97% Owned | Creation of Money | Finance Documentary | Debts Explained

How is money created? Where does it come from? Who benefits?

And what purpose does it serve?

What is a money system? What is the money behind the money system?

For centuries the mechanics of the money system have remained hidden from the prying eyes of the populace.

Yet its impact, both on a national and international level, is perhaps unsurpassed,

for it is the monetary system that provides the foundations for international dominance and national control.

Today, as these very foundations are being shaken by crises,

the need for open and honest dialogue on the future of the monetary system has never been greater.

This economic crisis is like a cancer.

If you just wait and wait, thinking this is going to go away, just like a cancer it's going to grow,

and it's going to be too late. What I would say to everybody is, get prepared.

This is not a time right now for wishful thinking that the government is going to sort things out.

The governments don't rule the world: Goldman Sachs rules the world.

"We're on the verge of a perfect storm".

In opposition lie corrupt and entrenched interests that lurk in the corridors of power,

for whom there are no reasons to relinquish privileges that they feel are justly deserved.

Has he got a reform plan for the NHS? [SHOUT: No!] Has he got a police reform plan? [No!]

Has he got a plan to cut the deficit? [No!]

Order! Misorder! Order!

Do you trust the government?

Try to calm down and behave like an adult, and if you can't, if it's beyond you,

leave the chamber. Get out. We'll manage without you!

"This is the banking fraternities feeding station.

There's no coincidence that boom and bust became a real cyclical issue around about the 1700's,

when William Paterson founded the Bank of England.

This is intolerable behaviour as far as the public is concerned. No, it's not funny!

Only in your mind is it funny. It's not funny at all, it's disgraceful.

One Solution, Revolution!

The system is inherently unstable as a result of the international power it provides to the dominant parties,

for at the heart of it lies the idea of; how can I get something for nothing?

Statistical analysis has found that every time an empire begins to near its own demise,

you'll find that its currency will be debased.

There is no guide to how this whole system operates.

To give you an example, a researcher at the BBC working on a Robert Peston documentary

went to the Bank of England and said, "Can you give me a guide to how money is created?"

And they just said, "No".

This documentary will investigate and explain this ever changing system,

and the impact it has both on a national and international level.

97% Owned

How is money created?

Notes and coins

In 2010 the total UK money supply stood at 2.15 trillion pounds.

2.6 % of this total was physical cash, 53.5 billion.

The rest, 2.1 trillion, or 97.4% of the total money supply was commercial bank money.

The 3% of money is created through the central bank

and that money essentially, if you created a £10 note you could sell that to a bank

to put into their ATM and the bank would have to repay that £10 or buy it for £10.

There would be no interest charged on that money, but that money is then essentially transferred to the Treasury

and it's a form of fundraising for the government. It's called seigniorage.

Seigniorage: Profit made by a government by issuing currency. The difference between the face value of notes and coins, and their production costs.

When the Bank Of England creates a £10 note, it costs it about 3 or 4 pence to actually print that note

and it sells it to a high street banks at face value, so for £10 and the profit,

the difference between printing the note and actually selling it for £10 goes directly to the treasury.

So, in effect all the profit that we get on creating physical money, bank notes, goes to the Treasury

and it reduces how much taxes we have to pay. Over the last 10 years, that's raised about £18 billion.

In 1948 notes and coins constituted 17% of the total money supply.

This was one contributing factor in the government's ability to finance post-war reconstruction.

This included the establishment of the NHS.

In only 60 years notes and coins have shrunk to less than 3%.

Prior to 1844 bank notes were created by private banks and the government did not profit from their creation.

Pre-industrialisation there was multiple forms of money co-existing,

and so the rise of government-sponsored fiat money is a relatively recent phenomenon.

In the 1840s there was no law to stop banks from creating their own bank notes.

So they used to issue paper notes as kind of a representative of what you had in the bank account.

Instead of you taking your heavy metal coins out of the bank and then going and paying somebody with them

you could get your paper which said how much money you had in the bank and you could give that to somebody

and they could use that to go and get the heavy metal coins from the banks.

Now over time these paper notes became as good as money.

People would use paper notes instead of going and getting real money from the bank

and obviously as soon as the banks realised that what they were creating had become the dominant type of money in the economy,

they realised that by creating more of it they could generate profits.

They can just print up some new notes lend it and get the interest on top of them.

And they did that up until the 1840s. In the 1840s they pushed it just a little bit too far

and that caused inflation, destabilising the economy. So in 1844,

the Conservative Government of Robert Peel actually passed a law

that took the power to create money away from the commercial banks and brought it back to the state.

So since then the Bank of England has been the only organisation authorised to create paper notes.

Since then everything has gone digital and what we now use as money is the digital numbers that commercial banks can create out of nothing.

The problem was that they did not include in that legislation the deposits,

the demand deposits, held in banks by individuals or electronic forms of money

which essentially is what those demand deposits are. Today most of the money in circulation is electronic money,

it's bank demand deposits that sit in our accounts.

So in a way the legislation's got to catch up with the developments in electronic money and the way that banks actually operate.

Money held in bank accounts are called demand deposits.

This is an accounting term the banks use when they create credit.

Banks follow the same process when they create loans. All money held in bank accounts is an accounting entry.

Commercial bank money

The reality is now that most money is not paper and it's not metal coins it's digital.

It's just numbers in a computer system. It's your Visa debit card. It's your electronic ATM card.

It's this - plastic. It's numbers in a computer system, you move money from one computer system to another.

It's all a big database and this digital money is what we are now using to make payments with.

It's what we actually use to run the economy.

I think a lot of people in the UK probably think that the government or the central bank

is in control of most money in circulation and issues new money into circulation,

but that's not the case.

It's private banks that create the vast majority of new money in circulation and also decide how it's allocated.

The official terminology for this accounting entry is commercial bank money.

When banks issue loans to the public, they create new commercial bank money.

When a customer repays a loan, commercial bank money is destroyed.

The banks keep the interest as profit.

There're a lot of misconceptions about the way banks work.

There was a poll done by the Cobden Centre where they asked people how they thought banks actually operated.

Around 30% of the public think that when you put your money into the bank it just stays there and its safe,

and you can understand why because every child has a piggy bank where you keep putting money in

and then when it's a rainy day you smash it and you take that money out and you spend it.

So a lot of people keep this idea of banking

it's somewhere safe to keep your money so that it's there for whenever you need it.

Another, the other 60% of people assume that when you put your money in, that money is then being moved across to somebody who wants to borrow it.

So you have a pensioner who keeps saving money her entire life and then her life savings have been lent

to some young people who want to buy a house. But actually banks don't work like that.

"It's basically an accounting trick….banks create money. They don't lend it …when a bank gives out what is called a loan, it basically pretends that you have deposited the money… it has to invent the liability… this is how the money supply is created." (Professor Richard Werner)

At the moment in the UK money creation and control is largely in the hands of private banks.

About 97 to 98% of money that's created is created as bank "debt money" you could call it,

when banks issue money into circulation as loans essentially.

This is a very poorly understood fact.

It's not a conspiracy theory, it's not a crackpot theory, it's the way the Bank of England describes the process.

When banks make loans they create new money.

…by far the largest role in creating money is played by the banking sector…When banks make loans they create additional deposits for those that have borrowed the money. (Paul Tucker - Deputy Governor of the Bank of England)

A few economists will realise the way the money system works

but if you don't realise the way that money works and you think that

everybody saving is going to work well for the economy,

what really happens once you understand the way the money system works,

is that if everybody starts saving the amount of money in the economy shrinks and we have a recession.

Most economists don't have this full picture. They don't understand all the elements of the system.

They rely on assumptions, on received knowledge without actually going into the details

and money is the centre of the economy. If you don't understand where it comes from,

who creates it and when it gets created then how can you understand the entire economy?

When the vast majority of money that we use now is not cash but electronic money

then whoever's creating the electronic money is getting the proceeds of creating that money

and obviously creating electronic money is much more profitable than creating cash

because you don't have any production cost at all.

