Chapter 29 - Protect The Real Economy

As you may now realise, we can live with debt. We can live with unpayable debt, but we cannot live with financial collapse. So the task is to prevent collapse of our monetary system. There are some components of the monetary system with which we cannot do without:

The cash system generally keeps functioning when a monetary system collapses, whilst the banks close their doors. Sometimes it gets bloated, but that is due to the government’s failure to tax in cash. Tax is only collected using bank transfers to government accounts.

The interbank payments system is operated by the commercial banks. Commercial banks are the high street banks that lend money to families for house mortgages and deal with payments to, from, and between businesses. So it is essential to keep the high street commercial bank operating if and when the big investment banks collapse. Investment banks use money to make money for their generally affluent clients and for the bank itself. The investment banks need to be separated from the commercial banks to ensure continued operation of the payments system in the event of a collapse of the investment banks.

The exercise is to prevent Hoarded Money from damaging the orderly circulation of circulating money. The method is to insulate the circulating money in the real economy from the finance industry. In the event of a collapse of all or part of the finance industry, the real economy continues. The approach is to separate the financial industry from the banks that operate in the real economy.


The Glass-Steagall Act of 1933 was a law that Franklin D. Roosevelt used to get the Unites States out of the Great Depression. The act forced banks to choose between being a Commercial Bank or being an Investment Bank. Many banks separated into two separate banks, an Investment Bank and a Commercial Bank. Commercial Banks are the high street banks in which families and businesses place their deposits and run their cheque and savings accounts. Commercial Banks operate the national and worldwide ‘payments system’, on which our livelihood relies. Investment Banks are City of London, Wall Street, and other large international banks that trade with the purpose of making money from money. The Glass-Steagall Act stopped local high street type banks (Commercial Banks) from engaging in risk-taking speculation with customers’ deposits. It stopped Commercial Banks from gambling away people’s life savings. It meant that Commercial Banks could not trade (gamble, risk) with their customer’s deposits for their own profit. A rarely talked about side point is that it encouraged high street Commercial Banks to invest in local business. Although rarely mentioned, this is an essential element of a Glass-Steagall type reform. When High Street banks invest local money in local businesses, the locality thrives. Wall Street Banks successfully lobbied the regulators to chip away at the Glass-Steagall rules in the nineteen eighties. Congress finally repealed the Glass-Steagall Act in 1999 during the Clinton years. Once the Glass-Steagall laws were repealed, six big banks went from controlling effectively the equivalent of 15 percent of US GDP to around 65 percent of US GDP. Many people believe the repeal of the Glass-Steagall Act led to massive investment speculation that caused the financial crash of 2008.

The Glass-Steagall and the Banking Act of 1933

The volume of investment banking had increased dramatically in the early 1900s. There had been a large rise in stock prices. This bubble collapsed in 1929, leading to the Great Depression. Around eleven thousand banks failed and unemployment rose to about 25%. The excesses of the Investment Banks, of that period, caused new regulations to be created to protect citizens from fraudulent investment situations, reduce the incidence of bubbles and stabilize the banking system.

The Glass-Steagall Act is a set of rules that are part of the Banking Act of 1933. This act required banks to separate themselves from their investment department. Banks were required to declare themselves as Commercial Banks or Investment Banks. The Banking Act created the FDIC (Federal Deposit Insurance Commission) to insure consumers’ deposits with Commercial Banks and included the Glass-Steagall provisions to reduce the risk of providing such insurance. Glass-Steagall made it illegal for a bank that held FDIC-insured deposits to invest in anything other low-risk situations. Many large banks split into two entities. JP Morgan split into JP Morgan as a commercial bank and the investment section became Morgan Stanley and the British section became Morgan Grenfell. The Glass-Steagall Act remained in place until it was weakened and finally repealed in 1999. [1]

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The Glass-Steagall Act is the only tested and proven economic stabilizer.

Commercial Banks operate in the real economy. They supply business loans, house loans and operate the ‘payments system’ on which the real economy relies.

The American Financial Crisis Inquiry Commission has published the results of its study on the causes of the 2008 financial crash. The report gives the main reason for the crisis as the gradual removal of the measures aimed at protecting citizens set up by Franklin Roosevelt in the nineteen thirties, including the Glass-Steagall Act. [2]


I believe that the Glass-Steagall Act did more than stop speculation with customers’ money. Glass-Steagall also redirected money into the local community and local companies that produced things and created jobs. As a side-effect, Glass-Steagall promoted useful local economic activity. It re-diverted money to where it would be more useful. The logic is this: If money from customers savings is kept from speculative banks then it is likely to be invested in the local community. It is invested in local companies and communities. A new Glass-Steagall Act is an essential component of our financial solution. Glass-Steagall needs your full support. Sign every petition that you can and get on the email list of local Glass-Steagall support organizations. Like a Glass-Steagall Facebook page.

