'HOW BANKS CREATE MONEY OUT OF
THIN AIR.'
Read the TRUTH from a few sections of
Hansard and don't be taken in by the
present Chancellor of the Exchequer
George Osborne in 2012.
Bank of
England Bill-October-1945-taken from
Hansard-House of Commons
Lieut.-Colonel Hamilton
(Sudbury)
I
hope that this House, with the kind
indulgence it always shows to a new
Member speaking for the first time, will
forgive me if I say a few words on first
principles. Although for a large number
of hon. Members what I say will be
elementary and well known, there may
also be those in the same situation in
which I was in when an inquisitive mind
led me to inquire into the processes of
banking. I used to regard banks as very
useful institutions for safeguarding a
man's money and for saving him the
trouble of handling large quantities of
cash himself. I knew also that they were
agencies for large-scale borrowing and
lending transactions.
I had a subconscious feeling that money
was a commodity limited in extent, like
potatoes. You either had it or did not
have it, and if you did not have it, you
certainly could not create it out of
thin air.
For us private
individuals that is only too true, and
painfully true sometimes. But I found
that in the case of banks the situation
was entirely different. Money was a
medium of exchange and could easily be
created out of nothing. When a bank made
a loan, it was not a loan in the
ordinary accepted sense of the word, the
transferring of purchasing power from
one party to another. For the greater
part, the money was created in the act
of making a loan, and, similarly, when a
bank purchased securities, the purchase
money was created in the very act of
purchase.
I realised also that this process of
creating money, and, at other times, the
converse process of destroying it, is
far and away the most important function
of our banking system. It is true that
there are people who deny that the
banking system creates money, and they
point to the fact that, if you look at
the balance-sheet of any bank, you find
deposits on the one side pretty equal to
the advances, securities and other
assets on the other side. That is true
enough, and they say, further, that that
shows that the bank is only using the
money deposited with
107
it by its depositors to lend to other
people or for other uses. None the less,
usually it is the other way round, and
the balancing of the balance-sheet is
very simply explained, because, when the
money is created, obviously, the man
into whose hands it comes will deposit
it in his banking account. Therefore, a
new entry on that side corresponds to
the entry on the other side.
If we have any doubt
whatever in this matter, we have only to
consider the vast volume of money which
is represented by the total deposits in
our banks—vast in proportion to the
actual cash in existence—and ask
ourselves, if all that money has not
been created by the banks, where in the
world has it come from? Once we fully
realise that the banking system has this
great power of creating money, we surely
must be impressed with the position
which it gives that system—a position,
virtually, of dictatorship in the
financial and industrial sphere, because
it means, in the first place, that the
banking system decides at any given time
what the volume of purchasing power in
the country shall be, and it decides in
accordance, naturally, with its own
interests, which may or may not always
be the interests of the community.
It has been
pointed out that, during that long
period of terrible depression which we
went through in the 20's, the banks
alone were practically the only type of
business which prospered, which surely
goes to show that their interests are
not always the same as the interests of
the community. Further, the banks also
obviously have power to decide, in large
measure, which undertakings and which
branches of industry can go ahead and
which must contract their operations. I
know, of course, that industry gets its
funds to a considerable extent from
private investors, but, to a greater
extent, it gets its financial resources
from the banks, and, in that degree,
they are the dictators. I do not want it
to be thought for an instant that I am
casting any aspersions on bankers or
financiers. They are honourable
citizens, doing their duty according to
their lights, neither better nor worse
than the rest of us, but I think it
would be miraculous if they always put
the interests of the community before
their own interests. It would indicate a
degree of saintliness in their case
which I do not think they would actually
claim
108
or which any of us would grant them if
they did claim it.
It is not their fault
if their interests run counter to the
interests of the community. It is our
fault for letting the system continue
which puts them in that position—a
system which places millions of ordinary
citizens in the hands of a few people
responsible, virtually, to no one but
themselves, although I know that an hon.
Member opposite did claim that it was
the shareholders who told them what to
do. I doubt myself whether that hon.
Member was innocent enough to think that
that really represented the position.
