A brief history of how power and money have been concentrated in fewer and fewer hands and how we get it back.

Money is power

We all need money but why? We pay rent or a mortgage to give us shelter and buy food and drink to sustain us. Beyond that modern life demands access to money or credit to function as members of society. We are also constantly encouraged to consume by the media and advertising which create desires for stuff way beyond our needs.

But where did money come from and how does it function? Early money was created as credit to pay taxes to rulers or kings and for trade. Money was a means of recording debts and exchanging value. The idea that hoarding money could generate wealth emerged from our banking system. The goldsmiths stored gold on behalf of their depositors and issued paper receipts for the gold. These paper receipts entitled the holder to exchange the paper for gold on presentation to the goldsmith. Over time these paper receipts came to be used as money instead of gold itself because it was more convenient to carry around.

These goldsmiths or early bankers created a second business of lending money for interest and because they were lending money in the form of paper receipts they found a way of lending much more than their own money, to earn even more interest.

They could do this because very few people who stored gold in their vaults came to take it away - they were just exchanging the paper receipts for goods. So the bankers found they could lend not only many times the value of their own gold but could lend their depositors' gold many times over.  Needless to say bankers became the wealthiest members of the community enabling them to buy political influence and wield great power.

Occasionally, bankers would become reckless and lend so much that rumours began to circulate that a particular bank had insufficient gold in its vaults to be able to redeem all the paper receipts for gold. Depositors would flock to the bank demanding their money, causing a "run on the bank". That bank would go out of business and people would chose to leave their gold with a more prudent banker. People need to have confidence when placing gold with a bank that it will be safe and returned in full when needed.

Other than the fact that we no longer have money backed by gold, banking works exactly the same way today. These wealthy bankers created the Bank of England in 1694 which in 1844  was given the exclusive right to issue money in the form of notes and coins. However, banknotes and coins only represent about 3% of the money in circulation. 97% of money we use today is in the form of loans and bank current accounts created by the fractional reserve banking system. Banks are required to maintain reserves (their capital, retained profits and a fraction of deposits) at the Bank of England. Banks can then lend many time their reserves, in effect creating money from nothing. For a full explanation of how this works look at the Banking and the Monetary System weblinks in the Resources Library.

This ability to create money grants banks extraordinary power and privilege which is little understood even by most politicians and economists. Since the World War II international government and commercial business has been conducted in US dollars. We need to understand how this concentration of wealth and power has evolved from the USA and across the world.

Central banking under the control of private interests

The early settlers in the American colonies were looking to escape persecution and the class ridden system in Europe. Over time they developed their own interest free money, Colonial Scrip, on which they built a vibrant economy. Needless to say, England's King George III objected to the loss of  tax revenues and European bankers were determined to gain a slice of the riches of the American colonies. The American War of Independence was fought, like most wars, over money and resources.

Once the colonies had won their independence in 1782, the founding fathers were anxious to protect the infant nation from the greedy bankers. But in spite of their best efforts, through buying political influence, in 1791 the banks managed to gain 20 year charter for the first, privately owned, American central bank. However, it didn't prove to be popular and it's charter wasn't renewed. Undeterred, the banks lobbied furiously and in 1816 a second central bank was granted a 20 year charter. However, Andrew Jackson, who was elected President in 1828, described the central bank as an engine of corruption and vetoed the renewal of its charter in 1832. The banks were kept at bay for nearly 80 years but having engineered a banking crisis in 1907 managed to ensure the Federal Reserve Act of 1913 was passed creating the twelve privately owned Federal Reserve Banks which control the US central bank, the US Federal Reserve Board or Fed as it is known (see Web of Debt book by Ellen Brown in Banking and the Monetary System weblinks). This model is replicated across the globe and although the Bank of England was nationalised in 1946, it still dances to the tune of private banking interests.

In the 1920s, the banks created money to fuel a stock market boom and a frenzy of speculation culminating in the Wall Street Crash of 1929 and the great depression of the 1930s. Needless to say banking interests at the centre of power used this as an opportunity to buy up assets on the cheap granting them even more wealth and power. For an example of how this is done, read The Great American Bubble Machine in the Articles section of  Banking and the Monetary System weblinks.

The Glass-Steagal Act implemented in the wake of the crash held the banks in check for a while but over time a new orthodoxy developed. Following the oil shocks in the 1970s when economies were hit hard by rising oil prices, free market neo-liberalism took hold under the dual leadership of Margaret Thatcher in the UK and Ronald Reagan in the US. Privatisation and free markets became the dominant theme and the prescription of choice issued by the IMF and World Bank to struggling economies which had fallen victim to banks' attacks. Banking and neo-conservative interests funded think tanks and education in order to entrench this thinking in the mainstream to further their interests. Key political posts came under their control. For example, in the 1990s, Bill Clinton's Treasury Secretary and former Chairman of Goldman Sachs, Robert Rubin presided over the dismantling banking and securities regulation which led directly to the development of the sub-prime mortgage market, burgeoning Credit Default Swaps and commodity speculation. It was on Clinton's watch that the Glass-Steagal Act was effectively repealed leading directly to the bank bailouts and current crisis. Goldman Sachs political influence is global.

The sub-prime crisis

The current crisis started in 2008 although signs were showing well before then. The collapse of Lehman Brothers and the consequent bank bailouts were precipitated by sub-prime mortgages going bad (ie. mortgagees not making their monthly repayments).  Mortgage defaults had occurred as early as 2006 but the banks continued to issue sub-prime mortgage backed securities and colluded with the Credit Rating Agencies to obtain AAA ratings.

Structural incentives obscured the toxic nature of mortgage backed securities and derivatives and fuelled the sub-prime crisis.

Until the 1970s, investors delegated due diligence to credit rating agencies for which they paid a fee. When rating agencies started charging bond issuers for ratings, their financial interests converged. Investigations following the crisis revealed evidence of collusion between issuing banks and rating agencies, optimising risk profiles of securities to achieve AAA ratings. Credit raters had no access to the underlying mortgage data which contained fraudulent applications and loans to house buyers with insufficient earnings. Consequently, they applied ratings on the basis of historical mortgage data from an era when loans were only granted to credit worthy owner-occupiers

 Pyramid of deceit

Financial incentives ensured the true nature of the debt wasn’t revealed. Buyers and property agents gained in a rising property market and lenders removed bad loans from their balance sheets. Investors bought AAA securities at exceptional yields. Issuing banks earned fees and traded their own book, sometimes at their clients’ expense. Meanwhile, rating agencies enjoyed a fourfold increase in revenues from 2000 to 2007.

Had investors conducted their own due diligence rather than rely on the rating agencies, the sub-prime crisis could have been avoided.