Newbie Corner - The Fundamentals

Bill Kruse
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Just joined the SIG? Let me prepare you for what's to come as best I can. Have you ever read Alice In Wonderland? It would make wonderful preparation for what you're about to be introduced to! Follow me now down the rabbit hole, I see by my fob watch that it is indeed late, very late!

Where Money Comes From In The First Place.

Mostly, banks make it up. Until quite recently, you wouldn't have seen this discussed in the British media anywhere, as a general rule. Mentions have been limited in international media too. However, it’s true! Now that Labour's Jeremy Corbyn has adopted a policy of what's known as People's Quantitative Easing, the subject of money creation is becoming better understood. Read on.

This is how things were considered to be until quite recently: “Based around a formula supposedly dependent upon what they have as cash or near-cash as reserves, banks create money from nowhere (as we already know governments can do). They do this under license, ultimately from government, in a process called fractional reserve banking.”

Um, well... if this ever was true, these days that’s all been deregulated. They just make it up now, so long as they feel you’re good for the ‘loan’. Much of the National Debt is money banks have created this way and ‘loaned’ to the same government that grants them the licence to create it in the first place. We’re told of cutbacks, of austerity measures, because we’ve got to pay back the deficit, the difference between what we earn and what we spend. A good portion of that is interest on the National Debt.

Since government can create its own money, then why do we have this charade about needing to borrow it from the relative handful of privately-owned banks, at interest? Remember, the banks don’t have it to lend in the sense they have to have a pound to lend a pound (as you or I do). They just have an effective license from the government to create money. One could argue strongly then we shouldn’t be ‘borrowing’ any money from banks in the first place. Why is there so little discussion about this fundamental issue?

It has been openly discussed in America, even confirmed recently by President Obama himself. In a speech at Georgetown University on 14 April 2009 about the bank bailouts – he said : “Although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?’ they ask – the truth is that a dollar of capital in a bank can actually result in 8 or 10 dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.”.

When he says ‘a dollar of capital in a bank can actually result in eight or ten dollars of loans’, he was actually referring there to the fractional reserve banking process, which at that time was presumably (officially) still extant in America. For further explanation, you could download Modern Money Mechanics, a PDF of a booklet circulated by the Federal Reserve Bank of Chicago, describing how money is created by the fractional reserve process. [Banks] “do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.”

Note that if you’d like an explanation about how money is created in an audio-visual format, Mike Maloney provides an excellent one in part 4 of his Hidden Secrets of Money series on YouTube.

This is from the Federal Reserve Bank of Dallas: “Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank once again holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.”

I’ll say now that, again, I think this info is a little out of date these days. The important point for you to take away, though, is that the money supply is indeed mostly created by the banks and doesn’t come from government (or wherever else you thought it came from, if you gave it any thought at all). We can see for ourselves that those quotes are genuine as we can view the sources for ourselves. Here’s a couple that are attributable, but not verifiable so far as I’m aware. They make sense though, so I include them here:

Robert B Anderson, Treasury Secretary under Eisenhower in an interview reported in the 31 August 1959 issue of US News and World Report: “[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.”

Congressman Wright Patman, Money Facts (House Committee on Banking and Currency, 1964) “Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money, they don’t necessarily take it from anyone else to lend. Thus they ‘create’ it.”

Moving on to the British side of things, here’s a direct quote on the subject from The Right Honourable Reginald McKenna PC, a former Chancellor of the Exchequer (1915-16). This is taken from his book Post-War Banking Policy (I have a copy myself and occasionally you can find it available through Amazon etc.): “While banks have this power of creating money, it will be found that they exercise it only within the strict limits of sound banking policy.”

Hmmm. Well, we might disagree there.

He goes on to acknowledge the power of banks to create money is kept quiet: “I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth – as indeed it is in the hands of the individual who owns it, wealth in the most liquid form – and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which, by some black art of its own contriving, can increase or diminish wealth and presumably make a great deal of profit in the process.”

Indeed it does. Many would suggest that’s because autocratic and irresponsible is exactly what the banks are, while in the process of making a great deal of profit for themselves.

