TABLE OF CONTENTS
Premises of the Research
Money Creation and Money Issuing
1. – Historical Analysis of Credibility
1.1. – The Biblical Concepts of Credit, Interest, and Money
1.2. – Jubilee as the Conclusion of a Financial Cycle
1.3. – Banking as a Consequence of the Biblical Law
2. – About the Applicability of the Biblical Law to Future Finance
2.1. – Politics as a “Zero-sum Game”
2.2. – Business as a “Non-zero-sum Game”
2.3. – Analysis of Demand and Production Functions
2.3. – The Right to Credit in Future Finance, as Correct Premise to Business
2.4. – Efficiency Analysis of Public Utilities, and other Public Services
3. – Development as Creation of New Wealth
3.1. – Finance as Redistribution of Wealth
3.2. – Business as Creation of New Wealth
4. – Conclusion
4.1. – Development is based on Business
4.2. – Business as Profit
4.3. – Profit as Worth, Utility, Efficiency.
4.4. – Credit as Essential Element of Business
4.5. – I. T. as a Means for Forecasting and Controlling Creditworthiness.
4.6. – Creditworthiness as Money Creation – Q.E.D.
The scope of this work is to investigate whether the current monetary system is functional and useful to human societies or rather to all those power centres, which create money like general purpose pills having placebo effect.
The analysis is reported in three parts.
Part One (Money Creation) is dedicated to the exposition of the current monetary system, mostly of the United States and the United Kingdom, the two countries the mostly have contributed to the development of
Part Two (Money Control) ……
Part Three (About Possible New Systems)
We strongly believe that, in addition to any technical equipment and organisational patterns we can develop, we firstly need to remove a deep sense of ignorance of the matter we still have in our societies.
We are convinced that this goal will be reached by future generations, because the forces to be contrasted and removed are the strongest in the world. Nevertheless, our commitment is to try and prepare the field to further attempts.
“Dire che uno Stato non può perseguire i suoi scopi per mancanza di denaro è come dire che un ingegnere non può costruire strade per mancanza di chilometri” (To say that a State cannot pursue its scopes for a lack of money tantamount to say that an engineer cannot build roads for a lack of kilometres.)
The Characteristics of Money
Commonly money is considered as “anything that is durable, divisible, stable, and acceptable as a medium of exchange, a store of value, and a unit of account to satisfy economic needs”.
The Gold Standard System
The first means of payment was precious metals, such as copper, silver, and gold.
Silver was firstly considered more precious and useful than gold, because it could be also used as tools (potteries, knives, mirrors, etc.) Therefore, silver was more worth full than gold. Once people realised than gold was rarer than silver, gold acquired more appreciation than silver. Money was coined in copper, silver and gold.
At the beginning money was coined at full title, i.e. with pure metal. When speculators became more and more skilled, pure metal began to be substitute with a less precious metal, reducing this way the intrinsic (real) worth of coins.
While business volumes were growing up, people realised that it was problematic to carry coins because of their weight and volume. Consequently, coins were substituted by notes, which were much lighter and easier to carry.
Therefore, Mints and chartered banks began to print-out bank-notes, instituting this way the gold standard system.
A system is in gold standard when its central bank shall convert into gold any amount of its currency that will be presented to the bank. When England was in the regime of gold standard, anyone could demand of changing into gold any amount of the English Central Bank.
Because every currency was exchangeable into gold, the exchange rate was given by the rate of conversion, and every international debit was regulated in gold terms.
The “golden point” indicated the limit of the peg system between currencies. Before the First World War a same quantity of gold could be bought at £1.00 in London, and at $4.87 in New York. If one Sterling Pound did not allow getting $4.87 in London, then it was allowed to send sterling pounds to New York to get that parity. Therefore, the exchange rate never dropped down under the parity plus the cost of sending pounds to New York and gold to London. Any excess in the balance of payments generated an excess of gold in the central bank. This allowed the central bank to expand his money supply with no fear of a lack of gold to back his issue. The increase of the quantity of money increased selling prices, and consequently reduced export and the excess in the balance of payment.
The Gold Standard Exchange System (Gold Exchange Standard)
The Gold Standard Exchange System was based on the conversion of a domestic currency into a foreign currency exchangeable into gold. Therefore, the central bank possessed the currencies used for this scope as reserve (together with gold). Many countries have followed such a system using the Sterling Pound until 1931, when England left the Gold Standard.
Every type of Gold Standard is dead, because the system on which it was realised is dead. Many theories have been supposed to justify this event, but probably only the theory that states that the Gold Standard did not allow Governments to impose their power and bribery is really true.
Today all Countries in the world have no more the Gold Standard, even because the total worth of bills and banknotes issued is much larger than the worth of all the gold available in the world.
The public has nowadays accepted the non-convertible banknote and credit system; therefore it is extremely evident the convenience to issue money (whose manufacturing cost is practically null) compared to the manufacturing cost of gold. A further advantage of banknotes comes from the fact that its worth does not depend from gold worth, but solely from the exchange worth of all products.
Banknotes have instituted the new system named as “fiduciary circulation”, This is a system that is not backed by gold, or other precious metals.
This term originates from the British law 1844 on the Central Bank, which established the limit of fiduciary supply of money at £14 million. Each note issued beyond this limit should have been completely backed by gold. The fiduciary limit has been continuously increased, and now monetary authorities are completely free to modify money issuing at their will. Practically, money issuing is completely fiduciary.
The Dollar Standard and “The Marshall Plan” Case Story
Picture the world at war in 1944.
All of Europe, except for Switzerland, is pounding its infrastructure, manufacturing base and population into rubble and death. Asia is locked into a monumental struggle that is destroying Japan, China, and the Pacific Rim countries.
North Africa, the Baltic’s, and the Mediterranean countries are clutched in a life and death struggle in the fight to throw off the yoke of occupation. A world gone mad! Economic destruction, human misery and dislocation exists on a scale never before experienced in human history. What went wrong? How could the world rebuild and recover from such devastation? How could another war be avoided?
This was the world as it existed in July 1944, when a relatively small group of 130 of the western worlds most accomplished economic, social and political minds met in upstate New Hampshire at a small vacation town called Bretton Woods.