So while we've got £18 billion over the course of the decade in profit from creating cash,

the banks have actually created £1.2 trillion.

Between 1998 and 2007 the UK money supply tripled.

£1.2 trillion was created by banks, whilst £18 billion was created by the Treasury.

A lot of people think when I say this or when you say this or when Positive Money say this, that we are all a bunch of nutters.

But on the 9th of March in 2009, the governor of the Federal Reserve, Ben Bernanke,

gave the first ever broadcast interview the Governor of the Central Bank of the United States of America had ever given.

The day before that he had bailed out AIG, which is an insurance company not even a bank actually,

to the tune of about US$160 billion.

So the journalist says to him: "Now Mr. Bernanke where did you get $160 billion to bail out AIG?"

Is that tax money that the Fed is spending?

It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank.

So to lend to a bank we simply use the computer to mark up the size of the account they have with the Fed.

So it's much more akin, although not exactly the same, to printing money than it is to borrowing.

Banks create new money whenever they extend credit, buy existing assets,

or make payments on their own account, which mostly involves expanding their assets.

When a bank buys securities, such as a Corporate or Government Bond

it adds the bond to its assets and increases the company's bank deposits by the corresponding amount.

New commercial bank money enters circulation when people spend the credit that has been granted to them by banks.

I found that talking on the door step from August 2009 around to the general election,

knocking on the doors, is that when we tried to explain how the money system works,

there's an almost in-built refusal of people to accept that such a bizarre situation could actually exist.

"Ah no, it can't possibly. What do you mean? It can't... banks can't...banks don't create money out of thin air.

That's ridiculous. They can't do that. They lend out their depositors' money."

Most people have an idea of how money is. They are used to their own way of handling money

and they try and implement their own idea of how their small household economy works into the national economy.

And of course it just doesn't work out at all.

By 2008 the outstanding loan portfolio of bank created credit,

also known as commercial bank money, stood at over 2 trillion.

As recently as 1982 the ratio of notes and coins to bank deposits was 1:12.

By 2010 the ratio had risen to 1:37.

That is for every pound of Treasury created money there were 37 pounds of bank created money.

In the 10 years prior to the 2007 crisis,

the UK commercial bank money supply expanded by between 7% to 10% every year.

A growth rate of 7% is the equivalent of doubling the money supply every 10 years.

The amount of money they're creating out of nothing is just incredible,

1.2 trillion in the last 10 years.

That money is being distributed according to the priorities of the banking sector,

not the priorities of society.

The banking sector itself grew from 1980 $2.5 trillion to $40 trillion by assets.

In 1980, global bank assets were worth 20 times the then global economy.

By 2006 they were worth 75 times, according to the UN.

As the following chart shows, total bank assets of UK banks as a percentage of GDP

remained relatively stable at 50-60% up to the end of the 1960s. After that they shot up dramatically.

And the real money in the world to be made today is not by producing anything at all.

It's simply by forms of speculating - basically making money from money.

That's the most profitable and by far and away the biggest form of economic activity that exists in the world today.

Today, banks are no longer restricted by how much they can lend,

and as such, how much new credit they can create out of nothing. They are restricted solely by their own willingness to lend.

The issue with allowing banks to create money - there's two main issues.

Firstly - the fact that they create this money when they make loans,

so it guarantees that we have to borrow all our money for the economy from the banks.

As such, to have a healthy growing economy, the Government needs to put in place strategies

to allow for ever-increasing debt.

The only way the Government can create additional purchasing power is by getting itself and us into more debt.

The second big issue with allowing the banks to create money is that they have the incentive to always create more.

They create more money if they issue a loan.

They get the bonuses, the commissions and the incentives to lend as much as possible.

You have to develop a sales culture. What did they do?

They recruited an amazing guy, a lovely guy, Andy Hornby, who came from Asda

to turn the bank into a supermarket retailing operation.

If you trust bankers to control the money supply,

the money supply will just grow and grow and grow, as will the level of debt,

until the point where it crashes, when some people can't repay the debt and then they'll stop lending.

You hear politicians and journalists saying We've been living beyond our means.

We've become dependent on debt. We need to reign in our spending and live within our means.

It's not possible in the current system.

The reason why everyone is in debt now is not because they have been recklessly borrowing.

We haven't borrowed all this money from an army of pensioners who've been saving up their whole lives.

Money in the current system is debt. It's created when the banks make loans.

So the only way, in the current system, that we can have any money in the economy,

the only way we can have money for business to trade, is if we've borrowed it all from the banks.

And it's the very opposite of what the Tory Party is arguing today,

which is that you have to create savings before you can help the National Health Service.

And it's because economists have completely confused those things,

both in monetary policy terms, but also in economic thinking,

and because most people still harbour the old fashioned view that you need savings before you can invest,

that we have the mess that we're in today.

Now, one of the reasons why we find it difficult to understand the banking system and credit creation,

is that we leave school without any money and we go and get a job working as an apprentice to a plumber.

We work really hard all month and at the end of the month somebody puts money in our bank,

and so for us the logic is: you work and then you get money, you get savings.

In reality you would never have got that job if credit hadn't been created in the first instance.

It's a really important conceptual misunderstanding

and it isn't something that the public just is guilty of. Economists don't understand this stuff.

Money doesn't come out of economic activity.

A lot of people I've come across kind of assume that if you have got businesses

and you've got people doing things, that somehow money emerges out of the process of people doing things,

making things and growing things, selling things and producing things,

that somehow money just emerges. It's not. It's like oiling a car. You have to put it in.

When I see David Cameron talking about how we need an economy not based on debt,

but we need an economy based on savings, he just doesn't know what he's saying. It's ridiculous.

It's absolutely absurd and it shows his complete lack of understanding of how our money system actually works.

What he is essentially saying is that We need an economy with no money.

If everyone was saving we'd have mass disappearing of money,

which is essentially what a bank write-off is - people defaulting on their debt -

which essentially is just money disappearing.

But if people weren't taking on the debt then it's just such a joke.

It's such an amateur understanding of how our economy works and how the monetary system works and how money is actually created.

So I really do get a laugh out of watching what people are actually saying.

They are all just regurgitating what they have learnt off each other and you just hear the same things

and it just really gets on my nerves when I hear people talking about

'Yeah, we need more regulations, we need to regulate the way banks are actually and the bonuses'

It's all just one big smoke screen and working on all the symptoms of a greater disease which is really

you need to look at the money system - the way money is created.

If we don't want any debt then we're essentially saying We don't want any money and we want a moneyless economy

with the exception of the 3% that's created debt free.

You know, it's a paradox under the current system.

If we as the public go into further debt then that's going to put more money into the economy

and we're going to have a boom. When you have a boom, it's easier to borrow, so people get into even more debt.

And eventually this cycle continues. It gets easier and easier to get into debt until some people get over-indebted

and then they default. They can't re-pay their mortgage.

That's what happened first in sub-prime America. And then it brings through a wave of defaults,

which will ripple across the entire economy. The banks go insolvent.

Then we're into a financial crisis and then the banks stop lending.

They were excessively lending in the boom and then they stop lending and that makes the recession even worse.

People lose their jobs and then they become even more dependent on debt just to survive, basically.

You know we have a system where we have to borrow in order to have an economy.

We have to be in debt to the banks. That guarantees a massive profit for the banks.

This is the boom-bust cycle.

And I've said before, Mr Deputy Speaker, no return to boom and bust.

Net bank lending must forever increase.

We are paying interest on every single pound. Even if you think the money belongs to you,

somebody somewhere is paying interest on that money.

The banking system has such a huge impact on the world,

but only because it supplies our nation's money supply.

We have to protect them. We have to subsidise them. We have to allow them to continue

because the disaster of a bank collapse affects us all in a huge way.

Anyone who says that we shouldn't have bailed out the banks doesn't quite understand the nature of our monetary system.

That's like eliminating a huge chunk of our money.

But also bailing out the banks is perpetuating a system which is never going to work anyway.

So whatever we do we are always going to have this cycle until we separate how money is created

and the activities of banking. Then the banks could do as they wish.

