The Money Power

How finance capitalists enslave the world
-- by: Frank Anstey, 1921, source: Australian Nationalist Archive
MHP hypertext version for non-profit educational use only

5.  The Capitalist Arsenal and Modern Banking

Central banks, paper currency, and control of credit

The Capitalist Arsenal

[Editor's Note: This chapter has been condensed. The full text is available at the source listed above.]

In the principal countries of the world the great financiers have established central depositories for gold. In many countries the great central bank is named after the Country of its location -- "Bank of France," "Bank of England," "Bank of Belgium," etc. In the United States the central is named "Federal Reserve."

In some countries the "Central" is a private corporation controlled by the directors of associated banks; in others it is a private corporation controlled by the Government; in others it is a public-owned institution controlled by private bankers; in others it is an institution both owned and controlled by the Government.

But no matter the name, no matter who owns or controls, in every country the "Central" Bank exists as a buttress to the private banking system. Behind the system behind the "Central" stands the capitalist-dominated State, ever ready at the word of command to furnish State aid, pledge the "credit of the nation," and issue additional currency manipulated by the capitalist controllers of the system.

Under this system gold disappears as an internal currency. It is no longer money. It is a stored product, not for internal use, but for international traffic and in several countries this transformation took place prior to the war.

Baron Brencard told the American Monetary Commission that the Bank of France is the Bank of Gold Reserve for all companies and corporations throughout the Republic, and "the gold of France is mobilised, ever ready for international economic service."

Lord Swaytheling told the Commission that the difference between the Bank of France and the Bank of England was that the former could pay out silver instead of gold, could refuse gold for export, or export heavily, and extend the note issue for internal purposes, and by these means "directly control international financial and economic relations."

The Bank of England differed in its methods, but Sir Walter Cunliffe, when Governor of the Bank, told the U.S. Monetary Commission that: "Private banks holding drafts on the Bank of England must present such drafts direct to the Bank of England to be paid to the credit of their account in the Bank of England."

Every private bank can settle its adverse balance with other banks by a transfer of its credit in the Bank of England, but in the Bank of England the credit remains.

It is, therefore, impossible for a private bank to draw off gold supplies without the consent of the Bank of England, and consent, even when granted, is often made fictional by increasing the price at which gold is supplied.

On the other hand, the liability of the Bank of England to other banks is diminished by its holdings of cheques and drafts on other banks. With these instrumentalities the B. of E., whenever it wishes, can draw off gold from other banks. Thus gold control by the Central B. of E. is absolute.

The German Imperial Banking Act of 1909 brought the Reichsbank, the "Central" of Germany, into line with those of France and Belgium.

The U.S. Monetary Commission reported that in consequence of the new powers conferred upon, the Reichsbank Bank: "It holds the gold reserves of Germany out of which all foreign obligations can be settled and places those gold reserves wherever they will be of the greatest economic service."

The desire to supplant Britain in the markets of the world led to the adoption of methods that would have made the average Labor Government shiver with timidity. Under the German "Junkers" the Reichsbank continued to act as "Central" for private banking companies, but those private banks were prohibited from establishing new branches. The Reichsbank established 500 branches of its own, and in several provinces of the German Empire it was the sole giver of credit in important spheres of economic life -- retail trade and agriculture. It advanced notes on houses and other forms of immovable property, and if the credit was wanted for the development of exportable products the charge for credit was nominal -- no more than sufficient to cover bank expenses.

The Reichsbank also advanced currency to the Government on a deposit of bonds, a security representing the Government's power to tax the entire wealth of Germany. The Reichsbank issued currency for bills on London and elsewhere. This made the Reichsbank the almost exclusive holder of credit in foreign States, and gave it a dominant power over the character and quantity of its imports.

By those means Germany built up credits in the countries of its principal operations. By those means it enabled the importer of the raw material of German industries to purchase on the favorable terms that those credits abroad permitted, and by those means it gave without cost a substantial subsidy to the great manufacturing interests of Germany.