John Maynard Keynes, the man who had predicted the current catastrophe in his book The Economic Consequences of the Peace, written in 1920, was about to become the principal architect of the post-World War II reconstruction. Keynes presented a rather radical plan to rebuild the world economy, and hopefully avoid a third world war. This time the world listened, for Keynes and his supporters were the only ones who had a plan that in any way seemed grand enough in foresight and scope to have a chance at being successful. Yet Keynes had to fight hard to convince those rooted in conventional economic theories and partisan political doctrines to adopt his proposals. In the end, Keynes was able to sell about two-thirds of his proposals through sheer force of will and the support of the United States Secretary of Treasury, Harry Dexter White.
At the heart of Keynes proposals were two basic principals: first the Allies must rebuild the Axis Countries, not exploit them as had been done after WW 1; second, a new international monetary system must be established, headed by a strong international banking system, and a common world currency not tied to a gold standard.
Keynes went on to reason that Europe and Asia were in complete economic devastation with their means of production seriously crippled, their trade economies destroyed and their treasuries in deep debt. If the world economy was to emerge from its current state, it obviously needed to expand. This expansion would be limited if paper currency were still anchored to gold.
The United States, Canada, Switzerland and Australia were the only industrialized western countries to have their economies, banking systems and treasuries intact and fully operative.
The enormous issue at the Bretton Woods Convention in 1944 was how to completely rebuild the European and Asian economies on a sufficiently solid basis to foster the establishment of stable, prosperous pro-democratic governments. At the time, the majority of the world’s gold supply, hence its wealth was concentrated in the hands of the Unites States, Switzerland and Canada. A system had to be established to democratize trade and wealth, and redistribute, or recycle, currency from strong trade surplus countries back into countries with weak or negative trade surpluses. Otherwise, the majority of the world’s wealth would remain concentrated in the hands of a few nations while the rest of the world would remain in poverty.
Keynes and White proposed that the United States, supported by Canada and Switzerland, would become the banker to the world, and the U.S. Dollar would replace the pound sterling as the medium of international trade. He also suggested that the dollar’s value be tied to the good faith and credit of the U.S. government not to gold or silver, as had traditionally been the support for a nation’s currency.
Keynes’ concept of how to accomplish all of this was radical for its time, but was based upon the centuries old framework of import/export finance. This form of finance was used to support certain sectors of international trade which did not use gold as collateral, but rather their own good faith and credit, backed by letters of credit, avals, or guarantees.
Keynes reasoned that even if his plans to rebuild the world’s economy were adopted at the Bretton Woods Convention, remaining on a Gold standard would seriously restrict the flexibility of governments to increase the money supply. The rate of increase of currency would not be sufficient to insure the continued successful expansion of international trade over the long term. This condition could lead to a severe economic crisis, which, in turn, could even lead to another world war. However, the economic ministers and politician present at the convention feared loss of control over their own national economies, as well as, run-away inflation, unless a “hard-currency” standard were adopted.
The Convention accepted Keynes’ basic economic plan, but opted for a gold-backed currency as a standard of exchange. The “official” price of gold was set at its pre-WW II level of $35.00 per ounce. One U.S. Dollar would purchase 1/35 an ounce of gold. The U.S. dollar would become the standard world currency, and the value of all other currencies in the western non-communist world would be tied to the U.S. dollar as the medium of exchange.
Marshall Plan, IMF, WB, and Bank of International Settlements (BIS)
The Bretton Woods Convention produced the Marshall Plan, the Bank for Reconstruction and Development (know as the World Bank), the International Monetary Fund (IMF), and the Bank of International Settlements (BIS). These four would re-established and revitalize the economies of the western nations.
The World Bank would borrow from rich nations and lend to poorer nations.
The IMF, working closely with the World Bank, with a pool of funds, controlled by a board of governors, would initiate currency adjustments and maintain the exchange rates among national currencies within defined limits.
The Bank of International Settlements would then function as a “central bank” to the world.
The International Monetary Fund
The International Monetary Fund was to be a lender to the central bank of countries which were experiencing a deficit in the balance of payments. By lending money to that country’s central bank, the IMF provided currency, allowing the underdeveloped country to continue its business, building up its export base until it achieved a positive balance of payments. Then, that nation’s central bank could repay the money borrowed from the IMF, with a small amount of interest and continue on its own as an economically viable nation. If the country experienced an economic contraction, the IMF would be standing ready to make another loan to carry it through
The Bank of International Settlement
The Bank of International Settlements (BIS) was created as a new “central bank” to the central banks of each nation. It was organized along the lines of the U.S. Federal Reserve System and it is principally responsible for the orderly settlement of transactions among the central banks of individual countries. In addition, it sets standards for capital adequacy among the central banks and coordinates the orderly distribution of a sufficient supply of currency in circulation necessary to support international trade and commerce.
The Bank of International Settlements is controlled by the Basel Committee which, in turn, is comprised of ministers sent from each of the G-10 nations central banks. It has been traditional for the individual ministers appointed to the Basel Committee to be the equivalent of the New York “Fed’s” chairperson controlling the open market desk.
The World Bank
The World Bank, organized along more traditional banking lines was formed to be “lender to the world” initially to rebuild the infrastructure, manufacturing and service sectors of the European and Asian Economies and, ultimately, to support the development of the Third World nations and their economies.
The depositors of the World Bank are nations rather than individuals. However, the Bank’s economic “ripple system” uses the same general banking principles that have proven effective over centuries.
The tie that binds the Bank of International Settlements and the World Bank
The directors of both banks are controlled by the ministers from each of the G-10 countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and Luxembourg.
Bretton Woods under Pressure
By 1961, the plans adopted at e Bretton Woods Convention of 1947 were succeeding beyond anyone’s expectations, proving that Keynes was right. Unfortunately, Keynes was also right in his prediction of a world monetary crisis.
It was brought on by a lack of sufficient currency (U.S. dollars) in world circulation to support rapidly expanding international commerce. The solution to this crisis lay in the hands of the Kennedy Administration, the U.S. Federal Reserve Bank, and the Bank of International Settlements.
The world needed more U.S. Dollars to facilitate trade. The U.S. was faced with a dwindling gold supply to back such additional dollars. Printing more dollars would violate the gold standard established by the Bretton Woods agreements. To break the treaty would potentially destroy the stable core at the centre of the world economy, leading to international discord, trade wars, lack of trust and, possibly, to outright war.
