The Nation's Credit: Senator Richard Darcey, 1941
( ALP, Tasmania)

Richard Darcey (1871 – 26 July 1944) was an Australian politician. Born in Launceston, Tasmania, he received a primary education before becoming an apprentice jeweller. He eventually became a jeweller in Hobart, and rose to become President of the Retail Jewellers' Association.
In 1937, he was elected to the Australian Senate as a Labor Senator for Tasmania. He held the seat until 1943, when he was defeated, having been demoted to fourth place on the ballot to make way for Tasmanian state minister Nick McKenna. Darcey died in 1944

...Wikipedia

 The following speech by Senator Richard Darcey of Tasmania is taken from

Hansard Estimates and Budget [SENATE] Papers 1941-42 (Revised)

On the 12 November 1941 : page 258-264

Senator DARCEY.- The banks can create as many millions of pounds as are required. It must be remembered that 21/2 (two and a half) per cent on a certain sum is equal to 5 per cent. on half of that amount. In December, 1937, Australia's national debt amounted to £1,262,911,649 0s. 1d. One person in the community, who signed himself "Patriot", was concerned about the magnitude of the debt, and accordingly he sent a 1d. stamp to the then Treasurer with the object, as he said, of reducing the debt to a round figure. Ufortunately, his purpose was not achieved, because between the time that he saw in the newspaper the amount of the national debt and the time when he sent the 1d. stamp to the then Treasurer, the national debt had increased at the rate of £1 13s. 4d. a second. The debt grows so quickly that it now amounts to £1,000,000 a week. It is still growing. Compound interest on that debt has got Australia into a deplorable state. Some persons in the community are forced to work five months in the year in order to pay their taxes. That is the position already when taxes have really only started.

Senator MCBRIDE- I should have thought that the honorable senator would have convinced a Labour government that taxation is not necessary.

Senator DARCEY.- At the moment, I am trying to convince the Opposition. I have stated facts in this chamber for several years, but previous governments have not heeded them.

Senator COOPER.- Even if the honorable senator were to convince the Opposition now, he would be too late.

Senator DARCEY.- Things are becoming so bad that the Opposition will be forced to listen to what I have to say. This country cannot pile up huge war debts and hope to meet its liabilities by means of taxes. I am obliged to tell the Opposition these facts because it is fighting against a budget which I am defending. There is only one way to avoid inflation.

Senator ARTHUR- What is inflation?

Senator DARCEY.- Inflation is the lowering of the purchasing power of the wages of the people. In South Africa efforts have been made to prevent inflation. Prices of commodities have been fixed, and heavy fines may be imposed on those who sell above such fixed prices. A man may be fined as much as £500, or given two years' imprisonment, for departing from the fixed price. In. Australia persons convicted of exceeding fixed prices were fined a mere £3 or £4.

Senator SPICER.- They can be fined as much as £500.

