The Bad Effects of allowing Banks to Create Money


The Wider Implications of Banks Creating Money.

Our money supply is created in a strange and confusing way. How it works, the history of how it came to be, and the laws that support it are discussed in the various chapters of my book Bank Robbery published on the websites Positive Money and The Cobden Centre. This talk, based on Chapter 6, concerns how the system contributes to certain bad practices in our world today. My intention is to emphasize the necessity for legal reform.

(i) Characteristics of Bank-Money.

A lot of what is written about money seems designed to make a simple subject difficult. When banks are allowed to create money, however, the subject itself becomes difficult, because the way that banks create money is confusing.

We are all familiar with money; we use it every day to buy stuff we want and need. Most of us also know that ‘what money is’ has varied from time to time and place to place. But today, with globalization, money is becoming pretty much one thing all across all the world: debt from banks, or ‘promises to pay’. What banks owe us – what they ‘promise to pay’ – is measured by numbers in bank accounts, and numbers on cheap paper and coins.[1]

The debts, however, are a fiction. Customers turning up to claim what a bank owes them might be given notes: but they are also ‘promises to pay’. The question ‘To pay what?’ will be greeted with silence and a shrug or a shake of the head. The answer many years ago was ‘gold’; the true answer now is ‘nothing’.

Legal fictions are created and maintained for a purpose. In this case, the fiction supports a system designed from the start to profit rich and powerful people at the expense of working people. It does its job very well.

The laws that make bank-money possible are laws that enforce the buying and selling of debt: they state that the full force of the State will be put behind the collection of a debt, regardless of whether the person claiming the money lent the money in the first place. This gives rise to the familiar modern situation where people’s debts are bought and sold; they have value.

This law enables two wealthy persons to create equal-and-opposite debts to one another and create value out of nothing. This is what a bank does when it ‘lends’: it creates two equal and opposite debts, from bank to borrower and borrower to bank. What the bank owes becomes money. Money is debt from banks to us. Because what they owe is money, banks are in the luxurious position of being able to charge interest on what they owe.[2]

Money created by banks has special characteristics that mark it out from other kinds of money which are property of a simpler type (shells, gold, stones with holes, bitcoin, etc). The first, already mentioned, is that banks are privileged to charge interest on what they owe.

A second special characteristic of bank-money is that new money is continuously created and destroyed in very large quantities, as banks lend and as loans are repaid. This contrasts with a situation in which money is pure property (whether gold, silver, stones with holes in them, or bitcoin, etc.). Where money is pure property, unencumbered by debt, it may circulate indefinitely without any increase or decrease in quantity.[3]

Another special characteristic of bank-money is that it is created by two parties (banker and borrower) when both consider they will make a profit from it. In other words, new money is created in circumstances where it will profit two parties to a private deal.

Another feature of bank-money worth remembering is that when a borrower spends some of its newly created bank-debt, the ‘money’ and ‘debt’ elements separate out. The debt stays with the borrower, but the ‘money’ element goes into circulation as money – it becomes the property of the person paid (though property of a strange kind; ownership of debt from a bank). This property may even be lent back to the bank at interest. Virtuoso operators use this separation of debt and value to end up with the value, leaving others with the debt.

These special characteristics of bank-created money enable certain sets of people to profit at the expense of the rest. This was the whole intention of the system when it was first founded, as detailed in earlier chapters.

Profits come in two categories: lawful and unlawful. Lawful (but unjust) profits are created by the system itself, as authorised by law. Unlawful profits must also be considered, however, because the system makes crime so easy. When crime is easy, many individuals will turn to it, especially if they can avoid punishment or disgrace. Advances in information technology have made financial crime a good deal easier to commit. Underfunding of enforcement makes crime easier to get away with. Cultures of criminality in the ruling classes have developed in which honesty, morality, justice and conscience are derided. Because they are of the ruling classes, these cultures are influential.

It should be an object of law to make crime difficult, not easy.

(ii) Systemic (endogenous) effects of creating money this way.


