By Umberto Mazzei
It seems that today there is a policy to privatize money, for banks to create and own all the money. We are standing far away from Adam Smith, Ricardo and Sismondi when they stated that only work creates value and that money is only the mean to account it. They described capital as an amount of useful things produced by work and which can be traded. Since then, money was considered as just another good which is useful to express the capital value and facilitates trade.
The difference between money and capital, established two hundred years ago, is the basis of economic science and has not ceased to be true, what happens now is that capital and money are being confused with credit and debt. Sismondi already said that money is the wealth acquired through work, and it is part of the circulating capital. Because of a confusion of money with capital …it has been believed …that national capital can be increased with fictitious money.
Further confusion between debt and wealth, which is so common in today’s economy, originates- according to Sismondi – in the United States; since its first independent government; since the George Washington Administration, in which Alexander Hamilton was the first US Treasury Secretary. Sismondi says “how can debt be mistaken for wealth? It is impossible to be more completely deluded than Alexander Hamilton, 1st United States Secretary of the Treasury, a much appreciated man. In its report to the House he says: “There is a kind capital … in the US, which excludes any concerns about the lack of capital: it is our financed debt” and he devotes 20 pages to confuse active with passive A this commentary he added, in the next chapter, something that shows a consistent behaviour by banks in the United States: “American banks … incite speculative activities with easily obtained money.
Money as mean of payment
According to the three classics of modern economy, money facilitates trade, because it is a neutral standard that serves as a reference to what is always a subjective exchange of the products of labor. An exchange in which each actor perceives a greater value in what he receives than in what he delivers. To stabilize the value received and to constitute in itself an intrinsic guarantee, rare metals which can be refined to a homogeneous and divisible quality have been used from time immemorial.
Sismondi explains that « gold and silver were chosen because they are both divisible to infinity and susceptible of reconverting without loss; imperishable throughout time that they are conserved, which may be purified to a degree that makes themselves perfectly equal and in perfectly similar amounts ». It is likely, that they were also chosen because some magical association with the colour of the sun reflections and the pale glow of the moon, which are the first two most obvious sources of vital effects. The division of these metals into pieces of identical weight and quality is what we call currency or money. The scientific and technological progress in the wedging allowed taxing on them inscriptions that describe accurately their weight and quality. The guarantee of veracity was assumed since antiquity by governments, because of that they were necessarily attributed to the monopoly of wedging. Up to this point there is complete coincidence among the three famous classic economists and from there on begin their differences.
Smith does not want government intervention to go beyond guaranteeing the money value, the wedging. Ricardo doesn’t want it either and he even considers the paper notes issued by private banks as the perfect form of money: The currency is in its most perfect state when it consists only of paper, but a paper whose value is equal to that of the sum of gold that it says to represent. The use of paper instead of gold replaces a very expensive agent, for one that costs very little; which places the country, without there being any loss to individuals, in the condition of being able to exchange all the gold it used before for that purpose, against raw materials, utensils and livelihoods, whose use increases both wealth and the joys of the nation.
Sismondi mocks Ricardo and says that it reminds him of the English Admiral Anson who noticed in his trip to China, that the fortifications made along the river of Canton, and intended to impose respect to that power, although they had very good appearance from far they were made with crushed paper and defended by cardboard cannons. The Chinese had reasoned more or less as M. Ricardo. The use of paper instead of copper, for the artillery, replaces a very expensive material by another that costs very little, which puts the country, without there being any loss to individuals in a condition to exchange all copper used before for their cannons against raw materials, utensils and livelihoods, which increases both the wealth and the enjoyments of the nation. This will be very good throughout the duration of the peace, but at the first war, it will known that the paper shields and the cardboard cannons are not as worthy as those of silver, copper and bronze.
The similarity that Sismondi finds between paper money Ricardo with the cardboard cannons that Admiral Anson saw in Canton, can also be found in the announcement that both, the Federal Reserve and the European Central Bank, are planning to withdraw from circulation the high denomination banknotes, those of US $ 100 and € 500 and € of 100, to force the circulation of money to be made through banks. This idea comes from neo-liberal economists like Larry Summers and others, like Kenneth Rogoff, who even wants only electronic money, so that only by spending it money can be removed from the banks. This would allows central banks to lower the interest rate to down to zero, which is actually negative rate, so banks can capitalize in their favour the devaluation of money.
The pretext would be that high denomination bills facilitate the drug money laundering. Regardless of the fact that retail drug trade is actually done with low denomination bills, the result of removing high denomination bills would be to concentrate on banks all kinds of savings and to accentuate the tendency to make them the forced intermediaries for any transaction. There are already limitations on the amounts that can be withdrawn from peoples own deposits, which is of a doubtful legality, but that extra measure seeks to prevent any independence and privacy in personal spending. What will happen, in a world without physical money- as it is highly probable -, most banks go bankrupt? How will people buy or sell if their money and savings consist only on electronic impulses recorded in the banks virtual file accounts? When the financial crisis comes, the plastic payment cards that move electronic consumption will be as useful as cardboard cannons mentioned by Admiral Anson.