Do not be deceived into thinking it is the full solution to our financial problems. It is the starting point. Glass-Steagall is needed to help prevent a collapse of our money system whilst significantly helping the local economy.

Commercial Banks

A Commercial Bank is a financial institution that provides services for businesses, organizations and individuals. These services include offering current, deposit and saving accounts as well as providing loans of freshly-created bank credit to businesses. It is a bank for mums, dads, families, small business and more. It is your local bank. It also operates the ‘payments system’ where bank credit is transferred from account to account to effect payments. Vast quantities of transactions take place daily, dwarfing the somewhat insignificant volume of cash transactions.

Investment Banks

An Investment Bank, also called merchant bank, is a bank with a wide range of specialized services for companies and large investors, including underwriting and advising on securities issues and other forms of capital raising, mergers and acquisitions, trading on capital markets, research and private equity investments etc. Also, an Investment Bank trades and invests on its own account. [4] Thus, an Investment Bank operates to make money for its clients but also for itself. The aim is to make money from money. Making ‘money from money’ does not assist the real economy that feeds, houses and clothes us, but makes those with ‘more money than they can spend’ even richer which automatically makes the less sophisticated poor people poorer in comparison.

Thus, a Commercial Bank tends to look after the interests of small and medium businesses and individuals in the local area and operate the fabulous payments system. Commercial Banks are an indispensable component of our privatised and commercialised civilisation. An Investment Bank, on the other hand, operates to make ‘money from money’ for people that have ‘more money than they can spend’, which includes itself. These big banks have their own trading rooms where they use their financial muscle to dominate and influence markets to make money for the bank. The sophistication of the systems used, the competitive nature of its employees and the influence wielded by the army of lobbyists over the lawmaking process combines to drain the less sophisticated real economy of wealth. The very essence of ‘making money from money’ is a sophistication of the usury denounced by influential people throughout the written history of mankind. Any act that attempts to make ‘money from money’ without adding any real wealth to the world is an activity that needs to be terminated. The various money reforming prophets of old did not go far enough on this issue as the practice had not reached the current level of sophistication. Banks should be banned from betting their own money in any form. Any unearned money obtained from any activity that makes ‘money from money’ should be heavily taxed whilst earned money from physical effort should have reduced tax.

Glass-Steagall was weakened over the years and was repealed in 1999 during the Clinton years. Very many people believe that the repeal of the Glass-Steagall Act led to the financial crisis of 1998. I believe they are correct, but for more reasons than they mention. Usually cited are the risky investments and practices. I include the following:

I can think of a few problems that occur without a Glass-Steagall type law:

The original concept of an Investment Bank was to invest their clients’ money in items that might create a good return. However, the Investment Banks started to invest their own money in items for the benefit of the bank. This creates a conflict of interest and with modern derivatives, they can profit from the misfortune of their clients. It also makes the banks prone to collapse. These banks should be prevented from investing for their own profit. This practice is a destabilising influence on the world economy.

After the repeal of Glass-Steagall, the volume of investment money increased, pushing up asset values. This led to greater profits for some and great losses for others when the asset values crashed. The losers tend to be pension funds, local and state governments and other less wary institutional investors. The magnitude of the bailout of the ‘too big to fail’ banks in 2008, using taxpayers future tax, was so great that I believe it is unpayable. It is not possible to collect this volume of tax from the people. It is not possible to pay this debt. The massive government debt in the US has become un-payable and uncollectable. The only solution is to lend more money to pay interest on previous loans.

Total Tax Revenue 2014=$3 021 billion[Whitehouse USA_Whitehouse-Tax collection by source hist02z1]
Government Debt=$18 141 billion
Federal Reserve issued Currency=$1 252 billion[Fred]
Bank issued bank credit. (M3-Currency)=$16 379 billion [NowAndFutures, Fred]

Commonsense dictates that the essential circulating medium cannot be used to pay off the debt, as that would leave the nation with no circulating medium.

USA graph of debt and money by Andy Chalkley. Creative Commons Attribute.

For a locality to prosper, investment must be made in the business and companies in that district. For a nation to prosper, investment must be made in the physical infrastructure of the nation that aids production. You can see this around you. If banks will not lend to small business in a district, small business stops employing. If banks invest in corporations, the corporations grow. You see more fast food restaurants and fewer local cafés. If banks increase the volume of housing loans to individuals, that sector grows, as it did with Australia’s previous state and public banks. If banks prefer to lend to those with some equity, then the rental market grows and the young rent from people with more than one house. Small-time speculators take the place of owner-occupiers. We then finish up with social problems and lack of security for the renters in old age. Total lunacy in lending practices.

Thus, we need to reinstall Glass-Steagall for a few reasons:

Never forget that:

The Glass-Steagall Act is the only tested and proven economic stabilizer.