Senator DARCEY.- That may be, but the fact is that they are not fined heavily. The reason is that many of the people who ought to be punished in this way find the money for political campaigns. Should the war continue for a few more years what are our taxes likely to be? Last year, the then Treasurer (Mr. Fadden) introduced a budget covering an estimated expenditure of £100,000,000. This year the budget runs into £325,000,000. I emphasize that the interest on the national debt is mounting all the time. Tens of thousands of pounds have been spent in Australia to inform the people that if they do not buy war savings certificates and war loan bonds the war effort will be retarded. I intend to ask what it has cost Australia for advertisements urging the purchase of war bonds and war savings certificates. I shall tell the Senate how the war savings certificates swindle is worked. The private banks have sold certificates to the value of £14,000,000. A bank which can sell certificates of a value of £100,000 puts the amount to the credit of its cash reserves. It can then advance to the Government credit amounting to £800,000 on the strength of that addition to its cash reserves, and it can charge the Government 3 per cent. on that sum. Do honorable senators know of a bigger racket than that? That is the kind of thing that went on with the knowledge of the previous Government. I hope that it will not continue under the present administration. No private individual may hold war savings certificates valued at more than £250, but the private banks found a way to get over that difficulty. They bought certificates in the names of their employees. These employees bought them voluntarily, on the advice of the manager of the bank. I do not know what would have happened to them if they had not taken his advice. Every fortnight an amount was taken out of their wages for the purchase of these certificates and placed in the bank's reserves. Although it is said we are fighting for so-called democracy, I maintain that, since this war started, Australia has been fighting with one hand behind its back because of the financial system under which we are governed.
On one occasion I told honorable senators that the people who sent us here are under the impression that the 111 members of Parliament in Canberra comprise a national government engaged in the task of ruling Australia. I have told the people repeatedly that their assumption is entirely wrong and that Australia is governed by the associated banks. Under the present system no government, can carry on its functions except by continuing the policy of borrowing. The only way to pay the ever-increasing interest bill is by borrowing still more. All money comes into existence through the banks in the form of a debt. That is why we are ealled upon to pay such tremendously high taxes to-day. I have spent a considerable part of my life expounding my financial theories to the people, hoping that they will some day realize what a racket is being put over them under the present financial system, and that an obligation rests on the shoulders of every member of this Parliament to scrap it. Honorable senators opposite have complained that the present budget imposes heavy taxation only in respect of incomes in excess of £1,500 per annum. They forget that the last two governments imposed tremendous burdens on those in the lower income groups and that those with small means are still being called upon to make heavy sacrifices.
People have said to me, "Poor people and dole workers still appear to have plenty of money to spend at the races and with which to back their fancy at the dog race meetings ". The real reason why so many working people patronize sporting events of that nature is because they hope by a chance win, to have a little extra money with which to buy the necessaries of life. The bookmakers, like the banks, make the odds.
My banker said to me one day "Why not work on an over- draft ".. I said "I was reading the notice on the wall outside. You are offering 21 per cent. for fixed deposits for two years. What is the current rate for overdrafts?" He said, "The rate to-day is 8 per cent.". I said "Do you realize what percentage of profit that shows your bank? It is nearly 200 per cent.". He said "But borrowers pay only from day to day ". I said, "They not only pay from day to day, they also pay all the time ". He then said "From what I hear and what I can see of you, you attend to everything but your own business ". I said "Mr. Manager, thank God, I do not owe you anything ".
My idea of happiness in this life is to do exactly what I want to do. If I give a great part of my life for the improvement of the lot of the workers, I feel that I am well repaid. Governments have been in office in the federal sphere for over 40 years, but we have never yet had a balance-sheet submitted to the country. All we get from governments is a statement of revenue and expenditure. How can we know where we stand, unless a Balance-sheet is struck? [Extension of time granted.]
Recently I submitted a balance-sheet to this chamber which had been drawn up by one of the most accomplished accountants in Australia, Mr. D. J. Amos, an employee of the Adelaide City Council. Mr. Amos proved-and I challenge any honorable senator to question any of his findings- that the Commonwealth Government can expend £362,000,000 a year on the cost of government and social services and still have £1,000,000,000 left with which to fight the war. Nobody seems to realize that we can lend against the productive capacity of the nation. It was estimated by the previous Government that the value of the productive capacity of Australia would reach £1,000,000,000 - this year. Banks can lend only against their cash deposits and up to 800 per cent. more than the amount of such deposits, but the nation is limited only by the productive capacity of its people. Mr. Amos gave the productive value of Australia in terms of producing units. In the United States of America, it was estimated that the national value of each inhabitant amounted to £308. If we adopt that figure for Australia and apply it to the nation as a whole, it will be readily seen what tremendous resources are at our disposal to finance the war.
We have a Joint Committee on Social Security, which has been charged with the task of recommending means by which the social conditions of the people could be improved. When that committee was appointed by the last Government, I felt that a lot of time and money would be wasted, because it would not tackle the money question, and, consequently, could not get to the root of the trouble and make worthwhile recommendations. The bad social conditions that exist to-day are brought about by lack of purchasing power in the hands of the people. When it is realized that the banks have the sole right to create credit, which represents the purchasing power of the people, and that they can stop it at any time, it will be realized what tremendous power is vested in them. During the depression food valued at hundreds of millions of pounds was destroyed on the advice of so-called economists as a means of keeping tip prices. It is an economic fact that prices are governed by the amount of money in circulation. If, as orthodox economists say, new money coining into circulation tends to increase prices and thus cause inflation, it must follow that the purchasing power of the people is reduced by the refusal of the banks to issue further credit, or by the calling up of overdrafts, it must have the effect of lowering prices.
A famous royal commission on unemploymcnt and allied subjects known as the McMillan Commission was established in England and continued its researches for about two years. As a reward for his labours, the chairman was given a seat in the House of Lords. As long as I can recollect royal commissions on unemployment have invariably found that unemployment has been brought about by over-production. After inquiring exhaustively into the matter the McMillan Commission found that unemployment was caused not by over-production but by under-consumption and. that money would have to he found from some source without increasing taxation in order to protect industry and to keep the people in work. Every man who is out of work is an economic loss to the country. As soon as he gets into debt, his freedom vanishes. I have said more than once in this charnbcr that debt takes away individual and national liberty. Suppose I am a baker acenitomed to buy flour from two or three millers. I owe one miller considerably more than the others. He says to me: "You must buy all your requiremcn from me in the future; otherwise I shall put you through the insolvency court" Because of my indebtedness to him I lose my individual liberty. A baker very often continues to supply poor people with bread, even though he knows that the prospect of being paid for it is rather remote. He has not the heart to stop their bread when he knows that little children in the house have nothing else to eat. In that way, he runs into debt, and immediately loses his economic liberty aiid becomes the slave of the miller. In addition, he is compelled to pay any price the miller to whom he is indebted likes to charge. In just the same way many nations are up to the neck in debt to the banks. When the late Mr. Lyons was Prime Minister he floated a loan on the market at 6 per cent.