Japanese financiers in their banking system followed upon German lines.

The American Monetary Commission reported that:

"The chief medium of exchange in civilised countries is the cheque. For counter change and wages, either gold or notes must go into circulation. Gold in circulation renders effective mobilisation impossible. Gold mobilisation is imperative if America is to hold her own in the international trade struggle. Therefore, gold must come out of general circulation and be replaced by a note currency."

Upon that report the American Money Trust acted, and in 1913 organised its "Reserve Banks". In 1915 the total note issues of all descriptions were $2,752,000,000 dollars, against a total gold reserve in the Washington Treasury of $200 million dollars. The gold stocks in the private "Reserve" banks amounted to 700 million dollars, but the liability for ultimate redemption was on the Washington Treasury.

On the 30th September, 1920, America's gold stocks had gone up to $3,000,000,000 dollars, but commodity prices were as high as in the countries whose gold stocks had been depleted. None of this gold was in circulation. It was in "reserve" and of these "reserves" the private corporations controlled four-fifths and their circulating currency for their citizens consisted entirely of paper. In addition to silver certificates, gold certificates, United States notes, National Bank notes, the "Federal Reserve" notes in actual circulation on 30th Sept., 1919, amounted to $2,655,000,000 dollars.

Thus in the United States, as in Europe, gold was withdrawn from internal circulation and mobilised as one of the instruments of the international trade struggle.

In all those countries gold passed to the Central Reserve Bank -- whatever its name -- and credits were created in the books of the Central, and to the extent of those credits the Central settled the foreign obligations of subsidiary banks or the obligations of one subsidiary bank to another. If the individual bank desired Notes, it deposited with the Central, bonds, deeds, commercial bills or other paper securities.

In America the New York Reserve Bank is the Chief Central of the twelve regional centres. Within its grasp is mobilised the main gold supplies of the United States, and these are mobilised not to liquidate the note currency of the country -- that responsibility is upon the Government. They are mobilised under Capitalist control for the international economic conflict.

The less gold used for internal purposes, the more is available for establishing a gold fortress for international operations or for building up credits, or liquidating obligations in foreign markets. A gold-producing country is therefore in the most favored position for the task of mobilisation, and an internal paper currency permits gold to be put to its best economic use. These things are not theories; they are facts, recognised and applied by the High Financiers in their predatory operations.

The bankers of the world no longer believe that a paper currency need be convertible into gold, or that it can be so converted. They only want the public to believe it. They only want Governments to function in their interests on the general superstition. They know full well that a currency convertible into all the commodities that gold will buy, is good currency and sound money, but they keep that fact in the background.

The bankers know that an adequate gold currency is impossible, yet they levy toll upon paper that represents nothing more than the borrower's security. They know that the solid assets of the borrowing public are adequate backing for any medium of exchange that may be issued, but they keep that fact in the background. They have adopted a paper currency in the form of cheques, and these to-day are redeemable, not in gold, but in the paper notes of the nation.

This system, which the nation by its note system has made possible, should be administered for national advantage -- not private gain -- and what the Capitalist "High Financiers" do for their own profit should be done for the profit and progress of the nation.

"Trade and Industry are wholly at the mercy of the world's money controllers. By means of the monopoly privileges accorded to the banking profession, these men exercise a greater influence over economic conditions than any potentate, ruler or government. They are the world's real autocrats.

-- Kitson in "The Money Problem."

Modern Banking

On March 16th, 1916, Sir Denison Miller, Governor of the Commonwealth Bank, stated in the New Zealand "Evening Post" that --

"Banking has its own language, not understood by the people, and not intended to be understood by them."

Mr. Frank Hirst, editor of the "Economist," told the American Monetary Commission (document 579) that the Bankers not only mystified the public, but obfuscated themselves with obsolete terms.