Here’s the Bank of England on the subject: “Banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’. That is, banks extend credit by creating money.”

The Independent Banking Commission chaired by Sir John Vickers recently produced its Interim Report (these useful tidbits had been removed by the time the final version came out) in which it was twice noted that banks create money.

Page 65: “Fifth, even before the crisis, banks enjoyed various kinds of State support, including the effective right to create money, and access to lender-of-last-resort facilities at the central bank. Comprehensive state support was given to banks in the crisis, for fear of what would otherwise happen, and continues to benefit banks directly and indirectly on a large scale, especially those seen as being systemically important.”

Page 98: “Like narrow banking, a complete move from fractional to full reserve banking would drastically curtail the lending capacity of the UK banking system, reducing the amount of credit available to households and businesses and destroying intermediation synergies. To its proponents, this shrinkage of credit is a benefit, as it removes the current ability of banks to ‘create money’, a prerogative they consider should be reserved for the State.”

Here's more from various luminaries, including an update from the Bank of England itself;

Former Bank of England Governor (now) Lord Mervyn King who said “When banks extend loans to their customers, they create money by crediting their customers’ accounts.” in a speech to the South Wales Chamber of Commerce at The Millennium Centre, Cardiff on the 23rd October 2012.

His former deputy (now) Sir Paul Tucker who said "banks extend credit by simply increasing the borrowing customer's current account... That is, banks extend credit by creating money." in a speech from the BofE and included in the Bank's Quarterly Bulletin for 2008 Q1.

The Bank of England (itself!) who informed us that “Commercial [i.e. high-street] banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created" in March 2014 in a report called “Money Creation in the Modern Economy”.

I’ll spell how it all works out a little clearer. You probably think that when you apply for a bank loan, someone like Dad’s Army’s Captain Mainwaring gravely considers your request and goes shuffling off to the vaults to inspect the contents. Can they afford to loan you some of the assembled wealth? he wonders, eyeing the vault (in your mind’s eye) full with paper money stacked end on end, piles of stocks, shares and bonds floor to ceiling, perhaps gold bars gleaming from the shadows. The stout and conscientious Captain walks the aisles, mentally reviewing your business plan – if you want to borrow to start or expand (or just plain run) your business – or your general credit worthiness – if you want to borrow for a holiday or build an extension or perhaps some other venture. What if you default? he wonders. What is the likelihood and what would then be the consequences to the bank’s customers, directors and shareholders? Deciding in your favour, he returns to his office where you wait in anticipation and informs you that – subject to the usual conditions, repayment plans, interest etc. – the loan has been approved. Overjoyed, you return home to check your bank account and, in due course, see the money has been transferred from the bank’s vaults to your account. Whoop-de-do. You’re in business.

In reality, there’s no transfer of funds from the bank’s account to yours. The money has appeared in your account though, so where has it come from? The answer is it’s new money. It never existed anywhere before. Someone at the bank pressed keys on their computer and lo! there was money in your account.

Banks and banking systems can create money out of thin air – and they do.

Debts for a Fee

Let’s examine what happens again. The bank CREATES the money it purports to loan to you. Remember here that banks aren’t inanimate objects, they’re groups of people with the label ‘bank’ written on them. Doesn’t it strike you that, given we’re a society dependent upon money to function, it’s a little unfair how one small section of society has the effective monopoly on legal tender creation? It gives them an impossible advantage over the rest of us, particularly when you consider they will only create money for a fee over and above the principal created. It makes us effectively a serf society, working ultimately to pay the banks the money they’ve created for us.

Remember too that where your personal debt is concerned, the money it consists of is created into existence. You have to pay the interest on it, though, from money which is already in circulation. You can’t print it or create it electronically yourself. You personally can’t create money, legal tender, into existence the way banks do. Only the banks (and government) are allowed to do that. Think about this some more. Almost all the money in circulation is only in circulation because a bank, somewhere, some time, created it as debt. There’s interest (fees) payable on that debt. This means that there’s interest payable to the banks on virtually all the money in circulation.