Senator KEANE.- Amd then "welehed on the interest rate.

Senator DARCEY.- That is so. We must remember that from 75 per cent. to 80 per cent. of all loans are subscribed by the banks. Having realized that it is easy to see who fixes the rate of interest. As I have said on many occasions, interest can be paid only by further borrowing. That is why the national debt has increased so tremendously in the last few years. In Hobart recently I was interested to hear a lecturer, an economist of the Melbourne University, give his impressions of a visit to Russia in 1934. Dealing with the Soviet's financial policy he said that M. Stalin had a habit of putting a loan on the market at 6 per cent., and, when he got the money, of lowering the interest rate to 3 per cent. I point out that that practice is not peculiar to Russia. I do not know whether M. Stalin learned of it from Mr. Lyons, or whether Mr. Lyons learned of it from M. Stalin. I have endeavoured to give honorable senators some idea of the mess we have got into as a result of following orthodox methods of finance. The only way Australia may be saved from financial and economic ruin is by a complete alteration of the financial system. There should be a revolutionary change in the finances of this country. The word "revolution" means a violent departure from existing methods or ideals. A violent departure from orthodox financial methods must be brought about in Australia if this country is to be saved from financial insolvency. To continue as we are going on to-day is madness. History shows that on several occasions one man has been right when the rest of the world was wrong. One of the new economists whom I follow has said that banks do not need to have money to start at all. This man was asked to go to Ottawa to express an opinion on a bank bill then before the Canadian Parliament. He was asked how much capital a bank required before it should be given a charter to trade. To the amazement of his hearers he said, "A bank does not need capital to start business. It needs only buildings, books and pens ". When a bank commences business it invites people to make deposits with it, and when it accepts deposits it simply gives receipts for them. But a depositor is given no security that he will get it back again, if I deposit, say, £100 in a bank, the manager says. "We will pay you interest at the rate of 2 per cent. for two years ". I say, "All right"; and I get a receipt for the deposit. On the other hand, if I wish to borrow £100 from a bank, the bank wants a guaranteed security to twice the value of the loan either in real estate, or bricks and mortar, before it will advance the loan. The banks are like the bookmakers. The latter cry the odds, and you cannot get a bet unless you take their prices. The banks make all the terms. It is use- less to go from one bank to another, because they have a gentleman's agreement.
Recently I was talking to the only son of a Queensland farmer who was heir to an estate of 14,000 acres. His father was one of the best stockmen in Queensland. In the bank-creatcd depression in 1929, the bank seized the whole of the 14.000 acres and the owner saw the finest milch cows being sold for 11s. a head. He lost the whole of his security because in the depression, which the banks created, his overdraft was called up. Later be was glad to get a job on a farm at 10s. a week. He worked at breaking in horses, and when he was injured in a fall and was obliged to cease duty for two weeks his employer stopped £1 out of his wages. That is a indication of the policy of the banking system in Australia. Is it any wonder that Professor Wadham, who inquired into the wheat industry in Australia, reported that the wheat lands of this country were mortgaged to the banks and financial institutions to the amount of £160,000,000? At that time the price of wheat was 2s. 4d. a bushel. Yet the Govenrnment of the day was urging the farmers to grow more wheat. Before this war broke out, the wool industry was in the same parlous state. The debt of the wool-growers to the banks and financial institutions was £175,000,000; and they requested the Government to pay a bonus of ld. per lb. in order to enable them to pay their overdrafts. The banks have never created 1d. worth of wealth in Australia, yet they own Australia.