As already mentioned, a bank creates new money to profit itself and the borrower. The borrower uses the new money to purchase things: labour, businesses, capital assets, luxuries. The more assets a borrower has, the more it can borrow. In this way, new money enriches persons who already have money.[4]

By purchasing assets, new money enhances the value of capital assets generally. Income from these assets accumulates with their owners: rent, interest, dividends, etcetera.

The same assets may also be used as collateral for other and simultaneous financial dealings, because the same law which makes debt negotiable, makes claims negotiable too. Multiple claims are created on the same asset, and each claim has value; this is how immense markets in derivatives and shadow banking are made possible.

Using these procedures, financial speculators have gained ownership of most of the world.[5]

Money in the Wrong Hands.

Despite the cultural myths of our age, most people do not wish to give their lives over to getting more ad infinitum: they want enough to live well, in return for work they can be proud of. Our system of money-creation favours individuals for whom ‘getting more’ overrides all other considerations.[6] The consequences of power residing in the wrong hands is incalculable and perhaps most significant of all the effects of banks creating money.

Inequality and Sick Economies: Engorgement of the Economy.

Economies may suffer from many different maladies. The one that recurs again and again today is economic engorgement when most wealth is situated with a few and spending on consumables dries up (there is only a certain amount a rich person can consume).[7]

When spending dries up, profits dry up.[8]


Extreme cycles of prosperity and recession are an inevitable result of banks creating the money supply due to what economists have called the ‘perverse elasticity’ of bank-created money: banks create too much money in the good times, and not enough in bad times.[9]

Debt, National and Personal.

Booms-and-busts are key to the creation of personal and national debts, vigorously exploited by today’s virtuoso players in finance.

Banks don’t just lend to speculators: they also lend to spenders, both nations and people. Large amounts of credit are lent when confidence says that everyone will profit eventually; credit is called in when the worm turns. Assets are seized. Greece today is a stark national example. People losing their homes after mortgage defaults are painful personal examples.

National Debts. National debts are founded on the same law that allows banks to create money. Wealthy people lend to governments and get a ‘bond’ – a debt instrument they can sell – in return. These bonds are effectively a kind of money among the people who buy and sell them, tied in value by the laws of negotiable debt to the money the rest of us use.[10]

For centuries, this advantage to the wealthy was no secret.[11]  With the expansion of the electorate, recognition of this simple fact disappeared under the radar.[12] The situation has become worse in recent decades because by relocating assets abroad, beneficiaries of the newly created money avoid paying their shares of the taxes that fund their wealth.

Growing Debt leads to a Non-Competitive Work Force.

Interest demands on debt, both national and personal (‘household’), adds to what workers must earn before they have anything to spend. As workers in countries with high levels of debt become more expensive, jobs are outsourced to where debt is less and labour is cheaper.

Corporations Hobbled by Bank-Created Debt.

After ‘deregulation’ in the 1970’s and 1980’s, a new phenomenon invaded city practice: replacement of share ownership with fixed-value and fixed-interest debt. Funded by banks, and operated by financial predators with money created for the mutual profit of both, this practice has reduced the adaptability of corporations to changing circumstances. These corporations become uncompetitive and fail or need state support.[13]

Arms Proliferation.

Banks feed a vicious circle between arms production and purchase by eagerly creating new money for both buyers and sellers. Banks create money for governments on the security of their citizens paying. Governments naturally compete to acquire arms: if your neighbour gets missiles, you want them too.[14] With demand guaranteed, banks willingly create money for manufacturers too.