The crisis was further aggravated by the belief that the majority of the dollars then in circulation was not concentrated in the coffers of sovereign governments, but rather in the vaults of treasuries of private banks, multinational corporations, private businesses, and individual personal bank accounts. A mere agreement or directive issued by governments among themselves would not prevent the looming crisis. Some mechanism was needed to encourage the private sector to willingly exchange their U.S. Dollar currency holdings for some other form of money.
The problem was solved by using the framework of a forfeit finance; a method used to underwrite certain import/export transactions, which relies upon the guarantee or aval (a form of guarantee under Napoleonic law) issued by a major bank in the form of either documentary or standby letters of credit or bills of exchange, which are then used to assure an exporter of future payment for the goods or services provided to an importer.
The system was well established and understood by private banks, government and the business community worldwide. The documents used n such financing were standardized and controlled by international accords, uniformed by the members of the International Chamber of Commerce headquartered in Paris. There would be no need to create a world agency to monitor the system if already approved and readily available documentation, laws and procedures provided by the ICC were adopted.
The International Chamber of Commerce is a private, non-governmental, worldwide organisation that has evolved over time into a well recognised, organised, respected and, most of all, trusted association. Its members include the world major banks, importers, exporters, merchants, and retailers who subscribe to well-defined conventions, bylaws, and codes of conduct over time that the ICC has hammered out pre-approved documentation and procedures to promote and settle international commercial transactions.
How Banks Create Money
Financial Institutions, because of their activities with which they provide special services to the economy, create money. This does not mean that they mint bills and coins; rather they expand the money supply by taking in deposits and making loans.
This theory is taught at any good University, and one of the commonest used text books clearly reports:
“As figure 15.3 shows (omissis), the money supply expands because banks are allowed to loan out most (although not all) of the money they take in from deposits. Suppose that you deposit $100 in your bank. If banks are allowed to loan out 90 percent of all their deposits, then your bank will hold $10 in reserve and loan $90 of your money to borrowers. (You, of course, still have $100 on deposit). Meanwhile, borrowers-or the people they pay-will deposit the $90 loan in their own banks.
Together, the borrower’s bans will then have $81 (90 percent of 90) available for new loans. Banks, therefore, have turned your original $100 into $271 ($100 + $90 + $81). The chain continues, with borrowing from one bank becoming deposits in the next.”
Therefore, arguing about the experience of Bretton Wood and how commercial banks create money, we can conclude that banks create money twice at a time, i.e.:
a) Firstly, when Central Banks issue banknotes and credits, as if they were owner of a wealth that already is in their vaults (which is false).
b) Secondly, when commercial banks reuse deposits to loan out brand new money (which is false).
Criticism to Money Supply Theory, and Quantitative Theory of Money
In the United States the quantity of money is commonly classified as follows:
M-1 is one of the most commonly used measures, and counts only the most liquid (spendable) part of money: currency, demand deposits (checks), and other checkable deposits. Commonly these are all noninterest-bearing or low-interest-bearing form of money. As of July 1998, M¹ in the United States totalled just over $1 trillion.
Currency is paper money and metal coins issued by the government, which is widely used for small exchange. It is “legal tender for all debts, public and private”, as the U.S. Dollar Bill states: that is, the law requires (enforcement by law) creditors and acceptors to accept it in payments of debts.
As of July 1998, currency in circulation in the United States amounted to $441 billion, or about 41% of M¹, and the average adult carries about $45 in currency.
Traveller’s checks, bank cashier’s checks, and money orders, which are all accepted as currency, accounted for another $8 billion.
Demand deposits (checks) are essentially orders instructing a bank to pay a given sum to a “payee”. They are a promise of payment, and although not all sellers accept them as payment, many do. Checking accounts, which are known as ‘demand deposits’ are count as M¹ because funds may be withdrawn at any time on demand. 84% of all U.S. households have checking accounts. As of July 1998, demand deposits accounted for 379 billion, or about 35% of M-1.
Other Checkable Deposits are those on which checks cab be written-include automated teller machine (ATM) account balance and negotiable order of withdrawal (NOW) accounts, which are interest-bearing accounts that can be held only in savings and loan associations by individuals and non-profit organisations. As of July 1998, checkable deposits in the United States exceeded $245 billion, or 23% of M-1.
M-2 includes everything in M-1 plus forms of money that cannot be spent directly but are easily converted into spendable forms.
The major components of M-2 are: M-1, time deposits, money market mutual funds, and savings deposits. As of July 1998, M-2 accounts for nearly all the nation’s money supply. It thus measures the store of monetary value available for financial transactions.
Time Deposits, unlike demand deposits, require prior notice of withdrawal, and cannot be transferred by check. The supply of money in time deposits, such as certificates of deposits (CDs), and savings certificates, grew rapidly in the 1970s and 1980s because government ceilings on interest rates were removed. Time deposits in M-2 include only accounts of less than $100,000 that can be redeemed on demand with small penalties. Large time deposits, usually those made by businesses, cannot be redeemed early and are not included in M-2. As of July 1998, U.S. time deposits amounted to nearly $959 billion-almost 23% of M-2.
Money Market Mutual Funds are operated by investment companies that bring together pools of assets from many investors to buy a collection of short-term, low risk financial securities. Ownership of and profits (or losses) from the sale of these securities, are shared among the fund’s investors. Shortly after having been introduced in 1974, money market mutual funds had attracted $1.7 billion. As of July 1998, they totalled $675 billion, i.e. 16% of M-2.
Savings Deposits (such as passbook saving accounts) represented 40% of M-2 in 1971, but less than 36% in 1998.
In the United States in the 1980s, M-2 began growing at a much faster arte than M¹ mainly because new types of investments offering higher-interest returns were introduced at this time. M-2 is now the more reliable indicator of the country’s economic status.
In the United States M-3 includes M-2 plus deposits in non-banking financial institutions, while in the United Kingdom it includes Sterling M-2 plus all other deposits in foreign currency owned by British residents.
Quantitative Theory of Money
This theory defines or pretends to define the relationship between the quantity of money in circulation and the level of prices in an economic system.