Senator BROWN.- Ned Kelly.

Senator DARCEY.- They are worse than Ned Kelly. The bushranger takes the risk of being hanged, but the successful banker is admired by his shareholders. I know wheat and wool-growers who never saw a cheque for years because the banks would not finance their clip, or crop, until these were made over to them. Ned Kelly was decent compared with some of them. I do not blame the bank managers. They have absolutely no say in the matter. Many take their instructions from London, and London takes its instructions from the Bank of International Settlements at Basle. That bank is not subject to the law of any country. Absolute power is given to it under its charter. I do not wonder that wars continue. One has only to examine the directorates of any of the big armament firms in England, and on it he will find ex-admirals and ex-generals who, from. time to time, write to the newspapers pointing out how unprepared Great Britain is for war.
Undoubtedly, Great Britain was unprepared for this war. I have spoken of corrupt governments. Let its see what happened in the election in which the Baldwin Government was returned to power. The late Mr. Baldwin was asked why he did not go on with an armament programme. At that time there was a very strong peace movement in Great Britain. He said that the Government dare not do it because it would lose the then pending election. So the first concern of that Government, as of many other governments, was to keep its place.
In 1939 Mr. Montagu Norman loaned Hitler £50,000,000. He said, "We shall have to let Germany have, the money, although we might never get it back. But it is worth £50,000,000 to support Nazi-ism.". At that time the bankers in Great Britain, were afraid that communism would overrun Germany. Financially, we are fighting with one hand behind our back. When a totalitarian state makes war on a democratic state, it has complete control over the whole of the financial resources of its nation. There is no individualism in a tothlitarian state.
Two years ago I said that Germany was using its national credit, ever since it started the armament race. I gave figures showing how the gold reserves of the world were held in 1939. In that year the total gold reserves amounted to 14,301,000,000 American dollars, That reserve was held as follows: United States of America, 8,126,000,000 dollars; Great Britain, 396,000,000 dollars; France, 1,435,000,000 dollars; Holland, 595,000,000 dollars; Belgium, 318,000,000 dollars; Switzerland, 407,000,000 dollars; Germany, 17,000,000 dollars; Italy, 124,000,000 dollars and Japan 97,000,000 dollars. The three most powerful and war-like nations of to-day have not as much gold between them as little Switzerland; yet we were told at that time by the orthodox economists that Germany could not possibly arm and fight a war because it was "broke". Germany realized that wars are fought not with money but with credit.
The German system of finance is this: Clothes, food and money are rationed. It is the most perfect system of its kind in the world. Dr. Schacht, the manager of the German Reich Bank, wanted to adhere to orthodox methods and to lend money to the nation through the Reich Bank. For that reason Hitler "sacked" him; but when the business people of Germany worked out a financial system to meet the needs of the nation, Dr. Schacht waa given back his job. If the Government in Germany wants 50,000,000 marks' worth of guns from Krupps, it places its order with Krupps, who take a cheque for that amount. Krupps then bank the cheque, and the Government has first call on that deposit it says to Krupps, "You have much more money now than you want " The company must then buy Government stock to the amount of 50,000,000 marks. It is allowed interest on that amount. The system is perfect, because it does not do away with the profit motive. Krupps still get their profit. That is how Germany is financing its tremendous war machine. We cannot do that. We must depend on what the banks give to us. We do not. use our national productive capacity as the Germans do. Until our system is altered we are fighting, financially, with one hand behind our back. There are many things which we could learn from German economics and finance; but we are compelled to adopt orthodox methods. If Germany is better armed and has a different financial system from our own, we must devise a means in order to enable us to meet Germany on its own terms. Therefore, our best plan is to alter our financial system in order to give us the greatest productive capacity in armaments and men. I repeat that we do not need money to fight the war. What we. need are credits; but in the past, we have used them through the wrong channel. If the circulation of additional money increases prices, it does not matter from which source that money comes if prices are not controlled. But we are told that they are controlled. We have been told that an increase of only 10 per cent. has been allowed, due solely to the fact that the costs, such as freight and insurance, are increasing. However, the prices of only some commodities have not increased. One finds that the prices of vegetables and fish, for instance, have increased considerably. That is the case in respect of everything that means food and shelter to the people. Rents are increasing, but rents do not come within the scheme of price control visualized by the Prices Commissioner. The Geelong Woollen Mills were sold by the conserva;ive Bruce-Page Government, which also disposed of the Commonwealth Line of Steamers. An amount of £500,000 is still owing on the latter deal. The man who bought the Commonwealth Line was sentenced to imprisonment for two years. Personally, I think that Mr. Bruce should have got five years. By cutting out Government participation in industry the profits of private enterprise, including the merchants of Flinders-lane, can be considerably increased. That is what I mean when I refer to corrupt governments. Any one who sacrifices the interests of the people for the benefit of profit-makers is a traitor. He is the fifth columnist of to-day-the enemy inside our gates.
