The Governor of the Bank of England, Melvyn King, recently cited the worst bank crisis since World War I as reason for cutting interest rates.

That, however, would cause price index to move upward. And in the vocabulary of those who run our economy, that is “inflation” - the worst thing that can happen. The main purpose of banks for the last half-century is to keep prices flat In the real world, the price level can, indeed, more upward because there is too much demand and not enough supply to satisfy it. That is real “ inflation”. But that does not mean that prices may have moved upward for quite other reasons. Nobody who moves from a town of 20 thousand to New York City is foolish enough to believe that his living costs will stay the same. How then can it stay the same when a growing portion of the world’s population has been making just such a move? The number of cities of 5 million has increased on all inhabited continents.

And then there is the detail that the higher technologies that have taken over call for far more education. that used to be norm. A century ago anybody who learned to read and write was deemed educated. Today you need some university education to hold your own against your computer. One could go on indefinitely enlarging the list of such upward movements of the price level having nothing to do with an excess of demand over supply.

Many of such non-inflationary types of price rise simply reflect the fact that our economy requires more public services that only the government can supply and are covered by taxation. The resulting level of taxation I have called “structural price rise”. And the deepening layer of taxation imposed to pay for them, I have termed “the social lien”.

There used to be two quite distinct ways of dealing with these very different kinds of price level increases. The government can make no distinction and respond to any rising of the price index by raising interest rates. That will bring down prices only by bringing down the economy into a recession, and if persisted in, a depression. This method hits everything that moves and reduces prices by increasing unemployment.

That is particularly appealing to those whose income is interest rates or who live by speculation based on price level.

But there was another policy weapon that had been developed in the great banking reform brought in at the very depth of the Great Depression by President F. D. Roosevelt in 1933, when things had become so bad that 9 thousand American banks had shut their doors by the time the new President was inaugurated..

After a full month during which all banks were shut down, and after consulting every economist who had something to suggest, he brought in the Glass-Steagall Act (laws) that amongst much else forbade banks to take over the other “financial pillars” - i.e. brokerage houses, insurance, and mortgage companies. The reason?. Each of these institutions keep their own cash or short-term interest-bearing securities easily convertible into non-interest-bearing legal tender, to meet the needs of their own business. Allow the banks to take over such non-banking businesses, and they will use those reserves as the basis for applying what used to be known as the “banking multiplier” - the number of times these bank reserves can be served as the basis for bank-loan creation.

If permitted, not only can the bank multiplier become a many-storeyed skyscraper, but the risk and hence the interest rates multiplies until from the initial 1:10 as it existed in 1949 , could attain the level of 380:1 that it did by 1998. This amounted in fact to a growing skyscraper with the elevator running only upward at an ever greater speed and , of course, at greater r isk. At a certain point there is only the military option left for the economy going on functioning. By that time the Glass-Steagall legislation brought in to prevent this, had not only been weakened and ignored, but actually repealed.

Such change in the guiding legislation implied a shift of political power into the hands of the banks. Under Roosevelt the manipulation of the central bank interest rate was not the only tool for encouraging or restraining business activity as the need came to be perceived. There was also the statutory reserves requiring private banks that took in deposits from the public to leave a modest portion of that deposit with the central bank that earned the depositing bank no interest. If the economy became over heated - rather than depending entirely on raising the benchmark interest rate - that hit everything that moved or stood still - the central bank could increase the statutory reserves if it judged that the economy required needed cooling, or lowering it if they wanted to perk up economic activity. The advantage of this alternative tool was that it reduced the dependence on high interest rates to control movements of the price level..

That left interest rates the sole remaining arm for guiding the economy.

But interest rates are the primary income of money lenders; and a mobile interest rate is the powerful arm of speculative capital. Along with Globalisation and Deregulation carried out in the 1980s. this in effect delivered the world economy as a private casino to world financial capital.

Such is the background. This leaves little but the military option as a desperate way out of a seemingly hopeless situation. It certainly has been a major factor in Washington’s incredible involvement in Iraq and above all Afghanistan.

Today the direct involvement of central governments in prime debt to rescue major banks loaded with subprime debt has imperilled the soundness of many countries ‘ legal tender.

And yet, instead of pushing stubbornly along these paths to doom, there is a simple, safe solution involving the double-entry accountancy that is a legal requirement in the private citizen. What is more, such double-entry bookkeeping was adopted to get the central banks out of a hopeless dilemma in 1996 in the US and in 2002 in Canada. To extend it to human capital would be like baking with a cookie-cutter. Instead of the government or central bank taking over part of a growing deficit from banks involved in questionable securities, our governments could credit the banks with its vast and totally unrecognized investment in human capital.

Almost a half-a-century ago Theodore Schultz reached an important conclusion. At the end of the Second World War he had been one of the hundreds of economists that Washington sent to Japan and Germany to predict how long it would take for these powers to become formidable competitors on world markets again. And some twenty years later - in the mid-1960s- Schultz wrote a paper in which he noted how wide of the mark he and his colleagues had been in their prediction. And the reason, he concluded, is that they had concentrated on physical destruction, and overlooked that their highly educated and disciplined work force had survived largely intact. From that he concluded that human capital was the most productive investment a country can make.

That, in fact, may well be the greatest lesson learned from World War II. For a few years Schultz was highly honored , and soon, almost totally forgotten. Usually the greatest lessons are suppressed. because what they teach us hinders rather than promotes the ambition .of the speculative finance sector that for some decades has run this world.

Redoing the accountancy of our central governments would not only strengthen the bank balances with top-rank assets - the government’s own credit - but recognize the resources unrecognised but more definitely at the disposal of at least developed countries to revive the economy even while providing highly useful projects in health, education, environmental upgrading.

There is nothing subgrade about these resources that cry out to be used. We will be happy to provide further documentation of this immense resource that comes pre-tailored for the purpose to exactly what the society needs.

William Krehm

(You can contact Mr Krehm by e mail at comerpub@rogers.com

or telephone him at (416 924 3964)