Escaping the Sovereign Debt Trap
By Ellen Brown
President John Adams is quoted as saying, “There are two
ways to conquer and enslave a nation. One is by the sword. The other is by
debt.” The major conquests today are on the battlefield of debt, a war that is
raging globally. Debt forces individuals into financial slavery to the banks,
and it forces governments to relinquish their sovereignty to their creditors,
which in the end are also private banks, the originators of all non-cash money
today. In Great Britain,
where the Bank of England is owned by the government, 97% of the money supply
is issued privately by banks as loans. In the U.S., where the central bank is
owned by a private consortium of banks, the percentage is even higher. The
Federal Reserve issues Federal Reserve Notes (or dollar bills) and lends them
to other banks, which then lend them at interest to individuals, businesses,
and local and federal governments.
That is true today, but in the past there have been
successful models in which the government itself issued the national currency,
whether as paper notes or as the credit of the nation. A stellar example of
this enlightened approach to money and credit was the Commonwealth Bank of Australia,
which operated successfully as a government-owned bank for most of the 20th
century. Rather than issuing “sovereign debt” – federal bonds indebting the
nation to pay at interest in perpetuity – the government through the Commonwealth
Bank issued “sovereign credit,” the credit of the nation advanced to the
government and its constituents.
|
The Bank’s achievements were particularly remarkable
considering that for its first eight years, from 1912 to 1920, it did not have the
power to issue the national currency, and it operated without startup capital. Sir
Denison Miller, Governor of the Bank from its creation in 1912 to 1923, was
quoted in the Australian Press on July 7, 1921 as saying, “The whole of the
resources of Australia
are at the back of this bank, and so strong as this continent is, so strong is
the Commonwealth Bank. Whatever the Australian people can intelligently
conceive in their minds and will loyally support, that can be done.”
This was not just hype. In a 2001 article titled “How Money
Is Created in Australia,” David
Kidd wrote of the Bank’s early accomplishments:
“Australia’s
own government-established Commonwealth Bank achieved some impressive successes
while it was ‘the peoples’ bank’, before being crippled by later government
decisions and eventually sold. At a time when private banks were demanding 6%
interest for loans, the Commonwealth Bank financed Australia’s first world war effort
from 1914 to 1919 with a loan of $700,000,000 at an interest rate of a fraction
of 1%, thus saving Australians some $12 million in bank charges. In 1916 it
made funds available in London to purchase 15
cargo steamers to support Australia’s
growing export trade. Until 1924 the benefits conferred upon the people of Australia by
their Bank flowed steadily on. It financed jam and fruit pools to the extent of
$3 million, it found $8 million for Australian homes, while to local government
bodies, for construction of roads, tramways, harbours, gasworks, electric power
plants, etc., it lent $18.72 million. It paid $6.194 million to the
Commonwealth Government between December, 1920 and June, 1923 - the profits of
its Note Issue Department - while by 1924 it had made on its other business a
profit of $9 million, available for redemption of debt. The bank’s
independently-minded Governor, Sir Denison Miller, used the bank’s credit power
after the First World War to save Australians from the depression conditions
being imposed in other countries. . . . By 1931 amalgamations with other banks
made the Commonwealth Bank the largest savings institution in Australia,
capturing 60% of the nation’s savings.”
Harnessing the Secret Power of Banking for the Public Good
The Commonwealth Bank was able to achieve so much with so
little because both its first Governor, Denison Miller, and its first and most
ardent proponent, King O’Malley, had been bankers themselves and knew the
secret of banking: that banks create the “money” they lend simply by writing
accounting entries into the deposit accounts of borrowers.
This banking secret was confirmed by a number of early
banking insiders. In a 1998 paper titled “Manufacturing Money,”
Australian economist Mike Mansfield quoted the Rt. Hon. Reginald McKenna,
former Chancellor of the Exchequer, who told shareholders of the Midland Bank
on January 25, 1924, “I am afraid the ordinary citizen will not like to be told
that the banks can, and
do, create and destroy money. The amount of money in existence varies only with
the action of the banks in increasing or decreasing deposits and bank purchases.
We know how this is effected. Every loan, overdraft or bank purchase creates a
deposit, and every repayment of a loan, overdraft or bank sale destroys a
deposit.”
Dr. Coombs, former Governor of the Reserve Bank of Australia, said in an address at Queensland University on September 15, 1954,
“[W]hen money is lent by a bank it passes into the hands of the person who
borrows it without anybody having less. Whenever a bank lends money there is
therefore, an increase in the total amount of money available.”