The manager of the Canadian Government Bank, Mr. Graham Towers, when giving evidence on oath before a monetary commission, was asked whether the Government bank could loan interest-free money to the Government. He replied, "Yes, undoubtedly; not only that, there is no need for the Government to repay the money to the bank. Through increased prosperity brought about by the spending of that money, the Government is repaid indirectly, and it is a good policy to adopt ". What did our orthodox economists tell the Commonwealth Government during the depression? The late Sir Robert Gibson, when governor of the Commonwealth Bank, who was a servant of the Commonwealth Government, said to the Government that unless it lowered social services and reduced salaries by 10 per cent, he would not come to its assistance.
The Royal Commission on Banking and Monetary Systems, in paragraph 630 of its report, stated that Parliament is ultimately responsible for finance and everything for the good government of Australia. The Commonwealth Bank has certain powers granted to it by statute. These powers are to be exercised in the interest of the nation. The royal commission stated that at any time when a difference of opinion arises between the Bank Board and the Government as to policy, a free and frank discussion should take place on the matter, in order to show the Bank Board where it stands. If the views of the board and the Government are still irreconcilable, the Government should say to the board that it takes full responsibility, and tell the board how to act. Why did not the previous Government use those powers? It did many things under the National Security Act. Under section 424 of that act any one criticizing the financial policy of the Government is liable to arrest and punishment. That is rather severe on a man who knows the trickery that is going on in the banking system. If he mentions it he is liable to be treated as a criminal. He might be able to save the people of Australia millions of pounds in taxation, but if he says a word that is contrary to the policy of the Government he is liable to be put in gaol. When speaking from the platform of the Town Hall in Eobart, I told my listeners that under section 42A of the National Security Act I was liable to be imprisoned for what I was saying, but that I would rather go to gaol than hold my tongue. I told the people the truth. I have told the Senate the truth on many occasions, but honorable senators seem to have little regard for the truth. I have taken up considerable time in delive ing this speech, and I hope that I have not been speaking only to the walls. The desperate position which confronts us to- day compels me to speak at great length. Things are very bad indeed. I know of many young men who have given up excellent occupations in which they had good prospects for the rest of their lives, in order to join our fighting forces, yet while they are overseas fighting in the defence of the Empire, the private bankers who stay at home seek only to increase their own dividends. In 1914 the then Prime Minister pledged Australia to the last man and the last shilling, but he did not use the Commonwealth Bank for the purpose for which it was created. He ran up a war bill of £860,000,000 by adopting orthodox methods of finance, and when the soldiers came back from the front he took their last shilling in taxa- tion to pay interest to the 'banks. That is what will happen again this time if the present system is not altered. I have high hopes that it will be altered, and that justice will be done to the men who are prepared to suffer hardships and undergo the risks of war in order that those who stay behind may live in safety and comfort. I wonder what the two-shillings-a- day English "Tommy" thinks when he reads that the Midland Bank declared a dividend of 16 per cent., due mainly to the fact that it has lent millions of pounds to the British Government for war purposes. It is time that that racket was stopped.
The trouble is to get people to realize just what a racket is going on. I have travelled all over Australia from Cairns to Perth, and have addressed hundreds of meetings on monetary questions. Although I am confident that I have converted quite a number of people, the ignorance of the average man, whether he be a wharf labourer or a university graduate, is astounding. He does not take the trouble to find out just how he is being governed. Certainly be grumbles about taxation. In fact I heard such grmnblings in Sydney during the past few days. Two years ago I told honorable senators that not until half their salaries had been taken in taxation would they take any notice of what I had been advocating. But it is coming to pass. Very little will be left of our salaries next year. When. we touch the people's pockets we sometimes touch their conscience, but we also touch the sensibility as to their personal interests. That is what will happen in this country before there is a realization of what we are being driven to.