As for the pretext of combating money laundering by leaving the public with only small bills and by giving the banks the control on the flow of trade, nothing could be more false. There is one of the largest banks, the HSBC, valued at US $ 215 billion, which is linked to the drug trade from the start. It was created, in 1865, precisely to handle the money from the opium trade that the prudish Victorian England imposed by war to the China of cardboard cannons. Today, its frequent headlines on money laundering scandals and its 556 subsidiaries in tax havens show him as an institution true to its origin. Three years ago it was fined US $ 1, 9 billion for laundering drug money. Right now the US government is accusing it of laundering US $ 881 million from drug cartels in Mexico and Colombia. The backward thing is that, although criminal offences are by definition made only by natural persons, when bankers commit crimes in association with drug traffickers, the traffickers are sent to prison, but the bankers are not personally charged and it is the legal entity of the bank that is held accountable and punished with a fine; a fine which is always lower than the gains. It could be seen as if the government is only claiming his share.
According to the World Drug Report of the United Nations (2005) the profits of drug trafficking are an important part of the global financial system. No wonder the same report notes that since the US occupation of Afghanistan, the country became the source of 87% of opium. The report also states that in year 2005 the illegal drug trade was worth US $ 177 billion. The latest UN figures (2013) put it at 320 billion per year. Alain Labrousse,at the Geopolitical Drug Dispatch, estimates that about 80% of the profits are laundered in rich countries banks Antonio Maria Costa, head of the Office of the United Nations crime and drugs, testified that it was only laundered drug money and corruption which prevented the collapse of the global economy during the crisis of 2007-08. It is not precisely the grandmother which treasures € 500 bills to give a present to the grandchildren on their birthdays the one who encourages money laundering.
The paper money fraud
For Sismondi Money is wealth acquired by labor, like all other values, and so, like them, it is a part of the capital circulation therefore it is a public good of great importance because it guarantees the value of all other goods and services. He says money is the road for trade; so for that reason governments should intervene to prevent fluctuations in their value and should monitor its use. That is the reason for the existence of central banks. Then he adds based on his experience of the abuses by banks that Smith never knew and became today quite visible: the principle that the law should not regulate private banks is totally false. These banks borrow national money, which is a public property, one that is and must always be under the supervision of the sovereign authority
Sismondi says that Ricardo’s proposal to replace the circulation of intrinsic value coins with a paper circulation is due to confusion between cash and equity. Ricardo’s ideas shaped the US economy since its independence and paper money circulated there since the very beginning. In England paper money was used for the first time during the British banks crisis of 1826, when all the metallic money was collected. Since then the Anglo-Saxon countries tend to sustain a circulation of paper money, which after the First World War they promote for the rest of the world.
Sismondi principles which require the State to be the guarantor of the value of money earned with work, have become quite uncomfortable for present practices and are being deliberately ignored. It is not the last reason for the study of his teaching to be abandoned and for him to be ignored. Today citizens receive in return for their work and their savings, papers with a monetary denomination whose value in real terms, in terms of their purchasing power, fluctuates always downward. The role of central banks as guarantors of the value of money is something that seems completely forgotten. So much that devaluation or subsidies are used to promote exports, which according to Sismondi is to pay its own merchants in order to enable them to sell cheaper, but at the expense of all the other subjects. All along his works Sismondi opposes manipulation of currency value and prices in order to favour a minor sector of the national economy at the expense of all others, as is since then the case for exporters and as now when everything is sacrificed before finances sector.
A recent example was given by the European Central Bank -BCE – Chaired by Mr. Mario Draghi, a former Goldman Sachs high executive officer, who is taking over from the Federal Reserve the emission of Quantitative Easing (creating money without funds), when it began to affect the value of the US $. To the ECB it seemed appropriate to issue one trillion and six hundred billion Euro in a stagnant European economy. Mr. Draghi, answering criticism over the issuance of such an enormous quantity of money which sabotaged the value of the Euro, replied that his intention is to bring down the euro until parity with the US dollar. A statement obviously made to precipitate a flight from the Euro to the US Dollar. The latest feat of Mr. Draghi is to take over from the Federal Reserve in charging zero interest for loans from the European Central Bank, which is actually a negative interest rate: it is to pay for lending. The measure, announced on March 10, 2016, under the pretext of promoting investment and employment, will have the real effect of sustaining the fictitious values of the stock markets bubbles created by the speculation of the financial sector and to delay their explosion, so that bank executives continue to collect their millions in awards.