The idea is, we have to go back to the banks to “borrow” more to pay back the interest on the money we already borrowed, back when we needed to borrow to pay back the interest on the money that we’d borrowed before … unending, isn’t it? So it’s unsustainable, right? Mathematically, it’s going to run out. Well, that’s the exact same situation we’re in today as a culture. In fact, most of the Western world’s in that same fix. We can routinely only get money from one source, and we have to pay over and above the principal to get that money… which means we’re always running around trying to achieve the impossible, to pay banks interest we can only get by going back to the banks for more money which incurs more interest … which is unsustainable anyway … and all this is about money that the banks never actually HAD in the first place. They just exercised their rather special prerogative to Make It Up!!! Welcome to the rat race! Welcome to the reason behind that feeling you sometimes have of just being a cog in a machine – you are! Most of this is very little understood. I have trouble with some aspects of it even now. As a help, I provide a list of resources on the Economania website at links-resources

On the subject of misunderstanding, many people without contradiction suggest a national budget’s just the same as a housewife’s budget and that, accordingly, the books have to balance. Clearly it’s not the same, because a housewife can’t create legal tender nor can she delegate that authority to a third party, but the nation can. Why is it we aren’t properly educated in these matters? Difficult not to think ‘conspiracy’ at this point, isn’t it? Mmmm ... it is and it isn’t.

All Quiet on the Media Front

No doubt there will be people behind the scenes who would rather that the great unwashed had no grasp at all of money creation and how it’s in the hands of a few, rendering them elite. But it’s probably not in the media because the media we have is either corporate-owned, political or shades of both. It’s simply not in their interests to highlight it. They’re dependant upon advertising, much of it from the banks or finance houses, for their profit. The point could be made now too that as most businesses have relationships with each other, the handful of media moguls are in cosy relationships with the banks and won't want to be upsetting them.

Perhaps this explains why the ongoing court actions against the banks for their allegedly unlawful and predatory behaviour towards our country's SMEs receives next to no media coverage.

Similarly the BBC, for instance, is reliant upon continuing political patronage. One wonders how long there’d be a BBC if it regularly pointed out how impotent government actually appears when the banks refuse to oblige by supplying money. Note that the fact that banks make up money was not exactly dwelt upon in BBC Business Editor Robert Peston’s BBC2 documentary British Banks: Too Big To Save?

In short, all the media appears owned or funded by people who have no interest in the general public becoming genuinely educated about money and its creation. If we did, I suspect a new society would arise as a consequence – one in which the current media backers and owners would lose much of their existing high social standing and wealth. It’s difficult to think they’d have any interest in promoting that, though cracks are beginning to appear.

One could suggest that the banks’ takeover of the planet took a giant leap forward with the surprising appointment of Canadian Mark Carney as Bank of England Governor. What’s Osborne doing appointing a foreigner to such a prestigious UK position? I’ve long held that Osborne is run by the banks, a puppet chancellor, and his appointment of the former long-term Goldman Sachs executive confirms that opinion.

Britain, to my mind, is run by the banks and for the banks. If they can’t make money from you, if they can’t send you to work, you’re superfluous. The future looks bleak for many. Are things going to work out in the end? They have to, or else what future is there for us as individuals?

Any alternatives?

We can fight the City of London, global heartland of the banking fraternity, in two ways.

  1. we can burn it to the ground (we’d be doing the world a favour in my view) and
  2. put in place an alternative system.

The tried-and-tested system of State-owned banking observable in America’s North Dakota is portable and can be used in any sovereign environment. Our own councils could use it here, form banks using council taxes as capital base and create money into their local communities accordingly. You might argue that such an arrangement could only work locally, not internationally, but local banking arrangements will spread as they prove themselves. The only reason they aren’t prevalent now is that when they show signs of becoming popular, they get crushed by the big banks.

I’ve formerly written here that that’s becoming increasingly unlikely to happen nowadays – the big banks are distracted, feuding amongst themselves. However, the appointment of the banks’ man Carney suggests otherwise – that the banks are tightening their grip. In an environment that becomes less hostile, local and state banking will become the norm. Ways will be developed to trade internationally too. The era we’re now in will be looked back upon, as it should be, as the economic dark ages. First, though, we’ve got to beat the bankers. I have a feeling in my bones that this isn’t going to be pretty.

