One of my correspondents recently referred me to an article and asked for my opinion about it. The article is Creating Money out of Nothing: The History of an Idea, by Mike King, dated April 2012 .
I read the abstract, the conclusions, and part of the body text, but could not bring myself to make a detailed read. “The history of an idea” is not relevant to my interests nor to the debt crisis that plagues civilization. Verbose and tedious, it seems to be an academic exercise that I doubt will be of interest even to historians.
On the positive side, it did prompt me to write a few words of clarification on the question, words that I think are both pertinent and helpful to those who truly wish to understand the nature of money and the role of banks in today’s world.
The accusation that banks create money out of nothing has, according to King, been made by many famous economists, including Schumpeter, von Mises, and Keynes. I too must admit to having once or twice used that statement as a sort of shorthand criticism of the global money and banking system.
It is surely true that saying that banks make “money out of nothing” is an exaggeration that can be misleading to the uninitiated.
Bank actually create money out of something. The question is, what is that something, and what is wrong with it?
The short answer is that banks create money on the basis of the promises of their borrowers to repay.
Mr. King would have us believe that banks simply take in money from savers and lend it out to borrowers. That is clearly wrong. Even the Federal Reserve, in its own publications, says that,
The actual process of money creation takes place primarily in banks.(1) As noted earlier, checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers’ accounts.
In the absence of legal reserve requirements, banks can build up deposits by increasing loans and investments so long as they keep enough currency on hand to redeem whatever amounts the holders of deposits want to convert into currency. This unique attribute of the banking business was discovered many centuries ago.–Modern Money Mechanics
As I’ve pointed out in all of my books, banks serve two primary functions. They act as both depositories, reallocating funds from savers to borrowers, and banks of issue that monetize the promises of their borrowers. I’ve explained that in detail in Chapter 1 of my book, Money: Understanding and Creating Alternatives to Legal Tender, and in Chapter 9 of my latest book, The End of Money and the Future of Civilization.
But not all promises provide a proper basis for creating money. As Edward Popp, describes it, banks create both bona-fide and non-bona-fide money. (See Money, Bona Fide or Non-Bona Fide at http://www.reinventingmoney.com/documents/bonafidePopp.pdf).
The vast majority of the non-bona-fide money that banks create, is created on the basis of loans made to national governments (when banks buy government bonds). Further large amounts of non-bona-fide money are created when banks make loans to finance purchases of consumer goods and real estate (see my books for details). This is a violation of the principle that money should be created on the basis of goods and services on the market or soon to arrive there, which includes promises of established producers who are ready, willing and able to sell for money the things they ordinarily offer.
The bottom line remains: the present global, interest-based, debt-money system, is dysfunctional and destructive.
The creation of money on the basis of interest-bearing loans is the cause of the growth imperative, and the creation of non-bona-fide money is the cause of inflation.
If we are to achieve a sustainable society and assure the survival of civilization, we must transcend the present money and banking paradigm and reinvent the exchange process. – t.h.g.
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Mr. Greco, I just stumbled across this website so I don’t know if you’ve every explained the mechanics of why a debt based monetary system promotes inflation… or the growth (monetary) growth imperative.
Let’s start with a simple situation that is easy for all to understand while retaining the essential essence of the situation.
If banks lend $20 to society at 5% interest, in one year society (including government!) owes the bank $21 due to double entry bookkeeping adjustments that add $1 interest liability to society’s balance sheet and $1 interest asset to the banks balance sheet.
Society has $20, owes $21 to the banks and the banks control the $1 required by society to pay back the loan.
The banks control the situation – and this is a situation that Napoleon recognized way back when…
“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes… Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
– Napoleon Bonaparte, Emperor of France, 1815
If you think that scenario is bad, wait until you find out what constitutes a “bailout.”
A bailout is when the banks lend $20 into society, keep the $20 to put into their corporate front pockets and offload the bill to society. At 5% interest, society, will owe $21 to the banks in one year and have $0 with which to pay it! Of course, the banks claim that they did this to society to save society – that’s the power of language when one group understands rhetoric and logical fallacy and the other lacks intellectual self-defense.
Now, how does this relate to inflation? Well, if the banks demand payment of the $21 after one year then society will know they’ve been conned (they can’t possibly pay back the debt – it is IMPOSSIBLE!) and the banks can only foreclose on $20 worth of collateral.
So, what do they do? They create another $20 that makes the first $21 owed easier to pay back, but this $20 is afflicted with same usurious math as the first $20 lent to society.
This causes the debt/money supply to inflate – and that’s inflation.
Steady state is not possible unless the objective is to bankrupt and asset strip all the debtors that can’t secure enough of the debt money receipts (money) to pay off their debts.