Formulated since a long time ago and still contradicted, this theory begun with the identity known as “Fisher’s equation”:
MV = PT
M = Quantity of money;
V = Velocity of circulation of the same quantity expressed in terms of income;
P = Average level of prices
T = Real total amount of goods and services
Such equation is an identity for the first member of the equation measures the value of total money needed by economic transactions in a given period of time (i.e. the quantity of money times the number of times it has circulated in am economic cycle to finance transactions), while the second member of the equation measures the total worth of products sold.
Because the total worth of money is equal to the monetary worth of products sold, then the two members of the equation are equal by definition.
Nevertheless, we can hypothesize that:
a) T is constant because economy is in the condition of full employment and keeps it constant;
b) V is constant because it is determined by some institutional characteristics of the economy, i.e. the pace of wages, which determines the way the buying customs of consumers match the need of money of sellers (these characteristics change very slowly during the time, therefore they can be considered as constant in the short period.)
Therefore, we can rewrite the equation as follows:
M = (T/V) P
Now, because T/V is constant, the equation implies that any change in the quantity of money is coupled with a change in the average level of prices. From this very simple theory economists have derived very simple suggestions in political economics.
For a few economists this theory implies that price inflation can be taken under control by monetary authorities through the control of the quantity of money in circulation. For this author, price inflation is not the pathology of free markets, but the physiology of monopolistic markets.
The Quantitative Theory of Money is customary used without any discussion by Governments and Central Financial Institutions in order to apply the monetary policy most convenient to them.
Anyway, if the quantity of money is kept constant with the scope of keeping stable the level of prices, total expenditure can nevertheless increase if consumers withdraw their deposits, or if companies expand their credits, or their instalments of payment. A few economists, therefore, argued that what really counts in this policy is the determinants of the desiderated consume (i.e. the factors of demand) and the global liquidity of the economy. This conducts, logically, to a Keynesian point of view of the political economy, which focuses on the elements of total demand, and emphasises on fiscal policy, more than on monetary policy, as means of control of the economy.
Notwithstanding all the aforementioned objections, the quantitative theory has gained supporters and fans probably not because of the work of the School of Chicago, but certainly for the double opportunity of creating at once new wealth from nothing by Central Banks and Commercial Banks.
The Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation (FDIC) insures deposits in member banks. More than 99% of the nation’s commercial banks pay fees to be member of the FDIC. In return the FDIC guarantees through its Bank Insurance Fund (BIF) the safety of deposits up to a maximum of $100,000. Therefore, if a bank collapses, the FDIC, through the BIF, promises to pay its depositors for losses up to $100,000 per person. (10,000 commercial banks are insured by States rather than by the BIF).
To insure against multiple bank failures, the FDIC maintains the right to examine the activities and accounts of all member banks. Such regulation was effective from 1941 through 1980, when fewer than 10 banks failed per year. At the beginning of the 1980s, however, banks were deregulated, and between 1981 and 1990, losses from nearly 1,100 bank failures depleted the FDIC’s reserve fund. In recent years, the FDIC has thus raised the premiums charged to member banks to keep up with losses incurred by failed banks.
Therefore, banks create false wealth from nothing (money creation), and guarantee genuine wealth (deposits) with a non-par value responsibility.
The Federal Reserve System
The Federal Reserve System consists of a board of governors, a group of reserve banks, and member banks.
As originally established by the Federal Reserve Act of 1913, the system consisted of 12 relatively autonomous banks and a seven-member committee whose powers were limited to coordinating their activities. By the 1930s, however, both the structure and function of the Fed had changed dramatically.
The Fed’s board of governors consists of seven members appointed by the president for overlapping terms of 14 years. The chair of the board serves on major economic advisory committees and works actively with the administration to formulate the economic policy. The board plays a large role in controlling the money supply. It alone determines the reserve requirements, within statutory limits, for depository institutions. It also works with other members of the Federal Reserve System to set discount rates and handle the Fed’s sale and purchase of government securities.
The Federal Reserve System consists of 12 administrative areas and 12 banks. Each Federal Reserve bank holds reserve deposits from and sets discount rate for commercial banks in its region.
Reserve banks also play a major role in the nation’s check-clearing process.
All nationally chartered commercial banks are members of the Federal Reserve System, as are some state-chartered banks. The accounts of all member bank depositors are automatically covered by the FDIC/BIF. Although many state-chartered banks do not belong to the Federal Reserve System, most pay deposit insurance premiums and are covered by the FDIC.
Financial Institutions in the United States
Commercial Banks are Federal or State chartered financial Institutions that accept deposits used to make loans and earn profits.
State Banks are commercial banks chartered by an individual State, while National Banks are commercial banks chartered by the Federal Government.
All commercial banks must be chartered. Every bank receives a major portion of its income from interest paid on loans by borrowers. Traditionally, the lowest rates were made available to the bank’s most creditworthy commercial customer. That rate is called prime rate. Most commercial loans are set at mark-ups over prime, however, the prime rate is no longer a strong force in setting loan rates. Borrowers can now get funds less expensively from other sources, including foreign banks that set lower interest rates.
Savings and Loan Associations (S&Ls), as commercial banks accept deposits and make loans. They lend money primarily for home mortgages. S&Ls in the U.S. hold now $1 trillion in assets and deposits of $728 billion.
Mutual Savings Banks are a kind of institution in which all depositors are considered owners of the bank. All profits, therefore, are divided proportionately among depositors, who receive dividends. Although 90% of all mutual savings bank deposits are held in five north-eastern States, these institutions have nearly the same volume of total assets as S&Ls.
Credit Unions are institutions in which deposits are accepted only from members who meet specific qualifications, usually working for a particular employer. Most universities, for instance, run credit unions, as do the U.S. Navy and the pentagon. More than 12,000 credit unions now operate in the United States. They hold $327 billion in savings and checking accounts for more tha 72 million members.
Nondeposit Institutions are other organisations that take in money, provide interest or other services, and make loans. Four of the most important are pension funds, insurance companies, finance companies, and securities dealers.
A Pension Fund is a pool of funds managed to provide retirement income for its members. Public Pension Funds include Social Security and $1 trillion in retirement programs for state and local government employees. Private Pension Funds, operated by employers, unions, and other private groups, cover about 80 million people and have total assets of $5.4 trillion. The Teachers Insurance and Annuity association (TIAA) operates the largest private fund in the United States, with assets of $214 billion in 1998.
