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Banking Civilization

by Patrice Ayme Sat May 23rd, 2009 at 04:10:09 PM EST

The financial and economic crisis of 2008 is not just a case of an economic cycle gone rogue. It's the old struggle of exponentiating wealth against the society that gives rise to it. What is new now is that wealth has been given one of the age old prerogatives of the state, money creation.

The FRACTIONAL RESERVE BANKING SYSTEM allows bankers to CREATE MONEY BY GIVING IT TO WHOEVER THEY PLEASE. This combines with the "SHADOW BANKING SYSTEM", a set of unregulated conspiracies among the richest people in the world (sometimes, the taxpayer is outright asked to pay for these conspiracies (AIG)).

A prerogative of the State, making the money, is  privatized and DEMOCRATICALLY UNSUPERVISED. This has created a money class whose increasing influence has bent to its liking society's aspirations, cognition, and common sense. That is all what the so called "financial" crisis of 2008 is about: it is an attempted takeover of democratic civilization by plutocracy, straddling a money machine. Most of recent American anti state ideology is part of that coup. Time to get informed; cognizance brings resistance.


Wealth tends to grow from a purely mathematical phenomenon, the exponentiation of capital: the more capital, the easier it is, in the average, to gather even more. But the more civilization, the more capital, the more exponentiation, the more the need for control.

Some have proposed to do away with capital, but capital is any set of value piled up, it could be a pair of shoes, so ranting against capital is as if howling to the sky against the concept of value.

 Another idea has been to put capital in common, to remedy this. The later method has been used since ever, and did not wait for Marx. Villages in the Middle Ages pretty much allotted land according to work capability. Exploiting capital in common is used in most of modern economies: in transportation, energy producing, education, etc.

Neolithic men in successful tribes took the exponentiation of capital for granted, and redistributed wealth systematically, since it tended to concentrate too much (going all the way to human sacrifices). The most successful civilizations learned to maximize both democracy, which brought ideas, and willing participants, while maximizing brute, fascist force (the army, and other law enforcement). The force brought power to the people against its enemies (such as desert raiders). As the economy got sophisticated, money appeared to facilitate exchanges and specialization, and the democratic state had to learn to control this more dynamic form of capital creation.

The State is, first, an army defending the city ("civilization"). To organize the army, there is the law, and it extends to the city ("polis"). Next, to feed the army, there is a need for house management ("eco nomy"). Economy necessitates trading of goods and services, best accomplished with money which represents value. So, bottom line, money is a set of contracts, a matter of trust that the full power of the law will come down hard if the trust is breached (that is why lawyers are so important). These are the core functions of the State. (Notice that none of this has anything to do with "capital" and "free market".)

Democracy is people power. At its best, people controls the State. Plutocracy is the power of those with so much capital it is called wealth. At worst, it controls the State. Plutocracy tends to always grow, for the purely mathematical reason of the exponentiation of capital

The struggle of democracy with plutocracy was intrinsic to the (non written) Roman Constitution. (Rome was double headed: SPQR = Senatus PopulusQue Romanus: Senate & Roman People). The second war against Carthage ruined the peasants and TARPed their money to the richest, while the old, more moral aristocracy died on the battlefield, killed by Hannibal's army (about 80 Senators and 20 officers of Consular rank died in a few hours in just one battle, Cannae, and there were many battles, until Scipio went around, and landed in Africa to carry the war to Carthage; arrivistes replaced principle). Hannibal did not have siege engines, and tried to submit Rome by ruining the countryside. The peasants fled to the walled cities manned by the Roman army. The profiteers charged them with extravagant rent (the equivalent of the teaser rates American banks have used in recent years on what they hoped would be their captive homeowners).

Using the Second Punic war as a boost, the new rich, the war profiteers, got so rich, they reached a critical mass that tipped Roman society into plutocracy.

In general fascism and plutocracy do the same thing; they concentrate a lot of power in a few hands, they lower the mental dimensions accessible to command and control. Plutocracy is economic fascism. Thus everywhere, since ever, one sees generals and commanders hand in hand with the biggest capitalists. Financial capital and other forms of capital can all be traded, because they all convert in the common currency of power.

An obsession with plutocracy was not shared by Socrates, Plato and Aristotle, but still Athens was nearly completely destroyed. The Athenian democracy had piled up all the mistakes possible (including: "If you are not with us, you are against us, so we attack you": Milos holocaust). Ultimately, though, Athens was defeated by the Persian hyper plutocracy, which gave Sparta gigantic amounts of money to build a fleet that destroyed Athens' fleet, and cut off its food supply, starving her into submission.

