Reforming Money and Banking

Notes for a Talk, Greenwich & Lewisham Positive Money Group, Weds 14th Sept 2016.

What is ‘Money’?

There’s so much confusion about what money is, it’s worth a few sentences on the subject to see what needs to be reformed.

We are all familiar with the essential quality of money: it is something we own, which can be exchanged for other things that are up for sale.

But money, of course, has to be something more than just an abstract idea. Most people are aware that money has ‘been’ different things in different places: gold, silver, beads, stones with holes in them, etc. What is money in our globalized world of today?

Today, it is debt from a bank.[1] This is where the ‘magic trick of banking’ comes in – a simple magic trick which confuses the public and prevents it from protesting in astonishment and outrage. It also confuses many practitioners, and saves them from having to assess the results of what they are up to.

The ‘magic trick’ of banks is that they rent out their debt. The normal activity of paying interest on what you owe is reversed: banks charge interest on what they owe.

Other chapters have gone into how this works, how it came to be, and the terrible effects the system is having on our world. This chapter is about reform.


There are laws which support the system, and a multitude of regulations which make it work. Some reformers want to change the fundamental laws; some want to adjust the regulations, so that the system still works, but more in the public interest. Generally, reformers agree on one thing: money should not be rented out at interest: it should be a form of property (like shells, or stones with holes in them, or perhaps in our computer age, digits) which we own outright.

Reform the laws, or change the regulations?

The fundamental law which authorizes all financial shenanigans (that is, dealings which create money or value rather than just intermediate money or value) is law that enables debt to be bought and sold as if it was a commodity. This law enables money to create more money.

To illustrate this, imagine that I, the author, lend you, the reader or listener, a thousand pounds. I no longer have the money; you have it. I won’t have that thousand pounds again until you give it back to me, whereupon you will no longer have it. No value has been created.

If, on the other hand, I lend the government or a corporation a thousand pounds, I get a piece of paper – a ‘bond’ – equal in value to what I have lent. This piece of paper is effectively a kind of money, limited to circulation among the wealthy but tied in value to the money that the rest of us use. I can exchange a bond among other wealthy people for other things of value, including money. This makes lending to the government or a corporation relatively risk-free and painless. It also creates new wealth for the class of those who are already wealthy (noted by Alexander Hamilton, star of a new musical taking America by storm).[2]

Bank-money is only slightly more complex than ‘bonds’. A bank-customer or ‘depositor’ owns debt from a bank. The debt changes hands when payment is made and becomes the property of the payee. The law says that this debt – these ‘promises to pay’ – can be bought and sold. This is how debt from a bank has been able to become our money supply. This is where, like a rabbit out of a hat, the ‘magic trick of banking’ appears: a banker’s debt becomes the money we use every day, and a bank can charge interest on its own debt.[3]

This law could obviously be done away with, and a previous situation restored in which law only enforces recovery of a debt for a creditor if he/she/it originally lent the money. This is the position that has my allegiance; I am looking for questioning and disagreement, so that I can understand further what might be the outcome of such a reform, for good and bad.

Opposition to Fundamental Legal Reform.

The same laws which enable banks to create money also enable governments to create national debt on a massive scale at little or no expense to the lender and great expense to the rest of the population.[4] This helps explain why both systems have endured for so long, and how governments and wealth have become so intimately entwined.

‘Democracy’ was always understood to be rule by the not-so-well-off, because the not-so-well-off are always in the majority. But today’s ‘democracies’ are dominated by the rich, because laws privilege the state and the financial sector to create value for themselves and for those who are already wealthy. This fact remains little-known for two reasons. First, voters, bored (and/or daunted) by details of finance and law, remain ignorant. Second: in key areas of the political, academic and financial worlds, ignorance – pretended or otherwise – is a prerequisite for advancement.

Lastly and most obvious, individuals who gravitate towards politics and finance are in pursuit of power and money; they are naturally disinclined to give up the single biggest common source of both. This is most notable today in the fact that ‘the Left’ is mostly uninterested in monetary reform. Marx admired the power of capitalist credit and debt creation: the fifth plank of the Communist Manifesto was that it should be taken over by the State.[5]

Reforming the Regulations.

