Enlightening the Shadow Side of Banking – Monetization of Negotiable Debts by the Few as Instruments of Enslavement of the Many






by Ivo Mosley



Ivo Mosley studied Japanese for a first degree and Musical Theatre for an MA. He has written fiction, plays, and cultural criticism for many publications, both mainstream and fringe. He became interested in money creation while writing on the illusion of democracy, identifying money-creation by banks as the murkiest of all institutionalised practices in a political system best characterised as kleptocracy masquerading as democracy. His most recent book was In The Name Of The People (Imprint Academic, 2013) and his next book will be titled Robbery By Banks. 

Reproduced from: http://ivomosley.com/latest-book-bank-robbery-2/

‘BANK ROBBERY’: A book in process of publication.

BANK ROBBERY by Ivo Mosley.

This book is being published chapter by chapter on the websites ‘Positive Money’ and ‘The Cobden Centre’. The theme is how wealth is created for the rich by banks and governments, which manufacture money as debt. Money and debt soon separate out; money ends up with bankers and financial speculators, while the debt ends up with the poor.

Chapters so far published are linked to below:


Chapter One: Banks and the Money Supply.

Chapter Two: Inequality and the Banking System.

Chapter Three: Law and the Banking System.

Chapter Four: Economists and Banking, Part One: the Early Days, to Adam Smith.

Chapter Five: Economists and Banking, Part Two: Adam Smith, some early Americans, and Friedrich List.

Chapter Six: Economists and Banking, Part Three: The Twentieth Century.

Chapter Seven: Secrets, Ignorance and Lies: The Bad Effects of Creating Money as Debt.

Other articles by Ivo Mosley:

Reforming Money and Banking 

A Devastating Plague of Kleptocracy


‘BANK ROBBERY’ is not a book about how to rob a bank: it’s about how banks rob us. The title sounds a bit sensationalist: perhaps people think it’s not meant to be taken too seriously. Banks don’t actually rob us, surely: they provide a service – even if they do charge too much, and behave badly when they think they can get away with it.

But actually, the title is to be taken literally. Robbery means ‘theft backed up by violence, or by threat of violence’. The theft in banking is that banks create money out of nothing for the use of themselves and selected others, the others being governments and financial predators. The overall effect of this is a continual transfer of assets from the rest of us to governments and a financial elite. The violence, or threat of violence, is what the state may use, to back up the rule of law: in this case, to enforce the laws that allow banks to create money.

It’s obvious to most people that if there is to be a functioning rule of law, the State must be able to use force when necessary to back it up. So it’s our responsibility, as citizens and voters, to make sure that the laws are just. In the West, we tend to assume that if an unjust law does exist it will soon be changed, because public opinion will not put up with it.

There have been many unjust laws in our history: the Corn Laws, laws supporting the slave trade, laws about who is entitled to vote, laws about the property rights of married women are a few examples. Many of these unjust laws lasted for generations before they were changed or repealed.

There are strong reasons why so few people talk about changing the laws that allow banks to create money. First, the public is ignorant about how money is created, and about the laws which support banking. Second, powerful vested interests depend upon the banks, and are happy to keep things the way they are. Third, most people are nervous of change, especially if it might upset how they make a living.

First, take public ignorance. Most people don’t understand how banks create money. In fact, it is very simple. When a bank lends, it creates two equal-and-opposite debts (promises to pay money): one from the bank to the borrower, one from the borrower to the bank. The borrower’s debt to the bank is familiar and easy: it stays with him or her (or ‘it’ if the borrower is a corporation) until it’s repaid. The only difficult bit to get one’s head around is: What happens to the debt from the bank to the borrower? Answer: it becomes money.

That sounds counter-intuitive: ‘the debt from the bank becomes money’. But it’s the very essence of banking. If I have ‘money in a bank account’, it means simply that the bank owes (promises to pay) me money. The numbers in my bank account indicate how much the bank owes me. If I pay someone, I arrange it so the bank owes the other person some of that money, instead of me. When payment is made, the bank simply moves numbers from my account into the other person’s account. The other person feels paid – they have been paid! That is how banking works – and how it always has worked. Debt owed by a bank circulates among people, and becomes money. ‘We the people’ are happy to use it as money, because it is convenient and because banks have, in the past, put some of their massive profits into making their services cheap to use.

This leads to the theme of how the law supports banking. Banking was, and still is, very distinct from money-lending. Banking creates money: money-lenders lend money which already exists. For many centuries, banking was practiced as a series of agreements between consenting adults (so to speak). Those consenting adults were the rich and the powerful: merchants and bankers, monarchs and princes. What allowed banking to really take off, and to permeate the lives of all of us, was a piece of legislation passed in England in 1704 and later adopted piecemeal across the world, which made debt into a commodity that can be bought and sold. In the context of banking, this means that if I pass some of a bank’s debt to me, on to you, in exchange for something I want to buy from you, the law will support you when you claim that the bank now owes that money to you.

The law which authorised the buying and selling of debt was the Promissory Notes Act of 1704. It was brought in specifically to put the stamp of legitimacy on money created by banks. Many lawyers, including the then Lord Chief Justice Sir John Holt, were against the new development: they considered that a loan of money was a private agreement between two persons, not an asset to be bought and sold. But Parliament consisted of rich men voted in by other rich men, and it overrode the lawyers. The public justification of the parliamentarians was that new credit-money, created by the Bank of England (founded in 1694), was already enabling the King to go off to war: it was a good development, and the law should catch up. The private attraction was that members of Parliament were already using bank-money to get even richer. When other countries saw the power the new law gave to the English government and to English speculators, they passed similar pieces of legislation. Today, we are living with the ever-worsening, and ever more global, consequences of that development.

This in turn leads to vested interests, and the question: ‘Who profits from banks?’ The answer is the same today as it was in 1704. Bankers, obviously; but they are not the only, or even the most significant, ones. Governments get a double advantage. First, they may borrow newly-created money from banks, charging interest and repayment to their citizens without previously asking permission. Second, citizens themselves are more prepared to lend, if in return they get an acknowledgement of debt – a bond – which they can sell. National debts in every nation date back to when that nation adopted laws to enable the buying-and-selling of debt. This piling up of debt upon citizens is especially unnecessary, even monstrous and obscene, now that money is almost all (97%) created digits. Governments may just as easily create these digits themselves without indebting their citizens. The bugbear of inflation can be avoided by the simple mechanism of not creating too much!

Financial predators also get an advantage: they may borrow money, newly-created out of nowhere and often in huge amounts, merely by convincing banks they will make a profit. This makes a mockery of free-market capitalism, which properly consists of two elements: savings (or accumulated profits) and entrepreneurship. On the one hand, savings are dwarfed by newly-created money: they have become almost irrelevant in the huge game of financial acquisition. On the other hand, the efforts of entrepreneurs are often swallowed whole, by predators armed with money conjured out of nothing.

In the current system, it is fairly obvious that government and financial predators effectively form an oligarchy. In these circumstances ‘democracy’ is merely an illusion similar to that exercised by a snake-charmer over a snake.

At this point, we can take half-a-minute or so to indulge in an unfashionable emotion: sympathy for banks – if only to highlight their role in the system. Banks may easily go broke because their debts – or liabilities, as they like to call them – stay out in the world, changing hands as payments are made. Their debts only get less, paradoxically, when a borrower pays back a debt, thereby cancelling out both debts at the same time in a reverse-process of how they were created. But borrowers may default on their debts. Sometimes lots of borrowers default at the same time in one catastrophic collapse. Banks are then in trouble: they owe huge amounts of money, but much of the money owed to them in return has disappeared. Instead of reforming the system, governments rush to their aid, charging their citizens with a big bill for re-setting the system.

