Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Towards a Sound Global Economy
By Rudo de Ruijter
ccun.org, June 9, 2009
Sometimes money is compared
with the blood of the economy. The credit crisis painfully demonstrated,
that the economy depends on a permanent infusion of credits. As soon as
the banks deliver a bit less credit, enterprises fail and the mass
dismissals succeed each other.
We are made to believe, that the
problems with the subprime mortgages were an incident. With a giga-capital
injection, a bit more rules and better supervision the banking system
would function correctly again.
And oh yes, we must trust the banks
Main cause of the credit crisis
The main cause of
the credit crisis lies in the bank/money system itself. The principle of
the money system is, that money is brought into circulation by supplying
credit and vanishes again at the moment the credit is paid back. Western
banks use two game rules: 1. in comparison with the lent out amounts, they
have to dispose of only 8% own capital. ; 2. they have to keep a small
percentage of reserves in their pay-desk to perform payments for their
customers and to hand out cash money.
With these two rules the
major part of the money, that customers have in their checking and savings
accounts, is lent out (at Triodos bank this is 65% , at most other
banks much more.) The lent out money is spend by the borrower and
subsequently arrives in accounts at other banks. The customers of the
first bank now still dispose of their bank balance, while at the receiving
banks new bank balances have been created. These new bank balances are
pretext to supply new credits.
This goes on and on. The bank balances are multiplied each time.
This system is called "fractional reserve banking".  The banks can
fulfil only a fraction of their commitments. They have lent out their
customers' money, although this money can be claimed immediately. They
just gamble, that customers will never claim more than they have reserves
in their pay-desk and that, if needed, the central bank will come to their
rescue. The percentage that banks are not allowed to lend out (the so
called cash reserve) can be determined by law (in the US it was 1:9). In
many other countries the central bank dictates the minimum percentage.
Before the crisis, for the Netherlands, I have read a cash reserve
percentage of only 3%.
Each time a borrower spends the money of
his loan, the money moves to a following bank, that takes advantage of it
to lend out most of it.
So, the same money is lent out over and over again. In a 1:9 system the
same money can be lent out 9 times. With a cash reserve of 3% it can be
lent out 32 times. And each time when it is lent out, a bank collects
The classical risk for banks is, that loans are not
paid back. That risk increases, when less new loans are put into
circulation than those that are paid back. Then the available money in the
country decreases. For the banking industry an environment in which the
money supply permanently grows has less risks. The central bank sees to
it, that the money supply keeps growing (the so called 2% inflation.) When
needed, banks can borrow from the central bank, with stocks or bonds as
collateral. When the government borrows money, the amount of money in the
country increases too. Of course, the biggest increase is caused by the
multiplier factor, that banks realize themselves. When the multiplier
factor rises, loans can be paid back more easily. The income of the bank
rises too. So there is a natural tendancy to lend out higher percentages
each time. The banks can also impose more and more requirements to the
borrowers to lower the risks. However, the consequences of this dynamic is
that the cash reserves decrease.
The purpose of the cash reserves
is to supply cash money to the customers and, mainly, to perform payments
between the accounts at different banks. When a customer of bank A makes a
payment to an accountholder at bank B, a bit of the cash reserve of bank A
moves to bank B. And as soon as a customer of another bank makes a payment
to a customer at bank A, it highers its cash reserve again. So, the money
goes forward and backward between the banks. In the past, it could take
three days to make a payment to a customer at another bank. Banks needed
quite a lot of cash reserves. Since then, the payment system has been
modernized. Payments go to the destination bank still the same day. The
same money can serve thousands of times for payments between banks each
day. For mutual clearance of payment orders only a little cash reserve is
needed today. The banks have also taken care, that their customers merely
need bank notes (cash) anymore. At first, employers were obliged to pay
wages in bank accounts. Everybody got checks, forms for payment orders,
followed by plastic payment cards and internet banking. In the
Netherlands, since a few years, the debit card is more and more imposed
for all small expenses. For each euro we don't keep in our pocket, the
banks can lend out a multiple amount...
Although a growing money
supply is needed to lower the risk of system crashes by failing loans, the
multiplier factor ends up causing more and more instability in the money
supply and causing smaller cash reserves. As soon as a bank has to book a
loss, this not only decreases its capital, but often also its cash
reserve. When a bank has less than the 8% required capital (compared to
the outstanding loans), or too little cash reserve left, then, according
to the rules, the bank has lost the game. The subprime mortgages caused
the system to get stuck in 2007, but, in fact, any somewhat bigger losses,
like for instance on Third World loans, could have triggered the crisis.
The banks simply had too few reserves left to take losses. And once one
bank gets in trouble, it can easily spread to other banks, because banks
borrow money and buy securities from each other to optimize their balance
sheets. The fact that the subprime mortgages were wrapped up as a complex
financial product only made the effect bigger.
But the main cause of
the crisis is not the loss on the subprime mortgages, but the structurally
decreased capacity of banks to take losses. And that is the consequence of
the natural dynamic within the "fractional reserve banking" system.
