Category Archives: Bank Money

The Creation (and Destruction) of Money by Banks

Noticing The Obvious

Economists are geniuses at avoiding the obvious and saying what various factions among the powerful want to hear. A good example is their discussions of bank-money, which avoid noticing how destructive our modern system is to the human and natural world.

Money-creation has been assigned as a privileged activity to banks for the profit of capitalists and governments. As a result it consists of credit and debt, not as a straightforward commodity.

There are three main differences between bank-created money and money created as a commodity:

1. Newly-created bank-money is allocated to persons (human or corporate) by banks on the speculation that, one way or another, it will turn a profit. It is also allocated to governments on the promise of payment out of future taxes, burdening the citizenry with debt.

Newly-created commodity money, on the other hand, could be allocated in any way subject to democratic approval (e.g. spent by government in lieu of taxation, or distributed equitably, or given entirely to homes for retired cats).

2. Bank-money is created with an inbuilt demand for interest, which takes money out of circulation and into investment. This transfer inflates asset values, making everyone who is rich richer and the rest poorer.

Commodity money on the other hand can be lent, spent and even hoarded: it has no inbuilt widget taking from ‘have-nots’ and giving to the ‘haves’.

3. Once bank-money has done its work, it is destroyed, as loans are repaid. This creates a need for new money, which can only be created by making more loans.

Commodity money, on the other hand, can be managed actively with the objective of maintaining a steady value for money. If there is too much money in circulation, some can be removed via taxation and destroyed; if there is too little, more can be created and allocated as mentioned above.

Because of the above three points, it is foolish to be surprised when money accumulates in vast pools owned by governments and the very rich, leaving savers, independent producers and the poor worse off.

Total Stupidity? Or Total Hypocrisy?

Does any central banker seriously believe that ‘quantitative easing’ will produce spending and recovery? Or do they know the obvious – that QE makes the rich richer?

Economists profess that if a 100 people, with a thousand dollars between them, want a cup of tea, and tea is on offer at one dollar per cup, everyone will probably buy a cup of tea.

They refuse to discuss the obvious fact that if one person has all the thousand dollars and everyone else is broke, only one cup of tea will be sold.

Are economists stupid? Disingenuous? Or do they merely serve those who get the money – that is, governments, capitalists and banks?

There are liars, there are hypocrites, and then there are economists….

Systematic Robbery – bank money and anti-democratic government

Summary of a talk given at the Political Studies Association International Conference, Cardiff 2013.

Our representatives betray us by allowing banks to create the money supply. The procedures by which money is created are hidden from the public. Most of the laws which underpin the process have never come before any kind of legislative assembly: they have never been argued over, let alone voted on. Knowledge of these laws and procedures is hidden to all but a few.

The system of money-creation by banks was developed in England at a time when Parliament consisted of rich men voted in by other rich men. It has since become standard across most of the world, as English financial and legal institutions have been adopted by other countries. It is managed by those who profit from it: that is, by politicians, capitalists (entrepreneurs and investors) and bankers. This most important of functions is in therefore in opposition both to democracy and to open and accountable government.

Public understanding of money tends to be that it is a uniform commodity, a medium or token of exchange, which favours no one person over another. Some people accumulate more than others because in some way, however inscrutable, they have provided more in exchange; or perhaps they have managed, in classic Marxist terminology, to get their hands on some ‘surplus value’. If such people save, according to the myth, they have money to invest; and that is capitalism.

Nothing could be further than the truth than this picture of our money supply. It actually consists of two systems which are almost entirely separate, in that there is almost no flow from one to the other. I say ‘almost’ because, alone among all our methods of payment, actual physical cash­ – coins and notes – crosses the boundary between the two systems. There is certainly a strong relationship between the systems, however, and it is this relationship which makes some into winners and some into losers.

The easiest way of understanding the relationship is to look at its origins in English history: then the picture becomes fairly simple. It came into being when a certain dodgy practice of English bankers was given legal authority by English Parliamentary representatives between the years 1688 and 1704. Representatives had just become the supreme power in the land, and parliament, as I have already said, consisted of rich men voted in by other rich men. What was this dodgy practice?