If governments had to borrow pre-existing money to finance arms purchases, would things be different? In normal times, ‘lend me some money to buy weapons’ is not a popular request, particularly if the lender has to do without the money lent while it is entrusted to a dangerously bellicose government.[15]

In an economy suffering from a lack of consumer spending, arms production acts as an economic stimulant. Its workers make products that will not be bought by other workers: even in America, citizens do not buy missiles and bombs.[16] Armaments workers’ pockets fill up with money that will be spent on other goods, and on reducing debt.[17] Selling arms abroad is even ‘better’: share and bond holders get richer, wages are spent in the home country, death and destruction occur somewhere else. Governments give ‘aid’ to both sides of a conflict, tied to buying arms manufactured by home companies. The result is ‘proxy wars’.[18]


War is massively destructive for all concerned; even winners expend labour, armaments, and human lives to no constructive effect. And yet, for an economy sick with engorgement, some of the observations made under ‘Arms Proliferation’ apply here too.

In war, governments undertake massive spending. Money goes to ordinary people in wages. What they produce is destroyed; they spend their money into the rest of the economy, on consumables and to pay off mortgages and debt.[19] Ironically, a defeated country (if not paralysed by demands for reparations) may recover more quickly than a victor country: much of its debt may have disappeared along with the institutions that created it.[20]

Bank-money and national debt make it easier for governments to finance war: they can borrow without asking permission. Banking in England was instituted and made legal precisely for the purpose of enabling war: specifically, to raise money “towards the carrying on of the Warr against France”.[21] As already mentioned, England’s head-start in the management of negotiable debt gave it advantage in war.

The Need for Economic Growth.

A steady-state economy is inconceivable when the money supply takes from most people and gives to a few; soon, most money sits waiting for investment, and spending dries up. In these circumstances of automatically increasing inequality, economic growth is a must – just to keep the economy going. Growth means that money which would otherwise sit idle pours into new factories, new employment – and the pockets of workers who will spend it.

Nature and Environments Destroyed.

The bank-money system is designed for predation and expansion. As just mentioned, only ‘growth’ can keep it from seizing up. The system itself demands relentless growth; resources and environments are plundered and destroyed.

There is however a counter-question that suggests itself. With a just money system, there would almost certainly be more general affluence. Would this general affluence be spent on more and more consumer goods; or would a different, more responsible ethos take over: would people begin to take care of our world?

Populations in Servitude.

Extreme inequality means greater dependency upon the powers of government and wealth. Governments redistribute wealth to some extent, but those ‘with’ do not like to see too much going to those ‘without’. The monetary system was designed to keep the majority dependent upon the minority, and aware of their dependency. The ethos (seldom stated out loud) is that without insecurity, the poor would do no work; behind the ethos is fear that the power of the elite will be lost.

In good times, few people bother to think of monetary reform. In bad times, anxiety and a general sense of the precariousness make it hard for people to consider major reform.

Predatory Finance: Whole Countries Looted.

Nations with strong banking sectors generate money out of nothing and export it. International predation proceeds along two different tracks, state and non-state.

State: The national currency of a strong country is a powerful weapon. Currency manufactured at almost no cost buys things abroad, after which it either becomes international currency, or sits somewhere as a storage of value.[22]

In this respect, nations behave like banks: exported currency is effectively national debt, which the creator country hopes it will never have to pay. So long as it circulates or is stored, it will never be used to claim goods from its country of origin.

Non-state (private): An efficient financial sector manufactures money in a strong currency for speculators who appropriate the resources, labour and production of a less sophisticated nation. Powerful governments often assist individuals and corporations in this.[23] The weaker nation’s government is paid off with some of the proceeds. The weaker nation, instead of receiving proper purchase value for its labour, resources and production, gets a corrupted government, heavily armed to suppress dissent and oversee rule by thugs.

What’s done today by finance is a continuation of what used to be done by conquest. Piercy Ravenstone wrote in 1821, concerning England’s rule in Ireland: ‘Ireland sends her surplus produce to pay the rents of her landlords in England, and her surplus poor follow to consume it.’ Today, millions walk towards the countries that have contributed to their ruin by appropriating wealth and land, selling arms, corrupting governments and destroying habitats.

(iii) Secondary corruptions.

‘Democracy’ Corrupted.

One outcome of allowing banks to create the money supply is corruption of the democratic process (so far as it exists). Those who finance political parties exercise undue influence.[24] Michael Hudson’s book Killing the Host details how financial interests have influenced not only the written law, but also the judgements made in court.