Insurance Companies collect large pool of funds from the premiums charged for coverage. Funds are invested in stocks, real estate, and other assets. Earnings pay for insured losses, such as death benefits, automobile damage, and health care expenses. Insurance companies now hold total assets of more than $3 trillion.
Finance Companies specialize in making loans to business and individuals. Commercial Finance Companies lend to a manufacturer that needs new assembly-line equipment. Customer Finance Companies devote most of their resources to small non-commercial loans to individuals. As of June 1998, U.S. finance companies had issued credit totalling $832 billion.
Securities Dealers (such as Merrill Lynch and A.G. Edwards & Sons, buy and sell stocks and bonds on the New York and other stock exchanges for client investors. Investment bankers match buyers and sellers of newly issued securities and receive commissions for the service. U.S. investment dealers and investment bankers now hold $69 billion in assets.
Special Financial Services in the United States
Most banks help customers establishing savings plans for retirement. International Retirement Accounts (IRAs) are pension funds that wage earners and
Controlling the Money Supply in Classical Economics
In classical economics, “Inflation is a period of widespread price increase throughout an economic system. It occurs if the money supply grows too large. Demand for goods and services increases, and the prices of everything rise. (In contrast, too little money means that an economy will lack the funds to maintain high levels of employment.)
Because commercial banks are the main creators of money, much of the Fed’s management of money supply takes the form of regulating the supply of money through commercial banks.
Consider the following illustration.
In July 1995, the Fed announced a decrease in the federal funds rate, the interest rate charged on overnight loans made among banks, from 6 percent to 7.5 percent. Inflationary trends had been easing since early 1994, and the step was intended to keep the economy from slowing down too much. Thus, the fed’s action completed a classic cycle of rate changes that it had begun in 1990, when the Fed had decreased interest rates to stimulate the then-recessionary economy. The Fed steadily cut rates until September 1992, when it became apparent that its actions were having the desired effect-consumer and business borrowing were increasing and business activity showed signs of increasing during 1993. At that point, therefore, the Fed stopped decreasing the rate. The decision was effective. Although the rate was unchanged throughout 1993, business activity continued to grow.
By 1994, however, the Fed perceived indications that the economy might be growing too quickly. It thus began gently increasing the interest rate to head off inflation. The first graph in Figure 15.4 (omissis) shows that, to keep inflation under control, the central bank raised the fund rate seven times during the next 17 months. The second graph in Figure 15.4 (omissis) shows that by early 1995 it was evident that the higher rates were having the desired effect. Because of higher interest rates, for example, consumer loans became more expensive. As consumers borrowed (and spent) less, overall economic activity slowed. Inflationary pressures were under control. Finally, by mid-1995, there were indications that another economic slowdown might be under way. The Fed thus cut the rate for the first time since 1992.”
The Spendable Money Supply
“For money, to serve its basic functions, both buyers and sellers must agree on its value. That value depends in part on its supply-on how much money is in circulation. When the money supply is high, the value of money drops. When it is low, that value increases.
Unfortunately, it is not so easy to measure the supply of money. One of the most commonly used measures, known widely as M-1, counts only the most liquid, or spendable, form of money: currency, demand deposits, and other checkable deposits. These are all noninterest-bearing or low interest bearing forms of money. As of July 1998, M¹ in the United States totalled just over $ 1 trillion.”
To the Quantitative Theory of Money the author adds also M-2 (Time Deposits, Money Market Mutual Funds, and Savings Deposits), stating that “Totalling over $4.2 trillion in July 1998, M-2 accounts for nearly all the nation’s money supply. It thus measures the store of monetary value available for financial transactions. As this overall level of money increases, more is available for consumer purchases and business investment. When the supply is tightened, less money is available, and financial transactions, spending, and business activity thus slow down.”
Gimmicks and Tricks of Money Creation
Central Banks create money through loans. Loan is a contract where someone exchanges through instalments a product (money) with other products (goods or services), or with any product having the same nature (currencies).
That is possible because central banks have the authority by law of creating money with no limit and no cost.
To sell a product is the faculty of its owner, and anyone who accepts the exchange recognises in good faith the ownership of the product to the seller. Therefore, the first keeper (commercial banks) recognises to central banks the ownership of money by legal fiction.
This is the first basic trick of the current monetary system. In fact, whereas money issuing is worthless, and gets its worth from the first keeper (a fiction between Central and commercial banks), the whole banking system gets at once two incredible goals because:
a) They get the pay-off through the interest rate
b) They create riches from nothing.
In effect, the responsibility of giving worth to money belongs to consumers who produce new wealth generating investments through their businesses.
Such accounting upset-down has realized a macroscopic indebtedness of all people in the world toward the banking system without any counterparty.
Furthermore, we cannot misconceive that even the most concrete “Gold-standard” system has the defeat of allowing money creation only to those authorities that possess gold. This way, therefore, we shall conclude that gold worth more than technology, culture, innovation, and environment at once.
If no investment, business, innovation, education is possible gold-less, probably something is wrong in our minds.
The second basic trick of the banking system is based on the current-account relationship between banks and depositors.
In any business, current-account agreements shall be regulated under the condition of reciprocity.
In fact, a current-account contract is the agreement in which two or more parties agree to exchange products each other, and regulate their balance of account at a reciprocal interest rate. Only banks, on the contrary, have a difference interest rate in their operations of loan-deposit contracts. Probably such a possibility is enforced by law (we do not believe it); anyway that is certainly a tricky law.
In the Foreword of this work we have warned our readers about the sense of ignorance of the matter that still exists in human societies.
People have commonly accepted, as a matter of fact, the institutionalization of such procedures.
We are ready to scandalize for trivial matters, but are strongly afraid of scandalizing for the essence of our business.
Punitive power is enforced by law to accept banks’ money ownership.
Remunerative power is expressed by the banking system when it decides to borrow money discretionally.
Conditioning power is performed by the banking system when it warns people to not destroy the only system they have to do business. That is all false!
Money creation in the current system does not work because the bodies of law on which the concept of money is based do not work.