The decline of Rome was the direct consequence of the victory of plutocracy over democracy (after centuries of apparently irresistible progression of democracy). Plutocracy buttressed itself by increasing fascism (first through wars overseas, then at home), and finally with the Catholic theocratic terror that burned through civilization.

Rome went down because the rich having got too rich, diverted too much of the economy, power and social servicing to themselves, depriving the rest. This is happening again in today's crisis. For example, the health care system, the worst of the developed world, is also the most expensive (relative to GDP). Both facts are related.

In Rome, the rich had to reign with increasing terror, and bestowed stupidity. In the end, the hyper rich, protected by private armies, separated from society fiscally and psychologically, while using the Christian superstition to handicap the mental capability that would have allowed people to revolt. The feudal aristocracy was born thus.

This is a recurrent disease: wealth combines with the army to break democracy, weakening the mental capability of civilization. Sumerian democracies turned into giant Mesopotamian fascist empires.

After Roman democracy had been smothered by its own plutocracy, the stupid Roman empire, ever increasingly fascist and lunatic, ended in a catastrophic Catholic terror. This in turn brought invasions by Germans, Huns, Persians and Arabs, within three centuries. The Persians had become mentally superior to Rome, because Roman intellectuals had flee to Persia, and Persia ended on the Mediterranean!

The decline of Rome lasted five centuries, and could have been reversed. But it was not reversed until the Franks assumed full power, because fascism is hard to reverse internally. It is no accident that the Franks took over, because they had become the Roman army, first, and were sort of exterior all along.

Later, in Oriental Rome ("Constantinople") the army and the church were the wealth, and the power controlling the people through Caesaropapism, with catastrophic mental consequences. Constantinople kept on refusing to accept the Western model of underlying secularism, and so kept on seeing the West as enemy, and died that way. This attitude has been faithfully parroted in Islam, complete with Caliphs as Caesaropopes, and the same consequence of global lack of mental sharpness that brought Rome down.

In a representative democracy an elected government represents the people and exerts the full power full governments have always exerted. Of course including first and foremost, the CREATION OF MONEY. BUT, the U.S. government has abdicated its most important function in peacetime to a number of unelected, very rich individuals, the bankers and their shadows.

In the self proclaimed "Anglo-Saxon free market capitalist system" top bankers and their associates in the "Shadow Banking System" HAVE BECOME THE GOVERNMENT. This is not an accident, but the very nature of the "fractional reserve banking system", which gives bankers, as a class, the power of CREATING MONEY, and also to decide who GETS THAT NEWLY CREATED MONEY, and who does not. Thus the richest decide who will get richer.

OK, let's hear it from the horse's mouth. According to the United States' Federal Reserve. fractional reserve banking provides benefits to the economy and the banking system:

"The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks' borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money. For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Referred to as the fractional reserve system, it PERMITS THE BANKING SYSTEM TO CREATE MONEY."

Now who operates the banking system? Bankers. So here you have it, black on white, from the central bank of the USA: BANKERS CREATE MONEY. SO ARE THE BANKERS COUNTERFEITERS, OR ARE THEY PART OF THE GOVERNMENT? Should be boil them in wine, or should we put them on a government salary?

(For the mathematics of how this works see the addendum.)

Money itself being power, BANKERS HAVE BECOME THE ADJUDICATORS OF POWER IN THE USA. There are taxes on money, there are NO TAXES ON POWER. Thus, the power of bankers feeds on itself non linearly. Bankers were able to create a gigantic financial system comprising hedge funds, tax heavens, derivatives, highly leveraged private equity (Cerberus), SIVs. Highly leveraged means that your friends in the banks have given you other people's money, initially starting with the little guy's money.

Democracy is in trouble in the USA. The usual unholy mix of army, para military secret services, wealth, and the military-industrial complex is festering. This is the old pattern. But there is new twist on the fundamental theme, that was never seen before. What Barack Obama calls "the old Washington ways of point scoring" is a euphemism for the struggle of plutocracy against democracy. An apparent technicality, Fractional Reserve Banking, is doing to democracy what the Second Punic war did before to Roman democracy.

Gangsters make gangs to steal banks, because that is where the money is. Bankers know better: they sit in the bank, and make the money, by giving credit. The (Democratically Unsupervised) Fractional Reserve Banking system allows unelected private individuals to create public money and to allocate it to whoever they please.