Most noticeable of all is a lack of discussion about the monetary system. In the United Kingdom, only the Green Party wants new money to be issued free of debt.[25]

A former member of the Bank of England’s finance committee has listed categories of banking abuse; there are currently 85 categories, and the list is still growing. [26]

Capitalism – Good and Bad.

Capitalism supposedly consists of savings lent, via banks, for use by entrepreneurs. True capitalism is agile at satisfying human wants and needs. When money is created by banks, however, created money dwarfs true savings and drives the economy. The standard narrative, taught in textbooks and propagated in the media, becomes a fiction and a lie.

It used to be said that the ‘Holy Roman Empire’ was neither holy, nor Roman, nor an Empire. In just the same way, today’s ‘liberal capitalist democracy’ is neither liberal, nor capitalist, nor democratic, but a kleptocracy which gets away with writing its own laws.

Economics Corrupted.

Economics, which could contribute so much to human good by diagnosing dysfunction and presenting remedies, has become instead a propaganda machine for kleptocracy, propagating lies and relentlessly misdiagnosing in support of power. Academic journals are funded by banks; the Nobel prize for economics is not a Nobel prize at all, but an impostor funded by the Royal Bank of Sweden.

The process of corruption is no conspiracy, merely that the livelihood of economists depends upon not mentioning certain things which might discomfort those who pay them.

The Cultivation of Ignorance.

Concentrations of wealth and power, fostered by bank money, own the media and set parameters for journalism so that in many areas it dares not speak truth. Good journalism has its origin in moral belief that humans, particularly in ‘democracies’, want and need to know.

Purchase of media companies by oligarchs is a sign of the times: whole populations are now subject to dumbing down, propaganda and demoralization. The ultra-rich want to control information, which is itself a source of wealth and power. An example (28/05/2016): ‘Billionaires seize control of the information flow’:

Extremist Politics.

An important secondary effect of the corruptions listed above is the drift to extremist politics. Ordinary people know they are being cheated out of freedom and rudiments of a decent life. When the ‘educated’ middle classes show little regard for truth and justice, they provoke mistrust of the entire structure of ‘liberal’ civilization. Monstrous human escapees from some medieval vision of hell – Donald Trump is a prominent example – sense their opportunity and offer themselves as a remedy. The true remedy – reform – is lost beneath the radar of public debate.[27]

(iv) Criminal encouragements.

Straightforward Corruption in Politics.

Money manufactured secretly by banks makes transparency in public affairs difficult, if not impossible. A blunt illustration: each Russian oligarch has his own bank, manufacturing money for (among other things) bribes. A bribe may be a very profitable investment – even a necessity, for someone who wants to climb to great wealth.[28]

Such corruption has far-reaching consequences. In many countries, politics and business cannot function without corrupt payments, and election time becomes an opportunity for competitive disclosure of corruptions. Outside agencies get involved – for instance agents of Putin’s Russia, with the intention of replacing governments with Russia-friendly regimes.[29]

Robbing the Public Purse.

For influential persons, the easiest way to acquire more money is to be friendly with a bank, take out a loan, relocate the money and default on the loan. The bank will be out of pocket; but friends in government may put public money towards shoring up the bank. The judicial system may be in on the racket too, turning a blind eye.

Current newspapers (2016) contain several examples. In Bangladesh, ‘some $565 million in assets are said to have been looted from the state-owned BASIC Bank between 2009 and 2012, yet the scam’s suspected mastermind, a former chairman of the bank, wasn’t troubled by the anticorruption commission investigating the fraud, reportedly thanks to his political connections.’ Banks in Bangladesh ‘are regularly recapitalized by the government — to the tune of about $640 million for fiscal year 2014 and, it is expected, more than $700 million for fiscal year 2015.’[30] In Malaysia, a ‘billion-dollar political scandal’ involves two brothers, a banker and the Prime Minister.[31] In Moldova, a large proportion of the wealth of the country has been looted and relocated with financial partners, mostly in Russia.[32]

(v) Survey: possibilities post-reform.