We have criticized the “Quantitative Theory of Money” because it is useless whether compared to the power of withdrawing taxes and levies by Governments.
Government withdraw on sales and profit is punitive of company efficiency. In other words, withdrawing taxes on sales and profit means to add extra costs to the cost/benefit ratio, and punish those companies that are most useful (profitable) to the market.
This consequence comes from the wrong use we do of Governments, which are unable to create new wealth, whose action is not based on business logic, but on politics logic (zero-sum game).
Nowadays money creation is a zero-sum game where the winner is the financial system (in most cases in collusion with Governments), and the losers are all efficient businesses, which are punished by tricky monetary systems and tricky bodies of law based on punishment of efficiency.
To change such a system is a matter of culture and education. Current monetary systems are the newest form of slavery based on money creation generated by banking and stock exchange systems, which allow financial speculation, i.e. the creation of a wealth (money from money) that comes from enforcements by law.
In the United States neither Federal Reserve Banks, nor Stock Exchanges and other Financial Institutions belong to all American citizens, even if they are publicly held. Therefore, what they issue contributes to enrich only a very limited number of people.
Money Creation Right as Land Ownership or Tenure in the Middle Age
The right to create money can be compared to the right of the sovereign that granted his subjects the right to cultivate the land, of which the sovereign considered himself as legitimate owner, behind remuneration of sharecropping, or other juridical relationships. The subjects granted in turn the right to cultivate the land behind similar remuneration to the peasants.
The presumed ownership of the sovereign on the land can be compared to the right of mintage, of which the central banks endowed themselves, and to the right that the same grant to private commercial banks to mint.
As the sovereign pretended a remuneration to grant in use a good that didn’t have value some up to when it was put in production, so the banks pretend an interest to grant in use a good that doesn’t have value some, up to when it is employed for the production of real wealth.
As the agrarian revolts have brought in the times to the distribution of the land, so we wishes us that the entrepreneurial revolts bring to the distribution of money among how much they employ it to productive scopes.
As lands are of all in most parts of social arrangements in the world, as much it has to be for the ownership of money.
With that we do not want to deny the quality of economic to money, as we do not want to deny the same quality the land, water, air or the sun. But as land, water, air and sun are not ownership of anybody particularly, neither of the State, likewise we can say of money.
As the sovereign imposed the servitude on its land, as much the banks impose the servitude on “their” money.
Accordingly, any juridical entity could impose servitude on “its” land, air, water, sun, and money?
Now even if we imagine that the money could, for absurd, be considered rather than as a good in ownership as a good datum in use, it is not legally correct the behaviour of the banks that use deposits to create new money through loans.
In fact, imagine that money is given in socage (as it happens for land).
In this hypothesis it would appear corrected the behaviour of central banks (and commercial banks in second issue) to pretend an interest rate in the moment of the issue of the money, but it certainly appears incorrect by banks to pretend an interest rate from the loans that these send forth on the deposits.
In fact as it is impossible that a same piece of bread can satisfy the hunger of two different people at the same time, it is as much impossible that a same piece of land can contemporarily produce two different crops at the same time.
And, if it is so for bread and land, it is as much for money.
When banks create new money from deposits, they confer once more to themselves an undue ownership of money.
Such appropriation is defined as theft in “The Theft Act 1968” of the United Kingdom.
“The Theft Act 1968, s 1 provides that a person is guilty of theft if he dishonestly ‘appropriates’ property belonging to another with the intention of permanently depriving the other of it. In this connection ‘appropriation’ is defined (by s 3) as any assumption by a person of the rights of an owner. This includes any later assumption of such rights after having come into the possession of the property lawfully or without actually having stolen it, as e.g. wrongful appropriation by a bailee”
Furthermore, “in its most general meaning, socage denoted a tenure of land by a certain and determinate service, as opposed to chivalry or knight service, where the tenure was precarious and uncertain. It was of two kinds: free socage, where the services were not only certain, but honourable; and villain socage or privileged villenage, where the services, though certain, were of a baser nature. All tenures (with a few exceptions) were, by the Tenure Abolition Act 1660, turned into free and common socage”
ABOUT POSSIBLE NEW SYSTEMS
The Theory of Economics
The classical economics has been defined as the science that deals with the study of mechanisms based on the satisfaction of human needs under the condition of scarcity.
Nowadays such definition is extremely reductive of the whole competence of economics, because we deal in a context in which excess can represent an economic problem as scarcity can do.
Therefore, we prefer to define more properly economics as “the science that deals with the study of the relationship existing between production and demand function.”
In simple mathematical terms it can be stated as:
E = f (P, D)
E = the economic cycle
F = indicates that between P and D exists a relationship
P = the set of production factors
D = the set of demand factors.
1) Production function can be stated as follows:
P = f (Na, E, L, T, C, R)
Na = natural resources (water, land, air, sun, raw materials)
E = entrepreneurship (which can surrogate one or more of the following factors)
L = labour
T = technology
C = financial capital
R = Venture capital and general risk.
2) Demand function can be stated as follows:
D = f (N, I, T)
N = needs
I = income (spendable)
Ta = tastes.
Cost-Benefit Analysis versus Inflation Theory
We cannot agree with inflation theory stated by classical economics for the following reasons.
Quantitative Theory of Money works only under the ceteris paribus condition, i.e. quantity of money can be assessed in a deterministic way if we take into consideration only the quantity of total business, total amount of money, and the velocity of money circulation. In this case, therefore, we shall assume that credit, or credibility, shall not change. Therefore, it has to be constantly adequate to the amount of total transactions, and to the velocity of money circulation.
It does not take at all into consideration the quantity of credit generated by businesses.
The misunderstanding of money supply can be connected with the huge misunderstanding of Bretton Wood, when the G10 agreed to bind money creation in US dollar to gold deposited in Fort Knox.
The extraction of all the producible gold was not enough to back the quantity of money needed for worldwide transactions.
Here we assume that quantity of money is generated only by credit, i.e. the credibility of operators.
Therefore, no determinism can be assumed, and we can assess and forecast availability of money only through non-linear dynamics.
Credit or credibility is an element of money creation that can
Such a concept confuses the effect with the cause. In effect, it is not the value of money to drop or increase, but the profit that comes from products.
