It's Up To Europe's Leaders Now, by Bryan Gould

Like so many others, I long ago got used to being pilloried as “anti-European” for daring to say that the “Europe” we were urged to sign up to was no such thing, but was a particular arrangement cooked up by the powerful and foisted on the people of that often benighted continent without bothering either to consult them or to take count of their wishes.

As the Greek crisis unfolds, and as it strips bare the pretensions of those powerful forces who talk with less and less conviction of the European ideal and of democratic rights, we can surely no longer be in any doubt.

The “Europe” in whose service so much sacrifice is now demanded is a cartel of bankers, financiers and right-wing politicians who have no interest in democracy, or jobs, or the living standards of ordinary people.

As the Greek people suffer, and plead “no more”, it is not the travails of the Greeks – or, for that matter, the Spanish, or the Portuguese, or the Italians – that weigh with Europe’s powerful; their sights are fixed on maintaining austerity and discipline, on adhering to ideology and doctrine.

Above all, they are determined to protect the euro, because it is the one weapon that ensures that there can be no backsliding.

The euro was put in place so that, whatever temptations – or even imperatives – there may be, there can be no going back. The grim and unrelenting disciplines of neo-classical economics demand nothing less.

For many of us, this imposition of a single monetary policy and discipline on a hugely diverse European economy was always destined to fail.

There was no way that small and underdeveloped economies like Greece could survive competition from a powerful German economy, especially when it was the Germans who had the power to decide on the monetary policy that should be put in place – and no prizes for guessing whose interests that policy turned out to serve.

The irony is that is those powerful interests – represented by the IMF, the European Central Bank, and the European Commission and obliged to follow the dictates of the German Finance Minister – who now find that, despite the disparity in power between them and a bankrupt and demoralised Greece, it is they – and not the supposedly feckless Greeks - who have the responsibility for saving the euro.

With the power of the referendum result behind him, Prime Minister Tsipras can now say that there is nothing more he can do. Ravaged by austerity, Greece has no resources left. Unless they are helped by a bail-out package that does not drive them deeper into collapse but instead gives them a chance, over time, to begin to grow again, they will be forced – since there is no other option – to leave the euro and seek their own salvation.

The Greeks have, in other words, taken their decision. There is nothing left for them to decide. The ball is now in the court of Europe’s leaders. It is now for them to give up entrenched positions.

It is up to them to decide whether to refuse to help, with the result that Greece will have to leave the euro whether they like it or not, simply to survive, or to relent and offer a more acceptable and realistic package that will keep Greece afloat and allow them to stay in a re-shaped common currency.

We know what they want to do. They have stuck to the current stance in the hope that the Greek government will fall and “regime change” will be brought about.

There has even been talk of a government imposed on the Greek people from outside or of a government of “technocrats” that will do the bidding of the financial establishment.

The referendum result, though, seems to have put paid, for the time being at least, to that disgraceful objective./

But, for a brief period, the Greek crisis has given us a glimpse of the mailed fist and doctrinaire rigidity behind the “European” ideal.

Rarely can there have been such a stark demonstration of the inherently undemocratic nature of the European power structure and of the interests it truly serves.

It may be that the Greeks, by forcing an “agonising re-appraisal”, will end up having done the true adherents of a united Europe a favour.

It may be that, at long last, we will begin to contemplate a Europe based on agreement freely given by the continent’s governments and peoples, an agreement to build a Europe by learning from each other how to work together and to cooperate more closely, a functional Europe that will do those things that are best done together rather than separately, a “bottom-up” Europe that will develop as a result of, but not getting ahead of, a growing sense of European identity and the wishes of its peoples.

We need a Europe, in other words, that is not just a vehicle for advancing powerful interests, and riding roughshod over everyone else, but that understands that the Greek poor and unemployed are just as important, and just as essential, to Europe’s future, and that enabling them and millions like them to live a better life is both a united Europe’s true purpose and its only real chance of success.

Bank-Created Credit, by Bryan Gould

For those of us who have argued for a long time that orthodox monetary policy is fundamentally misconceived, a significant milestone was achieved this week.

In an important paper published in the Bank of England Quarterly Bulletin*, three Bank of England economists have acknowledged that the overwhelmingly greatest proportion of money in the economy is created by the banks out of nothing.

