possession. If we lose them, or they are stolen from us, we lose all rights to them. They are anonymous.

When I pay, the bank-note does not say anything. It is always silent. It does not leave any trace. It is always running. It constantly goes from hand to hand. Or it remains forgotten during centuries under a tile or in a safe.

Monetary circulation is, by definition, the kingdom of darkness. Nobody knows nor can know anything, neither for good nor for evil. Neither to balance economy nor to pursue a murderer: And who ever says the opposite, whether he is a minister, a banker or governor of the national bank, is cheating and lying. And in the kingdom of darkness, of gloom, all is possible, all goes unpunished.

The wizards of money.

«Let me tell you a story of when one thousand pesetas still had some value».

«A civil engineer arrives at a small village, to study the project of a road. He goes to the only inn and has lunch. He then calls the innkeeper and gives him one thousand pesetas»:

«-I'll possibly stay a couple of days. Please book a room for me. When I come back this evening I'll confirm it to you. In the meantime please take these thousand pesetas and we shall settle matters later».

«The innkeeper went to the kitchen to talk to his wife. With those thousand pesetas they could pay the butcher, to whom they owed the same amount. When the butcher got the money he quickly settled a debt he had with the carpenter; this did the same with the blacksmith; since the blasmith's wife owed one thousand pesetas to the chemist for the medicine she bought for her children when they got scarlet fever, and for her husband when he had an abscess, she thought it was an opportunity to pay him off».

«When the chemist got the money, he closed his shop for a while and went to the inn to pay a debt he still had from the banquet when his daughter got married».

«In the meantime the day had gone and the engineer came back»:

«-Look, since the road will not cross the village, as we have agreed with the local authorities, I have decided to go back to town to-day. Therefore, please take the price of my lunch from those thousand pesetas, and forgive any inconveniency».

«When the engineer went away, the innkeeper told his wife»:

«-It was good luck that the chemist paid his debt, because otherwise I don't know how I could have settled things¹!».

This story leads us into the matter of the creation of money, which we have already mentioned. This is a very important matter, and quite unknown.

Almost everybody accepts that, at present, the bank system is, in fact, the actual creator of our means of payment, which is currency. We can find many explanations of the systems to create money in almost all the economy handbooks². Through a careful reading we may deduct the following conclusions:

«Creation of money» has two phases:

At first the national bank emits coins and banknotes, which are the legal means of payment, and, at the same time, produces resources granting credits to the banking system.

In a second phase the banks create deposits (current accounts = monetary units) as a result of the credit expansion (through granting credits on other people's resources).

Let us explain it more clearly. After a long process in which the gold reserves are no longer related to the emitted currency, at present legal currency has two instruments: the banknores and the metal coins produced by each State, and which are accepted through the public trust and the official support they receive. Oddly enough, however, the whole of the banknotes and coins in many State represent only about 10 per cent of the currency used. The remaining currency is created by the banks (banking system) and works by means of cheques and notations in current accounts. We shall give an easy example.

Let us suppose that somebody deposits in his current account a quantity of pesetas in banknotes.

The bank knows, through its own experience, that this amount is not usually cashed all at once and, therefore, it can put a part of this amount at the disposal of a customer who has applied for a credit.

The credit is granted as an accounting deposit (entering a certain amount) in a current account. The credit beneficiary will use it to pay his debts or to meet some expenses.

The people receiving money from the beneficiary will possibly deposit some of the money in the bank. (For the time being it is not important whether it is the same bank or another one). What we must see is that a new deposit has been created through a new down-payment.

This second deposit will allow the granting of a new credit. In this way the procedure can to a certain extent be repeated, i.e.. a down-payment in a current account (at sight) is the origin of a credit which generates at the same time a new down-payment, and all without stopping the first credit from being available to the customer. In this way the expansion of the credit increases the amount of currency available to consumers and to companies.

On the contrary, the long term accounts (money left in the bank for some months or years) do not allow the expansion of credit. The holders of these accounts commit themselves not to use the deposited amount for a given time. During this time the bank will lend the amount to whoever applies for a loan. In this case the bank acts as a middleman: it collects savings and converts them into capital-investment. This is, according to the banks, their task, and what most people think they do: the business of banks is the difference between the interests they collect and the interests they pay.

