Eric Cantona, the former professional football player, recently called for a “bloodless revolution” against the banks. The idea, according to Cantona, is that people should, en masse, withdraw all of their money from the banks, causing a general banking collapse, ensuring the end of the current system and hopefully, a better tomorrow.
The attempt predictably failed but as a result of his suggestion, Cantona was heavily criticised by various bankers, politicians and journalists for his irresponsibility. Cantona was told to stick to football and leave economics to the “experts”. His proposal was suicidal and would lead to ordinary people losing their money were it successful.
Perhaps the fairest criticism of Cantona’s suggestion would centre on whether or not it would achieve the aims it appears to represent. Cantona’s objective of bringing down the system was crystallised within the context of a popular protest in France in October of this year, against government plans to raise the retirement age from 60 to 62. Clearly, if “the system” was brought down there would be no government pension for anyone.
The issue for the pension system in France is similar to that in the UK. As indicated in a recent IEA report the pension liabilities of the UK government are now so large it is impossible that they will ever be able to honour all of the payments. What will happen is that the UK will default on these obligations. The retirement age will continue to rise until it is unlikely that anyone will live long enough to draw a significant pension. It is instructive to note that when Bismarck created the national pension in 1889 he set the retirement age 20 years beyond the average life expectancy existing at that time in Germany. Either something similar will happen in the UK or these pension liabilities combined with the other debts of the UK government (now estimated to be £6.5 trillion) along with the persistent budget deficit, will precipitate a complete financial collapse of the government.
The primary criticism directed at Cantona is that a general banking collapse would cause more harm than good, that we need banks as much as they need us. If banks go down we all go down with them. This is the same rationale for the various banking bail-outs.
Apparently, without these banks economic growth will be sluggish and life would be more difficult (without electronic cash, banks to give us mortgages etc.). We would have no online purchases, no credit cards, and would be forced to keep a pile of cash in the house.
The truth of this is apparently self-evident and I have heard many an intelligent and educated person make many similar comments. Of course it takes very little thought to conceive of alternatives to the present system and indeed, these alternatives do exist. Depositary institutions that keep 100% reserves are available, non-bank lending marketplaces are popping up all over the Internet and you can buy cash-cards that allow you to transact online or wherever else you like. I would venture to say that banks in their current form are rapidly becoming obsolete.
However, in amongst the criticisms, as we would expect crucial questions are left out. None of these experts asks why our banking system is so fragile that provocative comments from an eccentric French footballer can create such consternation. After all, Cantona has merely pointed out an obvious flaw in the banking system which has continuously led to bank failures. The most crucial question to ask is why we have such a dangerous system that not only is so fragile that it tremors at the merest criticism but if we do not reach into our pockets to bail it out it will drag us all down into financial oblivion.
Why indeed do we have a banking system the existence of which is heavily dependent on the confidence that people have in it?
The answer of course, is that powerful interests in Western societies depend on this system as a surreptitious method to extract wealth from the population at large. Banks earn significant profits from fractional reserve banking but even more importantly, they provide a cheap source of funds for Western governments. These governments have a tremendous interest in protecting fractional reserve banks and allowing them to operate their confidence game. In fact, one could argue that governments could not exist in their current form without the fractional reserve banking system. And arguably, fractional reserve banks could not exist as they do today, without the government. So while publicly disparaging banks for their reckless lending, at the same time governments are taxing future generations in order to save their brothers in arms at the banks.
Of course, now it appears that the European governments cannot find a bucket big enough to bail out the sinking ship. Germany’s appetite for bailing out other countries banks appears to be sated amid concerns that these continual bail-outs threaten Germany’s financial stability. Thus it appears that the process of bailing out banks may drag us all down the sinkhole anyway.
It is possible that the reality of the situation is beginning to dawn on Western governments. Fractional reserve banking is unsustainable in the long run. And Keynesians are possibly, just possibly, beginning to realise we are all still alive in the long run. There is only so much (real) money and eventually we will run out if we continue to consume our capital – capital consumption being a key effect of fractional reserve banking – in this case by having European governments overtly divert resources from wealth generators (i.e. productive individuals) to failing and unproductive fractional reserve banks.
There is nothing new in stating this. But the important take away here is that people at large are beginning to realise how fragile the banking system is. Cantona’s interview is a YouTube hit and there are plenty of people who are angry at the banks or who have realised that banks are not safe places to keep your savings.
The idea that fractional reserve banking is fraudulent and risky is beginning to take hold. It is at its early stages yet but this idea will spread. It has been said before that ideas, especially ideas that are compelling in their simple truth, can spread like viruses and become impossible to stop. This is how regimes can appear to collapse almost overnight (such as the Soviet Union). Nobody accepts the old idea anymore and it is replaced with a new one.
There is however, no need to name a date for everyone to yank their savings out of the system. Unfortunately, at the moment most people would not know where to put their cash (if they have any) afterwards. However, as the knowledge eventually spreads, savings will transfer from fractional reserve banks to either 100% reserve institutions or be invested in transparent lending marketplaces at rates far higher than what one can earn in a savings account. There is no need for a con-man acting as middleman.
The collapse of fractional reserve banking is inevitable and it will be the market process that causes this collapse, no matter how governments or bankers fight to preserve it. It is only a matter of time and as Cantona suggests it is unlikely blood will need to be spilt. Reality has a way of making itself known sometimes brutally and abruptly, and other times more gradually. It remains to be seen how swiftly the process of monetary revolution occurs.
You said that depositary institutions that keep 100% reserves are available. Can you give some examples.
Excellent explanation Robert. To move these concepts forward they now need to be condensed into several short points for rapid and broad consumption. Some say the evidence of brilliance is the ability to “say the most with the least”. This re-awakening of society towards honest weights and measures (economic freedom) needs some “jingles”.
I think you’re right. But I think that with the advent of the Internet the spread of libertarian ideas is going to increase. As people cast around looking for theories that better explain the phenomena around them, when Govt explanations fall short it is our responsibility to step in and fill the gap.
What a good article. We live in an age of delusions where the government thinks it runs the country, where the Central Bank thinks that it can print money with impunity and where the banks think the big jar of honey is bottomess.
Governments should take a look at the local motorway to see who actually runs the country; treat paper like gold and it behaves in the same way, treat it like paper and likewise, and the honey pot well, as you say, there is a bottom and it is not too far down now
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