Theories of how the system works:
The theories most commonly used to explain banking are either the ‘fractional reserve theory’ or the ‘financial intermediation theory’, however neither of these theories are accurate. In truth, there is only one theory that possesses objective, peer-reviewed empirical evidence to support its claims regarding the system, and this is the credit theory of money, sometimes called the credit creation theory
Richard Werner tested the theory of credit creation by having a bank in Germany monitor the electronic balance sheet of the bank when a loan was manually entered into the system. It was revealed that the provision of the loan increased both the balance sheet’s assets (money owed to the bank) and liabilities (money owed to the customer). The importance of this is that it violates the principles of both the fractional reserve theory and the financial intermediation theory
Fractional reserve theory suggests that banks, when they lend money, draw upon an existing reserve of cash (either the bank’s own money or deposits from customers) in order to finance the loan they provide a borrower. It is fractional because a bank in theory is required to possess a fraction of their reserve so that they can fulfil withdrawal requests from their depositors. Proponents of this theory say that it explains why a bank run (where depositors try to withdraw their deposits en masse) can be deadly for a bank as a bank may not have enough money on hand to supply all the deposits.
We know, however, that the empirical evidence provided by Richard Werner suggests that when a loan is extended by a bank, the bank’s balance sheet increases both in assets and liabilities. If the fractional reserve theory was true, then only the liabilities should increase (as money is owed by the bank to the borrower), while the assets would see a reduction in cash (as cash is given to the borrower) and increase in money owed to the bank — thus no net alteration in the total assets. In Werner’s study, this was not the case as both assets and liabilities increased and the cash reserves did not change. This renders the fractional reserve theory incorrect.
Along the same line, we can also disprove the intermediary theory. Intermediary theory suggests that banks act as intermediaries between borrowers and depositors. Depositors are paid a deposit rate by the bank which in theory represents the interest their money is earning when the bank lends the deposit to borrowers. This is where a bank is simply an intermediary as the bank plays no direct role besides facilitating the lending of deposits.
Werner’s evidence refutes this. In a similar way that fractional reserve is proven incorrect, the intermediary theory would need a bank’s balance sheet to increase in liabilities (as money is owed to the borrower for their loan) and their assets to see a decrease in cash reserves and increase in money owed to the bank with no net change. As a result, the natural conclusion is that the credit creation theory is the only valid theory regarding banking.
Credit creation theory:
Credit creation theory asserts that instead of money being drawn from deposits made by the bank’s customers, money is instead created once the loan is extended. Intermediary theory rejects the ability of the bank to create money, however we know this to be false as the empirical evidence provided by Werner shows assets and liabilities rising simultaneously.
Fractional reserve theory suggests banks can create money, however they believe money is created by the system as a whole, not by a single bank. A fractional reserve banking system achieves money creation by what’s called a money multiplier. This occurs when a deposit is deposited in Bank A, Bank A issues a loan while keeping a fraction of the original amount. That loan is then spent and enters Bank B, who then uses that money to create a loan while keeping a fraction of the original amount, which then goes to Bank C, and so forth. As a result, the system essentially creates money by continually re-lending money that was originally lent. This theory is however incorrect as well, as we have already investigated above
Credit creation theory instead suggests that banks individually create money when they extend loans to their customers, and that there is no requirement for a bank to possess any deposits in order to do so. This is consistent with Werner’s findings: when a loan is issued within a credit creation system, assets are increased by the amount of money owed back to the bank by the borrower while the liabilities are increased in equal amount by the amount of money the bank credited to the borrower. There is no change in the bank’s cash reserve, which is irrelevant to the entire process.
So in the simplest terms, banks create money out of nothing. 97% of money currently in circulation internationally was created by commercial banks lending money to borrowers and was not created by central banks. The ramifications of this system are significant, and it explains many of the prevailing macro-political trends we witness across western societies, from war to immigration.
Credit and its consequences:
Due to the way the economy is structured where the primary source of money creation is in the creation of loans, or in other words debt, there are forces on the economy that would not be present in an economy that is debt-free. The one major significant force is the charging of interest by banks on all debt that they issue.
