Chapter 40 - First they lend. Then they stop.

Graph of Bank Lending as a percentage of GDP for Australia. Creative Commons Attribute - Andy Chalkley.

The banks issue fresh money and cancel money without regard to the magnitude of the money supply. They arbitrarily cease to issue credit. The largest part of the Money Supply is the credit issued by banks. Their unscientific over-creation of money causes an inappropriate expansion of the Money Supply. Their cutbacks on lending decrease the Money Supply causing deflation and depression. Here is the same graph with some events added.

Graph of Australia Bank Lending causing Depressions. Private banks are not capable of maintaining a stable Money Supply. Creative Commons Attribute - Andy Chalkley.

This next graph shows the annual change in the value of private lending. I have averaged the figures over a three-year period to smooth the graphs.[1] Notice the violent changes in the volume of loans in Iceland. Iceland locked up some bankers!:

A graph of domestic credit provided by the financial sector (% of GDP) for Iceland. Creative Commons Attribute - Andy Chalkley.

This next graph shows the annual change in the value of private lending for the United Kingdom. How is anyone to maintain a steady economy when the lending varies so dramatically? I accidentally did not put the x-axis shift in these graphs. 1980 means the figures for 1980-12-31. I usually record 1980-12-31 as 1980.99:

Graph of Domestic credit provided by the financial sector (% of GDP) for the United Kingdom. Creative Commons Attribute - Andy Chalkley.

How my good Irish friends put up with this, I do not know. They are a tough lot:

Graph of Domestic credit provided by the financial sector (% of GDP) for the United Kingdom. Creative Commons Attribute - Andy Chalkley.
Graph of Domestic credit provided by the financial sector (% of GDP) for Canada. Creative Commons Attribute - Andy Chalkley.
Graph of Loans for Greece. Creative Commons Attribute - Andy Chalkley.

In the aftermath of a financial crisis, the banks were reluctant to lend. They stored excess reserves in case a ‘liquidity problem’ occurred. They had the reserves and backing to lend but did not do so to protect themselves. This basically means that they ceased to lend which caused a damaged economy. When there is a falling Money Supply or a Money Supply that is sluggish to expand the economy suffers enormously. Banks keep a reserve of money to cover demand. During and after a crisis they like to keep a higher level of reserve. This inhibits their lending behavior. This is the opposite to what is required to lift and economy out of a recession. The banks are operating for their own benefit without any consideration for the economy. The economy needs a mildly expanding Money Supply. If the private banks are to be the only entity supplying credit, they need to have an awareness of the needs of an economy. At exactly the time a boost is needed to the volume of credit in society they go on a lending freeze and cutback for their own internal operational reasons. This is entirely inappropriate. Absolutely no consideration is given to the volume of credit required by an operational economy. The banks are ignoring the needs and their responsibility to society for their own ends. They are entirely focused on their profitability and financial well-being with a total disregard for the responsibility to society bestowed on them by the granting of the exclusive right to create the credit for the nation.

Professor Walter Murdoch. Melbourne Herald. 1947-09-13.

“I do. Our money system - the regulation of the issue and recall of currency and credit on a national basis - is far too important, far too vital to the welfare of all of us, to be left to private profit-making firms.” [4]

This is a comment in a report from the Federal Reserve:

“Bank liquidity hoarding is not a new phenomenon. For example, in the aftermath of the Great Depression, and particularly during the late 1930s, U.S. commercial banks accumulated substantial amounts of voluntary excess reserves. As Ramos (1996) points out, during and immediately after a severe liquidity crisis, banks hoard excess cash to self-insure against further drains of cash and to send markets a strong message that their solvency is not at risk and that bank runs are not justifiable. The situation during the banking crisis of the 1930s clearly resembles the bank behavior during the most recent financial crisis. As suggested at that time, banks sought to build up liquidity buffers to reduce their risk exposure on the asset side of their balance sheets at times when capital and debt was very expensive.” [2]

They were protecting their own backsides at the expense of the nation’s economy.

Here is another comment from the same report:

“In line with earlier effects of disruptions in interbank markets, my results suggest that the same factors leading to precautionary liquidity hoarding also contributed to the sharp decline in bank lending.” [2]

The banks were hoarding money that was needed as a backing for the issuance of credit. The Federal Reserve bank had made the funds available but the banks simply hoarded the money with a total disregard for the well-being of the nation. Another sentence from the same report:

“Moreover, the considerable fear associated with the riskiness of banks’ portfolios further limits the ability of policy actions to revamp credit growth and stimulate the real economy” [2]

Efforts by the Federal Reserve to ensure that excess reserves were available to banks to encourage lending did not work because the banks simply hoarded the reserves. The central bank had little influence over the banks lending habits. The central bank was totally useless at maintaining the level of the Money Supply. The banks were hoarding funds rather than lending out money. This demonstrates that a private banking monopoly with a ghost control entity is totally incapable of controlling the level of credit. What we have is a totally unworkable system.

Here is the starting sentence of another report. This time by the New York Federal Reserve Bank:

“The buildup of reserves in the U.S. banking system during the financial crisis has fueled concerns that the Federal Reserve’s policies may have failed to stimulate the flow of credit in the economy: banks, it appears, are amassing funds rather than lending them out. ...” [3]

Why is control over the money supply in the hands of an entity that is totally incapable of controlling the level of credit in society. Our society is totally reliant on tokens. These tokens need to be available and moving. When the banks cease to lend there is an inadequate supply of tokens. The common buzzword used by the trade is: “keep the central bank free from political influence”. Thus it falls entirely on the banking industry and the central bank to maintain the level of tokens.

This situation needs to be corrected. The solution can be one of the following or a combination of the following:

There is a simplistic assumption that the control of the nation’s economy is a matter of controlling the money supply. The magnitude of the money supply is somewhat irrelevant in comparison to management of the magnitude of the volume of money that is actually circulating. Money that is hoarded is taking no part in the economy. The item that needs to be controlled is the magnitude of the Circulating Money. There is little point in presiding over a rise in money supply, if the money becomes hoarded and plays no part in the economy. Management of the economy requires a steady volume of money that actually circulates. To the unwise, this means monitoring the money supply and its velocity. Velocity should never be allowed to fall. A fall in velocity is exceedingly detrimental to the economy.

The stop-start of the lending by private banks alters the money supply in a damaging manner. ‘Stops’ cause businesses to downsize or close. ‘Starts’ lift the money supply but not in a manner to allow business growth and so the increase in the money supply becomes hoarded. This is witnessed by a fall in the velocity. It is impossible to maintain a money supply when the credit is created in a stop-start manner.

This is what a lending graph should look like:

Ideal Annual Money Supply Increase. Creative Commons Attribute - Andy Chalkley.