The creation of means of payment cannot be arbitrary without producing serious market problems, since the imbalance between the real sector (production and consumption) and the monetary sector of economy produces monetary inflation or deflation.

In a growing market there are evidently new, necessary means of payment to meet new investments, new production and new consumption. The problem is to guess the right amount of money which must be invented. But at present it is very difficult to know which is the right amount, because every State and every bank look for their own advantage, and the controls of the monetary authorities cannot be completely effective without really knowing the exact data that must be balanced, which is the value of production and active money for its purchase. Therefore, what can happen is that «nobody knows exactly how many millions of banknotes -dollars- are printed by the Federal Reserve, because their number is an esoteric figure which only some priests of the Bank know³».

The banking system. Judge and party in its own case.

We have tried to approach one of the nuclei of the economic system, looking for clues on how money is created. But the following is also a key question: who takes the invented money?

Apparently the invented money is distributed among customers. But we must point out that the bank charges high interest rates and in practice does not pay any, as it is granting credits with invented money. Some time ago (and even now, in many cases) the initial deposit and the balances of current accounts used to get a premium, but at a very low level (for example: 1 per cent) with respect to the interests produced by credits (for example: 17 per cent).

However, the bank has an important working hoard -which does not belong to it- and of which it takes advantage at a very little cost. In short, the important thing about money is to be able to use it, rather than to have it. Banks and bankers can obtain selfcredit in very good conditions; they can foster or hinder financial, speculative, exchange, investment, political, electoral, cultural... operations. As far as credits are usually granted to those having assets, they help owners and victimize those who have good projects but nothing to mortgage. Another beneficiary of the credit increase is the national bank. This compels the banks to lodge in it a percentage of the deposits with almost no compensation. When the States appeal to the national bank to cover the public deficit, they cause money to be invented which, as long as it does not correspond to an actual increase of production, will benefit some citizens -those receiving this money from the State- to the detriment of the others, who will be prejudiced by inflation.

Most books on economy explain theses processes in greater or lesser detail. What is surprising in all of them is that they make no comments on the effectivity and legitimacy of this bank system for the creation of money.

As far as effectiveness is concerned, the creation of bank money has a serious inner contradiction. On the one hand, the banks try to create as many deposits as possible, because on every new credit they charge high interest rates. Let us remember that, banks almost never reward current accounts at sight, which are the origin of credits. We have here a very important phenomenon because of its economic and social implications. It is impossible for the banks to look for the higest benefits for themselves and for the global economic balance. The monetary authorities have a number of means by which they to restrain the growth of the monetary offer when it creates inflation. But since they are indirect means (increase of the amount of compulsory reserves, increase of the basic interest rates, and emission of Treasury bonds), the effects are unpredictable and, besides, they involve other important economic variables (investments, unemployment...) which not always give sufficient freedom of action.

As far as the legitimacy of the bank's creation of money is concerned, this problem is usually not raised. Why should society consider it a positive asset, that companies should invent and use money without a proportional retribution to all of the current account holders on the basis of the common savings of the whole population? Why should a task, with very important «economic» common effects, that is not always balanced, be left in the hands of private interests? We have here a very subtle phenomenon of hyperexploitation which does not concern only one class (capital) taking advantage of another one (labour), but bears very few persons taking advantage of the whole of society. (This matter has already been shown in chapter 2).

This subtle exploitation gives power. In this case it is a special power which is stated in many ways, are being a strategical power for society: the banking system is responsible for most of the financing of the electoral system, that is for supplying funds to parties and candidates to elections with no other standard than the «trust». Oddly enough, the explanation and discussion of the legitimacy of these means of creation and taking of money by the banking system do not appear in the economy books or, even less so, in the electoral programmes.

As a matter of fact it is very difficult to throw light on the incidence of these means of reality. In the absence of a clear monetary system, most positions are opposed through different opinions and suggestions. Here are some of them:

«At present, bankers, absolutely all bankers, are the actual creators of money».

«They know it, but in an abstract form: in the last thirty years most economists have explained this reality; but in the experiences the matter is shifted to often that bankers do not see it clearly. They are like the uncunning magician getting rabbits out of his hat and not remembering having put them in...».

«Banks create money in the same way humans think: it is not necessary to will it».