The way our money-supply is created contributes to many evils. Without this contributing factor, what would the world look like? No doubt the evils would continue in lesser degree. But the world would have a chance to climb out of present reality, when so much good, real and potential, seems on the point of being overwhelmed by stupidity, greed – and yes, evil.

[1] Notes and coins are part of ‘reserve money’ created by central banks; money in bank accounts is created by commercial banks as claims on reserve money. Bank of England Quarterly Bulletin 2014 Q1 details how these are forms of debt or ‘IOU’.

[2] Frank D. Graham: ‘So far, however, as the totality of bank promises becomes, and remains, part of the currency, the promises are never called and the bank is in the delightful position of living on the interest of what it owes.‘ Partial Reserve Money and the 100 Per Cent Proposal’, The American Economic Review (1936).

[3] The stone money of Yap has endless lessons for those who wish to understand money. ‘The Stone Money of Yap, A Numismatic Survey’ by Cora Lee Gilliland. SMITHSONIAN STUDIES IN HISTORY AND TECHNOLOGY • NUMBER 23

[4] The comedian Bob Hope: “A bank is a place that will lend you money if you can prove you don’t need it.”

[5] According to Oxfam, 62 individuals now own as much as the poorer half of the world’s population.

[6] In Keynes’ version of a better future, ‘The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.’ (‘Economic Possibilities for our Grandchildren’, 1930).

[7] The most extreme historical example of an engorged economy – Nazi Germany at the end of WWII – is also the least-studied by economic historians. It was resolved when 90% of monetary wealth was simply abolished by the U.S. military administration (1948). For a lucid account, turn to the Civil Affairs Handbook issued for the American Military government, written by anonymous economists and until recently ‘redacted’ (kept secret).

[8] Asset-prices are today being kept high by ‘quantitative easing’, the creation of speculative capital. As returns decrease, so interest rates must go down too. Eventually, even at rates close to zero, banks are reluctant to lend and the word CRASH begins to looms once again on the horizon.

[9] Lester, Richard A. Monetary Experiments (1939, 1970) p. 291; and on p.292, ‘If the monetary system is to moderate rather than magnify the business cycle, money must be segregated from banking.’ Booms-and-busts do not seem to have existed before bank-money and negotiable debt.

[10] Hume and Hamilton both noted this.

[11] Montesquieu: ‘(Public) debt takes wealth from those who work, and gives it to those who are idle. It creates capital for people who do not work, and difficulties for people who do work.’ National debts became significant as soon as debt could be traded: in fact, they became exploding phenomena. English national debt went from 6% of national income to 137% of national income in the half-century after the foundation of the Bank of England.

[12] F.W. Maitland, 1879: The people cares not to understand its own laws, because these laws are obscure and antiquated; the laws are obscure and antiquated because those who would be advantaged by their reform know nothing about them. And as our Constitution grows more democratic it becomes ever more important that our civil law should be widely known. Little will now be done by Parliament to which it is not urged from without, and in these days, when there are always many excellent and exciting electioneering cries, many questions about which it is easy to make a stir, no Minister could afford to devote Session after Session to measures, however indisputably useful, for which there was no popular demand. It concerns Liberals in particular to see that nothing is lost by those successive extensions of the suffrage which they have advocated. But something will assuredly be lost unless the electoral body can be persuaded to interest itself in our everyday civil law. Something will be lost if the spirit of law reform which was fairly awakened in Parliament some half century ago be allowed to languish before one tithe of its appointed work is accomplished.’

[13] The process is described and documented in detail in Michael Hudson, Killing the Host, 2015.

[14] Adam Smith noted that the ease of raising money via national debt and bonds induces a carelessness, even a gung-ho mentality, in governments and citizens concerning war.

[15] As mentioned below, this is not the case when the lender is given negotiable debt (‘bonds’) in return.