Reforming the regulations, as opposed to reforming the laws, keeps the possibility alive of creating value out of nothing. This means regulations can be altered so that certain groups can continue the process of creating financial value. Naturally, splits arise, based upon ideological dispositions. These splits are often around inclinations towards ‘left’ and ‘right’.

Taking ‘left’ first: The State should be entrusted with providing a pure, ownership-based (i.e. debt-free) money supply; but in addition it should be able to create credit for tasks that would increase the public good such as environmental improvements, health, welfare, and other nationalized goods and services.

The ‘right’ distrusts the power of government. It looks at the long history of the misuse of government power, including the printing of too much money, and says that human freedom, liberated from government control, restraint and interference, would produce goods and public services more efficiently and beneficially than the state in response to public needs. With regard to people with needs but no money, many on the right favour a universal citizens’ income. This would supply finance in such a way that people can pay by choice, rather than be provided for. Many on the left advocate this too, for slightly different reasons.

In terms of monetary reform, the common ground of right and left is the provision of money without a debt-widget. Within the current legal framework, this would mean banks holding money on behalf of customers. When lending money on, a bank would not create multiple claims on the same money; the money itself would actually be lent. This would mean banks becoming what most people think they are; receivers of lenders of savings (as opposed to creators of money).

The right has the additional concern that the value of created money should not be pegged to the good intentions of the State: it should be pegged to a commodity such as gold, that cannot be augmented at the whim of politicians. Reformers on the left who share the same objective would achieve it by creating an institution, with authority over government, that would command it to create or destroy specified quantities of money, with the object of keeping the value of money steady. This creation and destruction of money could easily be achieved by using new money to augment or replace taxation, or destroying money gained from taxation.

Time for Reform: Why Now?

Today’s laws and system date from days when elected representatives and all those who voted for them were rich. Assemblies approved the laws because the practices they authorized would increase money for rich individuals and add to the power of the state.

The system was founded in England between 1694 and 1705. It was subsequently copied all over the world and it evolved into our modern, global financial system. It has done its job so well (so over-well, you might say) that, according to Oxfam, 62 individuals now own as much as the poorer half of the world’s population. In a previous chapter of Bank Robbery I outlined other undesirable outcomes of the way money is created: how it contributes to things such as war, corruption, global warming and environmental destruction.

There is now some urgency about the need for reform. If this and other reforms don’t take place, civilization as we know it may well come to an end. The ‘reform by’ date seems to be getting closer and closer. Its clock is ticking backwards.


[1] The essential facts are: the government (via the central bank) and the commercial banks cooperate to create and rent out all the money we use, including notes and coins. The government creates digits called reserve, which it rents out to commercial banks. Commercial banks rent out claims on this reserve, and these claims are what we use as money. Only after these rentals have been agreed does money enter our world as circulation. As for notes-and-coins, commercial banks buy them off the government in exchange for reserve: they are obliged bt the terms of their license agreements to provide them customers on demand in exchange for claim-money.

[2] from Report on Public Credit (1790): ‘It is a well-known fact, that in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money. Transfers of stock or public debt are there equivalent to payments in specie; or in other words, stock, in the principal transactions of business, passes current as specie.’

[3] Whereas banks charge interest on what they owe, governments commit their taxpayers to paying interest on debts contracted in their name. Thus, both are somewhat covert taxes on public prosperity.

[4]   A fact noted in 1776 by Adam Smith, the ‘godfather of economics’: ‘The security which it [the government] grants to the original creditor is made transferable to any other creditor; and from the universal confidence in the justice of the state, generally sells in the market for more than was originally paid for it. The merchant or moneyed man makes money by lending money to government, and instead of diminishing, increases his trading capital.’ Wealth of Nations, Book V, Chapter 3.

[5]  ‘5. Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.’ Nazis also took control of credit creation, with banks obeying orders – or else.


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