As money is created most prominently by debt, and all debt possesses a charge of interest (which is a bank’s source of profit), there is a constant demand on the economy to continually expand. This demand exists because while a loan of, for example, $100,000 when spent puts $100,000 into the economy, if the borrower is charged at an interest rate of 5% p.a. and they pay the loan within a single year, that borrower must fish $105,000 out of the economy in order to pay back the loan. That places an additional demand on the economy to provide $5,000 more than what the borrower put in.
This makes eternal growth a necessity, and explains why politicians are obsessed with endless economic growth. It also explains why recessions are so deadly: in a recession, as there is a shortage of money available to the economy, this leads to defaults on interest payments which in turn leads to hurting the income streams of banks which ultimately leads to the downfall of a bank or several banks.
Core to the entire international economic system is the continual maintenance of interest repayments — the profits of banks — or else the system risks total collapse. The death of a bank is the death of an economy as practically every business and individual has deposits with a bank, and as deposits are technically the assets of the bank and not the personal property of the depositor until they retrieve their deposit, a depositor is at risk of losing their entire account.
Politicians globally treat eternal growth as a matter of life or death. As debt balloons across the world, with current global debt reaching an absurd height of 300% debt to GDP, the west increasingly has an insatiable hunger for more and more growth. Any signs of recession brings terror within the financial community as the systemic risk of the debt bubble bursting becomes acute during times of recession. Governments poured trillions around the world into the international financial system during the GFC in order to prevent global collapse of finance, but dramatic fiscal policy on behalf of the government is not the only method of boosting growth
Massive immigration programs designed to move underutilised human capital from less productive nations into more productive nations is why we see across the globe a culturally suicidal immigration program that threatens to disenfranchise the native populations of most western nations. As the inhabitants are increasingly pressed to become more and more productive, sacrificing their social lives and dedicating them to careerism and consumption, birth rates fall and the need for more people to power growth becomes all the more essential
The mass acceptance of refugees into Europe was criticised by many on the left and the right, however the elite saw it (and in many cases still do see it) as essential economic stimulus to prevent financial collapse. Receiving the massive influx of refugees, even if not a single one of them became employed, was regardless worthwhile as the massive increase in consumption from these refugees would lead to the growth of credit which would in turn supply the economy with greater amounts of money to support the payment of interest.
People are often confused as to why it is so easy for immigrants from non-western nations to get visas into western nations while it is increasingly difficult for western citizens to get visas into other western nations. The reason for this is because the cost/benefit of westerners moving from one western nation to another is lower than it is for a non-western citizen to migration to a western nation. Within a western nation, a western citizen is already near his maximum productivity. To move, the western citizen disrupts his productive output for a time as he resettles into the new western nation and this, if allowed too often, can damage the growth of the global economy.
On the flipside, a non-western citizen is not anywhere near his maximum productivity when they reside in a nation that is not as technologically advanced. They are much more useful for the global economy when they reside in western nations as the west’s productive output per person is significantly greater than that of non-western nations. Non-western citizens are pursued so greatly that programs are supported and finance by both western governments and international organisations like the World Bank and IMF to encourage mass migration.
The financial elite care nothing for multiculturalism or diversity, but money flows into the left-wing’s pockets because it is essential that native populations of the west do not agitate for restrictions on immigration as immigration is vitally essential to the stability of the financial system. Any kind of ideology that poses a threat to the stability of finance are immediately vilified, most prominently nationalism as it insists upon the reduction of immigration. Rhetoric is thrown against them in attempts to cease their “hate” and “bigotry” so that the financial system can continue on its path of perpetual growth.
At the core of this it must be remembered that the root of it all is interest — the means by which banks make profit. The entire global economy relies upon the payment of interest as its lifeline, which in essence means that the entire global economy relies upon the continual profitability of international banking. It is no mistake that globally, mainstream and establishment political parties on both the centre-left and centre-right are financed by their local and global banks, it is no mistake that investment bank executives are always involved in government decision making, it is no mistake whatsoever that these financial elite are always behind the nascent progressive movements that insist upon acceptance and tolerance.