They'd be a normal business like everyone else.

There's a major democratic issue here as well. You have these private profit-seeking banks

creating up to £200 billion a year and pumping that into the economy wherever they want,

basically, wherever it suits them, whether they're pumping it into these toxic derivatives,

or putting money into housing bubbles, just making housing more expensive.

£200 billion in 2007 of new money coming into the economy, created out of nothing

and where that gets spent determines the shape of our economy effectively.

So if we are going to allow anybody to create new money out of nothing,

then we should at least have some democratic control over how that money's used.

I mean, would we rather have had that money used for health care, or to deal with some of the environmental issues or to reduce poverty,

or would we rather have it to make houses more expensive so none of us can afford to live in a house.

You can see it as a subsidy, a special super subsidy to the banks, for the right to create money,

which should be for the benefit of the public and spent through a democratic process.

Central bank reserve currency

There's also another form of money, which is effectively an electronic version of cash

and it's a type of money that the commercial banks use themselves to make payments between each other.

The high street banks don't want to be carrying around huge quantities of money

because it's dangerous, inconvenient and expensive. You have to hire security guards for that type of money.

So what they do is they pay each other in what is an electronic version of cash

which in the industry is known as Central Bank Reserves. They keep this electronic cash in accounts at the Bank of England.

But as a member of the public you can't access this electronic cash,

you can't get an account with the Bank of England.

What they do is they effectively sell this central bank money to the banks and they do this by creating it out of nothing

and using this money to pay for bonds, to buy bonds from the high street banks.

So, the high street bank will come along with a bond which is effectively government debt

and it will give it to the Bank of England and in return the Bank of England

will type some new numbers into the bank's account at the Bank of England.

So effectively they are creating central bank reserves out of nothing.

The Bank of England creates Central Bank Reserves

by increasing the available credit in the settlement bank's account with the Bank of England.

The settlement bank in return posts bonds, or sells assets as collateral for the reserves.

A total of 46 banks hold Central Reserve Accounts at the Bank of England.

Smaller or foreign banks hold accounts with one of these 46 banks to allow them to accept or make payments in pounds sterling.

Prior to March 2009, the Bank of England would ask each of the major settlement banks how much reserve currency they needed.

The settlement banks would then swap a bond for the reserve currency and agree to repurchase the bond for a specific amount

at a specified future date. The settlement banks would then receive interest

at base or policy rate for the central bank reserves they held.

Since the crisis, settlement banks central reserves have shot up dramatically.

Significance of central bank reserves

When bank customers transfer funds from their account to another person's account,

a process called Intra-Day Clearing occurs.

The amount of central reserve currency Bank A has at the Bank of England

is reduced by the corresponding amount that Bank B receives.

This is the importance of central reserve currency to banks.

Before the credit crisis, if a bank was short of central reserves at the Bank of England to meet its obligations,

then the bank would have to loan reserves from other banks with interest.

Only central bank reserve currency is moved, commercial bank money is simply deducted and added.

If you sell something on eBay, you know that that deal is not complete until you get some money put into your account.

Most people actually want to see the money in their account before they're happy to close on a deal.

Now the banks are pretty much the same, but they want to see the money in their account at the Bank of England

before they consider a deal complete.

So for example, if you are buying a house from somebody who banks with a different bank

then what'll happen after you've spent a quarter of a million on a house

is you'll tell your bank to transfer some money to the house seller's bank and what the bank will do

is actually instruct the Bank of England to move £250,000 from their account at the Bank of England

to the bank of the house seller. And that money will actually move across between the accounts at the Bank of England.

When that money has moved across, then the banks will consider that that payment has been settled.

They don't really deal in the kind of money that we have in our accounts,

they deal in this special money that can only be used at the central bank.

There are millions of people across the country, all transferring money to each other using only a few major banks.

These banks can keep a tally on their computer systems and usually many of the movements cancel each other out at the end of the day.

The five major banks - RBS, Lloyds, HSBC, Barclays and Santander - hold over 85% of all deposits.

As there are a limited number of banks in the system, the central reserve money can only be moved around them in a closed loop.

The money is just circulating through this system over and over again and if you think about it,

a one pound coin could be used to make a billion pounds of payments if it was circulated a billion times.

And that's effectively the system that you have now, is you have a small pool of real money

that's just going round and round the system and it's being used to make a huge quantity of payments on our behalf.

Just before the crisis there was only 20 billion in the accounts at the central bank.

If they don't have enough of this central bank money, then effectively they can't make payments

and if that happens then pretty quickly the entire system seizes up.

So the Bank of England has the responsibility of making sure there's enough of this money in the system.

The requirements for banks to hold a specific amount of reserves has changed many times since 1947.

At that time, banks needed to hold a minimum ratio of 32% of reserves, cash or Treasury Bonds to deposits.

In 2006, the Corridor System was introduced, in which banks could set their own reserve targets each month.

The rules changed again in March 2009 when the Bank of England introduced quantitative easing.

Quantitative Easing in effect, gives settlement banks the central reserve currency for free.

The Central Reserve Currency is what is referred to as the real money in the fractional reserve model

but the fact is banks can have as much of this as they want.

And Central Reserve Currency itself is a form of fiat money which is backed by nothing.

As a consequence there is no longer a meaningful fractional reserve.

A short history of money

If you look over the history of the last 150 years or so,

you start off with a development of a gold standard that really comes to the fore in the 1880s/1890s

where essentially countries peg themselves to a particular defined value of gold

and then they have an agreement to fix that value, to hold that value,

and to trade gold amongst themselves to make sure the balances are all there

and also to try and restrict or expand or contract activity in their own economies to make sure that the balance,

that particular fixed price, is maintained. That disintegrates after the First World War.

This is where the whole thing breaks apart, a very major dislocation in the international monetary system at that point,

not really resolved until you get Bretton Woods agreements at the end of the Second World War

in which everything is pegged to the dollar and the dollar is pegged to the gold.

So you are kind of one removed from the gold backing

or saying that there is a definite you know sort of solid commodity money behind the paper money and the credit money

that we are all using over here. You are kind of one removed from it.

After Hiroshima, Tokyo wondered when the next atom bomb would fall. They did not wonder long.

In 1944, at Bretton Woods, the US and the UK began to negotiate how to govern the world economy,

the world monetary system and came up with the World Bank and the IMF

and a series of other institutions designed to manage the global currency

and there was still a gold standard, but this gold standard was going to be tied to the dollar.

All of the world's gold had moved from London to Fort Knox,

and all of the world's currencies were tied to the dollar.

This system was designed to manage the sorts of imbalances, to avoid credit crunches,

or for countries, credit crunches are known as balance of trade deficits i.e. when they can't pay their bills and their currency collapses.

The currencies were managed and the system was stable, as long as the Americans played the role of oversight.

Now, who knows the great story about how that all came to an end?

The quantity of money that was needed to pay for the Vietnam War, that's exactly what I was trying to get at.

Oil shocks were another one.

That meant that the Americans were no longer respecting their role or playing their role governing the monetary system.

They were inflating the value of their own currency that ostensibly was meant to be tied,

tied to gold and to every other currency. So what did the French do?

The French were a little bit worried that President Nixon wasn't entirely honest.

And they were worried that precisely what we described, that Nixon was printing money when he shouldn't have been, was going on.

And they were worried there wasn't enough gold to honour the exchange rate of the French Franc,

so they sent a gunboat to New York harbour to ever so politely ask for our gold back please.

Did they get their gold back? Go on, guess! They didn't. And the Bretton Woods system came to an end.

And this is the point at which we enter the modern era of the financial system.

Fiat money: A medium of exchange, which the issuer does not promise to redeem in a commodity, and is based on confidence.

Historically, money creation was pegged to a commodity, often gold, but today it is pegged to nothing.

Which means there is nothing backing our money. This piece of paper is just a piece of paper.

Where does this leave us? If money is based on nothing, why do we think it has any value?

Sorry? Because we can still go and exchange it. What? Somebody else was going to shout.

Great little Latin fact, the word for credit comes from? belief. Correct.