Now was not making money one of the central core function of the state? For millennia? So how come are private individuals allowed, under the Democratically Unsupervised Fractional Reserve Banking, to confiscate for their own benefit the awesome power of the state?

We are faced, not just with a violation of democracy, but of the state itself. Fractional Reserve Banking is at the root of the disastrous wars of the Twentieth Century. It allowed hyperpowerful plutocrats to cause the Great Depression, while supporting Lenin, Mussolini, Stalin, Hitler, Franco, as they tackle up the wind of democracy. The democratic state is the natural enemy of plutocracy. So plutocrats will always be out attacking democracy, as they try to become the state That is why Hitler was continually attacking democracy, while being aided and abetted by American plutocrats, why American "republicans" continually attack the "government" (another name for the state, and for taxes, taxes being the main way to control plutocracy, hence another thing plutocracy hates).

In the USA, in the 1970s, a movement, starting in California, with an uneducated actor, Ronald Reagan, came to view the State as an enemy that had to be starved into inexistence. This, of course, is the aim of the plutocracy, because the plutocracy hates the democratic state.

Californians voted systematically to reduce their taxes. Conclusion: in many important objective measures, California went from being the best state in the USA to the absolute worst. Education and interest ratings are examples: California is now dead last on these two measures among 50 states, and forging ever lower. California is becoming a failed state. Once Reagan became president he turned the destruction of the state into a mantra, and did not think twice before giving enormous powers to bin Laden and the Pakistani ISI and other religious fanatics, in his will to destroy any organized state.

A way to destroy the state is to take away its ability to create the money it needs. This was the proximal technical reason for the fall of the Roman empire (that is how the Franks became the Roman army).

Under the most important empires of the past, Greco-Roman, Chinese and Frankish, governments made the money. Some of the currency, like the solid gold Roman "Solidus" was worth its face value. Most of the currency, though, had a face value much higher than its real value, (precious metal was mixed with cheaper metal: all the gold ever extracted, ever, amounts to a small two story house), although it was used simultaneously with the Solidus. Similarly, the Mongols just printed pieces of paper, so did the Han. Currency was a symbol of trust and a contract: money was worth whatever the government said it was worth.

As the Roman empire encountered serious trouble, so did its financial and currency systems. The rich escaped taxation so massively, they built a shadow economy and a shadow society (reminiscent of the "Shadow Banking System", and private enclaves of the present USA). Desperate for revenue, the imperial administration debased the Roman currency to the point, at least in the Occident, that its usage became rare. (A bartering society replaced it.)

As the mightier Imperium Francorum, the empire of the Franks, replaced Rome, covering Western Europe with 300 counties, and boosting exchanges, money became again central to the economy. The Franks exploited great silver mines in Eastern Europe, to make their basic currency alloys (that is why to this day the French use the Latin word for silver to qualify both silver and money). The Imperium Francorum, although decentralized relaunched serious business resting on a serious currency, that means on trust. To establish serious trust, the law punished counterfeiters in exemplary fashion.

A counterfeiter was a private individual who created his own money. Frankish law boiled counterfeiters alive. Nowadays, private individuals, the bankers, are allowed to make currency. Then they get invited to the White House. Verily, the Franks thought more civilized to boil them alive.

Propelled by the Great Depression, Hitler was elected in 1933, took office in January, promptly burned parliament, and accused foreign terrorists to have done so. Franklin D. Roosevelt took office in March. Instead of burning Congress, he closed all the banks on his first day. Why?

In FDR's view, the people who he called the "banksters" had caused the Great Depression crisis (banksters CAUSED HITLER). Roosevelt knew the banksters well: FDR was from the upper class. FDR cracked down on banking with the BANKING ACT OF 1933 (so called Glass Steagall, passed in June 1933). The Act tightly regulated banking and separated it from investing (on the ground of obvious conflicts of interest). The economy of the USA expanded enormously in the next 50 years, allowing democracy to win W.W.II. FDR did it. Or, more exactly, his Banking Act, the one Summers destroyed.

Germany, of course, went the other way: Hitler was a creature of many of the world's wealthiest men, and greatest corporations, who had financed fabulously the Nazi party, and its private armies. In total contrast with the supremacist FDR, Hitler was a creepy crawly from the lowest reaches of society. FDR had high thoughts, Hitler base thoughts. FDR was a lord, Hitler an employee.

