By Marshall Bridge and Carl Hemmings.
In this forthright article, two Nationalists of long standing argue that, in future, we must promote our economic policy in its entirety, or our ambition to recover Britain’s manufacturing base will fail.
The Goldsmith’s Tale (Allegorical)
Throughout history, many unlikely objects have been used as money. Pebbles, sea shells, nuts and even feathers have all been used.
After all, money is primarily only a means of exchange and so long as people have confidence in the system, no intrinsic value needs be attached to the means of exchange.
Notwithstanding this, gold and silver were used as a means of exchange in some cultures, and this became fairly widespread. In England, goldsmiths fashioned these metals into coins of specific weight and purity.
The goldsmith needed a strong vault to store his valuable metals and coins, and the Townsfolk also found it safer to store their own valuables and coins in his vaults in exchange for paper receipts issued by the goldsmith as evidence of deposits.
After a time, the Townspeople found it easier and more convenient to use the paper receipts or cheques that the goldsmith had given them in exchange for their gold coins to trade with each other at the local markets, rather than use the bulky coins themselves.
The goldsmith was also usually a moneylender and lent his own gold at interest. Later, instead of lending the actual gold, he lent the paper receipts to use as money similar to those now used by the Townspeople.
So far, so good, we have a legitimate paper currency backed up 100% by the gold in the goldsmith’s vaults.
Now we come to the dodgy part. The goldsmith had noticed that since his paper notes were now widely used, the Townspeople rarely came to his vault to remove all their gold, and they never came all at once so that 90% of his depositors’ gold remained untouched in his vaults.
As the local economy expanded and more people came to the goldsmith for loans to fund this expansion, he quickly realised that his own stock of gold could not cover the increasing demand for credit.
He then hit on a cunning plan. Why not use his depositors gold, in addition to his own, as a basis for the paper credits and pocket all of the interest himself? This he did, and in secret.
By these means, the goldsmith became immensely wealthy, and this aroused the suspicions of the Townsfolk. Was he selling their gold? When his vaults were opened, the gold of course was still there, but the secret of his great wealth was out.
The angry Townspeople insisted that henceforth the goldsmith, now a banker, must pay them a fair share of the profits. He must charge his borrowers a slightly higher rate of interest than he gives to his depositors. The difference would cover his overheads and also provide him with a reasonable profit.
This is how most people think that the banking system works today, but they would be mistaken.
As trade expanded even more and Europeans spread across the World, much more credit was needed but the amount of gold in the World was nowhere near enough to cover the increased demand for credit.
The banker’s next ploy was even more diabolical than his first plan. Since only he knew how much gold was in his vaults, he would give credit on ‘gold’ that was not even there.
As long as large numbers of his depositors didn’t come at once and demand real gold in exchange for his paper credits, how would anyone find out?
The system was crying out for reform, but the idea of bank credit was too ingrained and the ruling elite of that time, just like our current crop of politicians lacked the courage and inclination to put the bankers in their place, indeed it was the ruling elite who were cowed by the now powerful bankers.
All this was institutionalised in 1694 with the setting up of the Bank of England and the banking system still works for the bankers and not the people.
The system is known as ‘Fractional Reserve’ and this means that the banks can lend many times the amount of money held on deposit.
No currency today is based on the gold standard. Governments borrow ‘money’ in much the same way as I have described and saddle the taxpayers with a mountain of un-repayable National Debt.
This system is now worldwide. The banker’s biggest prize was the setting up of the American Federal Reserve Board in 1913.
The Bank of England was nationalised in 1947, but the basic system remained the same and so it is today.
So now readers know that banks do not lend their depositors money and we often hear nationalists speaking of banks creating money out of nothing.
Here, is how the system works. Banks use the double entry method of book-keeping. When a bank makes a loan it is recorded on the asset side of its balance sheet.
The balance sheet is then made to balance by recording the same money as a liability of the bank, and with a few keystrokes on the computer new money is created as a deposit in the borrower's bank account.
Nobody's account has been reduced by this transaction so the national money supply has been increased by the amount of the loan. Over 95% of our money supply is created by this process.