This is a system which places these
citizens at the mercy of these few
private men carrying out operations
which these citizens hardly understand
at all and over which they have no
control whatsoever, and, further,
operations which, at one time, may
plunge numbers of these citizens into
the misery of short time and low wages,
and, at other times, into the greater
misery of rotting in enforced idleness.
We have got to change that system. The
Chancellor has told us that the method
of choosing Governors of the Bank of
England needed to be replaced by one
that is more intelligent and more
dignified. I would go further and say
that it needs to be replaced by a system
which is democratic and which enables
the ordinary man, through his
representatives, to control who is going
to be Governor, and who are to be part
of the management, of the Bank of
England.
No industry has
suffered more under the vicissitudes
which I have been describing than
agriculture, the one with which my
constituency in West Suffolk is
principally concerned, and I may say
that people in that industry are
beginning to realise it. The farm
workers are giving very sensible and
practical expression to their
realisation, and did so, in the recent
General Election, by supporting Labour's
policy. The farmers, as a body, have not
yet got quite so far, but they did do a
rather remarkable thing in my
constituency, where a large number of
them sponsored for a time an Independent
candidate, who was not himself an
agriculturist at all. He was a
technician and a great student of
economics, and his study of economics
had led him to believe whole heartedly
in this very step we are considering
to-day—the nationalisation of the Bank
of England and putting finance
109
fully under the control of the
nation—although, apart from that, he was
still a capitalist. I hope that, in
time, the farmers will progress still
further and realise that the Labour
Party is agriculture's best friend.
Coming back to the
Bill, I have spoken of the banking
system so far as if it was one unit. So,
in a sense, it is, but we know also that
it is a two-storeyed edifice. On the
upper storey comes the bankers' bank—the
Bank of England, which controls, under
the limits of the note issue, the total
quantity of credit which will be
available at any time. In the lower
storey come the joint stock banks, with
which we ordinary mortals have dealings,
and which, subject to the demands
imposed by the central bank, can create
and destroy money and also decide who is
to get the money. I must confess, for my
part, that I was disappointed when I saw
that pleasant pamphlet which the
Chancellor showed us just now, and found
that it was only proposed to nationalise
the top storey.
I would have preferred
to nationalise the whole system straight
away, and that for two reasons. First, I
think all experience shows that you can
control a thing far better if it belongs
to you than if it belongs to someone
else. Secondly, we know that the banks,
by charging interest on all the money
that they create, levy a heavy toll on
the community, and I cannot really see
why that toll should go into private
hands. Still, there are those provisions
in the Bill which give the central bank
the power to request information from
the joint stock banks, to make
recommendations to them and to give
directions to them, and I am very glad
that they are there.
The Chancellor has
also told us that if they are not
sufficient he can take other radical
measures later on. I wondered whether
the right hon. Gentleman who represents
the Scottish Universities (Sir J.
Anderson) was, in a way, my ally in
wishing to nationalise the joint stock
banks, because he spoke of the
difficulties the directors of those
banks might have in discharging their
responsibilities as trustees. Perhaps he
feels it would be far better if they
were relieved altogether of those
responsibilities by having the banks
taken over entirely by the nation.
In conclusion, I
welcome this Bill. We welcome it on this
side. I would not
110
agree with the hon. and learned Member
for Montgomery (Mr. C. Davies) in saying
that no question of principle is
involved; I think a very important
question of principle is involved. I
think this is our first step towards the
Socialist Commonwealth, the first step
towards an ordered economy, organising
our resources for the benefit of the
community in place of the present
chaotic, wasteful and unjust muddle. I
think it is the first step towards
giving us the same liberty and democracy
in the economic sphere which we already
enjoy in the political sphere, and it
takes place at the strategic key point
of the whole economic system because,
after all, money is the life-blood of
that system. If the supply of the
life-blood is not adequate, the system
will be anaemic and depressed; if it
does not circulate properly to every
part, then those parts that are
neglected will become gangrenous and
diseased. This Bill, when it becomes
law, will enable the representatives of
the nation to ensure that the supply of
money is always adequate to the national
needs. I look forward to a series of
Measures in the months and years to come
which will ensure in every part of our
economic system that money will be used
in the best and fullest way.