Remember, Main Street doesn’t possess the money to pay off all the debt. This is a zero sum game – $1 debt = $1 money… the monetary balance sheet, as it were.
The monetary wealth of the Debt Money Monopolists is, BY DEFINITION, the INEXTINGUISHABLE DEBT OF EVERYONE ELSE!
The PEOPLE who are doing this to society sit above the banking institutions and governments. They finance both and, therefore, CONTROL BOTH.
The monetary system is a prima fascie fraud and a Trojan Horse used to transfer wealth and power to coterie of oligarchs who manage the Debt Money Monopoly system.
World renown Council on Foreign Relations insider historian, Carroll Quigley, discusses the machinations of this group in his magnum opus Tragedy and Hope.
I highly recommend that all interested parties read at least Chapter 19.
Tragedy and Hope, Chapter 19:
“The Money Power Seeks to Create a World System of Financial Control in Private Hands Able to Dominate Every Nation on Earth
In addition to these pragmatic goals, the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations. Each central bank, in the hands of men like Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Bank, Charles Rist of the Bank of France, and Hjalmar Schacht of the Reichsbank, sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.”
Debt Growth Juxtaposed to GDP Growth (Quarterly)
Note the 2nd chart showing debt growing exponential to GDP, a flagrant violation of Section 2A of the Federal Reserve Act:
Fed Z1: A SEVERE Storm Warning
Federal Reserve Act
Section 2A. Monetary policy objectives
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee ***shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production***, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]
I cover all of that in my books, articles and websites.
Iakovos Alhadeff, the problem is a duopoly between government and the banking interests that finance government. Quibbling about which part of the duopoly is more responsible than the other is to miss the point. They both work together right now and they both, working together, broke Section 2A of the Federal Reserve Act and took credit and monetary aggregate growth rate exponential to the America’s GDP growth rate and, in doing so, created the world’s greatest debt bubble – TOGETHER.
The truth is that banks and governments are legal fictions… they don’t really exist. PEOPLE do exist and PEOPLE have rigged this system so that an oligarchy benefits at the expense of the vast majority of people.
The Socialist Myth of the Greedy Banker
Your arguments are not convincing. It is not a socialist myth. The fact is the central governments and banks collude in the creation of money based on debt. Bankers get to lend our own credit back to us and change interest for it, while central governments get to spend far more than they raise in revenues by taxation, etc. Thus, we must contend with two major parasites, interest and inflation, which drain real value from the economy while increasingly enriching and empowering the financial and governmental sectors. That system is unstable, unsustainable and unfair.
You obviously did not read my document carefully
Correct, I did not. The best I can do is look at main ideas and conclusions. Less than one page should be sufficient to express the main points.
No. I am afraid that to deconstruct the propaganda that this is a banking sector and not a government induced crisis you do not need one page. You need many pages to expain to the reader that private banks cannot generate crises.Don’t you think it is a very important issue? Especially given that wherever you read for the the cause of the crisis, you read that it is a banking sector crisis.
From the document you cited…
>>private banks are not at all responsible for the crisis, since they cannot “create” money.<<
That is a claim. It is also a false claim. A false claim admitted by the Bank of England, the granddaddy of modern debt-based monetary systems.
Money creation in the modern economy (Off the Bank of England website!)
Click to access qb14q1prereleasemoneycreation.pdf
"Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money."
Read the Bank of England produced document – the truth of the matter is extremely simple. I explained it in my original post. Mr. Greco has explained it as well.
Now the BANK OF ENGLAND HAS EXPLAINED IT. And it took one sentence to simply explain how banks create new money – by issuing loans.
I will address the fallacies of the link that you posted shortly, but I want to get the obvious and Bank of England admitted truth out quickly.
Also note that the Bank of England ADMITS MOST TEXTBOOKS ARE WRONG WHEN IT COMES TO MONEY CREATION.
"The reality of how money is created today differs from the
description found in some economics textbooks:"
Perhaps the author of the link you provided is simply parroting the erroneous textbook information because he didn't actually bother to validate it, he just believed what he was erroneously told. Yes, the BANK OF ENGLAND called the textbooks wrong.
The Federal Reserve itself told us long ago that banks create money by making loans. See their booklet, Modern Money Mechanics, link on my other website https://reinventingmoney.files.wordpress.com/2013/07/modernmoneymechanics.pdf.