The abrogation of the Banking Act of 1933 in 1999 by Secretary of the Treasury Lawrence Summers, allowed bankers to use tremendous leverage again (and now Clinton is very rich, alleluia!). Bankers became masters of the universe again. It was back to the exact conditions that brought the Great Depression and Nazism. By 2008, the bankers had got so powerful, they organized the greatest transfer of wealth from the poor to the rich this side of the galaxy. In full view of everybody.

Some will say that I am a deranged extremist, so let's the extremist right wing, pro-plutocratic "The Economist" do the talking (May 22 2009):

"COULD there be a better time to be a bank ? If you have capital and courage, the markets are packed with opportunities--as they well understand at Goldman Sachs, which is once again filling its boots with risk. Governments are endorsing high leverage and guaranteeing huge parts of the financial system, so you get to keep the profits and palm off the losses on the taxpayer.

The threat of nationalization has receded, reinvigorating the banks' share prices. Money is cheap, deposits plentiful and borrowers desperate, so new lending promises handsome margins. Back before the crash, banks' profits just looked big; today they might even be real. The bonanza is intentional. Governments and regulators want the banks to make profits so that they regain their health faster after roughly $3 trillion of write-downs. It is part of the MONSTROUS bargain that bankers have extracted from the state (see our special report this week). Taxpayers have poured trillions of dollars into institutions that most never knew they were guaranteeing. In return, economies look as if they have been spared a collapse in payment systems and credit flows that would probably have caused a depression."

This from a magazine that used to support the bloody dictator Pinochet, because Pinochet saved plutocracy in Chili.

"MONSTROUS": I have said it in the past, now "the Economist" recognizes it is plain monstrous. Various governmental guarantees and gifts are well above ten trillions. Notice too that taxpayers could have just seized said institutions to prevent equally well "a collapse in payment systems and credit flows that would probably have caused a depression". And that taxpayers, having paid to prevent a collapse by paying much more than the "institutions" were worth, at the time, OUGHT to be the owners. Now, of course, since the government replenished them, the "institutions" are worth more. The government created the value, and then gave it to the very "institutions" that caused the crisis. And to the same people: for example, out of the twenty employees unit pointed by AIG itself as the most culprit, only two left, of their own volition. The other got more multi million dollar bonuses, paid by the taxpayers (AIG has cost nearly 200 billion, so far, to taxpayers).

Why so much rot? Why so much submissiveness? Where is the decency? Does this society have any rationality left? The terrible truth is fractional reserve banking gives maximum power to bankers. That, apparently cannot be confronted: politicians are paid, people are decerebrated.

In recent years, the size of the financial system have become enormous relative to their historical proportion of GDP. This is especially the case in the USA and London. Financiers make has become gigantic relative to the income of the average citizen. Obama himself pointed that most of the rise of GDP of the USA in recent years was purely financial. But finance does not create stuff and widgets. China does.

Here is the confusion the financial pirates have been busy entertaining: that GDP corresponds to economic activity, and, thus, that their piracy is a form of economic activity. In truth, it drains activity from reality.

Plutocratic propaganda claims that bankers create money, they give money to their friends, and then, well, if they keep on at it long enough, should not the money reach the little guy?

Answer: no. Because the total money created is finite. In appearance, the fractional reserve banking system allows to create money willy-nilly. But a second look at the math shows that this is not the case: although large, the money created is proportional to what is put in to start with. The multiplying coefficient is fixed, and depends upon the banks reserve requirement (fixed by the government, and the only thing government controls). It is called the "MULTIPLIER".

It comes from THE LAW OF CONSERVATION OF MONEY. This says, basically, that there is only so much WORK all of humankind can do at any given point of technology ("work" here is used according to its meaning in PHYSICS). MONEY EXPRESSES WORK CAPABILITY. The later being bounded, so is the former (inflation, and deflation occur when currency deviates from work).

Adam Smith's "invisible hand" is now the plutocracy and it is : "Shadow Banking".

Giving credit for new, profitable, ventures is itself profitable to society (once "profitable" has been carefully defined as civilization compatible common good). Typically new technology is involved. But let's notice that the Middle Age approach of having some plutocrat funding science is past. Today's science ideally cost at least 3% of GDP.

Financial types, to justify all the money they lend to themselves, insist on claiming that they made great innovations. In truth there have been no financial innovations. Even sub prime lending is the traditional trick of ensnaring people who cannot pay with credit, so that they can become serfs.