To say this way of creating money is odd, unnecessary and unjust should be like saying ‘the earth is round’ – except that it is so little-known, it is almost a secret. What (in addition to the above) are the negative effects of creating money this way?

The main characteristic of bank-money which distinguishes it from other forms of money is that it is lent into existence and destroyed upon repayment. This means that all bank-money is lent at interest: Someone, somewhere, is paying interest on every bit of bank-money in existence. Given that bank-money is now 97% of the money supply, those interest payments are hardly insignificant. They have contributed substantially over the years to inequality across the world, where today (according to Oxfam) the world’s 85 richest people own as much as the poorest 3.5 billion.

I will illustrate some of the other workings of bank-money with examples. Take the arms industry. Governments like, and in some cases need, to compete with each other in arms acquisition. Banks happily finance this competition: they create money for governments, because repayment is guaranteed out of taxes. They are also happy to fund arms manufacture because if demand is guaranteed, a profitable outcome is more likely. The result is new money, created behind closed doors, funding a circle that’s vicious for almost everyone. Governments and their covert agencies bristle with expensive arms: their victims must be counted in millions.

Nearer to home, a domestic example: London property. In a rising market, banks happily create new money to lend: they feel secure that the loan will be repaid. New money fuels rising prices: speculators profit, and everyone else is relatively poorer. So much so, that most young people in London today cannot dream of owning the house in which they live.

Noticing how bank-money fuels inequality leads naturally to considerations of boom-and-bust. Booms-and-busts appeared historically soon after banking was legally-authorised, starting with the South Sea and Mississippi Bubbles (both 1720). The pattern has stayed the same ever since. During a boom, money is created in huge quantities for investment and acquisition. The monetary assets of the rich, inflated by new money, become absurdly vast. The assets of the majority dwindle in comparison: they cannot afford to consume enough to make existing capital profitable, let alone for the creation of more. Recession follows. The incomes of workers are further eroded by unemployment, as unprofitable businesses collapse. A vicious circle sets in. At this point, the assets of the rich must also shrink if they consist of productive investments: only speculative hot air and puff will produce profits (an example is the London property bubble referred to above). This kind of economic collapse all-too-often leads to totalitarianism and war: the twentieth century provided enough examples of that, for us all to hope that the need for monetary reform will be noticed soon.

Lastly, we might notice the plight of poor nations vulnerable to predators masquerading as free-market capitalists. Western banks create money in vast quantities to buy up land and other assets, for profit in Western markets. The effects of this are very wide: governments are corrupted, displaced peoples migrate (or attempt to migrate) to where the money is, in search of survival. The potential for a fairer, more just and prosperous world is squandered. Much more could be said about this process, so vast and damaging to the human race, and to prospects for our future.

Mention should be made here of a smokescreen which has had a remarkably long life, considering its fraudulence: respected authorities (as well as cranks and crackpots) have blamed ‘the Jews’ for secret management of international finance, and many ordinary people have absorbed the lie. Banking emerged in modern Europe from Christian attempts to sidestep the laws against moneylending. For three centuries of its legality, and for several centuries before that, banking was a protected Christian activity, defended by social exclusion and by the compulsory taking of Christian oaths. Today, the Christian Church is influential in many countries which are hard-hit by predatory finance. Enlightened discussion about how money is created might find a toe-hold in those countries: and yet Christian organisations, when discussing the crisis of debt and inequality, will not discuss the role of banking. The current head of the Church of England, for instance, defends ‘good banking’ and attacks the relatively honest – or at least not duplicitous – trade of trade of lending existing money. To be sure, the poor should be protected from rapacious loan-sharks, but it is hypocrisy to pretend that banks will ever lend to the poor. As the comedian Bob Hope said, “A bank is a place that will lend you money if you can prove that you don’t need it.” At the moment, laws privilege the rich, enabling them to borrow newly created money cheaply. Justice would be better served by taking that privilege from the rich and giving the poor more legal protection from moneylenders.

I have made no mention of more outrageous forms of value-creation such as derivatives and shadow-banking, all of which depend upon creating, selling and buying debt. Nor have I mentioned the strange relationship between war and bank-money; nor how bank-money creates an insatiable need for growth, which leads to pollution, climate change and destruction of the environment; all these will be dealt with as the book progresses.

Adam Smith, godfather of economics, wrote that ‘All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.’ It is the job of every generation to restrain those who would be their masters – or to take the consequences.

I have not yet mentioned the vital question of how reform might be undertaken. The obvious starting-point is to reform those laws that allow debt to become money. The two websites simultaneously publishing my chapters, Positive Money and The Cobden Centre, both have strong ideas of how this should be done. I will consider these in due course: for the time being, enough to say: we should do it!

CHAPTER ONE: Banks and the Money Supply.

‘If it ain’t broke, don’t fix it.’ Sensible advice, especially when it comes to tinkering with the money supply: with laws about how money is made, how we get it, how we spend it. What would happen if the financial system was dismantled or thrown out of joint? Would we be able to pay the bills, eat, have shelter and live?

Most people don’t even want to think about the system, let alone how it should be reformed. Fear and ignorance reinforce each other. But reasons for reform grow stronger and stronger every day. Besides the massive criminality and corruption that go unpunished even in the complacent West, there are troubles which may not originate in the way we create money, but which are mightily fed by it: war, inequality, unemployment, mental health, drug abuse, environmental destruction, climate change; unaccountable power in governments, corporations and wealthy individuals; loss of moral freedom; misuse of assets and human resources; booms and busts of the ‘business cycle’: the list could go on and on.

To understand the connections between the way we create money and the troubles listed above is the subject of this book. Explaining how money is created is no problem: just one sentence will do (see the next paragraph for that). But unravelling the implications is a bit like a detective story. The blunt instrument that did the murder has been discovered, but the human story behind it is what’s interesting. Who did the murder? Why did it happen? What will the consequences be? And finally, the all-important question that lurks in the background of all good detective stories: Will justice eventually be done?

Instead of just one villain, however, the story of how our money is created is a whole history, with good intentions travelling alongside the usual motives of greed and deception. In the past, money was lots of different things in different places: cowry shells, tobacco, precious stones, any number of things. For many hundreds of years, money in the West was gold, silver and other cheaper metals. Today, money is almost all ‘credit’ – numbers in bank balances, representing claims (which we own) on digital money belonging to the bank. Here is a one-sentence description of how credit is created today: ‘Central banks, in obedience to their governments, create digital ‘reserve money’ which they sell to commercial banks; commercial banks are then allowed, by special legal privilege, to create multiple claims on their ‘reserve money’ and to lend those claims to whomsoever they please.’ It is these claims that we call ‘credit’, and which pass from person to person as the money we use every day.

Such simple facts are only seeds when it comes to understanding how this way of creating money affects the workings of our world. But three things stand out right from the start about the system, which uses law and privilege to establish ‘credit’ as a form of money.

  • First, it is a source of great profit to governments, who create and sell ‘reserve money’ to banks, and can borrow almost unlimited amounts in the name of their citizens.
  • Secondly, it is a source of great profit to banks, who collect interest on the credit that they in turn create.
  • Thirdly, money – credit – can be allocated in vast amounts, by mere decision of those who profit from it.

It is pretty obvious that this way of creating money advantages some and disadvantages others.

That money should be created in such a way may seem bizarre, but it makes complete sense when it is looked at in historical context – in other words, when it is read as a human story. What follows is the human story of how banks came to create our money supply.