Sir Edward Holden, of the London and Midland Banking Company -- one of the men selected by the British Government in 1915 to negotiate the 500 million dollars loan in New York -- lectured before the Bankers' Institute of Liverpool (December 18, 1907). He said:

• 1st: "Banking is little more than a matter of bookkeeping -- the transfer of credit from one person to the other."
• 2nd: "Securities create credits."
• 3rd: "Credits are transferred by means of cheques."
• 4th: "The transfer of credit is to circulate it -- make it current."
• 5th: "Currency is Money."
• 6th: "Money mainly consists of cheques."
• 7th: "Bank notes are only a fraction of the total currency."
• 8th: "Money is redeemed every time it is exchanged for commodities or services."

These admissions were made and these facts made public in order to buttress the end in view. Sir Edward Holden stood for the private cheque currency of the private Banks, backed, sustained, and redeemed by legal tender notes of the Nation issued to the Banks for securities deposited. Sir Edward Holden argued, as Pierpont Morgan has argued in America, that legal tender notes issued to the Banks on the basis of securities, is sound money.

In 1913 Sir Edward Holden urged the appointment of a Royal Commission "to devise means whereby the Bank of England may be empowered to issue to subsidiary banks legal tender paper money guaranteed by a deposit of securities." On February 7, 1914, in a circular letter to the London press, Sir Edward Holden urged that -- "the backing of such an issue should be bills of exchange, such as are dealt in by bankers every day."

This is designated the "Re-Discount System." It is a system enabling the bankers to get the use of a national guaranteed currency, not upon their own securities, but upon the securities entrusted to their care by their customers, and by such means the Government is made to function in the interests of the banks.

When the war broke out (August, 1914), all pretence of a gold basis disappeared, and the scheme described in previous chapters was put into operation. In principle it was identical with that outlined by Sir Edward Holden.

If such financial operations are sound for the banks it follows that a national currency issued from a National bank upon deposited securities is equally sound, and is an imperative necessity for purposes of national reconstruction.

Sir Robert Giffen, the author of "Financial Essays," said: "As long as the attention is rivetted on, not the real currency paper, but upon its assumed basis -- gold -- correct conclusions upon currency questions are impossible."

The writer on "Currency" in the "Encyclopedia Britannica," said: "The idea of the intrinsic value of money is discarded by all persons conversant with the working of the modern mechanism of exchange."

Professor Atkinson (Aug. 11, 1914), said: "It is a fallacy as common as it is vicious to assume that the world's credit is based upon gold."

The London "Economist" (May 22, 1915), said: "'Cash at Call' is a fallacy, and the outbreak of war proved it."

In short, the investment of gold, with an economic halo, is one of the tricks by which Financial Capitalism deludes and exploits the people.

Sir Felix Schuster, president of the Smith's and Union Bank of London, said: "The theory of banking is one thing -- the practice is quite another. Banking has evolved far beyond the theory on which it is supposed to be conducted."

And in a speech, reported in the "Banking Record" (September 21, 1914), he said: "The currency of the country is supplied by cheques instead of, as the Bank Act intended, by Bank of England notes."

The financial writer, McLeod, says: Cheques are currency in the same way as notes."

Hartley Withers, in his book on "War and Lombard Street," said: "Modern currency is the 'cheque' which can be multiplied to an extent which is only limited by the security which customers may be able to provide."

The essence of a sound currency is that every credit issued shall be based upon deposited securities, upon bills that represent products, deeds that represent property, and bonds that represent the taxable wealth of the community.

Frederick Temple, in "Interest, Gold and Banking," says: "The growth of the cheque system has had the effect of transforming the character of banking."

Oswald Stoll, in "The People's Credit," says: "Modern currency takes the form of cheques, with Government notes for wages and small change."

These cheques are redeemable, not in gold, but in the paper notes of the nation.

...

A material standard of value is impossible. Value can only be expressed by numbers: 1, 2, 3. It cannot be expressed by a substance. You cannot measure the depth or the value of a glass of water by placing a sovereign inside or alongside of it.