«When a banker examines his balance sheet, he finds that there is an equilibrium between deposits and credits. But he knows perfectly well that these deposits do not belong to him. With the exception of the bank's own resources [...] he will see on the one hand some credits to his debtors and, on the other hand, some debts to his deposit holders. If he compares two successive balance sheets he will find that deposits and credits have increased to a certain extent. Nothing more. The money that he may have created cannot be singled out in his balance sheet. The newly created money is not different from the old, which goes on circulating. Deposits mix among themselves indissolubly. The rabbit does not come out from the hat until all the balances of all the banks come together to produce the complete statistics: then it can be clearly seen that the amount of money in circulation has increased... Where is the secret?».

«The secret is that the money circulating at present is a circulating debt [...] contracted by special concerns⁴».

«If we tell any banker of the chain that he has «created» money, he will protest forcefully. He will sustain the credits he granted, that were backed by an excess of reserves as big as the credit itself⁵».

«Bankers are right when they say that they never lend one cent beyond what they have. The money is not created in the process of lending because a bank gives more money than it has. Money is created because in general you and I pay each other with cheques which give us rights to the banks of the others. There would be no creation of money if we cashed all the cheques we receive. But we don't. We deposit our cheques in our current accounts and, in doing so, we give our banks more reserves than they need to ensure the deposits they have. These new excesses of reserves put our bank in a position to lend or to invest and, therefore, make it possible for somebody else to open current accounts which again produce new excesses of reserves».

«This may cause some fear. Does this mean that the new monetary offer spreads indefinitely from only one new deposit? Wouldn't that be extremely dangerous?».

«Of course this would be very dangerous, but it is impossible for it to happen. After having well understood how an original increase of deposits increases the offer of money, we must also understand what causes expansion to stay within its limits».

All this complex reasoning is brutally casuistical. How can such an important, strategic and powerful tool be so scarcely clear, and so little exact, and how can it be left in the hands of the short-term intersts of the banks?

The complication does not finish here because, even if «theoretically» the national bank says that it has control mechanisms, in practice they are not always effective. On top of that it must be noted that today there are a great number of other forms of «currency», besides paper-money and bank-money, which can no longer be controlled by the national bank. «There is no clear cut separation line, within the whole of cash-flow, between what is currency and what is not. Whichever the definition chosen for currency, this definition will be surrounded by a number of instruments, more or less flowing, which can be used as substitutes⁶...».

To try to lay down the bases of the monetary policy not only shall the bank-notes and coins, the deposits at sight, the savings deposits, the long-term deposits... be kept in mind, but also the Assets in the Hands of the Public (ALP), which cover a large amount of uncontrollable quasi-currency, of paper being used as if it were currency: public debt, premiums, temporary cessions, companies' promissory notes... In Spain these ALP, in 15 years, have increased in number by in about 1400 per cent!

«It is easy to deduct, from all the previous considerations, that there cannot be an effective control on the invention of money».

«The immediate result of this situation is that every bank, within the more or less strict conditions set out by the national bank, behaves according to its own convenience. And there is no effective law on the whole to allow to set out global strategies for the whole market. Needs are met empirically and partially not in terms of the overall needs but almost always on behalf of the privileged sectors of society⁷».

Underground in the vaults.

Up to now we have been considering the legal process of creation of money, as a consequence of the interaction among emission of the national bank, expansion of the banks' credits, and utilization of cheques and current accounts by customers.

Wouldn't we be naïve, if we thought that this legal process is the only actual process for the invention of money? There is apparently a growing trust that fraud becomes more and more difficult, law is becoming harder and harder, inspectors are incorruptible. But if this were true, how is it that the Spanish government itself admits that in 1989 there were about 9.000 billions of black money (which represented almost one third of the gross national product⁸)? There is no need to go that far. How many companies do not have a double, or treble, accounting? and, in this general environment, are the banks an exception?

We may say that this happens only whitin our latitudes through the lack of effectiveness of bureaucrats, but that, in the USA for example, all this is impossible. For those who have no doubts, it is advisable to read the last survey-book by Vance Packard (1989) on the ultra-rich Americans. «As a matter of fact, the wealthiest people fix the amount of their taxes themselves. As it is explained by a financial adviser of the Washington area, specialized in established fortunes: «My clients decide the amount they wish to pay to the government, and we do whatever is necessary to make it so.» «We do not pay taxes. Only the small ones pay them.» -says multimillionaire Leona Hemley. «I know people five times wealthier than I am, who swank they have never paid a tax» -confirms Mr. Sol Price, with a fortune valued 200 million dollars⁹».