Furthermore, unit cost is lowest when the number of units sold mostly approaches to the number of maximum production capacity of the company. Only when the number of units sold is greater than the number of units producible, then we can expect a unit cost increase due to the influence of new fix costs connected with the increase of production capacity of the company, therefore a selling price increase in order to have the prior profit.
The Banco Popular’s Case Story
“The American Dream is to rise from poverty to wealth-or at least comfort-through hard work, determination, business savvy, and other virtues giving meaning by opportunity.
It is the dream not only of people who can trace their roots back to the Mayflowers but also of new Hispanic immigrants to America who speak English as a second language. For many, the dream has long been possible because the American banking system loaned money to buy homes and build and expand business. For other, however, particularly minorities, loans were often hard to get, and insufficient financial help doomed plans for both families and businesses.
Reflecting on the state of the American Dream, at least one bank recognized opportunity in this situation. Instead of classifying low-to moderate-income Hispanics as credit risks to be avoided at all costs, Puerto Rico-based Banco Popular saw them as an untapped market for personal and business banking services. When he looks at the multiethnic New York City neighbourhoods that many mainstream banks are reluctant to enter, Josè Antonio Torres, Banco Popular’s New York/New Jersey general manager, sees “strong retail areas with good, growing neighbourhoods and housing stock. They are the kind of communities where we have done well before.”
Indeed Banco Popular’s historical mission has been to serve the banking needs of Hispanic Americans. The bank entered the New York market in 1961 and through growth and acquisitions now boats 39 metropolitan-area branches. In addition to new York, Banco Popular has always focused on the five states with the largest Hispanic populations: California, Florida, Illinois, New Jersey, and Texas. Every acquisition that the bank makes keeps this market in mind. For example, Banco Popular acquired Houston-based Citizen National Bank in 1997 because its customer base was predominantly Hispanic. Citizens National Bank, explains Mike Cart, president at the time of the acquisition, had already “become lenders to ethnic minorities in low-to moderate-income areas all over Houston in the single family mortgage finance business. We already served the market that satisfied Banco Popular’s strategic plans.”
In the New York area, which is home to 3.4 million Hispanic and 70,000 Hispanic-owned businesses, the bank found a niche in lending to small and midsize companies and is the metropolitan region’s top provider of Small Business Administration-backed loans in term of dollar volume ($32 million in 1998). One of the bank’s new financing programs is aimed at second-generation, family owned Hispanic groceries. It centers around loans to adult children who want to expand existing businesses run by their parents.
Having witnessed Banco Popular’s success in New York Hispanic communities, mainstream banks such as Chase Manhattan and Citibank are also moving aggressively into the Hispanic market. Chase, for example, recently opened a small-business development centre in the Bronx, equipped with a multilingual business library and a staff offering management help. Chase also took part in a 2-year SBA pilot program to speed and simplify the lending process to minority businesses.
With a larger presence and more marketing money to spend than Banco Popular, will banks such as Chase and Citi ultimately dominate New York’s minority banking market?
Although the answer to that question remains unclear, it is clear that many Hispanics prefer a bank with ethnic roots. Roberto Reyes, owner of Jeselvi Travel in the Bronx, may be typical. When he opened his agency, he had a choice of banking with Chase or Banco Popular. He chose Banco Popular because he wanted to do business with Hispanics.
Whether it caters to the minority communities of Los Angeles, Houston, in Jersey City, or Miami or to nonminority communities across the United States, a complex system of financial institutions, especially banks, is needed to meet the money requirements of individuals and businesses.”
(By focusing on the objectives of this case, we can better understand the environment for banking in the United States, and the different Kinds of institutions that conduct business in it.)
“Banco Popular, the largest issuer of credit cards in Puerto Rico, is expanding its card operation to the 50 states. It’s a natural step for the bank, which is continuing to expand personal and business banking services to Hispanic clients at the same time that it enters the credit card market. ‘We have an understanding of the language and culture,’ explains Donald R. Simanoff, president of Banco Popular’s U.S. card division, ‘and targeting the Hispanic consumer is what we do for a living.’
Since 1997, when Banco Popular officially entered the market, it has opened nearly 150,000 credit card accounts, 25 percent of which are secured accounts with credit lines backed by customer bank deposits. Thus three-fourths of the bank’s credit card portfolio is unsecured because the customers are considered credit risks.
Ironically, one of the main challenges facing Banco Popular is convincing the nearly half of all Hispanic consumers who have no access to credit through cards or other banking services that credit can be a good thing. To attract customers, Banco popular offers card-related discounts on products popular in the Hispanic community, including Western Union money orders and purchases at Kmart pharmacies. It is also negotiating a discounted long-distance calling plan.
With a keen understanding of the cultural needs of the Hispanic market, and with a clear strategic plan, Banco Popular is optimistic about future success in its primary New York, New Jersey, Texas, California, Florida, and Illinois markets. At the same time, however, managers realize that they are learning new things about the market every day. Recently, for example, the bank discovered that 4 of 10 people who call the bank choose to speak English instead of Spanish. Many Hispanic customers read English better than do Spanish. This information convinced Banco Popular to issue credit card solicitations and statements in both English and Spanish and to make sure that every customer service representative is proficient in both languages.
Credit Cards and Smart Cards
“More than 124 million U.S. cardholders carry more than 1.4 billion cards.
Spending with general-purpose, credit cards in the United States reached $991 billion in 1996, and is projected to reach $1.6 trillion, almost the half of all transactions-by the year 2000. Credit cards loans have been increasing at the rate of 20 percent per year since 1994. As of 1997, it is estimated that householders were carrying $450 billion of credit card debt on which they were paying interest; it is projected to increase to $780 bullion in the year 2000. Why are banks and other card issuer so willing to grant this kind of credit? Returns are up to three times higher than those from other forms of banking.”
Certainly credit cards can be nowadays representative of the negation of any quantitative theory of money.
The so-called “Smart Card” is a credit-card-size computer that can be programmed with “electronic money”. Also known as “electronic pursues” or “stored-value cards,” smart cards have existed for more than a decade. Phone callers and shoppers in Europe and Asia are the most avid users, holding the majority of the nearly 1 billion cards in circulation in 1998. Analysts expect 3 billion cards to be in use by the year 2000.