The PRESIDENT.- The honorable senator's time has expired.

Senator FOLL (Queensland) [9.5].- I congratulate honorable senators opposite on their occupation of the treasury bench. I join with Senator MeLcay in offering to render any assistance in my power, so long as the efforts of the Government are directed towards ensur- ing that this country shall maintain a full-time war effort in both men and money. I regret that the change of government occurred when it did, be- cause the country lost the services of a number of men who had gained a great deal of administrative experience in a hard school. In many instances these man were jOust beginning to gather the fruits of their labour. I resent very much the statement made by Senator Darcey that the Labour Government found everything in a mess when it assumed office. I take great pride in saying, as did Senator McBride and others, that when the his- tory of Australia'.s war effort is written, the people will appreciate what was done for Australia by the Lyons Government from the time of the Munich Pact until the death of Mr. Lyons, by the Meuzies Government, and by the Fadden Government. Members of those Govern- ments worked exceedingly hard in the interest of this country, and laid the foun- dations of a defence policy which has provided a wonderful bulwark for the defence of this country should we be attacked. Therefore I resent Senator Darcey's remark.

Senator DARCEY.- I criticized the previous Government only because of its financial policy. I said nothing about its work. I adhered to financial matters, and I claim that I have shown that in that respect the previous governments were incompetent.

Senator FOLL.- The governments to which I have referred can take great pride in their financial programmes and as has been pointed out by Senator Spicer, in the fact that costs have been controlled and interest rates have actually decreased. That is a very great tribute to the work of those governments. Commodity prices in this country have risen to a lesser degree than in any other country because of the fact that at the outbreak of war, the then Prime Minister (Mr. Menzies) realized the necessity for adopting a system of price control. That system was introduced as one of the first acts of the Menzies Government. The suggestion made by Senator Dareey and supported, by interjection, by some honorable senators opposite, that the Prices Commissioner, Professor Copland, was prepared to do anything to keep his job, is unworthy of him. I have been in frequent contact with Professor Copland since be was placed in charge of the price-fixing machinery of this country, and I think that the Minister for Trade and Customs (Senator Keane), who is in charge of the department in which Professor Copland holds a position, will agree that he has done an extraordinarily good job in most difficult circumstances. It ill becomes honorable senators to make remarks of that kind about a public servant who is unable to defend himself. Senator Diaozv.-I said it to his face. Senator POLL.-Professor. Copland has given remarkably good service to this country. Although he was in no need of a job, he came forward and accepted.."

The above was Senator Darcey's 1941 speech. The year is now 2011... What's changed?

"That is what I mean when I refer to corrupt governments. Any one who sacrifices the interests of the people for the benefit of profit-makers is a traitor. He is the fifth columnist of to-day-the enemy inside our gates."
- - Senator Richard Darcey Hansard 12 November 1941

Think the GFC was big? You ain't seen nothing yet

writes George Monbiot in The Guardian October 12, 2011 - 6:55AM

Australian economist Steve Keen said the ingredients are there for another financial meltdown. I stumbled out into the autumn sunshine, figures ricocheting around my head, still trying to absorb what I had heard. I felt as if I had just attended a funeral: a funeral at which all of us got buried. I cannot claim to have understood everything in the lecture: Sonnenschein-Mantel-Debreu theory and the 41-line differential equation were about 15.8 metres over my head. But the points I grasped were clear enough. We're stuffed: stuffed to a degree that scarcely anyone yet appreciates.