Ralph Hawtrey, Assistant Under Secretary to the British
Treasury in the 1930s, wrote in Trade Depression and the Way Out, “When
a bank lends, it creates money out of nothing.” In his book The Art of
Central Banking, Hawtrey clarified this, writing, “When a bank lends, it creates
credit. Against the advance which it enters amongst its assets, there is a
deposit entered in its liabilities.But other lenders have not the mystical
power of creating the means of payment out of nothing. What they lend must be
money that they have acquired through their economic activities.”
Banks can do what no one else can: “create the means of
payment out of nothing.” The Commonwealth Bank’s far-sighted founders roped
this guarded banking secret into the public service.
The Bank Collapse of 1893 Spawns a New Public Banking Model
The Commonwealth Bank was founded under conditions like
those prevailing today: the country had just suffered a massive banking
collapse. In the 1890s, however, there was no FDIC insurance, no social
security, no unemployment insurance to soften the blow. People who thought they
were well off suddenly found they had nothing. They could not withdraw their
funds, write checks on their accounts, or sell their products or their homes,
since there was no money with which to buy them. Desperate people were leaping
from bridges or throwing themselves in front of trains. Something had to be
done.
The response of the Labor government was to pass a bill in
1911 which included a provision for a publicly-owned bank that would be backed
by the assets of the government. In a rare move for the time, the bank was to
have both savings and general bank business. It was also the first bank in Australia to
receive a federal government guarantee.
Jack Lang was Australia’s Treasurer in the Labor
government of 1920-21 and Premier of New South Wales during the Great
Depression. A controversial figure, he was relieved of his duties after he
repudiated loans owed to the London
bankers. In The Great Bust: The Depression of the Thirties(McNamara’s
Books, Katoomba, 1962), Lang described the Commonwealth Bank’s triumphs and
tribulations in revealing detail. He wrote:
“The Labor Party decided that a National Bank, backed with
theassets
of the Government, would not fail in times of financial stress. It also
realised that such a bank would be a guarantee that money would be found for
home building and other needs. After the collapse of the building societies,
there was a great scarcity of money for such purposes.
“. . . Chief advocate of the cause of a Commonwealth Bank
was King O’Malley, a colorful Canadian-American . . . Before coming to Australia, he
had worked in a small New York bank, owned by an uncle. . . . He had been much
impressed by the way that his uncle had created credit. A bank could
create the credit, and at the same time manufacture the debit to balance it.
That was the big discovery of O’Malley’s banking career. A born showman, he
itched to try it out on a grand scale. He started his political career in South Australia by
advocating a State Commercial Bank. In 1901 he went into the first Federal
Parliament as a one-man pressure group to establish a Commonwealth Bank, and
joined the Labor Party for that purpose.”
King O’Malley insisted that the Commonwealth Bank had to
control the issue of its own notes, but he lost on that point – until 1920,
when the Bank did take over the issuance of the national currency, just as the
U.S. Federal Reserve was authorized to do in 1913. That was the beginning of
the Commonwealth Bank’s central bank powers. But even before it had that power,
the Bank was able to fund infrastructure and defense on a massive scale, and it
did this without startup capital. These achievements were chiefly due to the
insights and boldness of the Bank’s first Governor, Denison Miller.
The other bankers, fearing competition, had thought that by
getting one of their own men in as the bank’s governor, they could keep it in
line. But they had not reckoned on their independent appointee, who saw the
opportunity posed by a government-backed bank and set out to make it the finest
institution the country had ever known. As Lang tells the story:
“The first test came when a decision was required regarding
the amount of capital needed to start a bank of that kind. Under the Act, the
Commonwealth had the right to sell and issue debentures totalling £1 million.
Some even thought that amount of capital would be insufficient, having in mind
what had happened in 1893. . . .
“When Denison Miller heard of it, his reply was that no
capital was needed.”
Miller was wary of going to the politicians for money. He
could get by without capital. Like King O’Malley, he knew how banking worked. (This,
of course, was before the modern-day capital requirements imposed from abroad
by the central banker’s bank, the Bank for International Settlements.) Lang
went on:
“Miller was the only employee. He found a small office . . .
and asked the Treasury for an advance of £10,000. That was probably the first
and last time that the Commonwealth lent the Bank any money. From then on, it
was all in the reverse direction.
“. . . By January, 1913 [Miller] had completed arrangements to open a bank in
each State of the Commonwealth, and also an agency in London. . . . [O]n January 20th, 1913 he made
a speech declaring the new Commonwealth Bank open for business. He said:
“‘This bank is being started without capital, as none is required at the
present time, but it is backed by the entire wealth and credit of the whole of Australia.’