If new wealth is generated by labour force through entrepreneurship, labour, technology, and risk taking, then money creation belongs to these factors.
If any human beings have the right and the natural capacity of working and risk taking, then to them belong the capacity of creating money as “anything that is durable, divisible, stable, and acceptable as a medium of exchange, a store of value, and a unit of account to satisfy economic needs”.
If any enforcement by law can generate new wealth, then entrepreneurship, labour, technology and risk taking are useless. Therefore we can imagine a society based on indolence and other capital sins.
If new wealth is a future quality, which can be generated by educated and qualified people, then money creation is a future quality, which cannot be generated by a present will. Therefore, money creation is equal to new wealth creation, and it can be forecasted and appraised …………………
If new wealth can be generated only by applying existing financial riches, then we can imagine the future as a matter of banknotes and financial instruments, having little or null culture, ethics and sense of reality. Therefore, new wealth can be only based on a growing scale dictated by interest rate.
If financial speculation will be still permitted, then future wealth will be based on fake worth generated by false suppositions.
If bodies of law will be based on power impositions (zero-sum games), then we will assist to continuous conflicts and riots.
If we will invest our deposits in generating new money, then we will have no resources to dedicate to new culture.
If every human being is given a free-will, then any rebel to the current financial system shall be entitled to use alternative systems. Only our blind faith in the western financial system impede us to see the different way of life developing people have. Development cannot be standardisation to most common or recurrent systems and patterns. Development cannot be based on theorems of the winner, but on scientific theories strongly corroborated.
Patterns for the start-up of a new monetary system
Every human being is entitled of a debit right at his/her birth date.
Such indebtedness shall be used as a “growing scheme” for the life, whereas “pension schemes” are used for retirement.
Indebtedness accounting shall be calculated as any bank account, or the like.
Any shortage and excess can be exchanged with other people on a direct basis.
Any abuse of debt rights will be punished.
Credits and debits shall be cancelled with death.
Profits and losses can be exchanged or compensated.
The Lord’s Prayer: “Our Father”
Our Father who art in heaven
Hallowed be thy name (First Petition)
Thy Kingdome come (Second Petition)
Thy will be done on earth, as it is in heaven (Third Petition)
Give us this day our daily bread (Forth Petition)
And forgive us our trespasses, as we forgive those (Fifth Petition)
Who trespass against us
And lead us not into temptation (Sixth Petition)
But deliver us from evil (Seventh Petition)
Ora, anche se immaginiamo che la moneta possa, per assurdo, essere considerata piuttosto che come un bene di proprietà, come un bene dato in uso, non è giuridicamente corretto il comportamento delle banche che usano i depositi per creare nuova ricchezza attraverso i mutui.
Infatti, immaginiamo che il denaro venga dato in soccida (come si verifica per la terra).
In questa ipotesi apparirebbe corretto il comportamento delle banche centrali (e delle banche commerciali in seconda emissione) di pretendere un interesse nel momento della emissione del denaro, ma appare certamente scorretto il pretendere un interesse dai mutui che queste emettono sui depositi. Infatti come è impossibile che uno stesso pezzo di pane soddisfi la fame di due persone diverse, è altrettanto impossibile che uno stesso pezzo di terra produca contemporaneamente due raccolti diversi. E, se così è per il pane e la terra, è altrettanto per la moneta.
Quando le banche creano nuova moneta dai depositi, si conferiscono ancora una volta una proprietà indebita sulla moneta.
Giacinto Auriti, L’Ordinamento Internazionale del Sistema Monetario,Teramo, 1993
The definition comes from most economic dictionaries used worldwide. Therefore, that is not a personal statement of the author of the research.
See Fabozzi, Modigliani, and Ferri, Foundations of Financial Markets and Institutions, Chaps. 7-9.
Ronald J. Ebert, Ricky W. Griffin, Business Essentials, Prentice-Hall, New York, 2000
Federal Reserve Bulletin (Washington, DC: Board of Governors of the Federal Reserve System, October 1998, pp. A12, A13.
Federal Reserve Bulletin, ditto
Federal Reserve Bulletin, ditto
Federal Reserve Bulletin, ditto
Federal Reserve Bulletin, ditto
Federal Reserve Bulletin, ditto
Many observers already believe that traditional banking has become a mature industry, one whose basic operations have expanded as broadly as they can. For instance, 1993 marked the first year in which the money invested in mutual funds (almost $2 trillion) equalled the amount deposited in U.S. banks.
Statistical Abstract of the United States, p.517
Statistical Abstract of the United States, p.517
Federal Reserve Bulletin, ditto
Statistical Abstract of the United States, p.510
Statistical Abstract of the United States, p.510
Statistical Abstract of the United States, p.510
Ronald J. Ebert and Ricky W. Griffin, ditto, pp. 409-410.
This material has been updated from Keith Bradsher, “Federal Reserve Trims a Key Rate; First Cut since ’92,” The New York Times, July 7, 1995, pp. A1, D1, D4.
Ronald J. Ebert and Ricky W. Griffin, ditto.
E. R. Hardy Ivamy, Mozley & Whiteley’s Law Dictionary, tenth edition, Butterworths, London, 1988, p.30
E. R. Hardy Ivamy, Mozley & Whiteley’s LawDictionary, tenth edition, Butterworths, London, 1988, pp.442-443
Tami Luhby, “Bank Vies for Popularity with Minority Businesses”, Crain’s New York Business, November 16, 1998, pp. 43-44;
Lisa Fickenscher, “Banco Popular Targets U.S. Mainland Card Market,” American Banker, October 19, 1998, p. 7;
Monica Perin, “Puerto Rico Bank Gains Share of Hispanic Market,” Houston Business Journal, September 26,1997, pp. 1 +
Note of the researcher.
Ronald J. Ebert and Ricky W. Griffin, “Business Essentials”, Third Edition, Prentice Hall, Upper Saddle River (N.J.), 1999, pp. 400
Bill Orr, “Will it be Smart or Debit?” ABA Banking Journal, September 1998, pp. 54-58.
See also Smart Card Forum. http://www.smartcrd.com/index.htm
There is no limit or measure to this essentially divine forgiveness, whether one speaks of “sins” as in Luke (11:4), or “debits” as in Mattew (6:12).