Credere = to believe

Since the collapse of the dollar gold standard in 1971 and the deregulation of the financial system,

money creation has grown exponentially.

The World Economic Forum meeting in Davos at the present time have called on a need for the credit within the economy,

the global economy, to be expanded by US$100 trillion.

A trillion is 12 noughts so 100 trillion, if you want to imagine is a 1 followed by 14 noughts.

They believe this credit expansion will create a boom

because there is now more money in the economy with which to make investments.

It's fascinating this emergence of digital currencies, how it's transformed everything really.

Because it just completely unleashed private banks to dominate and create the money system that works for them

and works for the people who run private banks.

Growth and inflation

If you want a growing economy under the current set-up we have to have growing debt.

This is something very, very few people really understand

- especially not the politicians who are managing the economy - which is a scary thought.

GDP Gross Domestic Product: The market value of all final goods and services produced in a country in a given period.

As the money supply grows more money is available which can be invested in productive avenues.

However it can also be used to gamble and drive up asset prices.

An increase in the money supply = A likely relative increase in economic activity.

The effects of rapid credit expansion

Inflation is a rise in the general level of the prices of goods and services in an economy over a period of time.

When the general price level rises each unit of currency buys fewer goods and services.

As the money supply grows and there is more currency available,

more money is available for investment which can lead to growth,

but more money is also available for purchases of goods and speculation which leads to inflation.

Essentially, inflation is what happens when too much money is chasing too few goods and services,

so there is too much money for the actual output of the economy.

In the seven years between the years 2000 and 2007 the money supply doubled and the central bank,

the Bank of England was under the impression at this time that they had it under control

because they were saying that prices weren't going up that much.

Of course they were only looking at prices in your local corner shop.

They weren't looking at the price of housing and housing is the biggest expenditure that most people will make.

Many western countries heavily subsidise agricultural production, which has the effect of keeping prices and inflation low.

Increasing house prices, it may make you feel like you're becoming wealthier,

but as your wealth increases the effect is that your children's wealth is actually decreasing.

So in fact there is no net gain in wealth because your children are going to have to pay even more when they want to buy a house.

So in effect there is no net increase. They are going to have to earn even more.

They are going to have to go into even more debt.

So rising house prices do not create additional net GDP value to the economy.

Actually what they do is they re-distribute wealth towards those people who already have houses

i.e. wealthier people and remove it from poorer people who can't afford to get on the housing ladder.

So it's another example of a very regressive policy to allow house prices to simply inflate.

It makes everybody feel like things are going well and people spend money on other stuff,

they take equity out of their houses but it's not creating new jobs.

It's not enhancing the quality of the economy. It's not helping our balance of trade.

It's not helping the public deficit. It's a zero sum game.

As of August 2011, 85.5% of consumer bank lending was secured as mortgages on dwellings.

If you have somebody creating money that can only be spent on one thing,

which is housing then the price of that thing is going to go up.

Between 2000 and 2010 they created over a trillion pounds of new money

- £500 billion just in the three years before the crisis. That's why house prices went up they way they were.

There's nothing special about houses.

It was just all this funny money being pumped into that market.

If money is spent into the economy a lot of money goes into houses for example into mortgages

- that's an increase in the amount of money in the economy - without a corresponding increase in activity in output, in GDP.

It's non-GDP based spending. That's what causes inflation.

In the UK we've had it in spades. We've had this massive housing boom.

The main cause for the housing boom, in my opinion,

is the huge amount of speculative credit created by the banks to go into houses.

If houses were cheaper, they would be easier to build. More of them would be built.

There would be less huge houses, with hardly any people in them.

London would not be the centre of a kind of very rich speculative orgy,

where all the richest people in the world want to get a property in London, because it's seen as a great asset.

Houses would be seen as places to live primarily, rather than seen as places to invest.

The important thing to think about is, if you are a bank and you've got to make a loan, you have choices.

You can give that loan to a small business and you'll know that the risk to you of that loan failing, defaulting,

is actually quite high, because that small business, the owners of that business,

have limited liability, which means if that business goes bust you as a bank get nothing back essentially.

So that's kind of high risk, compared to loaning your money to somebody with some collateral, with a house behind them, like a mortgage.

So there's a simple incentive for banks to prefer putting money into housing than into a small business.

Now that's a real problem if you widen that out across a whole economy,

because it means there's an incentive to put money into speculative rather than productive investment.

So again, we have to think about how we create our monetary system that is more balanced

between those two kinds of speculative and productive investment.

The government is showing enormous reluctance to regulate the housing market

and to again regulate the amount of money that banks put into houses.

We don't decide who creates credit for what. No. We leave that to a couple of chaps in a bank to decide basically.

A short history of bubbles

A bubble occurs when there is very high inflation in the price of a specific good or service over a short period of time.

The first recorded bubble was the tulip bubble of 1637.

The idea of the tulips and their relevance is that you saw the first ever financial bubble and crash.

The craze for tulips - black tulips being a mythical ideal of what somebody could genetically engineer

through cultivation after many generations - became a mania in the Netherlands in the 1630s.

What they didn't realise was that many of the very, very rare patterns on tulips bulbs

were caused by a virus and weren't genetic at all. But they traded them to the extent that tulip got to the point

where they were worth ten times the average annual salary of a person working in the Netherlands.

There was a futures market in tulip bulbs

because obviously you plant them now but you don't know what's going to come out of the ground.

So we see already, 400 years ago, that a money system or a financial system

is not something that exists in the abstract, somewhere out there in the ether,

but something that was to do with states, power, trade and how they interact with each other.

Unlike tulips, which are a disposable luxury, houses are both a necessity and a luxury.

And as such, they are ideal as a vehicle for money and bubble creation.

A dwelling is perhaps the most prized possession of value most people aspire to.

Inflating house prices in this way allows a nation to expand its money supply without affecting inflation data.

The additional purchasing power created increases the perceived wealth in relation to other nations

and thus it creates relative power.

It is a way of increasing monetary power without investing in the productive growth of industry.

Certainly if you look at Britain and America as outstanding examples of this,

these are countries with very high rates of private home ownership

so you've got a good base to try and perform this sort of policy off the back of.

I think it was quite deliberate in the case of the US, almost explicit, as Alan Greenspan

as head of the Federal Reserve when confronted by a stock market crash at the end of the 1990s

quite deliberately slashed interest rates to almost zero. Everyone can borrow very, very cheaply,

in particular its very easy to borrow against a house because this is an asset

and is potentially something that the bank can say Well, OK we're not just lending you money unsecured,

you actually do have a house so that's great because we can repossess it.

They won't tell you this when you take the mortgage but they can do this

and that bubble is then what fuels expansion such as it is,

inside the US and inside the UK where something similar takes place for the next decade or so.

I think it's also a reflection of an underlying weakness in these governments

that they simply lack the will and possibly the ability, but I think it more comes down to a will,

to challenge financial markets, to challenge big capital and say We're going to do something different now.

And you're going to have to go along with it because we've been democratically elected

and you lot frankly haven't and we have a mandate to do this and we're going to make this happen.

Just remember it's all part of the plan. What are you yapping about - you voted for it!

In Holland or the Netherlands what we had over a period of trying to get independence initially from Spain

and trying to raise money to get an army to free themselves was financial innovation.

They innovated public lotteries to get money together. They had public subscription.

This was the idea that led to the idea of public shares - a piece of the action that anybody could invest in -

that meant that something like two thirds of the population was investing in tulip bulbs by the 1630s.

After independence these instruments were applied to financing expansion.

Why was such a small country able to hold its own against so much bigger countries

for example Spain and Portugal that had the benefits of their empires for over a century in respect of the Netherlands?

Why could they compete? On what resource basis?

Well they had a more efficient, a more evolved and a broader based financial system

with these instruments that they'd innovated that allowed them to bring more money to bear at one point then anybody else, more quickly.

Incredible But True.

How to avoid inflation

Now, inflation can be avoided if the amount of money that goes into the economy is regulated

in a way that it doesn't exceed the actual activity that's happening in the economy.