A paper currency exists. We cannot do without it. It is issued by private Banks. Its convertibility into gold is a fiction. Yet upon that fiction the Banks trade, charge interest, and declare their annual dividends. Modern money is not capital, not property. It is a convenient representative of wealth in all its forms. When the manufacturer, the owner of capital, goes to the Bank for money, he mortgages his capital, and pays interest for a circulating representation of his own property.

Security and Credit

The "Round Table," in its article on "Lombard Street in War," says: "The amount of securities deposited in British Banks are worth over £1,000,000,000. Against these securities cheques are drawn. Behind these cheques there is not one ounce of gold -- the only security is the security deposited by the drawer of the cheque."

In Australia the securities deposited in the Banks are worth £240,000,000. Against these securities bank credits are created and against those credits inscribed in a book, cheques are drawn and interest charged. In addition to floating mortgages upon the gold in their possession, the Bankers have issued -- at interest -- rights to draw cheques upon the Banks to the extent of over £220,000,000. Behind these cheques there is not one ounce of gold -- the only security is the security deposited by the drawer of the cheque.

...

If the bank has abundance of oversea credits, it will reduce the amount of local money which it will give the exporter of goods for his oversea money. In his book on "Foreign Exchanges," Mr. Spalding, a member of the British Institute of Bankers, said: --

"In theory the importer gets the advantage of the cheaper rate at which the exporter was compelled to sell his bill. In practice, a, proportion or the whole of the premium goes to the banker"

In other words, "favorable" exchange seldom means "favorable" to anybody except the banks. They surround their operations with a veil of "meaningless phrases which have filtered down to us through the dust of antiquity" (Spalding), by "a language of their own, not understood, and not meant to be understood by the people" (Sir Denison Miller), until at last, as the Editor of "The Economist" told the Monetary Commission, "the bankers not only mystified the people, but obfuscated themselves with obsolete terms."

This smoke screen of senseless words and phrases is not without utility. It protects the "Monopoly of the Instruments of Exchange" from popular comprehension and attack. Thus Labor can expend its energies upon nationalised fried fish shops and bakeries, while leaving untouched the nerve centres of capitalism, without which capitalism cannot exist, without which national reconstruction on any other than capitalist lines cannot take place.

Every day the Banking Ring of each of the principal countries cables to London the amount of local credit local bankers are giving in exchange for £1 London credit. In London these rates are mobilised, tabulated, and cabled to all countries, to appear in the financial columns of the daily press of those countries.

...

London is, so far, the web centre of international finance.

In London are assembled the actual chiefs or the representatives of the great financial houses of the world.

These have their investigators, ambassadors, news gatherers in all lands. Upon the basis of early information as to the forthcoming surplus of exportable products and securities, upon the estimated volume of London credit that will as a consequence be at the disposal of each State, upon the knowledge of the inevitable influence of such credits upon the Exchanges, the Money Kings conduct their market operations and international speculations.

In these speculations upon the Exchanges, in these struggles for the rise or fall, immense fortunes are won or lost, and the "Money Market" becomes a market in money as clear and definite as a Pig Market is a market in pigs." But at no time or place are the prices of goods sold abroad affected by the internal currency or policy of the exporting country. The realised foreign prices on the foreign market are the means by which imports are paid and debts settled, and the values of goods sold are not affected by the economic structure, the monetary system or the internal social relations of the exporting State.

...

Industrial Monopolies

The existing banking system is the nerve centre of predatory capitalism. With banking made a socially owned and controlled function, the capitalist nerve centre is cut, the situation is changed, the control of the institutes and instruments of exchange by the inner ring of capitalist "financiers" -- the source of their power -- is gone.

With those instrumentalities in the hands of the nation, every industrial monopoly becomes inocuous against democracy, only capable of existence by the processes of legitimate trade and by compliance with the dictates of the Common Good.