This finding comes as no surprise to that growing number of economists and others who have recognised, as a consequence of simple observation, that this is the case. 

But it will no doubt be hotly denied, in the face of all common sense and evidence, by those (including bankers themselves) who, for reasons of self-interest or sheer ignorance, continue to adhere to the classical view that banks are simply intermediaries between lenders and borrowers.

The great British public is itself the victim of the confusion and obfuscation that has surrounded this issue for generations.

Most people, if asked, will tell you that what the banks do is to lend out to borrowers the money that is deposited with them by savers. 

On this analysis, there is nothing particularly special about banks; they simply charge for the service they provide in bringing savers and borrowers together.

The truth, however, now conceded by the central bank, is very different.

The banks enjoy a most spectacular and surprising monopoly power.

They alone are able to create new money - vast quantities of it - by the stroke of a pen or, in modern terms, by pushing a key on a computer keyboard.

When a bank lends you money, it simply makes a book entry that credits you with an agreed sum; that sum represents nothing but the bank’s willingness to lend.

The debt you thereby owe the bank does not represent in any sense money that was actually deposited with the bank or the capital held by the bank.

Nevertheless, when it arrives in your account, and you use it to spend or invest, the overall money supply is increased by that amount.

The only attempt to regulate the volume of new money created by the banks comes through raising or lowering interest rates - a power exercised not by government but sub-contracted to - you’ve guessed it - another bank.

This means that, in practice, the only limit on bank lending is their willingness to lend to applicant borrowers at whatever the current rate of interest may be.

The size of the market which provides the huge profits enjoyed by the banks is, in other words, decided by the banks themselves and their assessment of, and willingness to accept, the degree of risk involved.  

There will, in the search for the ever higher profits to be made from lending more and more of the money which they themselves create, always be the temptation to lend more than is prudent in their own interests or desirable in the wider interest - and that is how the global financial crisis came about.

The astonishing feature of this monopoly power enjoyed by private companies seeking profits for their shareholders is that their decisions as to how much and for what purpose money should be created, made with virtually no external control or influence to restrain them, constitute by far the single greatest (and potentially distortional) influence on our economy.

The Bank of England paper has now laid all of this out for public inspection. 

The authors do not quite have the required courage of their convictions, since they attempt to downplay the significance of their conclusions by using the operations of a single bank to illustrate the process of credit creation, and thereby fail to register the immense scale, when looking at the banking system as a whole, of what they are describing.

Even so, the policy implications of what they say are immense.

Our macro-economic policy at present virtually limited to attempting to control the money supply as a means of regulating inflation.

But since the volume of money is a function of bank lending and reflects nothing more than the banks’ search for profits at whatever the current interest rate may be, it follows that the whole thrust of current policy is entirely misplaced.

The banks, in deciding for themselves how much, to whom and for what purpose they will lend, will always give priority to lending for house purchase since it requires by far the least effort, and is the most secure and profitable form of lending.

Can we be surprised that, as a result, those wishing to borrow for business investment are at the tail end of the queue while house prices - inflated by the volume of new money going into the housing market - go on rising inexorably?  

It is bank-created credit that provides the major stimulus to asset inflation in the housing market, with all of its deleterious economic and social costs, while at the same time diverting essential investment capital away from where it is really needed - in the productive sector of the economy.

If we wish to restrain inflation, why do we not target the most obvious cause, rather than burden the whole economy with deflationary interest rate hikes?

And if we want a stronger real economy, why allow the banks the exclusive power to decide that the new money should go to housing rather than productive investment?

Our current monetary policy is based, in other words, on a complete misunderstanding of the role of money and its impact on economic activity.

Our economy is awash with money, but it is neither the economically neutral phenomenon - interesting only because of its impact on inflation - that classical theory describes, nor does it provide the stimulus to new productive investment in the real economy that it could and should do.

Monetary policy need not be just a rather ineffectual tool for controlling inflation.

It has the capacity instead to be a major stimulant and facilitator of real productive investment if we understand and use it properly. 

The banks’ monopoly of the power to create money prevents us from doing just that.

*Money Creation in the Modern Economy, by Michael McLeay, Amar Radla and Ryland Thomas.