[16] See, for instance, Joan Robinson, Freedom and Necessity Chapter 8, for a conventional account.

[17] Examples: During the ‘arms race’ in the Cold War, the U.S. enjoyed a rare stretch of financial growth and stability: between five and ten percent per year for several decades. Today, Russia is resorting to massive armaments production to restore spending money to a plundered populace; and North Korea (where the credit-creation facility belongs not to private banks but to the state) builds nuclear weapons despite, or because of, the poverty of its people.

[18] Examples: ‘In the first six years of the Obama administration the United States agreed to transfer nearly $50 billion in weaponry to Saudi Arabia’ which then went to war with one of the poorest countries on Earth: Yemen.  The five permanent members of the UN Security Council (China, France, Russia, the United Kingdom and the United States) are tasked with maintaining global peace and security, but companies based in these nations manufacture 71 per cent of the world’s arms (Roslyn Fuller, Beasts and Gods: How Democracy Changed Its Meaning and Lost its Purpose (2015) page 159) and the same arms companies contribute heavily to political campaigns. Sometimes the same government will fund several opposing factions: the activities of the United States in Central America are well-documented; Syria today is another example.

[19] A country mobilised for war experiences ‘disproportion between personal incomes and the value – at existing prices – of the consumable goods flowing to the civilian section of the economy; the government’s expenditures generate incomes but the goods in the production of which these incomes are earned are swallowed up by the military machine.’ Military Government Handbook, Germany Section 5, (1945) p.44. Ricardo made a similar point (1817) ‘At the termination of the war, when part of my revenue reverts to me, and is employed as before in the purchase of wine, furniture, or other luxuries, the population which it before supported, and which the war called into existence, will become redundant, and by its effect on the rest of the population, and its competition with it for employment, will sink the value of wages, and very materially deteriorate the condition of the labouring classes.’

[20] West Germany’s post-WWII ‘economic miracle’ is an interesting case in point. The ‘miracle’ began after Germany’s debts, internal and external, were written down by 90%. First, in the currency reform of 1948 stocks and bonds lost 90% of their value and 90% of government debt was wiped out. Later, with the London Agreement of 1953, its foreign debts were also reduced by 90%. ‘West Germany’s debt/income ratio remained below 25% until the 1970s; Britain’s post-war debt/income ratio started out at 175%, and remained higher than Germany’s until the 1990s’ – Eichengreen and Ritschl, SFB 649 Discussion Paper 2008-068.

[21] Clapham, The Bank of England (1944) I, 17. Also: ‘Caermarthen pointed out in the Lords, there might be objectionable clauses in the Bill (to establish the Bank of England) but it was the only means of providing money for the Navy to take to the sea that summer. This practical argument sufficed where all others might have failed.’ Cambridge Modern History Vol. V p. 268. See also Dickson, The Financial Revolution in England and Roseveare, The Financial Revolution 1660 – 1760.

[22] The billions of dollars already in Iraq before the war of 2003, and the forty billion flown there soon after, are curious examples, with an added element of ‘Where did it all go?’: and

[23] See Perkins, Confessions of an Economic Hitman (2006) for an interesting personal account.

[24] Marx, for instance, made it the fifth plank of his Communist Manifesto that the State would supply and control credit.


[26] Chapter 10 on ‘Accommodation Bills’ in Rogers, The Early History of the Law of Bills and Notes’ (2004) is an interesting case-study of a particular form of abuse, and the efforts of legal minds to address it.

[27] Examples: the right is gaining ground across Europe and in the U.S. In the Philippines, an unashamed advocate of extrajudicial murder is elected President because citizens are angry with the old élite which ‘seemed impervious to their pleas for economic equality.’ The rise of Donald Trump in the United States looks pale in comparison – so far, at any rate.

[28] Today’s example: banks are being investigated for providing money for bribes in international soccer:

[29] See for instance the Legatum Institute report Is Transition Reversible? The Case of Central Europe (2016).




One reply

  1. Cyril says:

    Thank you, nice read.

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