Central bankers should listen to Sismondi when he says that economic stagnation is not due to lack of money, but to the fact that the consumer money does not replace the capital fast enough. The whole Fifth Book of his New Principles of Political Economy is devoted to money and has the title of its Chapter IV precisely states that interest is the product of capital and not of money. That statement deserves some thoughts by Mr Mario Draghi of the ECB and by Ms. Janet Yellen of the Federal Reserve, whose entities – which still are main pillars of the world economy – emit astronomical amounts of money without funds and in order to lend to the banks at zero interest rate. A worthy reflexion only in the event that they could want to improve the world economy and not the profits of the bankers.
A private and universal fiat currency
The principle that the State should regulate and monitor private banks and intervene in the management of money, because it is a public matter of the highest concern was never better justified. The outrages committed by banks have only increased since 1913. Then a group of private banks constituted the Federal Reserve in the United States and converted US money into private property by replacing the government – specifically the US Treasury – in issuing it. Since then the issue of US money is not the US Government concern but that of a consortium of private banks, which decides on monetary policy, issues the amount of money it deems appropriate and lends it, with interest, to the Federal Government. It can be feared that these functions are carried out in their banks exclusive benefit.
After the Second World War the US privatization of money started to expand to the rest of the world. At Bretton Woods the US guaranteed to comply with the Ricardian condition to keep a paper money whose value is equal to the sum of gold that it says to represent. In exchange of a formal pledge by the Federal Reserve to a gold standard of US$ for ounce of gold it’s US$ would be used as the international reference currency. That lasted for 25 years, the time that lasted the US advantage of being the only economy favoured by the damage caused by two world wars.
In 1973, when their trade balance was already in deficit, the United States reneged on its gold standard and since then the world trades and accumulate reserves in US $, issued by the Federal Reserve without any value guarantee. That same year the United States achieved from OPEC countries the engagement to sell oil only in US $. Since then the US$ is a universal fiat money which is issued as required by the banks who own the Federal Reserve. As Emmanuel Todd said in Apres l’Empire … America is no longer essential to the world for its production but for its consumption … The United States created a Keynesian world, like that of the Egyptian pharaohs, in which America would now be our pyramid, maintained by the work of the whole planet. Their trade deficit keeps on because they pay their purchases in their currency, which has such a magical behaviour that some economists have deduced that the economic role of the United States is no longer, like other nations, to produce goods but money.
The universal bank fraud
Sismondi already said, when he spoke of the United States and England two centuries ago: Their bankers, because of their credit, seem to have endless capitals … That credit seems to have a creative power, and speculators … are given to illusions which are dangerous for them and for the states that believe in them … Every day a new speculator presents a gigantic project … if he manages to drag the country’s richest capitalists, he can turn his speculation into a national business … That kind of national business which today has attracted the richest capitalists – banks and great corporations – is speculation in the stock market. There, securities are traded which are only badly warranted credit. In general, those are but variations on the old trick known as Ponzi scheme, in which credits are sold whose profits are paid by issuing and placing more credit (debt). That is what stocks bubbles actually are. The mechanic procedure is to intensively buy some securities to inflate their value before selling them to investors, in whose hands they explode.
This is an old fraud described already by Sismondi, as Professor Fabrizio Bientinesi, from the University of Pisa, says in an important article entitled Sismondi and the dangers of the financial system . In that article Bientinesi points out that after the Napoleonic wars, auto financing, which was previously the norm for businesses and which contributed to regulate investment according to demand, was supplanted by the use of credit and credit as such, has virtually no limit. Hence the final passage to international finances as a system that guarantees its own existence at the expense of the rest of the economy.
Bientinesi quotes Sismondi, in his Etudes sur les Sciences Sociales and his phrases are very pertinent today, because nothing has changed. Sismondi says: “Bankers that negotiate loans for Greece, for the new states of America, for Spain or Portugal, in the absence of a guaranteed income provided by the interests, imagined the another one; to keep in their hands from the very funds that they advance to the governments, a portion of capital that was enough to pay the interest on the first two years. Thus they imply that after the crisis that is to be overcome, the state will find new resources; but they are rather counting on the regularity of those first payments to illusionate the mass of the capitalists, so they come forward to buy all the coupons they have upon themselves, when they sell them.
These frauds were repeated a hundred years later speculating with debts from economies affected by the First World War and the reparations required by the Treaty of Versailles. Those speculations contributed greatly to the 1929 crisis and following recession. As a result of that crisis, during the Franklyn D. Roosevelt Administration, the United States approved rules protecting depositors from such fraud, including the separation between savings banks and investment banks. That and the War economy that continued during the Cold War gave the West international financial stability until the time when Ronald Reagan in the US and Margaret Thatcher in UK began to deregulate banking activities. However, the emotion of regulation that still protected the savings depositors from speculation and fraud took place in the US under the William Clinton Administration.
