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The Astounding Conversion of Finnolly Servus

Gordon Coggins

Finnolly Servus started as a bond salesman in a small city, making cold calls to people with good addresses – a miserable life. He eked out a living, but he never made it big, and all the heiresses with good addresses scorned him. He married the daughter of a man who ran a small slaughterhouse. It seemed appropriate. The bank he worked for forgot him. New bonds, when he could get them, sold well in the 80s, but then Paul Volcker of the Fed shoved interest rates into the stratosphere, and the whole game collapsed. So Servus left the bank, with no regrets on either side, and became a mutual fund salesman. "Come to Finnolly Servus for Friendly Service," was his slogan.

Then came the mid-nineties; the "boomers" were saving, and anybody could sell investments. Servus Friendly Financial prospered. Finnolly’s personal portfolio grew three times as fast as his clients. So in the late nineties he sold them – their accounts, that is – to an expanding American brokerage firm, and became a private investor. With a newsletter. It suited him. He had been telling little lies about investment products for years. With an advisory investment newsletter, he had the perfect formula in the great market buy-tout-sell.

He began to make donations to political campaigns, and once was consulted by board members planning the breakup of a conglomerate. He made a killing on it.

Then came the millennium and 9/11. The market tanked. The boomers were cocooning. Finnolly Servus made the fateful mistake of believing his own forecasts. In Nortel and Enron alone he lost half his capital. He came too late for the real estate boom. Derivatives were a mixed bag. He was very uneasy about the income trusts he had bought into. One which promised a payout of 18.3% announced a steep reduction, and a modest 12-percenter had to draw on a line of credit to make the payment. He kept thinking about a line he had read in an article on income trusts: "Capitalizing future income is a good play – for the companies."

Sometimes he wished he were back in Friendly Financial, or even – when the ISC investigated him – back at the bank! But he joined the Canadian Taxpayers Federation, contributed to the Fraser Institute, set up a slimly endowed but well-publicized Friendly Servus Trust (for helping widows, orphans and the financially disadvantaged) and took to telephoning bureaucrats and politicians to advocate "necessary" measures. His list included:

• Shift taxation from capital to consumption, a flat tax on income, an increase in the GST;

• Redirect government spending from "social misfits" to afflicted corporations;

• Let banks merge (monopoly, he knew, is the ultimate success story);

• Expand foreign trade, through WTO and FTAA, to get those resource-rich developing nations to "liberalize their bloody assets";

• Lower the minimum wage and abolish the capital gains tax ("to create jobs");

• Increase the limit on RRSP deductions "to encourage investment";

• Stretch the compulsory retirement age to 69 to keep the salaried middle class investing;

• Privatize hydro, health care, and the CBC.

He even spoke to parent groups in favour of subsidizing schools. In short, Finnolly’s self-esteem was eroding like a sand-castle in a thunderstorm.

Part of a Panel on "Fixing the Economy"

He almost declined an invitation to be part of a panel on "Fixing the Economy," but even Finnolly Servuses sometimes get an angel nudge. He accepted, and at question period his destiny caught up with him. He had been pontificating on the point that "there isn’t enough money, so hard choices have to be made." A tweedy gentleman from a mike in the audience asked the panel, "You say there’s not enough money. Where does money come from? Who makes it?" The other panelists looked to Finnolly. He didn’t hesitate. "The government makes it," he said, and the difference between what it costs to make and the face value of the product is called ‘seigniorage’ and accrues to the government."

"Does the government create all our money?"

Finnolly hedged, "Well, most of it."

The gentleman at the mike persisted, "What about the money I use when I pay for something with a credit card?"

"That’s a loan from the bank," one of the other panelists snapped.

"Yes," said Finnolly, "banks have to keep money on deposit with the Bank of Canada to back it up."

"But there has been no such reserve requirement in Canada since 1993, when the Mulroney government abolished it at the request of the banks." The gentleman’s simple assertion left the panelists speechless. Finnolly Servus looked at the Chair who took the hint.

"Thank you, sir. Are there any further questions?"

"You gentlemen ought to learn where money comes from," said the tweedy gentleman, before leaving the mike.

There was a little murmur around the audience. The Chair decided to take only two more questions, though there was a line forming at one of the mikes.

"The credit card expert, a bank officer, could not contain himself. "The process of money creation is not a simple thing," he said. "The government is advised by the CBA and the FOMC. The FOMC, which meets once a week, determines the need for more money and advises the Governor of the Bank of Canada to create, which he does by a weekly offering of treasury bills. It is not a simple process."

Even the Chair looked embarrassed. He hastily took a question from a lady with a beef about the Canadian Pension Plan. She wanted to know why the Plan had lost four billion dollars. The panel assured her that markets always went up in the long run.

The last question, however, went to a tall, grey-haired man in a blue suit, who introduced himself with a name known in financial circles. "I have been a corporate accountant for many years. I have studied the banking system and the creation of money as debt by the chartered banks. In response to the explanation of money creation given by the panelist, I can only quote the old saying, ‘BS baffles brains,’ and say that I am baffled by it." A murmur through the audience culminated with several loud laughs. The Panel squirmed. The man went on, "My question, however, is about the title of tonight’s discussion. "Fixing the Economy." It seems to me that the economy is already quite well fixed – fixed to benefit a very few, at the expense of the majority. What economy are you trying to fix?"

The Chair raised his eyebrows helplessly, and turned to the panel. The bank officer snarled, "I don’t have to answer that stupid question."

But Finnolly Servus was moved to reply. He opened his mouth, and stopped, with his mouth open. At that moment he had an insight, a revelation, you might almost say. He realized that, for all he thought he knew about the way the market operated, he had made money only when everybody was making money. He said, "I’d like to speak with the gentleman afterwards." Several members of the audience applauded. The Chair took that as a sign the meeting was over.

Finnolly was as good as his word this time. While he shook hands with the other panelists, he kept an eye on the accountant, who was working his way over to the tweedy gentleman. In the coffee shop, after the exchange of introductions, Finnolly said to the professor, "So where does money come from?"

The professor deferred to the other man, "Do you want to tell him, Paul?"

"Okay," said the accountant. "You were right about seigniorage and government money creation, but government money accounts for only about 3% of the total money supply at present. Almost all the rest is created by the chartered banks and the other institutions they control, as loans." He repeated the last phrase, "As loans."

"As loans?"

"Yes over 90% of our money supply is created by and loaned out to us by bank holding companies of the chartered banks. That is why governments, most corporations and whoever has a mortgage are in debt. Almost all of our money is loaned money."

"I don’t get it," said Finnolly. I read somewhere that the banks haven’t issued money since the 1930s."

"That’s partly right. They haven’t issued their own currency, but when you go to your neighborhood bank for a mortgage, they don’t give you currency. They give you credit. And at the moment when the bank’s computer credits the principal to your account, that amount of new money pops into existence. The don’t lend you someone else’s money. And the loans isn’t backed by a pile of thousand-dollar bills in their vault. The mortgage principal is newly created Canadian dollars. Incidentally, although they are in your account, they belong to the bank. You have to repay them, you also have to find the money to pay interest on them, or your property becomes the property of the banks."

Finnolly Servus had another flash of illumination. "You mean the whole economy floats on borrowed money?"

"That is correct," said the professor.

Gordon Coggins

The Astounding Conversion of Finnolly Servus to be continued.

— from Economic Reform, Sep. 2003