Lord Adair Turner, chairman of the Financial Services Authority put it this way. “Banks don't just allocate pre-existing savings. Collectively they create both credit and the deposit money that appears to finance that credit. Banks create credit and money.” Less than 5% of money exists in tangible form such as bank-notes and coins.
This ready cash or high- powered money as bankers call it is used to ramp up credit into the economy by a ratio of many times the amount of the high- powered money, so virtually all the money in the economy consists of loans in the form of bank credit. Here, is another crucial point.
All this credit pumped into the economy consists of principal (loan money) only, but like all debt it has to be repaid with more money than was borrowed - as principal PLUS interest.
Clearly it is impossible to repay this debt from a pool of money that consists only of principal.
The only way in which the debt can be repaid without starving the economy of purchasing power is by borrowing more bank credit to service previous debts, resulting in an increasing spiral of un-repayable debt until the entire system crashes down under the weight of these debts and ends up in the type of recession which we are now experiencing.
Supporters of the current system say that it is fundamentally sound and that all of our problems are due to the greed and stupidity of bankers.
They go on to say that in future, firmer rules should be adopted to restrict lending and that people should not spend what they have not got and that we have all been living beyond our means, and other similar nonsense.
But if the banks do restrict credit, as these people suggest in a futile attempt to stave off the eventual and inevitable collapse, this will cause a chronic shortage of money in the economy making it impossible to pay many of the previous debts to the banks resulting in bankruptcies, repossessions and recession.
It’s the system itself that is the problem. It’s no good tinkering around with it. Under Fractional Reserve if there is no debt, then there is no money.
Money is debt. A complete reform is the only solution to deliver us from this recession and to avoid future economic crashes.
What We Would Do
There is a solution to the problem that faces us. A Government National Reconstruction Bank should be instituted which will reform the current financial system so as to ensure that the sole prerogative of money issue in Britain lies in the hands of British Government.
Government should issue new money as a portion of public expenditure. This issue will be regulated according to actual increases in the gross national product.
This free issue of money should normally be spent as part of the state budget on infrastructure projects.
The money would find its way into the general economy as wages and profits. Eventually, by these means, there would be sufficient purchasing power in the economy to enable the people to purchase the goods that they produce without resorting to bank credit from the corrupt Fractional Reserve banking system.
This bona-fide money would find its way into the private banking system from where some of it could be loaned out as required by their customers, but private banks would not be permitted to issue new money.
In other words, the banking system would actually function as it is supposed to and banks would become the servants instead of the masters of the productive sector of the economy.
Some people, who should know better, have criticised this policy as inflationary, but these people need to understand what is meant when we say that the issue of new money will be regulated according to actual increases in the gross domestic product.
In other words, if an increase in money supply is matched by an equal increase of real wealth in the form of goods and services, then there is no inflation. Indeed it is not possible to expand the economy without such an increase of money.
I trust that this explanation has clarified the thinking of those critics in what is admittedly a difficult concept for some people to grasp.
We Nationalists have always said that the only way to make Britain economically strong is to recover our manufacturing base.
To achieve this, it is necessary to gradually phase out the imports of foreign manufactured goods and replace these imports by a massive regeneration of British industry to fill the gap.
“Yes, this is an excellent idea” most people will say, “but where is all the money going to come from to pay for all this expansion?” This is a very good question, because by now we should all know that if we rely on the Fractional Reserve Banking System to fund this economic growth, it will be snuffed out in its infancy.
Only by the implementation of the monetary reforms outlined earlier will we be successful in our endeavours.
This is why the BNP's economic policy has always rested on two mutually dependant foundations – Protection of British industry linked to monetary reform.
Together they form a complete and coherent economic policy. One without the other is useless.
Our protectionist trade policy will not work without the money to oil the wheels of production and consumption and our expansionist monetary policy will merely suck in imports unless it operates behind protective walls.
All Nationalists know of our protectionist policy, but very few are even aware that we have a monetary policy that is fundamentally different from the establishment parties.
This omission must be rectified.
The party's media – website, leaflets, magazine and newspaper should be utilised to inform and educate our own members and the electorate of this vital issue.
Let us make this a priority before the next election. There are many votes to be gathered if we realise that the economy and banking reform will still be a prominent issue in that election.
Acknowledgements for the goldsmiths tale to- moneyasdebt.net