Dissecting the article you posted…
>>What happened in reality is that excessive money creation [by whom is the question here, not why!] was simply used to accommodate the unsustainable fiscal policies followed for years by many countries [that’sa why, not a whom answer. And it is partially correct]. Unfortunately it is much easier to notice the private banks credit expansion [note the banks expanded credit, per this author’s own admission – that credit **is** part of the money supply, so he contradicts himself and doesn’t even know it. Or does and he’s lying.] with the abundance of cheap credit [provided by banks!], and the resulting bubbles [caused by banks!], and much harder to realize that it was state policies and laws that dictated such expansions and led to bubble creation [we’ll wait for his explanation here].<>I therefore believe that it is of great importance for the general public to realize that private banks cannot create inflationary money. Only
governments can do so by introducing relevant laws as I explain below.<>Now I turn my attention to the private banker, to whom all socialists attribute the crisis. As expected, the private banker wants to sell as much of the medium of exchange as he can, whether the medium of exchange is olive oil, whether it is golden coins, or paper money or whatever, because this is his job.<>Therefore it is very normal and very healthy that the private banker wants to lend as much as he can, given of course his customers are creditworthy.<>So, can a private bank in this environment “create” money if it wishes to do so? The answer is again no.<>I hope that it is clear by now that private banks cannot create inflationary money.<>And governments have only 3 ways to finance their deficits. The first one is taxation, the second one is domestic and foreign borrowing, and the third one is by printing new inflationary money.<>If a government goes too far with the printing press though, it can cause very high levels of inflation, or even hyperinflation, with catastrophic consequences for the economy. But in the short run political parties tend to overlook the long run consequences.<>The main idea of this document is that there are no fat greedy bankers, but rather fat greedy governments and politicians.<>Such conspiracy theories are everywhere and always supported by populists, or by people that are not very educated or intelligent, and they have a tendency to believe populists.<<
Oh, I'm educated and intelligent enough to know that you just added ad hominem logical fallacy to your false presentation.
Your whole paradigm is WRONG, WRONG, WRONG. You think governments create money WHEN THEY DON'T DO IT. They borrow it from private banks owned and controlled by private people (who are far wealthier and more powerful than any politician).
The government isn't over $20 trillion in debt TO ITSELF!
But there is KEY POINT here. I believe you know that WHOEVER CONTROLS THE MONEY SYSTEM IN SOCIETY ACTUALLY CONTROLS SOCIETY. This is a no brainer. Because, if you controlled society but didn't control the money in society, THERE IS NO GOOD REASON FOR YOU NOT TO USE YOUR CONTROL OVER SOCIETY TO BEGIN CONTROLLING THE MONEY IN SOCIETY.
So, in order to try and defend the, let's get real, here, Banksters, YOU HAVE TO IMAGINEER A GOVERNMENT THAT PRINTS ITS OWN MONOPOLY DEBT-FREE MONEY WHERE IT DOES NOT EXIST IN REALITY.
That's a lie. That's dishonest. At least if you persist in this lie it is dishonest.
Now, you seem to be operating in a false dichotomy… it is either the Banskters or the government – pick one.
No, IT IS BOTH WORKING TOGETHER. THE BANKSTERS PRINT AND ISSUE THE MONEY AND THEN THE MONEY INCENTIVIZES THE POLITICIANS (YOU HAVE HEARD OF "SPECIAL INTERESTS," RIGHT?) TO DO WHAT THE MONEY POWER WANTS DONE AND THE MEDIA IS INCENTIVIZED TO PROMOTE PEOPLE WHO SUPPORT THE MONEY POWER AGENDA.
“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.”
I have sworn upon the altar of god eternal hostility against every form of tyranny over the mind of man."
– Jefferson to Dr. Benjamin Rush, September 23, 1800
You've been deceived. Your mind is under a tyranny. I'm fighting that tyranny in your mind, but the problem is that you will almost certainly like the lie you've been duped into believing, facts be damned.
“The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.”
― Daniel J. Boorstin
Here are more resources that explain REALITY, not imaginations…
“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks [that buy control of government and covertly wield it against the people who can’t envision the money flow between the two].”
Poverty /Debt Is Not a Choice [It Is a Feature!]
Inequality – Why are the Rich Getting Richer
Renaissance 2.0 – The Rise of Financial Empire
Debunking MOney – the Way the World Really Works
Oh, BTW, I’m not a “socialist.” I’m completely off the Money Power Political False Dichotomy cognitive slave plantation. The Democratic and Republican Parties, Inc. are both wholly financed subsidiaries of the Money Power. The borrower is SERVANT to the lender, after all.
Thanks for providing those additional resources for people who really want to understand who rules the world and how they do it. I’ll check them out, and I hope others will add their assessments of these resources.
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Reblogged this on @brookwarner.
Anything can be used as money. But unless it cannot be counterfeited by governments …
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