Financial geniuses go around, saying they invented credit cards. In truth, it's a French engineering company that invented the card technology, and all Wall Street did, was to graft on them interest rates so high that they were called in the past "usury", punished by law.

If society wants to keep the fractional banking system, it will have to admit that bankers can't lend to whoever they please, anymore than a science manager can fund whatever science project she wishes. Indeed, only that much money can be created, and then no more. If all the money goes to private yachts, planes, and mansions, ludicrous "luxuries", and SHADOW BANKING, there is nothing left for the real economy and everybody else.

That is why the infrastructure of the USA is crumbling in all dimensions (roads, bridges, trains, schools, air transportation, education, ethics, health care). It's high time to invest in alternative and renewable resources and productive human capital. The banks, instead have preferred to finance into toxic, self serving finance, or pseudo technology with high overhead.

The fundamental problem is that encountered in the middle Middle Ages, when the aristocracy became immensely rich. The feudal system started as a division of labor, and a private arm of the government. But then the powers of those who held the weapons and the capital kept increasing. As the poor got poorer, most people found themselves serving the rich instead of themselves.
Prez Franklin D. Roosevelt introduced in 1933 his concept of "banksters"; he neutralized them with his Banking Act. Now, thanks to Summers, the banksters are back. So, either the banks govern (the system we have presently), or The People decides to control the banks. We The People.

The solution is drastic, and conservative. To reestablish the state, let alone democracy, money making should again be the prerogative of the state, and only of the state. To reconcile this with the existence of banks, bankers ought to be endowed with a fiduciary duty, and made basically into officers of the state, who would be punished in exemplary fashion, should they deviate from their fiduciary duty.

A Hypocratic oath, and tight legal supervision so they will not be corrupt. This is the route of hope that audacity ought to chose.

Patrice Ayme.


According to the Congressional Research Service: "In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the "commercial" and "investment" banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions' securities activities."

The Banking Act of 1933 determined that:

  1. Conflicts of interest characterize the granting of credit -- lending -- and the use of credit -- investing -- by the same entity, leading to abuses that originally produced the Act.

  2. Depository institutions possess enormous financial power, by virtue of their control of money.

  3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

  4. Depository institutions are supposed to be managed to limit risk. Their managers cannot engage in speculation.
I expanded vastly on point 2) above.

2) MATH OF FRACTIONAL RESERVE: Let me explain in excruciating detail how this works. Before the recent financial insanity, the bank reserves' requirement were about 10%. This means that if 100 currency units were deposited in Bank A, it could lend out 90 and keep just 10 in its coffers. Those 90 would go to bank B (bank B could be bank A, or a mix of banks, it's irrelevant to the math). Bank B could in turn lend out (90 - 90/10) = 81, since it was required to keep a tenth of 90 in reserve. So notice what happened: at this point, 100 injected initially has resulted in 90 plus 81 lent out, for a total of 171: from 100 initially, banks A and B have created 171. And this goes on, for a while, before stopping.

A 10% reserve requirement, an initial injection of 100 million is thus transformed in roughly a billion. (That's why I suggested in September 2008 that, instead of using the TARP as a subsidy, it should be instead used to restructure and recapitalize banks; to use TARP as a subsidy was like giving money to a cocaine dealer, namely it costs a lot, and now he thinks you approve of his behavior, and wants more.).

3) FRACTIONAL RESERVE BANKING AS CHERNOBYL: As reserve requirements are lowered, the multiplier effect is much multiplied. Multipliers of 50 were allowed (case of Bear Sterns). If one million dollars was deposited in such a bank, the bank could lend 50 millions to, well, friends. Far from being about conservatism, this is an amazing revolution, by the bankers, for the bankers. A coup d'etat.

As reserves go to zero, the multiplier goes to infinity, at which point the bank has no capability to resist any bad loan. This is basically what happened to the ill fated Chernobyl reactor: per it's abominable design, the nuclear reaction was augmenting, the more it was shutting down catastrophically (SCRAM). The analogy with present finance is great: such a system is unstable, and will explode, just like Chernobyl, and for somewhat similar reasons: the more one tries to restart the system, or shut it down, the more it becomes unstable. The safe way out is for government to control the excesses of all the big banks, just by buying common shares (as Obama has finally been doing lately), and then bring international legislation to destroy the Shadow Banking, and make the rest of banking as transparent as science management.


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