A banking historian named Loyd Mints – a deeply respectable and learned man – wrote the following:

It would seem that an evil designer of human affairs had the remarkable prevision to arrange matters so that funds repayable on demand could be made the basis of profitable operations by the depository institutions.

Loyd Mints is referring to the fact that once a bank gets hold of people’s money, a host of devilish opportunities open up to it. The situation today, which can only be described as madness, is the culmination of a series of developments in banking over the last three thousand years. A number of clear stages followed on quite naturally from each other, and noticing these stages makes it easy to understand how banks create money today.

Banking can be said to be as ancient as writing itself. Some of the earliest surviving bits of writing are not literature or law or religious stories, but records on clay tablets of how much is owed by someone to someone else. This record is from several thousand years ago: ‘Mannu-ki-Ahi and Babu-Asherad acknowledge that they have 10 minas of silver belonging to Remanni-Adad, chariot-driver, at their disposal.’  This is banking in its simplest form: a person (or institution) accepts money from someone, and issues a credit note (or clay tablet) in return. Temples in ancient Sumer, Babylon, Egypt, Greece and Rome did this: they were religious institutions doubling up as banks.

Once money is in the hands of a banker – ‘at his disposal’ – he can put some of it to use. He can lend it, or invest it, or simply spend it. If he wants to stay in business, he will have to keep enough on hand to pay customers who come asking for ‘their’ cash. So, part of a banker’s skill is to judge how much he should keep handy, to meet his obligations.

The more a banker has on deposit, and the more skilfully he uses it, the richer he may become. He may even pay depositors to leave money with him, so that he can have more to play with. Naturally, his favourite customers will be those who leave money with him for a long time. When he lends (or invests or spends) money that he is ‘storing’ for his customers, the money re-enters circulation. The important point to notice at this stage is that the banker is not creating money; he is just putting some of it back into circulation.

The next development in banking is when bankers start to actually create money. This happens quite naturally, when customers begin using their credit notes as a way of paying other people. A credit note is, effectively, a claim on a bank’s money: so if a bank is generally trusted, a seller might be happy to take a credit note in payment, provided he’s confident he can use it to get cash from the bank. Being paid with a note was popular among rich customers: when cash was silver and gold, a credit note was easier to manage than chests of heavy metal. Credit notes begin to circulate alongside gold and silver: they became a form of money.

It was good for bankers’ business when their credit notes began to circulate because they stayed out longer and fewer were presented for cash. Bankers could use their cash more freely. Credit notes were circulating alongside cash, so there was a clear increase in the money supply. Bankers were not just putting money into circulation; they were actually creating it.

The next development in banking occurred again quite naturally. Bankers realised they could write out new credit, even when no new cash had been deposited. If the credit was in the form of notes, they could sell the notes, or lend them, or buy things with them and become instantly a great deal richer. If the credit was just a couple of lines in a banker’s ledger books, the result was the same; payment could be made by transferring credit from one customer to another, either within the same bank or between banks. The Venetian banker and Senator Tommaso Contarini wrote in 1584: “A banker may accommodate his friends without the payment of money merely by writing a brief entry of credit; and can satisfy his own desires for fine furniture and jewels by merely writing two lines in his books.”

In 17th century England, the practice of credit creation came under intense and public scrutiny. Banking developed fairly late in England, and when it arrived it expanded quickly. ‘New-fangled’ bankers began writing notes in large amounts and getting very rich off the proceeds. The old landed class felt threatened, and the practice was highly disapproved of by many contemporary lawyers and economists. Such notes ‘represented nothing’; they were ‘fictitious credit’; in the words of Bolingbroke (English political writer, and major influence on the ‘founding fathers’ of the United States): a ‘new sort of property, which was not known twenty years ago, is now increased to be almost equal to the terra firma of our island’.

Battle lines were drawn. The Lord Chief Justice, Sir John Holt, ruled that the credit notes of bankers, passing from person to person as currency, were not to be enforced at law. Many in Parliament, however, which at that time consisted of rich men voted in by other rich men, liked the new money. As individuals, it offered them opportunities to get richer; as a body, it made it easier for them to finance war. Parliament passed a law (the Promissory Notes Act of 1704) stating that bankers’ credit notes should be enforced regardless of who presented them. Notes could pass from hand to hand as currency, and the law would enforce their payment. Centuries of legal attempts to prevent fraudulent contract were overturned in favour of capitalists, bankers, and the government’s need to finance war.

Bit by bit, this bankers’ privilege was incorporated into legal systems across the world. In 1845, the American judge Joseph Story wrote: ‘Most, if not all, commercial nations have annexed certain privileges, benefits, and advantages to Promissory Notes, as they have to Bills of Exchange, in order to promote public confidence in them, and thus to insure their circulation as a medium of pecuniary commercial transactions.’

This last development is normally considered to constitute the foundation of modern banking: credit-money manufactured by banks for first use by capitalists and governments. However, there were two significant stages still to go before the madness of today could be arrived at.

At this point in banking history, the difference between the two forms of money – cash and credit – was obvious: ‘cash’ was valuable metal and ‘credit’ was just written words and numbers. But an owner of credit could legally demand something valuable in exchange – gold. Paper could be easily created, words and numbers are easily written, but gold was hard to come by. Nations and their bankers had to amass gold if they wanted to be trusted. The ‘gold standard’ lasted pretty intact until the First World War, when the need for money to finance war could not be met by taxes or loans. Nor could it be met by claims on gold, for the fighting nations (and their banks) were running out of gold. So governments adopted a recipe which had been tried a few times before: they issued paper promises to substitute for the gold, with the assurance that after the crisis passed, gold would be accumulated and once again supplied.

Production of this government paper was so prolific that after the war, the ‘gold standard’ was ‘smashed to smithereens’, as one commentator put it. Subsequent attempts to restore it were sporadic, half-hearted and hedged around by conditions. Meanwhile, it had become apparent that an economy could function well on money that was just paper and numbers in bank accounts, so long as the amounts were restricted.

Once money became just paper and numbers, we can, with hindsight, see a choice: should ‘money’ be restored to its old character, as property to be owned outright; or should it continue along the path it had travelled for so long – towards being a commodity rented out by governments and banks? In reality, the question was barely posed. Credit-creation was the fountainhead of power: it operated in shadows of obscurity, far from public scrutiny, not quite understood even by those it advantaged and even less understood by those it disadvantaged.

Now that credit and cash are mostly digits in computer systems (with a few notes and coins thrown in – roughly 3% of the money supply – as if just to confuse us) the difference between them is less than obvious. But the system is structurally the same as when it was based on gold. In retrospect, it may seem an act of genius that a group of people (governments, bankers, capitalists) have established a money supply manufactured by themselves and lent to the public at interest. Had it been a conspiracy, it would have been the most diabolical conspiracy ever made. But it was not a conspiracy: it was merely the continuation of a system which had worked well for the rich and powerful, and would now work for them even better.

Before banking reached its modern status, however, it had still one stage further to go. This was deregulation. At the beginning of 1971, one last vestige of the gold standard still survived: payments between nations could still be demanded in gold. This last vestige was put to rest in August 1971, when U.S. President ‘Tricky Dick’ Nixon refuse to honour a demand from France for payment in gold. He gave them dollars instead.

At this point, some extra regulation might have been a good idea, to give some protection to those of us who ‘merely wish for a normal existence’. What actually happened was deregulation – as if to remind us of Adam Smith’s words: ‘All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.’ The fundamental privilege of banks, allowing them to create multiple claims on the same asset, was allowed to other ‘depository institutions’. Accounting practices went one step further, allowing two different persons to actually ‘own’ the same asset. Madness had struck – or, in Hollywood-speak, greed had become good, even God: a new Commandment replacing all the older Ten.