In many countries the governments were called for
help to save the banks. This is remarkable, for the banking system
functions outside any democratic control. The directors of central banks
took the ministers of finance to international meetings (or took them in)
and extracted inconceivably high loans for the banks. All of us we are
guarantors with future tax money. However, the banks would pay a market
conform interest on these loans. To put it otherwise, they will charge
their customers for it: you and me. In fact the ministers of finance
were put against the wall. The banks were not allowed to fail; they were
The power over the money has been given away by
members of parliament in the past. They had no idea about what money was
and how the system worked. Now the banks determine how much money there is
in circulation and how much the population must pay for this service. The
multiplier factor of money also leads to a shift in power within the
Banks make more and more investment decisions and the government all
the time less. And because there is more and more money available, more
and more things become buyable. This has led, for instance, to the
dismantling of many state tasks. Services, that are important for the
functioning of society, like public transport, post, telephone, water and
energy supply have been thrown in the hands of the financial benefit
seekers. Private companies would perform better. But in fact, it hides a
shift in power due to the "fractional reserve banking".
pretend, that we live in a democracy, but the parliament has no say
anymore over money, one of the most important factors in society. To get
the power over money back inside the democracy only small law changes are
needed. Unfortunately, today's parliamentarians, except a very little
number of them, still don't understand nothing about the money system.
That is a pity, because by taking back the power over money and with an
adequate bank reform, they would be able to stop the credit crisis almost
Described in short, this
bank reform could show like this: the central bank becomes a state bank,
part of the ministry of finance. The state bank is the only bank that
creates money for loans. The parliament decides which sort of loans must
get priority in the interest of society. These loans can be supplied at
favorable conditions. This way, the parliament gets much more influence
over the shaping of society.
Todays' commercial banks become
server counters for the loans from the state to the public. They manage
the checking and savings accounts of their customers on behalf of the
state bank. They cannot dispose freely anymore of this money and cannot
multiply the balances.
However, they will be allowed to collect funds to lend out.
When the treasurer of the local sports club would use the
money unseen to invest it and enrich himself this way, he takes the risk
to be condemned. But when bankers manage the money in our checking
accounts this way, they go free.
The corrupt rules for banks have
originated long ago, when gold smiths, and later bankers, were bent upon
fooling their customers.  The only difference with before is, that the
system has now become official and the law allows it. Of course, this
practice is kept secret as much as possible. You will not find any website
of a bank or of a central bank, explaining clearly how a bank works and
how the system functions. At schools - except for a few very rare
exceptions - the subject is not treated, and even in most economy studies
it is not part of the program.
In particular from 1913, after the
establishment of the Federal Reserve Bank in the US, the bankers have
succeeded to obtain an own legal framework in many countries and seize the
power over the local money. In each of these countries one bank got the
role of the central bank. The names of these central banks keep up the
appearance, that they would be governmental bodies, whereas, on the
contrary, they became independent from the local parliament and
government, be it step by step sometimes: De Nederlandse Bank N.V. (1914),
Bank of Canada (1935), National Bank of Danmark (1936), Deutsche
Bundesbank (1957), Banque de France (1993), Bank of Japan (1997) and so
on. On their bank notes, there were often portraits of kings and
In many cases the appearance that money would be of the state was
corrobated by the fact that the state kept the responsibility to
mint coins. On the coins too, there were often trustworthy portraits. When
necessary, even religion was used. The Dutch guilder coin had the
inscription "God be with you" in the side.
It is thanks to the potential for economic growth and the
increasing availability of raw materials and energy during the last
century, that the money multiplier did not lead to problems, but even
pushed the economic growth.
My thesis is, that today's bank
system is a danger to the future of humanity. The permanent inflation,
which is inherent to this system, forms an impulse for ever more economic
activity in order to compensate for the loss of value of the money unit
and to obtain a bit of the additional money put in circulation. In my
opinion, this is also where the stubborn believe comes from, that an
economy must grow to be healthy. (And not, for instance, from a
spontaneous desire of the working class to work harder all the time.)
Sustainability, on the contrary, supposes an equilibrium with our
environment. Our environment does not grow along with the increase of our
economic activity and population. It is destroyed by it. 
need to get rid of our inflationary banking system as soon as possible and
put the power over money back where it belongs in a democracy: in the
 The 8%
capital requirement is the standard from the Basel Accords of 1988, on
which all kinds of exceptions apply. This way, for loans with mortgages on
housing, banks only need to have a counterpart of capital equal to 4% of
the outstanding loans. For loans to other banks the requirement is still
lower most of the times and for loans with a state guarantee it is 0%.
in 2004 the
European Commission proposed to lower the 8% to 6% and the 4% to 2.8%.
The Basel II Accords of 2006 offer more possibilities to (big) banks
to choose the most favorable method to determine their risks.
 At Triodos
Bank 65% is lent out.
http://www.mises.org/story/2882#3 see chapters Fractional Reserve
Banking, Central Banking, Deposit Insurance. Note, that Murray N. Rothbard
(1926–1995) was a defender of the return of the gold standard, like, for
instance, Ron Paul still is. Although understandable, seen from a
historical US' perspective, a money system based on gold has many
disadvantages. Countries without gold mines would have to buy gold (which
means deliver goods and services to the gold mining countries) for the
only purpose of disposing of a national means of payment. Each time when
more gold comes on the market, they will be obliged to buy more of it, to
prevent their currency to devaluate against currencies of countries with
increasing gold stocks.
The gold mining industries would, in many aspects, get supra-national
power, even more than the Fed today. Gold has no stable value. Its pricing
can be influenced by holders of big stocks, like the gold mining
industries and central banks. Even big numbers of small buyers and
sellers, when triggered by fear or greed, can influence its price.
All these price fluctuations can form a danger for any economy that has
its money pegged to gold. Still more than today, gold would trigger
conflicts, oppression and wars.
 Bank crisis? Reform!
Secrets of money, interest and inflation.
 Energy crisis: turning-point of humanity.
link to the original article:
Rudo de Ruijter