Now, the best way to do that, in my opinion, is to make sure that money is issued into the economy

only for productive investment, for productive goods and services,

so money goes in to help a small business to start up which creates jobs, which creates additional purchasing power

which means there's no inflation.

During their history almost all central banks have employed forms of direct credit regulation.

The central bank would determine desired nominal GDP growth then calculate the necessary amount of credit creation to achieve this.

And then allocate this credit creation both across the various banks and type of banks and across the industrial sectors.

Unproductive credit was suppressed. Thus it was difficult or impossible to obtain bank credit for large scale,

purely speculative transactions such as today's large scale bank funding to hedge funds.

The World Bank recognised in a 1993 study that this method of intervention in credit allocation

was at the core of the East Asian economic miracle.

There're all sorts of things that governments have done in the past, very successfully in a number of cases

and often not unsuccessfully in this country but the examples that spring to mind like South Korea, Japan,

often in East Asia where governments have been quite targeted about how they're going to rebalance the economy,

picking sectors and deciding where the investment should take place, I think that has to start happening in the UK

because we're in a demand side recession rather than looking at crisis of supply.

You have to have a system where credit is put into productive avenues,

where credit is put into building high speed rail links,

where credit is put into building houses rather than giving people money to inflate the price of houses.

So it's quite simple really in that way and the current system is simply set up not to do that basically.

The creation of money by private banks for non-productive usage causes real inflation

and as such it is a tax on the purchasing power of the medium of exchange.

Decrease in the standard of living

The figures for the UK are quite stark actually.

The average median real incomes (for the bit in the middle) for most people declined over the last 8 years.

They are now in quite sharp decline as we go into recession

- the sharpest really since about the 1930s - so real income is declining.

Bank created fiat currency allows the private banks to suck wealth from the economy

and over time results in a gradual decrease in the standard of living.

As people become poorer they become even more dependent on debt

and this at a time when efficiency and mechanisation have improved dramatically.

If you go back to the 1960s and we were expected to, we were looking forward to an age of leisure,

television programmes saying What are people going to do with their spare time?

And now we have got more people working harder than ever, spending more than ever, which looks great,

everyone is spending more, but if you're not actually benefiting from what you're spending,

if you're having to spend the money on childcare costs on commuting costs and so forth,

costs that people didn't in the past used to have to pay because you could walk to work

and one member of the family was able to stay at home and be a permanent homemaker, then you're not actually any better off.

Everyone is under such enormous pressures nowadays.

I am conscious that my four nephews and nieces are facing difficult times.

They're just going to find themselves having to work very hard just to keep a roof over their heads, to get a roof over their heads.

People are getting poorer in real terms. It's because prices are always going up

because all this new funny money is being pumped into the system by the banks

and they're creating it all as debt so at the same time as prices are going up and things are getting more expensive,

we're getting further and further into debt

and our wealth and the return that we get from actually working is getting less and less all the time.

You can't deal with poverty when you have a financial system and a money system

that distributes money from the poor to the very rich.

Any distribution that you try and do in the opposite direction is effectively pissing in the wind.

If you look at issues like increasing inequality one obvious way to tackle inequality is to have, for example,

a redistributive tax system. You tax the rich you give some money to the poor.

You move a bit of money down the scale.

That's all very well but if you completely overlook the fact that there's another redistributive system

which is taking money from the poor and giving it to the rich, then you're not really going to tackle this inequality

and the way a debt-based money system works - it guarantees that for every pound of money there's going to be a pound of debt.

That debt is typically going to end up with the poor, the lower-middle classes,

those people end up with the debt and they end up paying interest on that money

which then goes back to the banking sector and gets distributed to the people working in the City or in Wall Street.

What this system does overall is it distributes money from the poor to the rich essentially,

distributes money from the poorer regions of the UK back to the City of London

and it also distributes money from all the small businesses, all the little factories around the UK

and distributes that money back into the financial sector.

We have a system whereby the activity of actually supplying our nations money

occurs under the very same roof as the same organisation that is responsible for profiting from putting together borrowers and lenders

i.e. a bank. So, a bank creates our nation's money supply as well as making loans for profit.

The government cannot allow the banking system to fail because if it did over 97% of all money would disappear.

This is why in the event of a crisis the risk is transferred to the taxpayer.

But even during normal times banks receive numerous guarantees and benefits beyond the right to create money.

Bill, by the way, I know the Bank of America is a very big bank,

it happens that I have $32 there myself.

Just between us what assurance do I have that this money is safe?

Well, all deposits up to $10,000 are insured by the Federal Government in Washington.

That's my guarantee?

Yes sir.

Have you heard that the Federal Government is about $280 billion in the hole?

Banks receive large safety nets from the government. The taxpayer guarantees 85,000 pounds as deposit insurance.

And the Bank of England provides liquidity insurance in case a bank runs out of reserve currency.

Someone wrote that a big investment bank is like a Giant Vampire Squid wrapped around the face of humanity.

Hypnotising politicians. Who throw money at the banks. No strings attached.

No matter what damage is done. Trashing the planet. Forcing cuts to things that make life better.

Goodbye schools. Goodbye playgrounds. Goodbye jobs. The bankers that we bailed out

then gave themselves bonuses that were bigger than the first wave of public spending cuts.

Britain alone gave the banks more money than it cost to put a man on the moon 6 times over.

Where did our money go? Who let the banks get away with it? Why? Can Vampire Squids ever be useful?

No Government yet is brave enough to tame them perhaps they need a plan.

Take back our banks

Ever increasing debt

The spending cuts agenda is an attempt by the government to shift debt from its account to that of the public.

This is the Government's response to the bank bail outs and is necessary in a debt based monetary system

where increased purchasing power is the result of growing debt and where a diversification of debt

provides overall stability and market confidence.

Policies such as student fee increases and the privatisation of public services, assets and industry follow the same model.

The problem we're facing is that there is this transference from the public debt to private debt

which is essentially a way of transferring risk, away from UK plc and the Government

on to the heads of individuals and it's going to be the most vulnerable individuals who are going to have the most debt.

Thus it's a very regressive policy framework that the Government's embarking on where the risk is moved on to those who are most vulnerable

and if there is another financial shock, if there's an oil shock for example,

the people who will pay the penalty are the poorest people in society

or homeowners for example who will fall into negative equity if interest rates go up even 1 or 2 percent

there will be really big problems. So I don't think it's a sensible way forward for us at the moment at all.

It's regressive and it's certainly not fair in the terms that the Government is talking about

and it's certainly not a case of We are in this together.

As more of the country's resources and industries are privatised the private sector takes on more debt.

As a result more money is created and there is a boom.

Some private equity companies have taken this theory to the extreme, engaging in a practice known as a Leveraged Buy Out,

where a company is purchased at an often inflated price and the purchase price is transferred to the business as a debt.

The company becomes responsible for the funding of its own purchase.

These debts are often so great that the company needs to reduce staff, salaries and research activities.

When you have to factor interest as a business,

if you have to factor interest repayment into your goods and services,

then you have to charge a perpetually higher price as you take on more and more debt.

An increase in the diversification of debt results in an increase in the money supply.

When the money supply increases more money is available for productive activities and consumption which is the condition for a boom.

It's questionable whether we're going to get out of this recession

or whether we'll just keep ticking along the way the way that we are now.

However if we do, then when we come out of this recession and when growth starts again look at what happens to debt.

It will rise and it will keep rising and the faster the economy is growing,

the faster the debt will rise and then give it another 3 to 5 years we'll be back where we were.

The debt will become too much - people will start defaulting again.

It's kind of the system that we're locked into now is that we can't grow the economy without growing the debt

and the debt is the very thing that will bring down the economy.

The only option going forward is to reform it to stop banks from creating money as debt.

By fixing the monetary system we can prevent the banks from ever causing another financial crisis

and we can also make the current public service cuts and the tax rises and the increase in national debt unnecessary.

The current monetary system allows the banking sector to extract wealth from the economy,

whilst providing nothing productive in return.

