...In sum, specialization of economic
activities, by breaking up the economic process, had made it
possible for people to concentrate on one portion of the
process and, by maximizing that portion, to
jeopardize the rest.
The process was not only broken up into producers, exchangers,
and consumers but there were also two kinds of exchangers (one
concerned with goods, the other with money), with
almost antithetical, short-term, aims.
The problems which inevitably arose could be solved and the
system reformed only by reference to the system as a whole.
Unfortunately, however, three parts of the system, concerned with
the production, transfer, and consumption of goods, were concrete
and clearly visible so that almost anyone could grasp them simply
by examining them, while the operations of
banking and finance were concealed, scattered, and abstract so that
they appeared to many to be difficult.
To add to this, bankers themselves did
everything they could to make their activities more secret and more
esoteric. Their activities were reflected in
mysterious marks in ledgers which were never opened to the curious
outsider.
In the course of time the central fact of the developing
economic system, the relationship between goods and money, became
clear, at least to bankers.
This
relationship, the price system, depended upon five things: the
supply and the demand for goods, the supply and the demand for
money, and the speed of exchange between money and
goods.
An increase in three of these (demand for goods, supply of
money, speed of circulation) would move the prices of goods up and
the value of money down. This inflation was objectionable to
bankers, although desirable to producers and merchants. On the
other hand, a decrease in the same three items would be
deflationary and would please bankers, worry producers and
merchants, and delight consumers (who obtained more goods for less
money).
The other factors worked in the opposite direction, so that an
increase in them (supply of goods, demand for money, and slowness
of circulation or exchange) would be deflationary.
Such changes of prices, either inflationary or deflationary,
have been major forces in history for the last six centuries at
least. Over that long period, their power to modify men's lives and
human history has been increasing.
This has been reflected in two ways. On the one hand,
rises in prices
have generally encouraged increased economic activity, especially
the production of goods, while, on the other hand, price changes
have served to redistribute wealth within the economic
system.
Inflation, especially a slow steady rise in prices, encourages
producers, because it means that they can commit themselves to
costs of production on one price level and then, later, offer the
finished product for sale at a somewhat higher price level.
This situation encourages production because it gives confidence
of an almost certain profit margin. On the other hand, production
is discouraged in a period of falling prices, unless the producer
is in the very unusual situation where his costs are falling more
rapidly than the prices of his product.
The redistribution of wealth by
changing prices is equally important but attracts much less
attention. Rising prices benefit debtors and injure
creditors, while falling prices do the opposite. A debtor called
upon to pay a debt at a time when prices are higher than when he
contracted the debt must yield up less goods and services than he
obtained at the earlier date, on a lower price level when he
borrowed the money.
A creditor,
such as a bank, which has lent money—equivalent to a certain
quantity of goods and services—on one price level, gets back the
same amount of money—but a smaller quantity of goods and
services—when repayment comes at a higher price level, because the
money repaid is then less valuable.
This is why bankers, as creditors in money terms, have been obsessed with
maintaining the value of money, although the reason
they have traditionally given for this obsession—that "sound money"
maintains "business confidence"—has been propagandist rather than
accurate.
Hundreds of years ago, bankers began to specialize,
with the richer and more influential ones associated increasingly
with foreign trade and foreign-exchange
transactions.
Since these were richer and more cosmopolitan and increasingly
concerned with questions of political significance, such as
stability and debasement of currencies, war and peace, dynastic
marriages, and worldwide trading monopolies, they became the
financiers and financial advisers of governments.
Moreover, since their relationships with governments were always
in monetary terms and not real terms, and since they were always
obsessed with the stability of monetary exchanges between one
country's money and another, they used their power and influence to
do two things: (1) to get all money and debts expressed in terms of
a strictly limited commodity—ultimately gold; and (2) to get all
monetary matters out of the control of governments and political
authority, on the ground that they would be handled better by
private banking interests in terms of such a stable value as
gold...
In effect, this creation of paper claims greater than the
reserves available means that bankers were creating money
out of nothing.
The same thing could be done in another way, not by note-issuing
banks but by deposit banks. Deposit bankers discovered that orders
and checks drawn against deposits by depositors and given to third
persons were often not cashed by the latter but were deposited to
their own accounts. Thus there were no actual movements of funds,
and payments were made simply by bookkeeping transactions on the
accounts.
Accordingly, it was necessary for the banker to keep on hand in
actual money (gold, certificates, and notes) no more than the
fraction of deposits likely to be drawn upon and cashed;
the rest could be used for loans, and if these loans were made by
creating a deposit for the borrower, who in turn would draw checks
upon it rather than withdraw it in money, such "created deposits"
or loans could also be covered adequately by retaining reserves to
only a fraction of their value.
Such created
deposits also were a creation of money out of
nothing, although bankers usually refused to
express their actions, either note issuing or deposit lending, in
these terms.
William Paterson, however, on obtaining the charter of the Bank
of England in 1694, to use the moneys he had won in privateering,
said, "The Bank
hath benefit of interest on all moneys which it creates out of
nothing." This was repeated by Sir Edward Holden,
founder of the Midland Bank, on December 18, 1907, and is, of
course, generally
admitted today...
http://real-world-news.org/bk-quigley/02.html#5
