Chapter 7 - The Bank of Parrot

Bank of Parrot

You and I shall set up the 'Bank of Parrot'. We set the bank up with minimal assets, meaning almost nothing. The important part is that we arrange to join the 'payments clearing' system that operates between banks. We need to join so that we can transfer bank balances to and from bank accounts in other banks. A man called Mr. Seed walks into our bank and asks for a loan to buy a house. His first name is 'Bird' and we agree to the loan. Mr. Onion, who is the seller, happens to be another one of our customers. We write plus one million into the account of Mr. Onion. We get Mr. Seed to sign some papers that give us the deeds to the house if he misses a payment, then we write one million dollars with a minus sign next to it, into a loan account in the name of Mr. Seed. Our balance sheet sees changes in the plus column and in the minus column, but remains in balance. The plus one million balances the minus one million. Mr. Onion has $1 million that he can spend. We did not have one million of customer deposits. We did not have one million of government money in a vault. No cash moved. We did not phone the central bank. This money did not exist before the loan was made, so this is new money. There was an increase in the Money Supply of the nation of $1 million. There was an increase in debt in the nation of one million dollars. No central bank created cash, folding notes were involved. No customer deposits to the magnitude of $1 million were required before we could lend $1 million. Some think we operate under Fractional Reserve Banking and the Multiplier Effect. The only fraction is the large fraction of their brain that doesn't work. The only Reserve we ever need is borrowed from the central bank.

I guess you're fairly new to banking and do not know the tricks of the trade. The main trick of the trade is to avoid using real government money, which is the cash folding notes issued by the Reserve Bank. Our customers believe that $1000 listed in their bank statement represents $1000 in cash currency. Although we will give them small quantities of cash to maintain the illusion that the figures in a bank statement represent real money, in reality, the money does not exist. There is nothing backing the deposits in our bank account. The only backing for the loan is the asset which they are purchasing.

We play a game of shifting numbers between bank accounts to give the illusion of payments from one customer to another, where in reality, the money in the bank accounts does not exist and never did exist. Provided we can get the government and the Reserve Bank to support this system, we can make interest income on money that does not exist.

We have a fairly straightforward way of making loans to people. Because they don't ask for the money as cash real money, we can make a loan of money that doesn't exist. Sarah wants a loan of $10,000 to buy a car from 'Dodgy Car Yard'. We agree, and get Sarah to sign some loan papers. We type minus $10,000 against the account of Sarah. We type plus $10,000 against the account of 'Dodgy Car Yard'. Logical people just assume that we lent out other people's money at a minor premium. We don't dispel this myth, but we do actually need other people's deposits as reserves. These reserves are needed to cover minor fluctuations in demand for cash. We buy cash from the Reserve Bank using our virtual substitute money. We also need reserves to cover any daily imbalance between ourselves and other banks. Luckily, these demands are not too great because we persuaded customers to use our virtual money, which we named 'Commercial Bank Money' for realism. In reality, this Bank Credit is just a substitute for real money.

One of our clever predecessors created the term Fractional Reserve Banking to imply that a 'fractional reserve' was held at the Reserve Bank. We did not doubt this even though it was not true as there was no fraction and no reserve. Thankfully, we had sympathetic politicians who were thankful for our donations to their campaigns. They were so helpful to us that we gave them consultancy jobs on on their retirement from politics.

Hopefully you have learned your first lesson well. It is entirely erroneous and misleading to suggest that customer deposits are required before a loan can be made. It is entirely erroneous to suggest that this is Fractional Reserve Banking as new money is created without any involvement of the central bank.

Although our loans are made by making plus and minus accounting entries, we do need to make some other adjustments. We need to have a little more cash available as customers like to have comparatively small quantities of real money as cash for minor retail payments. Between three and five percent of money in the nation is in the form of cash, folding notes and much of this is in people's wallets and buried in back gardens. So we will need to purchase a little more cash from the central bank, just to cover likely demand. We will also need to transfer a little more money to the central bank as a buffer to cover the daily inter-bank transactions, which are the result of people paying bills into accounts in other banks.

If you think nobody cares if you are alive, try missing a couple of payments.

We will soon add interest to the account of Mr. Seed. Mr. Seed's loan account will be increased by about 10% each year. This is income and we list it as income in our profit and loss statement. So Mr. Seed's loan has increased by 10%. Overall the money owed to our bank will increase about 10% each year, although some of the income will be spent on expanses and wages. The virtual digital Bank Credit that we created by register entries, does not increase. So the effect of our loan practices is to have an escalating volume of debt in the nation whilst the volume of money does not increase. The rate of increase in debt in the nation is a little less than the interest rate as we spend money back into society on wages and expenses.