Why is it that we've got all this technology,

all this new efficiency and yet it now requires two people to finance a household whereas in the 50's it only needed one person working?

The reason for that is not because these washing machines and everything are more expensive.

It's because of all the debt and because the banking sector is effectively creaming it off from everybody else.

So a growing banking sector is not a good thing.

If the banking sector is growing it's either that it's becoming less efficient or it's becoming a parasite on the rest of the economy.

We can talk about the banking sector becoming 4%, 5%, 6% of GDP,

what's happening to the rest of the economy? It's becoming 96, 95, 94% of GDP.

We've got to get switched on to this now. If we want to have a chance of tackling any of the other big social issues,

you've got to figure out the money issue.

The poorest in the world pay for crises even when they've not benefited from the often reckless and speculative booms,

like the housing boom in Ireland that preceded that crisis.

Over the last 30 years we've seen income differentials increase so that the rich have got much, much richer and ordinary people haven't,

they've stayed the same or they've got poorer.

One of the ways that the economy was kept going was by providing cheap credit,

providing debt to those very people who couldn't really afford things anymore, so they kept buying

and when it collapses it's those same people that have to pay once again even though in many ways they were the victims the first time.

As a result of the crisis the Bank of England has bought corporate debt and repackaged it at lower rates of interest.

Yet the average person is being asked to pay more than ever to borrow on overdrafts and credit cards.

Debts between the very wealthy or between governments can always be renegotiated

and always have been throughout world history.

They're not anything set in stone. It's generally speaking when you have debts owed by the poor to the rich

that suddenly debts become a sacred obligation more important than anything else.

The idea of renegotiating them becomes unthinkable.

Can you pin down exactly what would keep investors happy,

make them feel more confident?

That's a tough one. Personally it doesn't matter. See I'm a trader -

I don't really care about that kind of stuff.

Pay your taxes!

Were you born in England?

If I see an opportunity to make money, I go with that.

For most traders, we don't really care that much how they're going to fix the economy,

how they're going to fix the whole situation. Our job is to make money from it

and personally I've been dreaming about this moment for three years. If you know what to do, you can make a lot of money from this.

I have a confession which is, I go to bed every night I dream of another recession,

I dream of another moment like this.

I dream of another recession, I dream of another moment like this. You can make a lot of money from this.

Bruno, Virginia hurt somebody real bad, you oughta help her.

Incoming!

The way in which you can look across Europe now and see that the new Prime Minister of Greece,

not elected, essentially imposed, Papademos - former employee of Goldman Sachs.

The new Prime Minister and Finance Minister of Italy - Mario Monti - former employee of Goldman Sachs.

The new President of the European Central Bank - former employee of Goldman Sachs.

You see these people popping up absolutely everywhere.

That's the way to change what we have, take all power and all freedoms away from the people

and collect everything into the hands of one small group with absolute power.

From the people, without the people, against the people.

What's been interesting out of all this is the question of democracy that's been opened up very starkly in Europe,

that you have a government of bankers essentially imposed upon you.

It's bankers who more or less got us into this mess to put it rather crudely, but that's a good first approximation

and then you say OK, Bankers are the people who therefore are going to get us out of it

and incidentally there going to run your country now. There's a serious question of democracy that has opened up here.

By the way, the banking crisis drove more than a 100 million people back into poverty.

The mortality statistics of people who go into poverty rise hugely for a whole range of reasons.

So the banking crisis isn't just about becoming poorer - it was about killing people as well.

And guess what? We haven't really got to the bottom of it.

We never held anybody to account and we haven't done the radical reforming job that we really needed to do

because we mistakenly thought If we destabilise the position any further, it'll make matters worse.

And guess who took the decisions? All the people who were there in the first place.

"I think you ought to know, that the business of one of these businessmen is murder."

"Their weapons are modern, their thinking: two thousand years out of date."

International aspects

Look, I was there when the Secretary and the Chairman of the Federal Reserve came those days

and talked with members of Congress about what was going on. It was about September 15th

Here are the facts, and we don't even talk about these things

on Thursday at about 11 o'clock in the morning the Federal Reserve noticed a tremendous draw down

of money market accounts in the United States to the tune of $550 billion was being drawn out in the matter of an hour or two.

The Treasury opened up its window to help, they pumped $105 billion into the system

and quickly realised they could not stem the tide. We were having an electronic run on the banks.

They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account

so there wouldn't be further panic out there, that's what actually happened.

If they had not done that their estimation was by 2 o'clock that afternoon

$5.5 trillion would have been drawn out of the money market system of the United States.

It would have collapsed the entire economy of the United States and within 24 hours the world economy would have collapsed.

When money is withdrawn internationally from one currency to another

the reserve currency shifts from the national bank of one country to the reserve account of the foreign bank.

Foreign banks have relationships with local banks that allow them to hold foreign reserve currencies

whilst not being a part of the central bank scheme at the local central bank.

For example when 1,000 pounds is transferred into euros a UK bank will agree an exchange rate

with a Euro area bank, perhaps 1.15 euros to the pound.

The UK bank will then transfer £1,000 of the central reserve currency to the UK partner bank of the European bank

whilst the European bank will transfer 1,150 euros of reserve currency

to the European partner bank of the UK bank.

What happens when currencies and the exchange rate system is no longer managed,

what are some of the first consequences?

Devaluations.

Speculation.

Imbalances. Where some countries would accrue more and more and more of what? What will they accrue?

Other currencies, other currencies.

The reserve currency needs to be spent in the country of origin or exchanged into other currencies.

Most foreign banks do not have deposit taking accounts outside of their national borders

and as such the foreign reserves they hold do not come back to them in the form of deposits.

When a country accumulates trade imbalances it either accumulates foreign reserve currencies

in the case of surplus or spends its own reserves in the case of negative trade balances.

Balance of trade is basically the difference between what you're selling abroad and what you're buying from abroad.

Now, the feature of the UK is that for a very long period of time

it's had a deficit of something called a visible balance of trade

which is trading things that you can see.

So that is goods that you'd recognise, stuff you can put in containers, it's cars, computers, things that you'd see in a shop.

That's been a substantial deficit. I think it opened up in the early 1980s and essentially it hasn't gone away since

- if anything it's got wider and wider.

Foreign exchange reserves cannot be directly used for domestic spending.

The money can only be spent abroad or on imports.

A country with a large balance of trade deficit relies on its creditors to spend the imbalances accrued in its own market.

There have been proposals in the past to try and create a mechanism for those imbalances to match up.

For instance John Maynard Keynes at the end of the Second World War

- his original proposal for what became Bretton Woods and the set of institutions settled there like the IMF and World Bank

was that there would be a kind of international clearing union.

This particularly related to the trade side rather than the financial side directly

but the principle was that once trade balances had opened up everybody would bank through an international clearing bank

and that would kind of force everyone to eventually reconcile the imbalances that appeared in the real economy.

But no such mechanism exists. The accumulated net trade imbalance of the UK is around 800 billion pounds.

Currency wars

In essence what has happened is that over many years some countries have had big trade surpluses and others big trade deficits.

The countries with trade deficits have been spending more than they've been earning

so they've had to borrow from abroad and they've been doing this year after year.

Countries like that, the United States, ourselves and some other countries in Europe

- that cannot go on and there are two ways in which this can come to an end.

Either and we've seen this in some of the countries in Europe, if they can't find new ways to become competitive

then their ability to repay the debts is called into question.

Another way of doing it, which we followed is that we have a credible plan to repay our debts

and the value of sterling has fallen by 25% to make our exports more competitive and attractive to overseas buyers

and to be more attractive for British consumers to buy from British producers rather than overseas producers.

That is what we have done to put in place a framework to rebalance our economy and I'm sure that's the right way to do it.

Currency war, also known as competitive devaluation, is a condition where countries compete against each other

to achieve a relatively low exchange rate for their currency.

As the price to buy a particular currency falls so too does the real price of exports from that country.

Domestic industry receives a boost in demand both at home and abroad.

It's made British exports appear rather cheaper so they recovered a little bit

but because the rest of the world is looking really quite ropey they've started to fall back down again.