Multiple claims on multiply-owned assets now enable ‘shadow banking’ to create financial assets equal in nominal worth to fifty (or more) times annual global production. The relationship between these ‘financial assets’ or ‘near-moneys’ to the lives and freedoms of those who ‘merely wish for a normal existence’ will, I hope, be addressed in a later chapter. For now, enough!

Chapter Two: Inequality and the Banking System.

Extreme inequality is the main economic, political and cultural evil of our times. This chapter is about how bank-credit, as money newly-allocated and carrying an interest charge, increases inequality, transferring wealth and power from ordinary people to governments and the very rich. It is an old story, investigated in detail by the early American economists John Taylor, Daniel Raymond and William M. Gouge, but long since buried under arguments between competing advocates for big-State and big-business. Somewhere, the economics of what we live for in the West – freedom, democracy, equality, justice – have got lost.

Concern for inequality and the suffering of others brings in consideration of ethics and justice. There is indeed an ethic supporting the new hierarchy, which says: ‘It is right that the few have so much money; they are the cleverest among us; their management of money amounts to genius and what’s more, it increases the overall prosperity of humanity’. The corollary of this is: ‘At the bottom of society are the feckless, the lazy, the incompetent, the stupid.’

Entirely buried under this ethic is the fact that the ultra-rich are beneficiaries of what John Taylor called (1821) a ‘machine for transferring property from the people to capitalists’ As described in the last chapter, this system consists of giving certain institutions the privilege of creating money in a way that profits and advantages the powerful. The losers are those who, for whatever reason, don’t join, serve or profit from this system: they may be inclined to live in freedom, morally and independently. After 300 years of circulating credit, this has become difficult.

One of the stranger things (of these strange times we live in) has been to watch governments, in a crisis caused by too much money in the wrong hands, pouring money into the same wrong hands via ‘quantitative easing’.

In quantitative easing, governments create brand-new money and use it to buy government debt (bonds) from large non-bank corporations (e.g. pension funds and insurance companies). The money (in the U.K. 375 billion; in the U.S. 3.5 trillion) does three things. First, by buying back government debt, it lowers the cost of government borrowing. Second, it gives companies ready cash to buy other assets (stocks, corporate bonds, shares, buildings); this raises the price of capital assets generally, making rich individuals and corporations richer. Third, it gets banks out of trouble by refilling their ‘reserves’ free of charge when the company deposits its brand-new money: this increases their reserve ratio, making it safer for banks to lend. In theory, banks will lend to businesses producing goods that people want to buy; but in our post-crunch world, most people have little excess money for spending and ‘productive enterprise’ is less profitable as a result, so most bank-lending goes to rich people to buy more assets. The price of those assets increases, and banks and investors again get richer.

Helped on by ‘quantitative easing’, inequality has now risen to almost incredible levels. There is a choice of statistics to express this inequality, most of them mind-boggling. An example: according to an Oxfam report (‘Working For The Few’, Jan 2014) the richest 85 individuals in the world are worth more than the poorest 3.5 billion. Another example: 25,000 people die from hunger each day, while a new billionaire is created every second day. From another angle: in 1983, the poorest 47% of America had $15,000 per family (2.5 percent of the nation’s wealth): in 2009, the poorest 47% of America owned zero percent of the nation’s wealth (their debts exceeded their assets).

The concentration of power and wealth in a very few individuals signifies a new social order. No rich individual is capable of day-to-day management of his/her own affairs: they are served by hierarchies of people and corporations. Many levels and branches of human and corporate ‘persons’ devote their working lives to maximising wealth at the tip. Laws are manipulated, taxes avoided, costs are cut, workers shed, regulations ‘captured’, environments destroyed, etcetera.

The poor are treated more and more exploitatively – and yes, with more and more contempt. Distant orders are given by departments devoted to cost-cutting and ‘efficiency’ – meaning more profit to shareholders; the state picks up the cost of these ‘efficiencies’. Overarching decisions affecting millions of lives are made at greater and greater remove by people who never have to witness the suffering and death they cause. This ‘remove’ is perhaps the most important factor in human affairs: if you are not close to the death or suffering your activities require, you can easily ignore it.

The bizarre, hideous and outrageous doctrine known as ‘austerity’ means cutting back on essential state-provided services. Poor and independent people, already bled into penury by the financial system, are deprived of the very basics of compensatory provision, and move from poverty to desperation so that kleptocrats may continue to get richer.

Perhaps just as strange, the alternatives being offered by political parties in countries suffering economic devastation (Greece, Portugal, Italy) look back to left- and right-wing totalitarianism from the last century.

And all this in what we like to call ‘democracies’!

There is a simple reason why no significant ‘just and reasonable’ alternative is on offer. The fundamentals of the financial system are far beneath the radar of public perception and debate; meanwhile, more and more complex ‘financial instruments’ grow from the fertile ground of ‘fictitious credit’, with the result that the visible manifestations of the system are more-or-less incomprehensible.

The American founding fathers were aware of much of this. John Adams wrote, in a letter to Thomas Jefferson: “All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.” How much more relevant are those words today!

The system today is similar to how it was in Adams’ day, only worse. Credit is 97% of money, whereas in his day it was considerably less than half. Chapter One examined the evolution of our bizarre system. Put simply, the government (via the central bank) creates digital money (reserves) which the banks buy at auction in exchange for government bonds. The banks then create claims on this digital money, and those claims – now called ‘credit’ – are rented out and become 97% of our money supply. To complete the picture, it is necessary to add that notes and coins are part of ‘reserve money’, purchased by banks and released to the public as a service to attract and keep customers. Otherwise, reserve money stays entirely within the banking system; only ‘credit’ may be owned outside it.

The main features of the system which contribute to inequality are these:

  1. 97% of our money supply is lent at interest. The profit goes to banks and spreads out, via investors, to increase the price of other capital assets (i.e. to making the rich richer). Again simply put (by John Taylor, friend and colleague of Jefferson and Adams) the interest paid to banks on our money supply is a ‘tax raised by the rich and powerful on the poor and the productive’.
  2. Governments borrow money (newly-created for them) from banks, by negotiation only with the banks themselves. The deal for the banks is: governments commit their citizens to pay interest, and to repay the loan at some time in the future. When the loan is repaid, the credit-money disappears, allowing the bank room to make a new loan. The new money gives spending-power to governments over and above taxation, at the expense of productive citizens who must pay the price in more taxes.
  3. The availability of borrowed money, newly-created in large amounts upon mere promise of a return, means that large corporations, which avoid paying taxes and influence law-making, borrow to prey on smaller, more efficient enterprises made vulnerable by the effects of (1) and (2).

The result has been a relentless growth in the dependence of citizens on large powers – on governments and private corporations. As the poor are reduced to below subsistence levels, so the government steps in to intervene and win votes. But the drift to inequality cannot be stopped without reforming the system; nor can independence, equity and justice be restored without the same.

Bank-currency has ramifications in many different areas of our lives. It not only relocates wealth; it relocates it to a specific type of person. Just as medieval feudalism gave power to individuals in every society devoted to war, so bank-currency gives it to individuals devoted to getting more money. Keynes looked optimistically to a world governed by a different, more equitable social ethic:

‘When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals… 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. All kinds of social customs and economic practices, which we now maintain at all costs because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.’

Hip hip, hooray! But not yet.

When the system was just beginning, its character was obvious for all to see. It was praised by some and deplored by others – for identical reasons. It was ‘an excellent way to fund wars’: approved by some, deplored by others. It enabled financiers to ‘engrosse the commodities and merchandises of their own and other countries, so that none can be had but at the second hand’: approved by some, deplored by others. It lowered the interest rate at home, allowing capitalists to lend fictitious credit at higher rates abroad: ditto. It allowed ‘boundless power’ to financiers to lend to the government, thereby giving ‘boundless power’ to government too: ditto.