Since then the banking activity, with the natural support of the consortium which is the Federal Reserve, unleashed a speculation of every type of paper that led to the financial crisis that exploded in 2008. A crisis in which in order to avoid the bankruptcy of the speculators, the Federal Reserve and other central banks used public money, issued money without funds and borrowed money from the banks to give money to the very same bank…and save them from bankruptcy. Between 2008 and 2014 the Federal Reserve issued 3 trillions of US $ – i.e. public debt – with no other object but to save the banks from their sorry speculations. In 2015 the European Central Bank took over issuing € 1.6 trillion so the carnival on the stock markets could keep on.
Graph 1. Federal Reserve emission of “Quantitative Easing» 2008- 2014
A carnival where financial wizards pronounce technical sounding English spells to transfer the savings from the 99.5% of the population, to an already rich 0.5%. A misguiding jargon where Quantitative Easing means issuing money without funds or giving public money to the banks; Default Equity Swaps is mutual guarantee on unredeemable debts; Sub-prime mortgages means mortgage without real collateral. These and other euphemisms for the word fraud are sheltered under the larger term Derivatives, which are bets that crisscross on the stock market. According to the Bank for International Settlements in Basel, the Derivatives rather than decrease after the crisis caused by them have doubled. By 2015 they reached a figure close to US $ 800 trillions, with a daily trading of around 25 trillions. To give an idea of their excess over real economics, we remind our readers that the annual US GDP is US $ 18 trillions.
It is impossible to pay the amount of debts owed by the banks, but the Fed and the ECB seek to delay the collapse by squeezing the 99.5% of the population, until the of banks directors keep on making money on their speculative bets. Meanwhile, bankers commit other clearly criminal offences. Because of the dimensions of their crimes we believe that many among that 0.5% favoured by central banks should be in jail. In one scandalous case it was found that the “traders” used pseudonyms such as The Cartel, The Mafia, and Bandit’s Club which show a clear knowledge of their activity. So far the only country that has put bankers in jail is Iceland, which also refused to pay their debts with public money.
It would be impossible and tedious to scroll through, in this limited space, the list of frauds committed by banks, so we will only mention a couple of important examples among many scandals that continue to make headlines, despite the unusual discretion shown by the press when it regards banks.
On August 20, 2014, we read that the Bank of America, the second largest on Wall Street, was fined 17 billion because of fraud. That fine was the largest that any bank had paid until that date. A year later, on August 14, 2015, the press announced that nine of the largest banks in the world – some of them are part of the Federal Reserve – were accused of manipulating exchange rates at the expense of their clients. The offence was settled with a fine of US $ 2 billion and payment of US $ 2 billion to the investors. The guilty banks were Goldman Sachs, Bank of America, Citi, Barclays, BNP Paribas, HSBC, JPMorgan, RBS and UBS. There are other foreign banks accused of complicity, these are Standard Chartered Plc, Societe Generale SA, Bank of Tokyo-Mitsubishi UFJ Ltd., RBC Capital Markets, Deutsche Bank AG, Credit Suisse Group AG and Morgan Stanley. The interbank change rates movement is of around US $ 5.3 trillion daily. It can be seen that stealing is still good banking business; even when you are caught and fined. No one was arrested.
Sismondi was right when he considered money a public good, which must be legislated and monitored by the State. The independence of central banks is false myth that shelters bands that manage national finances for the benefit of international private interests.
The present financial system is a parasite of the world economy, which robs the public from the earnings of their work in the real economy, the economy which produces goods and useful services. Credit recklessness and fraudulent indebtedness of private bankers have led in Europe to the liquidation of public assets and social security systems to pay for private debt. It is curious that the affected countries are the same that, two centuries ago, were mentioned by Sismondi as victims of the same financial speculations. As in Greece, where along with its museums the millenary cultural testimony of our civilization was privatized.
Banks dominate governments and that makes impossible a political solution before the final financial explosion. Then there will be three remedies, which are not mutually exclusive:
- a) Recover the control of central banks and of money printing, impose a standard to avoid the erosion of the money value, which serves debtors and exporters but damages all workers salaries and savings
- b) Nationalize all bailed out banks and manage them under strict collegial supervision to promote national economic and social development.
- c) Apply anti-monopoly laws to banks and divide them as communitarian banks, under operative separation rules, such as those that existed before Bill Clinton and the posterior take-overs.
These basic ideas are inspired in Sismondi’s political economy which was thought long ago, but which was never more valuable than ever. The increasing wealth concentration and financial fraud problems that we face today, derivate from the biased abstractions that Sismondi denounced in Ricardian economics, the one that still guides the economic policies of the Anglo-Saxon world. They are the work of that invisible hand that, unless we firmly control it, will keep moving stealthily to steal everything from us.