We do our best to avoid them using real money, by giving them cheque-books, credit cards and online money transfer facilities. Collectively, our cartel of banks has done remarkably well in keeping the use of central bank cash down to 3% in UK. (~3.5% in Australia and worldwide down to 8%.) 97% of the money used in the UK is our virtual Commercial Bank Money. It is a remarkably good system as it makes the people work very hard and we finish up owning most of the assets and shares of the nation.

You did, of course, notice that Mr. Seed is under the illusion that he is the homeowner when in reality is a mortgage note holder. The house does not belong to him until he makes the final payment. This effectively means that at the time of creating the virtual money, we own the physical asset called a house. In the total scheme of things, this means that our cartel of banks effectively owns the housing stock of the nation through simple accounting entries and virtual money creation. This does of course mean that we need to keep the housing stock slightly restricted and keep population growth, through immigration, to maintain a demand for our virtual money. We had a win when we doubled the value of our housing stock and interest by encouraging women into the workforce. We now get a good slice of two people's incomes as interest payments. Thankfully, we have stopped them paying off their loans too quickly, causing a drop in our interest income. Thirty year loans are much better for us than fifteen year loans because we make more money. Very often the marriage breaks up or they miss a payment and we confiscate the house and all the payments that they have made. The real estate agent thinks he is selling houses, but in reality he is selling our loans. We encourage the mortgagee to believe that he is the homeowner, when in reality he is a mortgage note holder, which means he is not the owner until he has paid us the last of our payments. We effectively own all the housing stock in the nation by creating loans out of thin air. When we encouraged women into the workforce with the catch cry, you can be 'freed from the kitchen', the birth rate dropped. Fortunately immigration increased which has maintained a mild undersupply of housing, that has maintained house prices so that we can extract a high proportion of people's income as interest. Fortunately, the populace is clueless that it is our loan practices that maintains the barely affordable house prices.

There is a very interesting effect of our loans for real estate. If we did not make loans for real estate, people could only buy houses and land for the money that they had. This would be money they could earn or beg from family and friends. House prices and land prices would be very low. As we make loans for houses using money that we create with accounting entries, we conveniently make vast quantities of money available for real estate purchases. This raises the purchase price of real estate dramatically. People reach a situation where they can only buy a house if we give them a loan of our mythical virtual Commercial Bank Credit.

Thankfully, we have managed to downplay the warnings in the Bible and in the Koran about the evil of usury. We have conditioned the public to believe usury is normal practice. Another issue occurred in 1767 when Sir James Steuart wrote his books about economics and banking. Although he wasn't against our banks, he did point out many of the problems we were creating. We labeled him as 'an out of date Mercantilist' and conveniently Adam Smith produced a book, nine years later, that looked as if it was being harsh on banking practices, but was actually accepting of what he called 'reasonable interest' and the reduced 'state control' of our practices. He wrote a book favorable to our interests, so we arranged for it to be heavily promoted.

The invention of double entry accounting has been very good to us. A business is considered to be well-run if it uses double entry accounting. This essentially means that for every credit in one account there is a debit in another account. This means we do not need depositors' money to make loans. We can use double entry accounting and make a credit in one account and a debit in another account. Double entry accounting allows us to charge interest on account entry money that never existed until we lent it.

The whole arrangement is quite fascinating. When we issue a loan, the interest needs to be paid from the available money, which just happens to be the money we lent. Thus, the interest is paid using the principal that they borrowed. Considering all our customers, each year they give us back 10% of the money we lent them. This puts them in a bind. They have to keep borrowing money so that interest can be paid. It doesn't take long until they are borrowing money just to pay interest. This includes the nations that owe us money. They are in a trap from which they cannot escape.

What is also interesting is that we have persuaded the government, itself, to conduct its business using our commercial Bank Credit, rather than using the currency they create.

The government itself uses double entry accounting. Every debt in one account is matched by a credit in another account. This leads them to the erroneous belief that they need to balance their budgets, which is rather bizarre because the government itself is the only entity that is authorized to create money. The government fails to spot that it could create money and push that into a bank they owned themselves to create the Bank Credit to operate the nation.

Because the government finds it easier to use our Bank Credit to pay its expenses rather than the comparatively cumbersome government money, the government ends up in debt to us for money that it could create itself.

The Eighteenth Flaw of Economics

   Double entry accounting is wonderful until it is used for government finances.

In government finances, a credit does not need to be matched by a debit as money can be created.