Contrary to widely held public opinion, the banks are not a part of our infrastructure like roads and the water supply, here to serve the nation’s best interests. To the contrary. The banks are private companies, in business to make a profit for their directors and shareholders, any way they can – and any way they can get away with.
If you have money in the bank you may think that it belongs to you. It doesn’t. Lord Cottenham’s Ruling in 1848 remains substantially true today: "Money, when paid into a Bank, ceases altogether to be the money of the depositor; it is then the money of the Banker... to do with it as he pleases....." And there’s more:
Banks are actually allowed to create new money – money which is thus morally if not legally a National Resource to be used, one might suppose, to finance industry and infrastructure. In fact it is used for hi-stakes, hi-tech gambling by adventurous young traders with everything to gain (6 figure bonuses) and nothing to lose.
No, nothing to lose, for the banks win both ways. When they make big profits, the directors award themselves huge bonuses, and the shareholders get big dividends. But when the banks go bankrupt, guess who bails them out?


Today we live in a highly complex society, an economic producing-consuming inter-relationship requiring an equally complex financial infrastructure which can provide facilities for daily account-keeping, for trade, for saving, and most importantly for investment in industry which becomes ever more specialized and capital-intensive, thus requiring adequate guaranteed investment.

Because we accept without thought or question the need for a financial framework, it is natural to assume that the Banking System which currently provides that framework is part of the national infrastructure in the service of the nation – like the public utilities, water, power, and sewage disposal. And we blame the Banking System when its members act irresponsibly, building up huge gambling losses which require taxpayer bailouts.

But the banks are not a part of the nation’s infrastructure, working to serve the nation and its citizens. The banks are private companies, in business to maximize profits, if possible on a quarterly basis, for their directors and shareholders, prompting them to engage in ever more risky and obscure ventures during periods of economic growth, and to reduce or eliminate loans during recessions. So much for service to country. And let the depositor beware!


With an eye to retirement you might consider one or several of the many Investment Funds available. They are strictly regulated, their charges clearly stated, and one can choose the focus of a particular Fund – Asia, Europe, stocks, bonds etc. Once invested you know exactly where your money is, what it is doing, and you can even track its performance daily.

Not so with money put into the bank, which disappears at once into a back hole – and don’t ask what becomes of it. For the banker’s privilege of obscurity we can thank Lord Cottenham, whose 1848 ruling in the classic case of Foley vs. Hill and Others is worth quoting since in essence it remains substantially valid today:

"Money, when paid into a Bank, ceases altogether to be the money of the depositor; it is then the money of the Banker... to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the depositor if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his depositor; but he is, of course, answerable for the amount, by paying (back) a similar sum when he is asked for it."

That was 1848. But the Cyprus Bailout in May 2013 established a new precedent: when a bank fails, even deposits are no longer sacrosanct. With deposits at risk, prudent bank management becomes even more important. But prudence is about as far away as you can get from modern banking practices.


Banks make money by lending customers’ deposits, charging a higher rate of interest than the rate they are paying. But they long ago expanded their activities by literally creating money out of thin air. This process is known as "fractional-reserve-banking", which means that banks create loans considerably greater than their actual reserves.

The amount of loans they are permitted to create by the Central Bank is proportionately related to the reserves which each bank holds. This is known as the "Reserve Requirement". If the Reserve Requirement is 10%, the banks must hold £10 of reserves for every £100 of loans, or demand deposit liabilities. To state this another way, the banks "pyramid" on their reserves; for every £10 held by the bank, the bank can create £100 of loans, or demand deposits. This is known as the money multiplier.

That this privilege of creating money is “authorized” by the Central Bank might imply that it is a National Resource, to be used for the Nation’s benefit in financing industry and infrastructure. But the banks had different, more profitable ideas.

In recent years opportunities for (apparently) quick, sure-fire profits opened up in such diverse areas as housing bubbles (prompting a flood of mortgage loans) as well as the more obscure instruments of financial gambling such as off-balance-sheet financing, structured investment vehicles, and ultra-complex trading models. These and similar sleights-of-hand presented banks with the irresistible temptation to explore fully Lord Cottenham’s implied invitation to put funds under their care in jeopardy, and to engage in hazardous speculation, a course they adopted with considerable enthusiasm.

Not only were banks pyramiding on their reserves, they were pyramiding on pyramid by supplementing the funds at their disposal with substantial short term debt obligations. Then the economy turned down and the now highly-geared banks started to fall, first in USA, then in Britain with Northern Rock, Ireland with Anglo Irish, followed by tiny Iceland and a host of European banks, all brought down by property speculation, and hi-tech gambling which even market sophisticates barely understood.

And when the mighty fall, guess who’s there to catch them...


Q: Are bankers Conservative or Socialist?  A: Yes.

When they’re on a winning streak taking in profits on bets the complexity of which few but the young whiz kids understand, when star traders and executives are taking home bonuses in the millions, the bankers are True Blue Conservative – and "Hands Off Private Enterprise!"

But when the bets turn sour and phenomenal winnings turn into ruinous debts, suddenly they’re Socialists, standing in line, their hands held out for government welfare - and welfare on a colossal scale which dwarfs unemployment benefits for ordinary out-of-work folks. And so the government steps in with a rescue package thereby throwing the government itself into even deeper debt. For the banks, it’s a win-win situation. No-one appears to have noticed the irony of bankrupt governments supporting bankrupt banks.

As governments get drawn into rescue operations, traditional economists make dark threats about the dangers of governments running the banking system. But the reality is that a nation’s banking and monetary system is a vital, indeed the most important element of its infrastructure, and as such it currently wastes a valuable resource, fails dismally to support the needs of industry, and may even bring down its government.

There is thus ample justification, if not an urgent necessity, for a fundamental review of our banking and finance system, what we require from it, and how best our needs for trade, and investment in commerce, industry and infrastructure can be supplied efficiently and cost-effectively. This is not a new challenge, and other nations, other economies, other periods in history have found workable solutions.

When finance serves industry,
we can create jobs and growth NOW.
The mechanisms are there, tried and tested.
And it’s not rocket science.
The Economics of Prosperity

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