The story is known to every elementary student of economics. English bankers of the 17th century stored gold, and gold was then used as money. It was a period of civil war: hungry armies were on the move, and there was a big demand for strong-rooms. Bankers gave receipts to owners of the gold, so they could return and claim it. Soon these receipts, these claims on gold, began to circulate as paper money. People began to pay for things by handing their claims to someone else.

So far so good, you might say. Paper money is light to carry and easy to hide: a brilliant and positive development! But bankers, realising that gold would stay put in their vaults for as long as the receipts kept circulating, thought – why not issue receipts for gold that doesn’t exist? They began to write receipts for fantasy gold, and to lend the receipts at interest. For reasons which are not too hard to imagine, these bankers rapidly became extremely rich. They also made themselves vulnerable, because there were claims out in the world on more gold than they had in store.

Parliament, for its own reasons, authorised this dodgy practice. As rich individuals, they could now borrow, invest and make more money; as a government, they could borrow and finance war. The Bank of England took on the role of managing the system: from this was born the institution of the central bank. The dodgy practice was now a complete system.

The system is still in operation today. The ‘reserve ratio’ you may read about is a measure of how many claims exist against a single quantity of a bank’s ‘cash reserve’. We have said goodbye to the gold – the gold standard died finally in 1974 – and to most of the paper too; but we the system itself is maintained as a virtual, that is digital, reproduction. What was gold, is now cash digits. The money we actually use – always excepting those notes and coins – is digital claims on cash digits.

In other words, what we have now is a direct descendent of a system designed three hundred years ago for the profit of banks, governments and capitalists.

What is dodgy about creating claims on cash that isn’t there? To start with, and fundamentally, it is lending a claim on something you don’t have. It is taking money – interest payments – under false pretences. By augmenting the money supply, it is diluting the value of currency held by others—a schoolboy’s dream, taking a little from everyone so they won’t notice. It is creating purchasing power for some and not others, creating more inequality in a world already more than unequal enough. In short, it is manufacturing money for the benefit of a certain section of society – government, capitalists and banks – at the expense of all the rest, including workers, genuine savers and independent producers.

On the ‘winning’ side: banks make big profits, and capitalists and governments are able to borrow from cheap rates, because fantasy money is cheaper to lend than gold. (Just think of cash moneylenders’ rates today as against those of banks: anything up to 1,000% as against 5% or less.) Especially important for governments is the fact that no permission except the bank’s is needed to borrow; and banks, licensed by governments, are inclined to cooperate. Together, banks and governments burden that convenient legal fiction ‘the people’ with almost unlimited debt – and governments get to spend the money from that debt.

This system of creating money is foolish as well as fraudulent. Banks create claims in the act of lending and those claims disappear when loans are paid back, so the money we actually use grows or shrinks according to the banks’ appetites for lending. Because the money tends to grow and shrink at the wrong times, economists call this ‘perverse elasticity’. It turns the ups-and-downs of the ‘business cycle’ into full-blown booms-and-busts.

Of more consequence, however, is that within the overall quantity of created claims, money is forever being transformed (via the portal of interest) from circulating money to money seeking investment. Another way of putting this is to say that bank-money is created with an embedded widget which transfers it bit by bit to the ownership of capitalists. The difference between money created pure, and money created as fictitious credit, is precisely the presence of this embedded widget.

This way of telling the story points out the specific nature of the abuse, which is the creation of claims on money that isn’t there. Such claims are called fictitious credit: if you try to claim what you think is yours, you find out it’s not there. Objecting to this, of course, is quite different from objecting to, say, the taking of interest, to credit, to negotiable claims, or even to capitalism, none of which in themselves amount to theft.

From the way the system operates, we would expect a steady growth in the amount of capital in the world, and a steady decrease in the amount of money in circulation. We would expect the steady impoverishment of people not attached to government or employed by capitalists. We would expect a steady increase in the amount of debt loaded onto their peoples by governments.

We would expect massive pools of capital available for projects with a guaranteed return, such as arms production: for arms are purchased by government order with public debt, and governments like to compete in arms acquisition. We would expect cooperative enterprises which profit capitalists, governments and banks at the expense of that convenient legal fiction ‘the people’.

We would expect humans to become less and less competitive against machines, because machines are bought with created capital, while workers come burdened with government-created debt that has to be funded by taxes on employers and workers.