The predatory powers of created capital are as much at work between nations as they are inside nations. A country devoted to efficiency and production, and with an efficient banking system, lends money created out of nothing to a foreign government, which distributes it among voters and ‘friends’ to buy goods from the creditor country. Government is corrupted and voters get into debt along with all other citizens except a few ‘friends’ and pilfering government officials (who may relocate vast sums of money, perhaps to London, England or Florida – or anywhere else of their choice). Whole peoples become indebted and find their assets swallowed up by financial speculators: Greece is selling its temples and beaches, Italy is selling its marble mountains. A world-wide system has been created by banking privilege which can only begin to be made equitable by financial reform.

As mentioned in the first chapter, the system was established internationally by laws ‘annexing certain privileges, benefits, and advantages to Promissory Notes… in order to promote public confidence in them, and thus to insure their circulation as a medium of pecuniary commercial transactions’. These ‘privileges, benefits and advantages’ may just as easily be taken away again, but only if citizens become familiar with reality. Three hundred years of history have shown that elites are happy for the truth to be buried deeper and deeper, not so much with lies as with a blind spot in public recognition, so that eventually it is never noticed at all.

Since banking practice was made legal, its workings have been overseen by regulators, not the justice system. Financial operators only come up against the law if their robbery oversteps the privileges granted them, and strays into legally-recognised fraud. The justice system is then obliged to confront some of the complexity which may emerge once deceptive practices are legitimised. Two hundred years ago the learned judge Lord Eldon had to decide between competing claims based on fictitious paper assets. ‘I must say that the speculations about paper certainly outran the grasp of the wits of courts of Justice,’ he remarked with lovely English understatement. The puzzle of how to deal with illegal fraud in the context of so much legal fraud is still with us: most perpetrators get off scot-free.

Very few people in a normal state of mind jump with excitement at the chance of learning about bank-money. But the system has transitioned from empire-building, oligarchy-creating to world-destroying, end-of-time stuff. It is time for reform. A terrible gap has opened up between the wonderment we could have created on Earth and the present situation, which can only be compared with the dream related by Procopius towards the end of the Roman Empire: the Emperor first consumes all that is good in the world and spews it out as excrement; then he consumes his own excrement, too.

But reform must be the subject of another chapter.

Chapter Three: Law and the Banking System.

The first chapter of this book described how private commercial bankers came to provide almost all of the money supply in the West. The second described how this process has affected who is rich and who is poor, culminating in the extremes of wealth and poverty we experience today. This chapter looks at banking in relation to law.

A system of law can be anything from a concerted effort to establish justice in our human world, to a system of robbery and murder (Nazi law is an extreme example). When a banking lawyer described modern banking as ‘the greatest system of kleptocracy foisted upon the human race’ he was agreeing with many previous eminent and knowledgeable commentators. The American Founding Fathers were particularly vocal on the subject: banking is the enrichment of ‘swindlers at the expense of the honest and industrious part of the nation’ (Thomas Jefferson, 1813). ‘Every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults represents nothing, and is therefore a cheat upon somebody’ (John Adams, 1809). Even more bluntly, the banking system supports a ‘tyranny of fraud’ (John Taylor, 1814).

Laws enabling bank-money to permeate the economy were passed at a time when ‘real money’ was gold and silver, whereas bank-money was claims written on paper or in ledgers. One justification for bank-money was that it replaced an expensive commodity with a cheap one. This justification no longer applies: today, all money (except coin) is produced very cheaply indeed; but the system authorising banks to create credit continues.

Only a few people, even among bankers and politicians, take the trouble to understand the simple reality of how bank-money is created. Powerful people must surely understand (or know intuitively) that money-creation is the source of their power, for it enables them to access huge amounts of money created on the spot on the prospect of a profitable return. At the present time (May 2015) wealthy speculators may, in theory, even be paid to borrow (the new phenomenon of negative interest rates), though the reality is somewhat different: (http://www.nytimes.com/2015/04/24/business/get-paid-to-borrow-money-risks-and-limits-apply.html).

On the other hand, most ordinary people probably assume, in a trusting sort of way, that money is created impartially: that is, favouring no one group over any other. Readers of this book will probably understand that this assumption is wrong. Our modern system of money-creation was authorized precisely because it does favour some groups over others. Banking had already flourished for many years within trading and ruling circles, but to establish the legality of banking practice and to make it ubiquitous and pervasive, a simple change in the law was needed.

The change in law, first introduced in England in 1704, was to make the promises of bankers enforceable. In other words: if a banker issued a note promising to pay a certain sum of money (gold or silver) to whoever presented the note, the law would support the owner of the note when they went to claim the money. At first sight, this law seems to favour the customer; after all, if a bank promises to pay, it should be held to its word. But the real significance of the law – and this was obvious to everyone concerned when the law was introduced – was that it enabled the promises of bankers to become money: to ‘pass from Man to Man in Payment, which will be an Addition to the Cash of the Nation’ (John Cary, 1695.)

How can the promises of bankers become currency? For a customer, a banker’s promissory note is a claim on money belonging to the bank. How can a claim to money, itself become money? In his mighty History of Economic Analysis, economist Joseph Schumpeter observes: ‘You cannot ride a claim to a horse, but you can pay with a claim to money.’ He goes on to explain: if ownership of a claim can be legally transferred from one person to another, and everyone believes the bank will pay ‘real money’ when presented with the claim, then a claim to money can be as confidently received in payment as ‘real money’. Furthermore, a paper claim was an attractive form of payment, being more convenient and easier to manage than heavy gold-and-silver.

So ‘promises to pay’ became a kind of money, circulating from hand to hand in payment as ‘bank-credit’. Bankers have understood for a very long time that they can get away with creating ‘promises to pay’ far in excess of money they have in store, so the money supply grew with money created by the bankers.

The simple ‘widget’ of law authorising banks to create money, first introduced in England in 1704, and has since then been adopted in various forms all over the world, as countries have conformed to international standards of banking and commerce.

Before the Promissory Notes Act of 1704, bankers were writing ‘promises to pay’ and notes were passing from hand to hand, but no one could be certain that the law would enforce them. Some judges were ruling in their favour, and some against. The Lord Chief Justice of that time (Sir John Holt) had set his face against them. Sir John Holt was a man in advance of his time: he made rulings against slavery and the persecution of witches. His surviving remarks on promissory notes indicate that he thought it undesirable to make a special exception (‘specialty’) of promissory notes which would allow them to evade established rules and principles of law.[1]

What were these established rules and principles of law? They were fairly elaborate, reflecting the efforts of lawmakers to avoid supporting unjust claims and contracts.

One rule was that obligations arising from a contract should only be enforced if the person obligated had derived some previous benefit from the contract (rules and doctrines of ‘consideration’: ‘nudum pactum non parit actionem’ or ‘ex nudo pacto non oritur actio’). This would imply that a bank should only be obliged to pay on a note if it had received some sort of payment or benefit from the bearer.

Another was: if the law recognises that you have a right to something but you need a court order to take possession of it, you cannot transfer that right to someone else (the ‘non-assignability of choses in action’). An example: if you are owed money, you can’t sell the debt for someone else to collect. A bank-note represents a debt from a bank, its ownership passing from hand to hand.

A third was: you cannot give to someone else what you do not own yourself (‘nemo dat quod non habet’). For instance, you can’t sell Buckingham Palace unless you already happen to own it. This spelled trouble for bank-notes: if a promissory note gave no definite rights to its first owner, there was nothing to pass on to subsequent owners.