Every joint stock combination within the Commonwealth must be a licensed combination.

The right to trade must be subject to the terms of the license.

The license must carry the right of public supervision, prohibition of inflated capital, of hidden reserves, of excessive profits, or of discrimination between purchasers. The law under which the license is issued should prohibit the use of any Commonwealth instrumentality -- telegraphic, telephonic, postal or bank -- by any company or combine attempting to trade without a license or in contravention of the terms of the said license.

No Government can be credited with sincerity if it condemns the trusts, rings, and combines with words only, and yet permits them to use the instrumentalities of the Governments in the carrying out of their nefarious plans.

The Commonwealth exercises power against lotteries and against proscribed persons or firms alleged to be engaged in selling or trading in material or information alleged to be inimical to the moral or physical welfare of the citizens of the Commonwealth.

What the Commonwealth cannot do by direct legislation it does by the use of its instrumentalities.

The Commonwealth not only exercises this power against lotteries and gamblers, and traders in noxious matter, but it extends the refusal of its services to all persons and firms declared to be acting as agents, or aiders and abettors to the: firms or persons alleged to be acting in a manner detrimental to the public interests.

The Commonwealth refuses to pass through its Customs the products of any firm upon which it lays its ban. It can interdict all goods which the Government, or its appointed authority, declares to be manufactured, transmitted or sold under conditions injurious to the public. The Nation exercises its right to grant the use of its services to those who comply with its conditions.

The Commonwealth can exercise its powers and use its instrumentalities as much against monopolies and combines as it can against lotteries and traffickers in noxious matter.

Commonwealth Governments have consistently declined to use banking powers against Capitalist combinations, even when Royal Commissions and the decisions of the Courts have proclaimed that the combines acted in restraint of trade, to the public detriment, for their own aggrandisement.

But a Capitalist controlled Government of the Commonwealth is prepared to exercise that power against the Governments of the States and against the decisions of the elected representatives of the people of those States even when those decisions are within the powers permitted by the Constitution.

Thus the States have power to establish State banking and to issue State instruments of credit receivable in all debts, dues, and obligations of those Governments at all the public offices of the States -- civil or economic -- and the Commonwealth Government has no constitutional power to directly prohibit such instruments or activities of the States.

But what the Commonwealth Government cannot do by direct legal injunction from the Courts it does indirectly by the use of its banking power. Thus under the amended Commonwealth Bank Act of 1920, the Commonwealth Government clothes the private banks with legal authority to refuse acceptance, to deny circulation to the credit instruments of the States. Thus, that which no Commonwealth Government would compel the private banks to do against trusts, rings and combines, it authorised them to do in 1920 against the Governments of the States.

Thus the Bank Act of 1920 is an admission of the tremendous power which the Commonwealth Government can exercise, but so far has refused to exercise, to protect the pockets of the people from the piratical onslaught of distributive combines and industrial monopolies. With a complete nationalised banking system supplanting all private traffickers in credit instruments, the public control of all monopolies and combines becomes absolute. By its control of banking and banking facilities the Commonwealth can compel every monopoly (while permitted to exist) to seek the law, secure its license, and conform to its decisions.

The Private Banking Monopoly is the greatest monopoly on this continent. It is the fortress and buttress and financial arsenal of every industrial and commercial ring, trust, combine and price-raising conspiracy on this continent.

It should not be permitted to exist.

It possesses the power to give or withhold credit. It can withhold or withdraw credit from men whose securities are beyond question. It exercises autocratic control over the products and properties of the people. It is the "Unseen Power." It should be dethroned. Its powers, prerogatives and perquisites should be the exclusive privilege of the organised Nation, acting through the agency of its own instrumentality -- the Bank of the Nation.

Whatever else may follow -- in land or industry or augmented local powers -- the "instruments of exchange" are essential to their effective functioning. Their control, so essential to the pre-eminence of Capitalist "High Finance," is equally essential to all processes of industrial and social reconstruction.