We would expect a vicious circle of humans being made redundant and dependent on the State, putting yet more financial burden on those who productively work.

It would be easy to go on, outlining how the monetary system needs or favours war, environmental devastation, cultural degradation, ‘recreational drug use’, relentless and unsustainable growth, and huge cities of the dispossessed which appear wherever representative government takes root; and how it generates the tidal waves of created capital which swallow the assets of ‘emerging’ countries, producing barbarous billionaires and new kleptocracies.

None of these connections is ever, so far as I know, debated in representative assemblies. It would make no sense for a party, or for that matter an individual tyrant (increasingly significant these days, when dictatorships are rearing their ugly heads all over the place) to question a system which offers to supply them with money at others’ expense. For money, as the saying goes, is ‘power in its most liquid form’.

3. Law.

I mentioned earlier that the laws which support bank-created money were not created in a democratic fashion. The origins and continued existence of these laws throw doubt on how much true democracy there is in ‘representative democracy’.

For a bank to legally create fictitious credit it needs three privileges. It must own the cash deposited with it. It must be authorised to create claims on that cash, over and above the amount of cash it holds in story. Lastly, its claims must be enforceable in law: they must be allowed to disguise themselves as legal tender – as euros, dollars, pounds etcetera.

These privileges were first established in England, since when they have been adopted all over the world. The first privilege was established – or rather re-established, since it was already commercial practice – in a famous case, Foley and Hill of 1848, when the judges agreed with each other: the money customers deposit is ‘to all intents and purposes the money of the banker, to do with as he pleases’ [Lord Cottenham]; and moreover, that a banker ‘receives it to the knowledge of his customer for the express purpose of using it as his own.’ [Lord Brougham]. In other words, we all know that when we put money in a bank it becomes the property of the bank, and that it’s no longer ours. End of story.

The second legal privilege of banks was given a fascinating explanation in another well-known case [UDT and Kirkwood, 1966]. One of the three judges, Lord Denning, said that the law came to enforce such credits by a process of ‘communis error facit jus’ which a legal dictionary explains thus: ‘What was at first illegal, being repeated many times, is presumed to have acquired the force of usage, and then it would be wrong to depart from it.’ Denning’s actual words: ‘thus it {the law} will enforce commercial credits rather than hold them bad for want of consideration.’.

Unlike these two laws, the third (establishing fictitious credits as legal tender) was actually debated and passed by the English parliament. Parliament, as I keep repeating, consisted then of rich men voted in by other rich men. They passed the Promissory Notes Act of 1704 specifically to crush judicial opposition to fictitious credit: in particular, to suppress Lord Chief Justice Holt’s attempts to stop bankers from dictating the law. It is interesting that Holt is famous today for his efforts to restrain another establishment vice, the persecution of witches; and for his reminder that slavery is not permitted on English soil.

To add confusion, the laws supporting the practice are dishonestly framed. A bank is defined as an institution that accepts deposits; and, in circular fashion, as an institution licensed to act as a bank. The essential privileges of a bank are thus masked, hidden, unacknowledged. Lord Denning complained of this lack of definition fourteen times in the judgement referred to earlier.


Halting the creation of money as fictitious credit would not be difficult. What is difficult is piercing the veil of public ignorance, so that people know enough to demand reform.

Reform would consist of two processes: withdrawing the privileges of banks, and managing the transition to a ‘level playing field’. For this, some democratic decision-making is needed: on how to restrain fictitious credit, how money should be made or destroyed in future, and how to adjust the artificially-created debts in the meantime so that an equitable transition might be made to an equitable future. My book In The Name of the People considers how this might be done.

Why is there such widespread denial of the theft inherent in our monetary system?

‘In common usage, theft is the taking of another person’s property without that person’s permission or consent with the intent to deprive the rightful owner of it.’ – Wikipedia.

Our modern monetary system was invented and developed between 1688 and 1704 in England by English parliamentary representatives and English bankers and capitalists. It has since become established all over the world.

The scheme of the system is (and was) twofold: one, to provide government with a way of borrowing money without asking anyone’s permission; and two, for capitalists to raise potentially unlimited amounts of money, created out of nothing on the speculation that they will be able to pay it back with interest.

The system is maintained by governments and capitalists, with banks and central banks acting as intermediaries. Banks profit too, by taking a cut.