Yet another rule stated that obligations and rights arising from a contract should only be enforced between the original parties – i.e. not for a third party arriving late on the scene (a doctrine now known as ‘privity’). This would rule against bank-notes, which are an agreement between a bank and the anonymous and ever-changing ‘bearers’ of the note.

Yet another rule was: the law should not enforce obligations originating in an illegal act (for instance, a claim on the loot from a robbery, or payment for an assassination). This last is particularly interesting if bank-credit is, as Jefferson, Adams and so many others have claimed, a ‘swindle’, a ‘cheat’, or a ‘fraud’.

The complexity of these rules, and the fact that their histories and meanings are still controversial today, reflect the difficulties that law faces when dealing with claims. A claim is an odd kind of property. Most pieces of property are fairly definite and simple: a house, a piece of land or furniture, a vehicle. A claim is different: it often arises from a private contract and it must always involve risk: of what might happen between when it is created and when it is exercised. It can be on something that only partially exists (as with bank-credit); on something that might or might not exist (for instance, mineral rights); on something that might exist in the future (for instance, profit on an investment); or on something that exists today, but might not exist tomorrow (for instance, the assets of a debtor teetering on the edge of ruin).  It can also be on something belonging to someone else – as when people invest in war, or piracy, in exchange for a claim on some of the profits.

So why did the English Parliament of 1704 authorise fictitious bank-credit to pass from hand to hand as currency, when the process transgressed so many rules and principles of law? The context of the decision reveals a lot about the nature of bank-money and its effects upon our world.

In 1704, banks were fairly new to England. They had emerged during the Civil War a half-century earlier as safe-deposits for gold and other valuables. Private bankers were making a great deal of money by issuing more ‘notes of receipt’ than they had gold in store, and these notes were circulating as ‘promises to pay’.

Parliament at that time consisted of rich males voted in by other rich males (‘forty shilling freeholders’). Members of Parliament were roughly of two types: landed gentry, and men rich from business and trade. Generally speaking, the landed gentry were anti-banking. Banks were a threat: they were creators of ‘fictitious credit’: ‘a sort of property, which was not known twenty years ago, is now increased to be almost equal to the terra firma of our island’ (Henry Bolingbroke, 1710). On the other hand, merchants and businessmen were generally pro-banking.

Successive English governments had become heavily dependent upon private bankers for supplying them with gold in return for the government’s own ‘promises to pay’, most of them in the form of wooden tally-sticks (sticks with cuts made in the full width signifying the debt; the sticks were then split so that the two portions held by creditor and debtor exactly matched. An interesting aside: when, in 1834, two cartloads of old tally-sticks were burned in the House of Commons, the fire went out of control and burnt down the whole building).

The unending problem was the English government’s need of money to go to war. ‘Real money’ – gold and silver – could not be conjured out of nothing: it had to be borrowed with the consent of its owners, or gained by taxation (which also required some sort of consent); and of course it could be stolen from foreigners if war was successful. Credit, on the other hand, was mere paper or wood. If ‘live now, pay later’ was the government’s motto, ‘get rich by creating credit’ was the bankers’.

‘All sorts of paper credit in Orders, Bills, Notes, Bonds, Assignments, etc, overflowed the kingdom,’ wrote an official in 1700. ‘All our wealth seemed to consist in a little gold and adulterated silver, a world of wooden scores and paper sums. Never was there known before such vast debts owing for Excise and Customs, upon Bills and Bonds unsatisfied. We had all the symptoms upon us of a Bankrupt State and an undone people.’ With so much credit-money augmenting the money supply, life had become hard for the working poor, who had to rely on debased and devalued coin to buy their bread: ‘a loaf which in the previous reign cost threepence rose to ninepence’ wrote the historian Lecky.

In order to decrease the government’s reliance on private bankers, the Bank of England – a corporate bank with privileges and monopolies – was founded by Act of Parliament in 1694. The Bank put investors’ money to use at least twice over, lending to the government and issuing promissory notes, on which (to begin with) it paid interest. Before the establishment of the Bank of England, King William had to send his ministers round the coffee-houses of the City of London to borrow to go to war. After it, the government was £1,200,000 richer and ‘the navy was able to take to the sea that summer’. William forged off to war and defeated the French at the siege of Namur (1695).

The foundation of the Bank of England ‘set a precedent for proposals to accord special privileges to those who lent their money to the State for the prosecution of war’ according to the economic historian Ephraim Lipson. But the Bank operated under strict limits, and after a run on the bank organised by London’s private bankers, the war-making King was once again in difficulty. According to one contemporary report, he was unable even to pay the travelling expenses of one of his agents. The government once again sought help from private bankers.

For most of history, private bankers had operated in a sort of legal ‘grey area’. After a large public bankruptcy, one of them might get into serious trouble, as when a banker was decapitated in front of his own bank (Barcelona, 1360). As a further restriction on their activities, for centuries bankers had to dodge laws forbidding the taking of interest. But banks were too useful, too necessary even, for States to actively suppress them for long, and they continued on as an activity between consenting adults – a sort of monetary equivalent of adultery – alongside the activities of moneylenders and pawnbrokers: but very different from these, because unlike moneylenders and pawnbrokers, banks were actually creating most of the money they lent. (The most authoritative history of early banking, Abbott Payson Usher’s The Early History of Deposit Banking in Mediterranean Europe, begins with the sentence: ‘The essential function of a banking system is the creation of credit’).

The English Parliament, its power greatly increased by the ‘Glorious Revolution’ of 1688, and provoked by the resistance of Sir John Holt, needed to establish once and for all that bankers’ money was legitimate, so that their activities, both as members of government and as individuals attempting to get very rich, could continue without challenge from pesky lawyers. And so the law was passed.

Attempts have been made over the years to assert that the Act of 1704 was not really necessary: that promissory notes emerged from the custom of merchants, and that the custom of merchants is, was, and ever must be an automatic part of law. In 1801 an American court took a vacation so that eminent judges could consider whether an action on a promissory note ‘could have been supported in England before the statute of Anne (i.e. before the Promissory Notes Act)’. Modern law is respectful of commercial practice, in particular of the ‘sanctity of contracts’. Things were not ever thus; even in the nineteenth century, judges were disputing the automatic right of commercial practice to be considered lawful. The simple fact is: the law of 1704, adopted in various guises across the world, put a stop to judges questioning the legality of circulating bank-credit.

Disgruntled landowners had opposed the passage of the Act in 1704: one grumbled that they ‘bore the greatest share’ of the burden of war, being ‘loaded with many taxes’ while the ‘Men of the City of London’ were ‘enabled to deck their wives in velvet and rich brocades’. But they found consolation in another form of robbery. The new supremacy of Parliament, unleashed from constitutional restraint by monarch, church or even most of the people (a majority had no right to vote) enabled landowners to pass over 3000 private Enclosure Acts depriving poor and independent country people of their rights of tenancy and rights in common land. Both main factions in Parliament were now engaged in dispossessing the poor: while England became the richest country in the world, its poor joined the desperate of the earth. A visiting slave-owner from Jamaica commented to an investigating committee in 1832: ‘I have always thought myself disgraced by being the owner of slaves, but we never in the West Indies thought it possible for any human being to be so cruel as to require a child of nine years old to work twelve and a half hours a day; and that, you acknowledge, is your regular practice’ (quoted by John and Barbara Hammond in The Town Labourer). The yeomen of the countryside, an ‘industrious, brave and independent class of men’, ‘once the pride of the country’, were ‘extinct’, their descendants ‘almost the paupers of the nation’ (Amasa Walker, 1867).

