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breather. In the words of William E .
Brock, President Ronald Reagan's
chief trade adviser, "The interna–
tional financia! community can
assess its management of the inter–
national ' debt' crisis of 1982-83 with
a certain sense of satisfaction ."
But Ambassador Brock qualified
bis compliment to internationaJ
financ ie rs with this warning:
"Many of us in international t rade
view the current situation [near the
end of 1984] with lingering misgiv–
ings. For the moment , the most
critica] stage of the crisis appears to
have passed , although any ftuctua–
tions in interes t rates would have a
dramatic effect on debt levels."
Two Key Factors to Watch
Westero industrialized societies
generally are blessed with an edu–
cated labor force, access to adequate
natural resources, modern factories
and developed markets for goods and
services. But two important factors
must be present also for a free-mar–
ket economy to grow. They are the
oi l that reduces economic friction
and allows a national economy to
produce at high volume.
The two factors?
Cooperation
and confidence.
There
must
be confidence in the
economic system if a nat ion with a
free-market system is to have a
strong economy. Banks in particu–
lar must earn the trust of deposi–
tors. Bank customers must feel
confident that their banks ar e
sound, that their deposited money
will continue to earn a profit and
that bank officials wi ll continue to
correctly discern acceptable risks.
Banks provide much of the needed
cooperat ion in this competit ive
world. They organize loan syndicates
that provide vas t amouots of capital
for growing industries, provide
advice and help bring people
toget her for further fin a nc ia!
growth.
Though industry may possess ade–
quate capital, a trained and coopera–
tive labor force is needed to produce
quality goods and services. When
labor strikes against industry, the
economy begins to suffer. And pub–
tic confidence starts to waver. If
enough people begin to believe the
economy is headed for a downturn, a
snowballing effect may occur. Sub–
sequent investments and risk-taking
20
ventures suddenly dry up. As people
hold their money instead of spend–
ing and investing it, the ecooomy
begins to contract instead of grow,
and the nation enters a recession.
Of course, this is a simplified
sketch of complex economic events.
But it
does
happen, and many econ–
omists are now looking at this phe–
nomenon .
What Will 1985 Brlng?
As a gauge to measure the necessary
cooperation and confidence, or the
lack of it, what financia] institution
should you watch?
The international banking sys–
tem!
In
this competitive human age,
political and economic forces are
closely intertwined. No individual
institution is as infiuential as the
bank.
Despite the image of the non–
emotional , intellectually cold bank–
er, the banking business is actually
the most personal and subjective of
al/
businesses.
Anthony Sampson, author of
The
Money Lenders,
points out: " How–
ever complex and mathematical the
[banking] business has become, it
still depends on the assessment of
trust with very human fail ings."
Want to start a new business or
finance an expansion of your existing
industry? You must first convince a
loan officer or bank board of direc–
tors that you are a worthy risk.
These officers use both objective
and subjective factors to reach their
decision, regardless of whether the
loan is for a used car or a new hydro–
electric dam in South America!
Why are banks so concerned with
risk? In addition to profitable inter–
est, the loans (considered assets in
the banking system) they make
affect the general
trust
their deposi–
tors have in their inst itution.
How Banks Create Money
J ohn Kenneth Galbrait h once
declared: "The process by which
banks create money is so simple
that the mind is repelled."
Too few realize how banks create
money to loan. Most of the money
that a bank loans exists only on
paper-no currency is printed or
precious metals purchased to }?ack it
u
p.
Consider this simple example:
You deposit $ 1,000 in a U.S. bank.
The Federal Reserve sets a limit
(which changes from time to time)
on how much of that money can be
loaned out. For this example, say
it's 90 percent. This means the
bank must keep at 1east $100 in the
bank to protect you.
The bank, over a period of time,
/oans out
the other $900 in the
belief that most of the time they
will have enough money on hand
from other depositors to pay you
back your $ 1,000 should you come
in and demand it.
As your money passes from bank
to bank, financia! institutions may
continue to legally reloan your
money unt il almost
$9,000
is levied
against your original deposit!
As long as banks are held high in
overall public confidence, this type
of financia] behavior continues
smoothly.
But, as in the case of the Cont i–
nental Bank of Illinois, this can
quickly collapse into crisis if public
confidence wanes in the ability of
banks to make quality loans.
The Contlnulng Crisis
A s 1985 dawns, an incredibl e
amount of money is still owed to
governments and private banks by
nations in Latín America. Even
though the fi nancia] system doesn't
generally accept the concept of
national bankruptcy, Latín Ameri–
can nations could be forced by cit–
cumstances to repudiate part or all
of their enormous debts.
The unsettling element in this is
that nations in this world have a long
h_istory of doing this very thing!
Who remembe r s that King
Edward Ill bankrupted two major
banking houses in Italy in 1327
when he repudiated English debts?
Or that even the United States was
considered a terrible risk in the mid-
1800s in the Civil War period?
Less than half a century later, the
Uni ted States found itself a
creditor
nation to the same European coun–
t ries after the First World War.
Blrth of the Eurodollar
As American economic might con–
tinued its unprecedeoted g rowth
after the Second World War, Euro–
pean nations and prívate fi rms began
hoarding U.S. dollars for thei r
exceptional value. lnternational
The
PLAIN TRUTH