What are the thefts involved?

Heaping debt on someone without their permission is a fairly simple form of theft. If I borrow at my neighbour’s expense – if my neighbour has to pay both interest and capital and I spend the money – that is a pretty outrageous theft.

This primary theft continually impoverishes citizens, and makes them easy prey for the second theft when someone – a capitalist – is able to conjure up money out of nothing and buy their assets.

The theft is therefore a double act. Governments impoverish their citizens: capitalists buy up their assets. Eventually all assets would end up in the ownership of capitalists, except that crisis intervenes when there is not enough money left in general circulation.

Ignorance of the system is now at its greatest since the system began.

In the early days of the system, representatives and capitalists had no need to dissemble. They were the ruling class; they were openly in the business of getting rich by putting their citizens, and the rest of the world, to work. Objections were also open and vociferous, but ineffectual, because the ruling power called the shots.

Around 1920, understanding of the system was at its greatest. C.A. Phillips, J.M. Keynes and others published books clearly explaining the process by which banks create and destroy money.

Around 1920, poor people began to get the vote. Straightforward acknowledgement gave way to obfuscation, not noticing, not discussing. Since then, although the system is not hard to understand, ignorance of it has been carefully nurtured and maintained.

How does the system work today?

The system works today on a two-tier basis: real money (cash) and claims on that cash.

The only real money we citizens ever get our hands on is notes and coins. All other real money – ‘cash’ – is owned by governments and banks. The money we citizens spend – whether by bank transfer, credit card, debit card, cheque, e-transfer or any method other than cash – merely transfers a claim against our bank to someone else. At the end of a day’s trading, the banks tot up all these claims and decide how much they owe each other.

Governments create cash, and banks create claims against cash. Because almost all the money we use consists of claims against bank cash (‘credit’), banks create almost everything that we think of as ‘money’. What banks call ‘credit’ is exactly and precisely these created claims.

Why do so few people discuss this scenario?

The governor of the Bank of England recently announced (25/10/10): ‘Of all the many ways of organizing banking, the worst is the one we have today.’ Yet talk of fundamental reform is more-or-less absent from any agenda.

A few reasons for this are fairly obvious. No politician – mainstream or extremist – wants to give up the ability to borrow without limit, and without permission. No one who is influential by reason of being rich, or being favoured by the system, or who is beholden to rich and powerful employers, wants to change a system which benefits them. Others are terrified that tinkering would only make a bad situation worse.

Meanwhile the poor, who might be able to recover some assets if the system was reformed, are kept in the dark about it – and about how they have been dispossessed.

What are the consequences of bank-created money?

There is scarcely an evil in the modern world that is not created or exacerbated by banks being privileged to create the money-supply. Here are a few of the more obvious.

First and most obvious, all the money tends to end up in the possession of capitalists – that is, people whose only business is making money from the efforts of others. This means not only that the ‘others’ are impoverished: they are also thrown on the mercy of capitalists and governments, degraded and dispirited into a condition where they feel they have no rights, only ‘entitlements’ to hand-outs specified by the floating voters who have effectively authorised the latest government.

Secondly, a need for growth is built into the system: only exponential and relentless growth can continue to increase the amount of money in circulation. (Claims are created, and subsequently circulate, when banks make loans: interest payments drain money from circulation and into capital).

Thirdly, the system favours vast capital projects destructive of the natural world: slow & responsible development by saving-and-lending is disabled.

Fourth, artificial markets are created and fed by collusion between governments and capitalists. For instance, the ability of governments to recklessly borrow provides assured clients for the arms industry; and the ability of banks to create capital for assured markets creates a ready supply of arms.

Fifth, when capital can be cheaply created to buy machines, and when human employees come with heavy tax burdens, an artificial advantage is given to machine labour over human labour. Unemployment is exacerbated.

Sixth, power deserts elected representatives and lodges with money pure and simple. ‘Representative democracy’ becomes a managerial front for a system favouring one group – a non-productive group – at the expense of all the rest. Moreover, the favoured group enjoys power without responsibility for ‘money is power in its most liquid form’. Next to the power of created capital, the power of voting once in a while is a pitiful paper doll confronting a mechanised army.

This is a summary of Chapter 4 of my book In The Name of the People published 25/02/13.