To check this concerted oppression from both sides of the political class, there soon emerged trades unions, socialism and communism. With them came a new ideology that would put all credit-creation in the hands of the State. Meanwhile, banking was largely removed from scrutiny by lawyers, judges, or even elected representatives, and given over to ‘regulators’ charged with keeping the system going. This meant that extraordinary developments, such as the replacement of gold-and-silver (as base-money for credit) with digits created by the State, occurred with little scrutiny or public debate. Lawmakers grew unfamiliar with the process of banking, and attempts to rein in the creation of credit by banks, such as the Bank Act of 1844, were undermined by their ignorance of the different guises that bank-credit can assume. Subsequent Acts were mostly concerned with adjustments to the regulatory framework to accommodate new commercial practice. Judges gave famous decisions based on commercial practice: such as Lord Cottenham’s of 1848: ‘Money, when paid into a bank, ceases altogether to be the money of the customer; it is then the money of the banker …’ and this insightful contribution from Lord Denning (1966):

‘When merchants have established a course of business which is running smoothly and well with no inconvenience or injustice, it is not for the judges to put a spoke in the wheel and bring it to a halt. Even if someone is able to point to a flaw, the courts should not seize on it so as to invalidate past transactions or produce confusion. …Communis error facit jus (common error makes law). … This applies with especial force to commercial practice. When it has grown up and become established, the courts will overlook suggested defects and support it rather than throw it down. Thus it will enforce commercial credits rather than hold them bad for want of consideration. It is a maxim of English law to give effect to everything which appears to have been established for a considerable course of time and to presume that what has been done was done of right, and not in wrong.’

When money-creation by banks was discussed in the UK Parliament in 2014, the majority of speakers began by admitting they had almost idea of how money-creation actually works.

Now that money is mostly just digits in ledgers, our two-tier system of money-creation is the toxic residue of a primitive structure of exploitation. A later chapter will explore how the system could be reformed: the next chapter takes a look at how various economists, some well-known and some forgotten, have viewed (or ignored) the subject of bank-created money.

Chapter Four: Economists and Banking, Part One: the Early Days, to Adam Smith.

Over the years, many economists have noticed how bank-created money skews the economy, affecting distribution of power and wealth across time and influencing what gets manufactured, built, destroyed. Their observations – and often the economists too – have gone in and often out again of what is ‘generally recognised and known’. This chapter and the next will offer brief glimpses of how economists have noticed the following facts – and how some have suggested reforms, so that money might be created more equitably:

  1. Bankers create more in ‘credit’ than they have in ‘cash’;
  2. ‘Credit’ becomes money when it circulates in making payments;
  3. When credit replaces cash, interest payments on the credit are effectively a ‘tax raised by the powerful on the productive’;
  4. Large credit allocations by banks increase the powers of government and concentrations of capital (i.e. money intended for investment and speculation as opposed to spending).
  5. Bank-credit feeds war, predatory nationalism and national debt.
  6. Bank-credit allocates power in a way destructive to the human and natural world: to the environment, freedom, equality, and to other conditions that make human happiness a widespread possibility.

For roughly two thousand years, from the days of Aristotle to the end of the Middle Ages, economists (such as they existed) were not scientists: first and foremost, they were moral philosophers. During the Middle Ages they were employed by the Christian Church, which held a great deal of worldly power. Sword-wielding bishops went into battle, Popes led armies, papal territories grew and shrank: but mostly (and more to the point) the Church’s authority relied on its assertion of a moral order. The Church was made up of human beings so of course it was open to the normal corruptions of greed, hypocrisy, ambition etcetera, and in many respects its moral precepts differ from those we would live by today. The authority of its pronouncements were backed up by a system of Church Law capable of meting out punishment, and also by the threat of damnation – which for many was a serious consideration.

In one of the great ironies of history, economists of the Christian Church (the ‘Scholastics’) ignored Christ’s recommendation (in the Parable of the Talents) that money SHOULD be lent at interest: in keeping with more ancient Greek and Jewish traditions, they maintained that taking interest (‘usury’) was sinful. Princes, merchants, moneylenders and bankers found ways around these laws. Princes ignored them. For investors, there were exemptions if the lender was to suffer loss of some sort. As for bankers, they used falsified exchanged rates and currency transactions to confuse the authorities.

At this point, it is worth emphasizing the differences between moneylending and banking. Moneylending is the straightforward lending of money already in existence. Banking creates new money, as claims on money owned by the banker (nowadays we call these claims ‘credit’ although that word has actually a much wider meaning – as will be explained later). In medieval times, moneylending was allowed by Christian authorities to Jews under the authority of monarchs (who would then habitually rob moneylenders of their accumulated wealth). Banking, on the other hand, grew out of a practice (the Exchanges) which was forbidden to Jews. It was ring-fenced not just by social and racial prejudice, but also by the compulsory taking of Christian oaths. The historical remnants of this separation linger today in the different kinds of institution that call themselves ‘bank’. Commercial banks (along with their governments) create money in a legally privileged and protected procedure; ‘merchant banks’ lend it. The name ‘merchant bank’ is itself a misnomer, assumed by merchant moneylenders when the word ‘bank’ came to sound more respectable than the word ‘moneylender’. All of which means that, looking at the present for a moment, extremist agitators are being historically and conceptually illiterate (along with whatever else) when they blame the systemic robbery of banking on ‘the Jews’.

Preoccupied with their job of suppressing usury – the taking of interest – among Christians, Scholastic economists ‘paid scant attention to the operation of the economic system’ (de Roover). In other words, they did not fully analyse the process of credit creation. Late Spanish Scholastics came closest to identifying what was going on. Luis de Molina, (Tratado sobre los cambios, 1597) recognised that bank-credit was in practice a way of making payment (and therefore a form of money): ‘Though many transactions are conducted in cash, most are carried out using documents which attest either that the bank owes money to someone or that someone agrees to pay, and the money stays in the bank.’[2] This comes close to the simple truth stated publicly by the Venetian banker and Senator Tommaso Contarini in 1584, that a banker may create means of payment (money) “by merely writing two lines in his books”. Many economists today are in denial of this simple, long-established truth, and insist that bankers are merely intermediaries between savers and borrowers.

As medieval society diversified during the fifteenth, sixteenth and seventeenth centuries, from a society composed of ‘those who work, those who fight and those who pray’ to a more complex world centred on enterprise, trade and capital, so people outside the Church began writing on economics: humanist philosophers, public administrators, merchants and financiers. These people, living in the practical worlds of administration and business, were bound to notice that banks were creating lot of credit on rather few assets.

Those practical economists are today known as ‘Mercantilists’. Mercantilists disagreed with each other about most things, including the desirability of banking, but they were agreed on one thing: a State should maintain a healthy balance of trade in order to accumulate money for emergencies such as wars, and also to avoid running out of circulating coin. In an age when cash was gold-and-silver, bad decisions by rulers could result in a kingdom being drained of coin. When there was a shortage of coin, people had to resort to barter, improvised local currencies – and to various forms of credit.

Money-creation by banks was a familiar fact. A sentence written in the 1560’s (perhaps by Elizabeth I’s diplomat-financier Sir Thomas Gresham) that bankers ‘do greate feates having credit and yet be nothing worth’ was repeated almost word-for-word by the businessman Malynes in 1622: bankers ‘do great feats having credit and yet be nought worth’. Malynes went on to notice bank-credit rested on very little money. ‘What is this credit? – or, what are the payments of the Banks, but almost or rather altogether imaginative or figurative?’ He went on to explain in detail how payments are made in-bank, by debiting and crediting from one account to another without involving the transfer of hard cash, and how bankers quickly amass vast fortunes from this practice: ‘without that any money is touched, but remaineth in the bankers hands, which within a short time after the erection of the Bank cometh to amount unto many millions.’