A new Glass-Steagall would separate high-risk Investment Banks from more traditional banking. It would allow Wall Street to take risks, but not by dipping into the life savings and retirement accounts of regular people.

To prevent a total collapse of the money system, governments should immediately separate Commercial Banks from Investment Banks. Investment Banks invest their client’s money as well as investing for their own profit. Commercial Banks lend to local business and civilians and operate the payment system. In the event of a collapse of one or many Investment Banks, the Commercial Banks would also be prone to collapse without a financial separation.

A New Glass-Steagall in the USA

A new Glass-Steagall for the USA will be good for the whole world, including Australia.

Efforts to reinstate Glass-Steagall have been unsuccessful. In 2011, HR1489 was introduced to repeal the Gramm-Leach-Bliley Act and effectively reinstate Glass-Steagall. In 2013, US Senator Elizabeth Warren and a bipartisan group of Senators are proposing a bill they call a “21st Century Glass-Steagall Act” in an effort to curb the power of big banks.

There are Facebook pages, web petitions and web pages pushing to reinstate Glass-Steagall. Please support them.

The Volcker Rule

The Volcker Rule is a federal regulation that prohibits banks from conducting certain types of investment activities with their own accounts, and limits their ownership of and relationship with hedge funds and private equity funds. The Volcker Rule is based on the Glass-Steagall Act of 1933. The purpose of the rule is to prevent banks from making many types of speculative investments that many believe caused the 2008 financial crisis. [8] [9] The Volcker Rule refers to part of the ‘Dodd-Frank Wall Street Reform and Consumer Protection Act’, originally proposed by former U.S. Federal Reserve Chairman Paul Volcker.

The Volcker Rule was effectively Glass-Steagall ‘lite’ as it did not curb inappropriate activity by banks. An essential loophole was incorporated which enabled business as usual. NerdWallet puts it this way: “The Volcker Rule is rendered essentially meaningless with one loophole: banks can’t make speculative trades, but they can hedge existing bets using techniques virtually indistinguishable from speculative trades.”“If the Volcker Rule worked the way it was intended, a bank’s profit would only be derived from the difference between interest earned on loans and interest paid on deposits.” [10]

The Wind-back of Usury Laws

In 1980, a bill was enacted called the ‘Depository Institutions Deregulation and Monetary Control Act.’ Section V of the bill reads:

“Eliminates State mortgage usury ceilings and restrictions on discount points, finance charges and other charges with respect to residential mortgage loans on real property or mobile homes unless a State adopts a new usury ceiling prior to April 1, 1983, or adopts new limitations on discount points or other charges at any time”

This deregulation gutted the New Deal era financial regulation that prevented excessive usury for nearly half a century. By 1986, with this credit card-friendly ruling, all usury laws in America had been gutted. With this ruling and the Alternative Mortgage Transactions Parity Act (1982), the financial system not could have created the real estate bubbles of the late 1980s and the 2000s. States still have usury laws, but the banks get around them by locating their credit card head office in a state that has no usury rate limit. [7]

Making Money from Money

The practice of making money from money is essentially the practice of usury taken to a refined level. It has been made respectable. The main problem with this is that it goes against the original reason for civilisation to start using money tokens. Money tokens were invented to facilitate the trade of goods and services. It was one of the procedures that enabled us to move from our hunter-gatherer past to a civilised lifestyle a very short five thousand or so years ago. This trade in goods and services suffers as soon as:

The sophisticated systems practiced to Make Money from Money invoke a few of the above items. The whole practice of Making Money from Money is to the detriment of civilisation. It does nothing to increase the real wealth of the nation. In the limit, the perpetrators end up with vast quantities of virtual money in a nation that is bankrupt, inefficient and on the verge of collapse. Their money is as useless as a ton of gold on a life-raft. The whole practice of Making Money from Money needs to be reviewed, heavily taxed, and eliminated as far as possible. So strong is the Money from Money sector of the economy that they live in an almost tax-free bubble and the tax burden is put on the Circulating Money essential to the production of real wealth. Business is hammered at every transaction whilst the financial sector operates with tax-free transactions. Something is horribly wrong when the financial parasites pay less tax than those operating in the real economy, creating real value and goods and services of real value to the citizenry.

Malcolm Fraser 2014 “I am firmly of the view that Australia should not adopt the European policy of ‘bail-in’ of depositors in order to save failing banks. Instead, Australia should fully separate retail banking from the speculative activities of Investment Banks, which the Glass-Steagall law did in the United States so successfully from 1933 until its repeal in 1999.

It is appropriate for the government to back the retail banks that serve the community, but it should make it clear to Investment Banks that they are no longer too big to fail, and therefore responsible for their own losses.” [6]


A draft bill for a banking separation Act similar to Glass-Steagall has been introduced in the Italian Senate by Sen. Giuseppe Vacciano (M5S). It has been signed by virtually the entire M5S faction (48 senators out of 50). [3]

To Summarize