However, since I wrote much of the above and as I referred to briefly earlier, much to my surprise along has come Labour's Jeremy Corbyn with his People's QE. QE, I hasten to point out, is these days a blanket term for money creation by government. It should probably more properly be called OMF, as it is by the MMTers, (Modern Money Theorists) meaning Overt Monetary Financing. I'm very keen on this idea and I'm both surprised and pleased to see it now. Not only does it help dispel the myth there can be any such thing as a shortage of money in a country which has control over its own currency and its own central bank, but in implementation it favourably alters the ratio of money in circulation which has been created for free by our own bank as opposed to the money created into circulation by the private banks at interest.


As I hope we can determine from some of the sources quoted above, it’s a sham. Completely unnecessary. Osborne, Cameron and their shabby little gang are revealed as either ridiculous incompetents or as spivs and conmen, and so are the other international world leaders who support it. It’s self-evident – you don’t make an economy grow by taking money out of it, no matter that you portray the deprivation as ‘savings’. Only the economic illiterate could swallow that argument and, very likely by design, that’s just what the majority of the electorate are.

Money isn’t lost when it’s spent into the economy, unless – arguably – it’s then kept permanently under mattresses or siphoned off into tax havens. Instead, it’s regained through taxation. This is a circular arrangement: the government pays it out and we spend it – in particular the poor and those on benefits spend it, as they have little choice in the matter – and eventually the Chancellor gets it back as taxes, so it can be recreated into circulation again. This occurs independent of any action the markets may or may not take and it’s misleading of the government to pretend otherwise. We could, and very probably should, formalise this arrangement by admitting the economic necessity for it, distributing a set sum to all and calling it, perhaps, universal social credit or basic income. That would keep the wheels of the economy turning. I see its eventual implementation as inevitable.

Since our government chooses not to do this, we can only assume its real aim is to maintain and enhance the financial status quo. Austerity is also being used as an excuse to remove all of the social progress of the last few centuries and return us to a feudal state, where the bankers and a handful of other business leaders rule the rest of us as serfs. Austerity’s imposition will get worse for as long as we continue to put up with it. While I’m not entirely comfortable with the idea, I will remind you here of my earlier suggestion to burn down the City of London. My feeling is that the same conditions which gave rise to the financial shocks of 2007/2008 are still extant and, in fact, have grown in liability and consequence. I suspect what happened back then was the pre-shock and the real quake has yet to hit us.

While we’re waiting for it – as our position collectively deteriorates and the banksters get ever more comfortable at our expense – then taking up your pitchfork and your flaming torches, while initially repugnant, might soon not seem such a bad idea. Increasingly, here in the UK, we’re being denied access to law by the simple expedient of making it expensive and extremely complex. Under those circumstances, what’s a disaffected population to do except violently revolt? Yet we shouldn’t be forced to contemplate such things.

Equally, as a nation, we shouldn’t be contemplating borrowing money from anybody. Money is just made up stuff. All money everywhere is stuff that someone, somewhere has made up. As a sovereign nation, we can make up our own money and distribute it into the economy interest-free. Use that money to create wealth, real wealth – build hospitals, train surgeons, fund the arts and sciences... – together with taxing out any excesses and there won’t be any inflationary consequences. Given that we have this ability of sovereign money creation, it is the absolute height of folly to be borrowing it from others. It serves only to get us deeper into entirely unnecessary debt. This, I assume, is the real strategy behind the policies which are allegedly Osborne’s – to get us, as a nation, perpetually into debt to a handful of malevolent billionaires. I imagine the intention is we and later our grandchildren will spend our working lives not to better ourselves, not to improve our quality of life, but to pay off these entirely unnecessary and impossible debts. The poor and the middle classes, the upper classes too, are then turned into an income stream for the very, very rich.

In today’s popular idiom, it’s rent-seeking (I call it ‘milking’ myself). Whatever, it’s a scam. BB

Bill Kruse - - Permission granted to freely distribute this article for non-commercial purposes if attributed to Bill Kruse, unedited and copied in full, including this notice.

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