War is yet another method of expenditure. Multi-million dollar bombs being dropped carelessly to wipe out only a few enemy targets is in fact desirable — the greater the expenditure on war, the greater the growth of credit. Credit growth is key to the survival of the financial system, which is what makes perpetual war a key part of western foreign policy. Equally, war waged against nations who close their economies to foreign capital or attempt to break away from the international financial system is essential to the survival of the international financial system.
The productivity lost when a nation closes its borders to the global economy damages the international financial system. A nation may be tolerated for a time, but as global debt becomes increasingly more acute and anxiety begins to rise among those in international finance, waging war on those nations denying international finance becomes a necessity.
Role of central banks:
Central banks have proven to play an increasingly vital role in the global financial system as they took on proactive intervention within the economy during and after the GFC, delivering stimulus in the form of quantitative easing and cutting rates. While commercial banks create money through the provision of loans, there are capital equity requirements upon banks that requires them to possess a certain amount of liquidity so that they can service withdrawals in the event of a sudden shock in the financial system.
If they do not meet their equity requirements, they are incapable of providing new loans. The way that banks get around this is by either lending to one another (which is where the “interbank rate” becomes relevant) or receiving liquid assets from the central bank. The central bank can tighten the availability of these liquid assets as well as the cost of using them, which directly impacts the cost of interbank lending and in turn will lead to impacting the cost of interest rates for borrowers.
Central banks, in my view, play an insidious role in the global financial system. They facilitate the structure of the financial system established by the private banks that allow them to create credit and demand interest by creating a framework of legislation around what they do. The accountability between a central bank and a private bank is extremely low — often around the globe the heads of central banks are former private sector bankers, and particularly in the US the federal reserve system itself is owned directly by the private banks which possess enough power within the federal reserve to overturn government decisions
Central banks are in constant interaction with one another globally, coordinate their actions to ensure the maintenance of the international financial system. The federal reserve bank naturally takes the largest role in this international coordination due to the size of the US economy and the importance of New York’s banks, but the Bank of England too plays an important role as London plays as second in command to New York.
Foreign banks in Australia:
Little to the knowledge of the average Australian, international banks possess a significant portion of our economy. Investigating ASX-listed companies has one discover that practically every single business is dominated by HSBC (London), JP Morgan (New York), or Citibank (New York). On behalf of their clients, these major banks siphon profits out of the Australian economy through the possession of these shares back to their clients wherever they may be in the world.
Besides in the rare and unlikely scenario where bank clients take an active role in the management of their portfolios, these banks have unprecedented control on the outcome of shareholder decisions in Australia’s largest businesses. Our banking system is dominated by these large investor banks, along with scores of our large businesses in mining and agriculture, all of whom in turn donate to our politicians to barter for control and preference in the economy.
This level of control is unprecedented and is completely hidden from the public, but necessary for global finance if it wishes to prevent politicians from bending to public demand and move away from globalisation and the goal of eternal global growth. Core to this is the profiteering of the bank, taking potentially 30-50% of Australia’s profit from a variety of publicly traded corporations. It is not unique to Australia either, with many nations falling victim to this profiteering where the profits of the productive labour of the local populace is siphoned to benefit foreign bankers and their clients.
Simply due to how the system functions, many evils are necessitated in the name of stability and profit. In realisation of this, many of the social trends that we witness across the globe are suddenly explainable when before they seemed objectively idiotic and suicidal. There is no exaggeration when banking cartels are blamed for many of society’s ills for it is their tentacles of finance that suffocates the globe.
Much more could be said on the consumer culture that aims to perpetuate the eternal growth goal, with discussion on progressivism as a phenomenon of finance, where corporate tax hikes and pseudo-socialism benefit large corporate profitability, however the primary takeaway is the shackling evil of interest, and how such a simple thing can lead to untold damage to the world.