So what we're looking at is something that is almost like a kind of anarchy and in a way an increasing anarchy.

This is what's happened over the last few years where the Brazilian Finance Minister has been the most vocal about this,

talking about currency wars, talking about the desire of national governments when confronted by a major recession

they think If we could export more we can dig ourselves out of this recession.

If we want to export more we depreciate our currency.

That makes our goods cheaper everyone else buys them and we'll all be better off.

The issue here is if you depreciate its like everyone else appreciates against you.

Their stuff becomes more expensive so they're not happy about that.

They also want to depreciate and this is where you can see a competitive round of devaluations breaking out.

To decrease the value of its national currency a national central bank sells reserve currency into the market.

It creates this currency out of nothing by typing numbers into a computer.

i.e. a central bank buys foreign reserve currency.

The amount a central bank can create is not limited because there is no defined commodity behind the reserve currency.

During the long phase of commodity money, the exchange rate would depend on the amount of gold,

silver or copper contained in the coins of each country.

Similarly after the advent of paper money and the gold standard,

the exchange rate depended on the amount of gold the government promised to pay the holder of the bank notes.

These amounts did not vary greatly in the short term and as such exchange rates between currencies were relatively stable.

After the Second World War currencies were pegged to the dollar and the dollar was backed by gold, this system came to an end in 1971.

So, we have a modern financial system where money is now chaotically organised,

there is no exchange rate because there is no gold standard system to sustain it,

so we don't need it. In fact we believe the market will resolve all the problems of exchange

whether your currency should be worth more than mine is a reflection of your economy relative to mine

and if that changes the currency and exchange rate can change and if we need that to happen

it will happen magically by the efficiency of market and profit seeking. You guys know the rest I think.

A currency's value in relation to another currency is determined by the market.

If more people want to buy a currency than sell it its value increases.

If more people want to sell, its value decreases.

The value is set by individual banks as they buy and sell currencies they will adjust the exchange rate.

The last study I read in 2007 each day on currency markets $3.2 trillion are traded, each day.

Who knows what the global GDP is?

$50 trillion 50? Again Brucey, higher!

60; that's closer. The point is - think about that exchange happening every single day

- there's about 260 business days a year.

It takes a few weeks to match the global value of every economic transaction that happens everywhere,

every day, in a year. It takes a few weeks.

Obviously all of us trade currency fairly regularly. If you go abroad you exchange into another currency.

That's a form of currency trading - you're swapping your pounds or euros or yen whatever it might be.

That happens fairly regularly and that's a conventional part of the trading process.

Large corporations have to do this on a regular basis.

Where it becomes something that people question and where you get people saying Well hang on, this is speculation!

is when you get people realising that currencies move around next to each other and if they move around in value next to each other

there's always an opportunity to try and make money out of those changes in value and therefore you can speculate on it.

That's the more questionable end of the market,

that's the bit of the market that things like a financial transactions tax will try and chop away at

because the assumption there and it's kind of not incorrect is that it just produces instability for everyone else.

These people want volatility in the market because that's how they make their money.

They want to encourage it and they do encourage it by trading and speculating in the way that they do.

By 2010 the foreign exchange market had grown to be the largest and most liquid market in the world

with an average of $4 trillion of currency being exchanged every day.

Volatility creates a need. What does it do to countries, especially perhaps small ones like developing countries,

if there are suddenly huge and instantly fluctuating financial flows? What do they have to do to cope?

Increase the production of the products they're selling and sell more

Lowering the price

And becoming possibly even poorer.

Once you start talking about the international system it becomes really quite a peculiar thing

in that a lot of it depends on simply sentiment and beliefs about what an economy is like

rather more than it depends on anything the economy might or might not actually be doing

and that can shift very rapidly because if it's just someone's belief about a currency is supportable

then you know they can carry on believing this until whenever

- If that belief changes it can change very rapidly in a financial market.

The process of financial contagion can take place in just minutes or seconds even.

You can just move from being an apparently quite a stable robust economy to being one that suddenly sentiment has turned against you

and you find that the markets are picking on you.

It can often be not much more than you're simply the next door neighbour of a country that's currently in trouble.

Many of the world's financial crises in the past thirty years have been caused by

rapid withdrawals of a nation's currency or the currencies of an entire region.

This type of activity is often referred to as financial warfare.

It's benefited major institutions really quite substantially, like Goldman Sachs for example,

or any large bank has done somewhat better out of this set of arrangements than it would have done in a far more regulated environment.

It's made people very, very wealthy. It's allowed financial markets to expand absolutely enormously.

Anybody involved in that is keen on seeing a deregulated world. In the case of the UK you have a government

which has been quite overtly and deliberately and aggressively arguing

against any forms of regulation being imposed on those financial markets.

But it's not the case that there's someone behind the scenes pulling the strings

- this is how things work - quite deliberately, overtly, in front of you. That's the world as it is.

It is making some people very rich. They're quite happy with it.

I think it is a form of economic warfare.

Much of the change in the way that the global economy works over the last thirty years result from this debt,

this third world debt because it's given rich countries and banks and the financial sector enormous amounts of power and control

over the poorer bits of the world where a lot of the resources are that we like using

and that's being used in a way that many people have compared to a form of colonialism.

It's a very real direct form of power that's being used over those countries to force those countries to do

what are really in the interests of the richest segments of the world that they do.

And as a result of that not only have corporations become absolutely huge,

made huge amounts of profit and absolutely enormous and all pervasive,

but the financial sector has become even bigger than that and the real money to be made in the world today

is not by producing anything at all its purely by forms of speculating. Making money from money

- that's the most profitable and by far and away the biggest form of economic activity that exists in the world today.

To protect themselves, vulnerable countries need to accrue currency from rich countries

who create these currencies out of nothing.

The Netherlands, first Governor General of Indonesia the man who built the trade routes,

fortified them, what I mean by that is built forts along them and fought Spanish fleets and British fleets,

said about the development of the Netherlands Empire and Netherlands trade was 'We cannot make trade without war, nor war without trade.'

Money and power.

Financial Imperialism

So reserves have become the way in which you can insure yourself against what?

Speculation. Speculative attack. Falling markets. Bubbles.

When a country succumbs to a speculative attack it is asked to deregulate its markets

and conform its financial system to that of the dominant party.

The big problem that's faced by most developing countries who've got into a debt crises was

that they were told by the powers that be in the world, the International Monetary Fund,

which in many ways governs the global financial system, that the way to get out of debt is first of all to restructure your economy.

especially to increase your exports so you're earning more dollars and then you can pay off your debt

which is normally in dollars or some other foreign currency.

Unfortunately time and time again that was proved to not be the case at all.

Actually countries cut back their public spending to the bone so they stopped growing; they stopped having any potential for growth

and what they did produce was aimed at the export market, was aimed at creating dollars and so on.

They were paying off their debts but they weren't developing their own economy at all.

They were paying far more in debt repayments than they were spending on health or education or anything else and

their debts just kept getting bigger and bigger.

The country becomes a vassal state allowing large corporations to exploit its natural resources and workforce.

Financial Imperialism: Expanding and maintaining imperial power through monetary dominance.

It's not even shadowy. There's no great mystery about what's happening here and how the world operates.

It's quite blunt. For the last thirty years you've got something pretty much everywhere that generally gets labelled Neo-Liberalism

- this idea that you should have floating exchange rates, weak regulation particularly of financial markets,

minimal government interference or involvement in what the market does and it's more or less how the world operates.

And then there are institutions - the outstanding one at this point is the IMF - that will actively try and enforce this state of affairs.

So it's not greatly shadowy, that there are people behind the scenes somewhere trying to manipulate stuff, this is actually quite overt.

This is happening and this is how it has been for my entire adult life.

This is how the world is operated and it's made some people very wealthy, it's produced enormous concentrations of wealth.

So when the International Monetary Fund comes in, in order to try and alleviate a countries debt problems, it imposes a set of conditions.