Likewise, on a macroeconomic level we do not find any clear recording showing the yearly creation of money by the banks, nor any indicator of their relationship with the cash deposits which have been effected. Everything becomes complicated and difficult to calculate for any citizan, and also for any economist that isn't a specialist. One of the few economists which give a capital importance to the creation of money is Maurice Allais, Nobel Prize winner of Economics in 1988. He suggests to «give back to the State, that is to the collectivity, the income related to the monetary creation». «The revenue from the creation of money would go directly to the State, which could then reduce taxes. Most, if not all, of the progressive income taxes could be suppressed¹⁰».

Besides, the bank system is a patron of foul play: black money (from hidden economy), red money (from drugs), dirty money (from criminal circles), are whitewashed by the banks. Many things are hidden by the bank. The clearest case, but not the only one, is the whitewashing of red money, produced by the drugs trade.

«All the great banks in the United States have accepted they had infringed the Federal Reserve Law as a system to whitewash the money from the maffia, collected in the areas where great amount of cash are deposited every day.» «The Government representative for the National Programme against Drugs acknowledges that up to now it is a mystery how the money from drugs moves around in Spain. It is also not exactly known what financial props are used by those dealing drugs. However, we know that the profits obtained in Spain and in other countries, after their whitewashing, are transferred to the network of tax paradises of the international banking system.» Mitterrand himself has said that «the banks which have recirculated money from the drugs trade deserve radical punishments, because in this field we must act mercilessly. This matter justifies that the necessary researches be authorized on the origin of bank money all over the world¹¹».

«The «naughty» ones are the tax paradises. What nobody says is that most of the international banks have offices in them¹²». «Unfortunately, we know of no study in which the percentage of credits is stated, which were squandered by the élites of the Third World countries, and which in most cases, found a discrete shelter in the banks of the industrial countries through their tax paradises.» «Industrialized countries usually do not remember that their banks are the first to take advantage of these flights of capital, the same as with the «whitewashing» of the black money from drug trafficking¹³».

In short, a subtle weapon is hidden behind the brilliance of marble, the security of steel, the impeccable accounting, the undiscussed uprightness of people... which only a small minority of very well located persons know of, and who, since they only care for their own interests, not only jeopardize the general balance and may endanger the whole, but, sooner or later, as with a boomerang, may endanger themselves.

Notes:

¹Esteve Busquets, «Només seixanta duros», El 9 Nou, 27.10.1989.
²Josep Ma. Bricall (1979), «Introducció a l'Economia», Editorial Ariel, Barcelona, 1980; Richard G. Lipsey (1983), «Introducción a la Economía Positiva», Vicens Universidad, Barcelona, 1985; Miguel A. Lorente, «Banca y Mercado Monetario», Banco de Vizcaya, Bilbao, 1978.
³«La crisis que viene», Más Allá, No. 19.
⁴Jacques Lavrillère, «La industria de los banqueros», A. Redondo Editor, Barcelona, 1969, pp. 87-89.
⁵Robert L. Heilbronner and Lester C. Thurow (1982), «Introducció a l'economia», Editorial Empúries, Barcelona, 1985, p. 298.
⁶Magdalena Grau, «Moneda telemàtica i estratègia de mercat», Centre d'Estudis Joan Bardina, Barcelona, 1985, (mentioning Lord Kaldor).
⁷Ib., p. 69
⁸«Dinero negro: lo único que sobra en España», La Mañana, 7.5.1988.
⁹Vance Packard, «Les ultra riches», Acropole, Paris, 1990.
¹⁰«Hay que acabar con los impuestos sobre la renta», La Vanguardia-Dominical, 20.8.1989, pp. 16-22.
¹¹«El Narcotráfico y la Banca», La Gaceta, 29.12.1989.
¹²«Miedo e hipocresía», La Vanguardia, 9/1989.
¹³«El problema de la deuda», La Vanguardia, 9/1989.