“In those few simple words was the charter of the Bank, and the creed of
Denison Miller, which he never tired of reciting. He promised to provide
facilities to expand the natural resources of the country, and it would at all
times be a people's bank. ‘There is little doubt that in time it will be
classed as one of the great banks of the world,’ he added prophetically.
“. . . Slowly it began to dawn on the private banks that
they may have harbored a viper. They had been so intent on the risks of having
to contend with bank socialisation that they didn’t realise they had much more
to fear from competition by an orthodox banker, with the resources of the
country behind him.
“. . . One of the first demonstrations of his vigor came when the Melbourne
Board of Works went on the market for money to redeem old loans, and also to
raise new money. Up to that time, apart from Treasury Bills and advances by
their own Savings Banks, Governments had depended on overseas loans from London. . . . In addition
to stiff underwriting charges, they found that the best they could expect would
be £1 million at 4 per cent., at 97 1/2 net.
“They then decided to approach Denison Miller, who had promised to provide
special terms for such bodies. He immediately offered to lend them £3 millions
at 95 on which the interest rate would be 4 per cent. They immediately clinched
the deal. Asked where his very juvenile bank had raised all that money,
Miller replied, ‘On the credit of the nation. It is unlimited.’”
Another major test came in 1914 with the First World
War:
“The first reaction was the risk that people might start
rushing to the banks to withdraw their money. The banks realised that they were
still vulnerable if that happened. They were still afraid of another Black
Friday.
“There was a hurried meeting of the principal bankers. Some reported that there
were signs that a run was already starting. Denison Miller then said that the
Commonwealth Bank on behalf of the Commonwealth would support any bank in
difficulties. . . . That was the end of the panic. But it put Miller on the box
seat. Now, for the first time, the Commonwealth Bank was taking the lead. It
was giving, not taking, orders. . . .
“Denison Miller . . . was virtually in control of the
financing of the war. The Government didn’t know how it was going to be
achieved. Miller did.”
And so this interesting story continues. Miller died in
1923, and in 1924 the bankers got back in control, throttling the activities of
the Commonwealth Bank and preventing it from saving Australians from the
ravages of the 1930s Depression. In 1931, the bank board came into conflict
with the Labor government of James Scullin. The
Bank’s chairman refused to expand credit in response to the Great Depression
unless the government cut pensions, which Scullin refused to do. Conflict
surrounding this issue led to the fall of the government, and to demands from
Labor for reform of the bank and more direct government control over monetary
policy.
The Commonwealth Bank received almost all of the powers of a
central bank in emergency legislation passed during World War II, and at the
end of the war it used this power to begin a dramatic expansion of the economy.
In just five years, it opened hundreds of branches throughout Australia. In 1958 and 1959, the
government split the bank, giving the central bank function to the Reserve Bank
of Australia,
with the Commonwealth Banking Corporation retaining its commercial banking
functions. Both banks, however, remained publicly-owned.
Eventually, the Commonwealth Bank had branches in every town
and suburb; and in the bush, it had an agency in every post office or country
store. As the largest bank in the country, it set the rates and set policy,
which the others had to follow for fear of losing customers. The Commonwealth
Bank was widely perceived to be an insurance policy against abuse by private
banks, serving to ensure that everyone had access to equitable banking. It
functioned as a wholly owned state bank until the 1990s, when it was
privatized. Its focus then changed to maximization of profits, with steady and
massive branch and agency closures, staff layoffs, and reduced access to
Automated Teller Machines and to cash from supermarket checkouts. It has now
become just another part of the banking cartel, but proponents say it was once
the lifeblood of the country.
Today there is renewed interest in reviving a publicly-owned
bank in Australia
on the Commonwealth Bank model. The United States and other countries
would do well to consider this option too.
Ellen Brown is the author of Web
of Debt: the Shocking Truth About Our Money System and How We Can Break Free.
She can be reached through her web site.
Subscribe to American Free Press. Online subscriptions: One year of weekly editions—$15 plus you get a BONUS ELECTRONIC BOOK - HIGH PRIESTS OF WAR - By Michael Piper.
Print subscriptions: 52 issues crammed into 47 weeks of the year plus six free issues of Whole Body Health: $59 Order on this website or call toll free 1-888-699-NEWS .
Sign up for our free e-newsletter here - get a free gift just for signing up!
(Issue # 17, April 26, 2010)
|