In the 1980s and 90's they called that set of conditions a Structural Adjustment Programme

and it tends to take very similar forms wherever it happens.

Indeed we can see structural adjustment programmes in essence happening today in countries like Greece and Portugal and Ireland

where countries are instructed to decrease the amount they spend on the public sector,

they are instructed to liberalise their trade market and liberalise their capital market

so money can much more easily come in and out of their economy.

The idea is that this will encourage investment to come in from richer parts of the world

and that all of their problems will be solved from this investment.

In actual fact this is proved time and time again to be completely without foundation.

In actual fact what happens is it destroys fledgling industries and capacities in these developing countries

and developing countries become completely dependent on goods and services from developed countries

and also from capital from developed countries. One of the things the International Monetary Fund is very keen on

is telling countries to lower the taxes that should be paid by multinational corporations when they come and operate in a country

because then you'll encourage more multinationals to come in.

Of course what it also means is the profits that are made by those multinational corporations leave those countries just as quickly

- the country itself doesn't benefit. Today you have many developing countries which have got almost no tax base.

They've not developed a tax base at all and so they're even more dependent on international capital markets,

on the money markets, on creating debt and that's why you have so many countries in the world that have really been robbed

of their sovereignty, and it's very difficult to see how democratic societies can evolve or function when actually a government is

more dependent on the diktats of the International Monetary Fund and the money markets than it is on their own people.

Financial instruments

What we've seen since the 1970s is a dramatic increase in a series of phenomena that have had a stimulative effect

on the changes in the financial system that have brought us to the gleaming and shiny metal and steel business that's over there.

In case you don't know that's the City of London I'm pointing at.

To compensate for the lack of a defined commodity based value underlying currencies,

financial institutions developed securitisation as a means to manage risk.

You develop securitisation as a means to try and stabilise the whole system

this is a set of financial processes and financial innovations that really accelerate from the seventies, eighties onwards.

You had a chaotic system that needed to manage risk and you had to innovate.

You needed derivatives, options, futures. You have new markets in volatility management tools.

Who knows what the term hedging is?

Spreading your risk. Managing your risk, insuring against it, precisely.

Up until very recently, until the 1960s the Securities and Exchange Commission would be quite clear

that derivatives that weren't based on real products like agricultural products - so pork belly futures or whatever -

would in fact be essentially a kind of gambling and therefore you weren't allowed to trade them.

That changes in the sixties. Everyone can trade currency futures,

things that are not based on real products being traded at some point in the future but are based on the movement of currency prices.

Once you have the system of fixed exchange rates breaking down obviously this accelerates enormously

so as you get the rollback of government regulation here, you get the market taking over with its own products here

and the theory is that the market is better at regulating itself,

its more stable than if you have a government interfering all the time.

The efficient markets hypothesis - the idea that you have set up a financial market, they're fast,

everybody in them is well informed, they all keep a very careful eye on what everyone else is doing

- it'll therefore be very stable and reflect real changes in the economy.

It's not going to be driven by panics, manias, speculative bubbles. None of this is really going to happen.

If there is movement up and down it's because something real is happening and traders and investors in financial markets are responding to it.

So that's the efficient markets hypothesis. The practice - I think what you see in 2008 is the end of that process -

the appearance of a crisis so major that belief that it'll simply be self-stabilising and self-regulating really can't carry on.

The practice carries on anyway but you can't really argue in the same way that you used to

It's good or It's necessary or This is OK for the world.

In the last decade we had a new innovation - something called a credit default swap.

A way of buying insurance against a company you invested in going bust

and in 2002 they were worth less than $1 trillion. In 2007 they were worth $60 trillion.

That's five years.

Everybody is suddenly sitting there saying Oh! These CDO's we've made don't in fact provide the kind of stability that we thought.

The maths that's inside of them is complete nonsense it turns out.

There's far more risk attached to trying to securitise risk and securitise debt

in the way that we have done this than we thought. And we now think these things are now worthless!

The attempt to get more and more complex ways of regulating and shaping a financial market

and trying to make a quick buck out of it as well actually helped produce the opposite effect to what its apologists said

- which is, it led to a spectacular crash.

What we saw as a result of this very different situation was one phenomenon above all,

one sector above all grew, and that was the financial sector.

While the financial sector benefits enormously from the current monetary system,

the system is neither stable nor fair.

The assumption in what the Bank of England does right now is that the cash that we hold is backed up by government debt.

The government can back up its promises by the fact that it can tax the public.

So what they're implying is that cash is backed up by government debt,

when government debt is backed up by the ability of the government to get cash from the public.

Time and time again over the past thirty years we've seen private debts being transformed into public debts,

and ultimately the price of that debt is being paid by the public in the debtor country.

This is why spending cuts are necessary.

The system is designed to make certain people very rich at the expense of a nation's citizens and tax payers.

The system lowers the standard of living of the majority and distributes this wealth amongst the privileged.

So what we are left with is a financial system since the early seventies that has no fixed exchange rates

that suddenly has increasingly open financial borders,

that has central banks having to manage without having any control because there's nothing here where the gold used to be.

Chaotically they have to ease quantitatively. They have to lend as a lender of last resort.

Throughout history monetary systems were designed to give the dominant international power an advantage

and this power is fiercely defended and expanded on.

International currency reform

What I would like to see is a new kind of currency that is backed by something that is scarce

and that we really need and we really value. Something like energy or renewable energy, for example,

a kilowatt hour backed currency would be very interesting to me.

We need to start valuing things that are most scarce and that we need to survive as a human race in the long run.

Backing an international currency with something like that will generate enormous investment in,

for example, renewable energy, if that's the primary international unit of account that is being used.

Another option is a basket of currencies so you mix up the value of different currencies

to create a very solid currency that people have confidence in.

Perhaps even better would be a basket of commodities with which to back up international currencies.

Now if it was possible, internationally, some way or another, to get all these increasingly competing national economies together

and say We're all going to sit down and write out an agreement, somewhat like the Bretton Woods agreement

which will allow for, unlike Bretton Woods, some currencies to be pegged against different baskets of goods

more appropriate to their national economies. If you could arrange for that to happen then that would be nice

and you can see how that would start to create a kind of order in the international macro economy which is otherwise lacking.

The real difficulty there is just political who on Earth is going to do this?

Who is the force that is going to make this thing happen?

Creating a monetary system which is both fair and stable is possible and can be achieved.

What are international organisations for if not for such a purpose?

Part of the voiceover for this documentary was taken from the book, "Where does money come from."

This is George. George worked in a big bank in the City of London.

But one day without warning George's bank went bust. Luckily, the government rescued the bank

and George kept his job but the greedy government wanted something in return for their help.

They demanded a higher tax on George's salary and bonus. For someone with a high cost lifestyle like George,

a shock like this can be devastating. Now George struggles to afford the rent on his riverside apartment in central London.

The tyres on his Aston Martin are wearing thin and are barely road legal.

Unless George's situation improves - or unless someone like you helps him -

then George may even be forced to walk to past the next Saville Row tailors and buy his suit from Topshop or Next.

Even if George had anything to celebrate he can no longer afford the champagne to celebrate with.

George is not alone. Countless others are suffering like him. No-one knows how long it'll be until the good times return.

But with your help George can turn his life around. A simple monthly donation from you can bring a bit of sunshine back to George's life.

Just £395 will help him celebrate minor achievements with a magnum of Cristal champagne.

As little as £900 will help George buy a new set of tyres for his Aston Martin.

£2000 can help George recover his self-esteem with a suit from a prestigious Saville Row tailor. But even a small amount will help.

Just £200 will buy a meal for George and his girlfriend Experience. Just £200 extra will buy the drinks.

By adopting a banker you won't just be supporting someone like George in a time of need

- you'll also be supporting the trendy wine bars of the City of London, the luxury car makers of Italy and the tailors of Saville Row.

You'll be doing your patriotic duty to support Britain's greatest industry in its time of need.

And when the good times return and George gets his bonus back,

the taxes he pays will help fund the public services that the rest of you scroungers depend on.

So please, until the good times return for George and those like him, will you give today?