Professor Steve Keen was one of the few economists to predict the financial crisis. While the OECD and the US Federal Reserve foresaw a "great moderation", unprecedented stability and steadily rising wealth, he warned that a crash was bound to happen. Now he warns that the same factors that caused the crash show that what we've heard so far is merely the first rumble of the storm. Without a radical change of policy, another Great Depression is all but inevitable.

The problem is spelled out at greater length in the new edition of his book "Debunking Economics". Like his lecture, it is marred by some unattractive boasting and jostling. But the graphs and figures it contains provide a more persuasive account of the causes of the crash and of its likely evolution than anything that has yet emerged from Constitution Avenue or Threadneedle Street. This is complicated, but it's in your interests to understand it. So please bear with me while I do my best to explain.

The official view, as articulated by Ben Bernanke, chairman of the Federal Reserve, is that both the first Great Depression and the current crisis were caused by a lack of base money. Base money, or M0, is money that the central bank creates. It forms the reserves held by private banks, on the strength of which they issue loans to their clients. This practice is called fractional reserve banking: by issuing amounts of debt several times greater than their reserves, the private banks create money that didn't exist before. Conventional economic theory predicts that when the central bank raises M0, this triggers a "money multiplier": private banks generate more credit money (M1, M2 and M3), boosting economic growth and employment.

Bernanke, echoing claims by Milton Friedman, believed that the first Great Depression in the US was propelled by a fall in the supply of M0, which, he said, "reinforced . . . declines in the money multiplier". But, Keen shows, there is a weak association between M0 supply and depression. There were six occasions after the second world war when M0 supply fell faster than it did in 1928 and 1929. On five of these occasions there was a recession, but nothing resembling the scale of what happened at the end of the 1920s. In some cases unemployment rose when the rate of M0 growth was high and fell when it was low: results that defy Bernanke's explanation. Professor Keen argues that it's not changes in M0 that drive unemployment, but unemployment that triggers changes in M0: governments issue more cash when the economy runs into trouble.

He proposes an entirely different explanation for the Great Depression and the current crisis. Both events, he says, were triggered by a collapse in debt-financed demand. Aggregate demand in an economy like ours is composed of GDP plus the change in the level of debt. It is the sudden and extreme change in debt levels that makes demand so volatile and triggers recessions. The higher the level of private debt, relative to GDP, the more unstable the system becomes. And the more of this debt that takes the form of Ponzi finance — borrowing money to fund financial speculation — the worse the impact will be. (emphasis added...ed)

Keen shows how, from the late 1960s onwards, private sector debt in the US began to exceed GDP. It built up to wildly unstable levels from the late 1990s, peaking in 2008. The inevitable collapse in this rate of lending pulled down aggregate demand by 14 per cent, triggering recession.

This should be easy enough to see with the benefit of hindsight, but what lends weight to Keen's analysis is that he saw it with the benefit of foresight.

In December 2005, while drafting an expert witness report for a court case, he looked up the ratio of private debt to GDP in his native Australia, to see how it had changed since the 1960s. He was astonished to discover that it had risen exponentially. He then did the same for the United States, with similar results. He immediately raised the alarm: here, he warned, were the conditions for an economic crisis far greater than those of the mid-1970s and early 1990s. A massive speculative bubble was close to bursting point. Needless to say, he was ignored by policymakers.

Now, he tells us, a failure to address these problems will ensure that this crisis will run and run. The "debt-deflationary forces" unleashed today "are far larger than those that caused the Great Depression". In the 1920s, private debt rose by 50 per cent. Between 1999 and 2009, it rose by 140 per cent. The debt-to-GDP ratio in the US is still much higher than it was when the Great Depression began.

If Keen is right, the crippling sums spent on both sides of the Atlantic on refinancing the banks are a complete waste. They have not and will not kickstart the economy, because M0 money supply is not the determining factor.  ...

Read more: http://www.theage.com.au/opinion/politics/think-the-gfc-was-big-you-aint-seen-nothing-yet-20111011-1litt.html#ixzz1aXgUQNFK The Guardian