Malynes called banking the ‘Canker (cancer) of England’s Commonwealth’. He listed some of the bad results of bank-created credit: it fuels wars, it raises prices, allows bankers to engrosse (amass) commodities and trade for their own benefit and to manipulate the exchanges for their profit. A pro-banking opponent, Thomas Mun, replied (in another pamphlet) that Malynes’ objections were mostly ‘all one matter in divers [different] forms’ and that every idiot knew them (‘such froth also, that every Idiot knows them’). Since anyone with good credit can borrow and do the same, Mun went on, why pick on bankers? We see here the beginning of an argument that might be had today – if the facts of banking were publicly and openly acknowledged.

The Mercantilists were publishing their pamphlets around the time of the birth of modern banking in seventeenth century England. It was a time of wars: a Civil War at home, and wars with the Dutch abroad. For a while (1649-60) England dispensed with kings and queens altogether and found itself under a military dictator, Oliver Cromwell. Parliament sent a deputation imploring him to take the Kingship because at least people knew the limits of a King’s power: no one knew the limits of Cromwell’s. Another ‘humble offering’ put to Cromwell was a proposal by one ‘Samuel Lamb, merchant’ to set up a national bank. Cromwell’s response is not known, but the proposal survives. A national bank, Lamb said, was desirable for the same characteristics that foreign banks were undesirable: to be able to monopolise and sell at a profit, to create credit out of nothing, instead of having to pay for it; to finance war by means of ‘imaginary money’; even, in what seems a very modern touch, to use bank-credit to purchase natural resources abroad to ‘save our own timber here until a time of need’. Fast-forward a few hundred years and we see Japan still heavily-forested, having stripped many Pacific Islands of their trees.

So banks, like weapons systems, were needed to counter foreign banks: along with armies and navies, bank-credit was a weapon of predation. For national self-defence, ‘what the neighbours have, we must have too’. With the Mercantilists, the economics of nationalism were born, and they are with us still. Later (1816) Thomas Jefferson would describe banks as ‘more dangerous than standing armies’. None of these observers would be surprised to see, today, the peoples of Mediterranean countries brought to their knees by predatory credit.

Before leaving the mercantilists, it’s worth mentioning an insight of Josiah Child (1630-99). He chose to ignore the credit-creation aspect of banking, but nevertheless warned of the destructive power of foreign lending. It is sometimes forgotten how much wisdom was taken by Christians from their Old Testament, the Jewish Bible. This observation of Child’s rings true today and is worth quoting: ‘the Wisdom of God Almighty did prohibit the Jews from lending upon Use one to another, but allowed them to lend to Strangers for the Enriching of their own (i.e. the Jewish) Nation and Improvement of their own Territory, and for the Impoverishing of others, those to whom they were permitted to lend, being such only whom they were commanded to destroy or at least to keep Poor and Miserable, as the Gibeonites, etc., Hewers of Wood, and Drawers of Water.’ Rich nations are today finding predatory credit as effective as war used to be, in the struggle to dominate and exploit.

The next character in economic history is an almost cartoon-style foretaste of modern power. Sir William Petty is known as the founder of modern statistical economics. Petty was a man of immense energy and imagination, obsessed with mathematical calculations and schemes for the general improvement of humanity, and he made an enormous fortune out of what was perhaps the first modern genocide. By Petty’s own calculation, 504,000 people, more than a third of the people of Ireland, ‘perished and were wasted by sword, plague, famine, hardship and banishment, between the 23rd of October 1641, and the same day 1652’ – that is, during Cromwell’s war of attrition and depredation in Ireland.[3] Petty was on the spot: his job was surveying and allocating the newly-emptied lands to Cromwell’s soldiers and ‘adventurers’ – people who had invested in the ‘war’ to make a profit. Many of these people sold their plots on cheap to Petty, not wanting to settle in a land far from home where the few remaining natives hated them.[4]

With Petty, we emerge from economics as a branch of moral philosophy into the economics of the modern world: control (and seizure) of resources, maximised productivity and social engineering. Petty, at the very outset of this development, expressed himself in an unusually direct manner. The labouring class, being ‘licentious only to eat, or rather to drink,’ should be restricted in what they could consume. Surplus goods should be put in storehouses rather than wasted in over-feeding the ‘vile and brutish part of mankind… and so indisposing them to their usual labour.’[5] Independence and freedom were for the higher orders; social management for the rest.

‘Supernumeraries’ – that is, humans not needed in Petty’s system of maximised productivity – should be paid to do entirely useless things like building pyramids: for ‘at worst this would keep their minds to discipline and obedience, and their bodies to a patience of more profitable labours when need shall require it’ (Keynes repeated this suggestion in slightly different words in Book Three of his 1936 General Theory). Maximization of productivity should be pursued not to provide plenty for everyone, says Petty, but to increase the wealth and strength of the nation. And once that is achieved, Petty asks himself: ‘What then should we busy ourselves about? I answer, in ratiocinations upon the Works and Will of God.’[6] One wonders what sort of God was floating around in Petty’s mind.

Petty recognised that banking increased the money supply and he recommended it for that reason. In a pamphlet titled Quantulumcunque he asks himself: ‘What remedy is there, if we have too little money? – We must erect a bank, which well computed, doth almost double the effect of our coined money: and we have in England materials for a bank which shall furnish stock enough to drive the trade of the whole Commercial World.’ His ‘almost double’ was a low estimate, but his prediction that English banking could ‘drive the trade of the whole commercial world’ proved pretty much true. Three hundred years later, a banking historian would write: ‘By 1914, the great loan-issuing houses could not unjustly claim that it was largely by their efforts that Britain held in fee not only the Gorgeous East, but the greater part of the rest of the world as well.’[7]

Petty’s recommendation of banks included no assessment of how the new money, its creation and allocation, might advantage some and disadvantage others. His preoccupation was: will the new money be put to productive use? (if so, good); or will it be frittered away in idle consumption? (if so, bad). This way of thinking has come to dominate economic thinking. A third possibility, not mentioned by Petty and often ignored since, was that credit can be used in sheer speculation. This potentiality would soon show its power in the Mississippi and South Sea Bubbles (both of which burst in 1720).

Soon after Petty’s death (1687) came two developments, both central to subsequent history and both remarked on in Chapter Three: the establishment of the Bank of England (at that time a private bank) and the Promissory Notes Act of 1704. The Bank of England (1694), according to Thorold Rogers ‘put into circulation nearly 1.1 million of notes’ on ‘a reserve of less than £36,000 in cash’: i.e., it issued thirty times as much credit as it had cash to back it up.[8] It ‘invested nearly the whole of its funds in Government securities’ – i.e. in loans for war. Those who supplied the finance were making large profits, and they were mostly of the ruling Whig party – so much so that Bagehot and Holdsworth referred to it as a ‘Whig finance company’.[9]

The Bank of England came under repeated attacks from rival bankers and political opponents. In 1696, when coin was scarce because of re-coining, the Bank was almost driven under in a run organised by its enemies. In 1705, there was a proposal to replace this private bank with a public institution of National Credit, as explained in a pamphlet: An Essay Upon the National Credit of England.

This remarkable proposal foreshadowed in many ways what Henry C. Simons would propose more than three centuries later, during the Great Depression. The idea was that the government should pay contractors and suppliers with its own notes of credit, instead of borrowing expensively from banks and private profiteers.[10] These credit notes would circulate as money, on the security and surety of the assets and labour of the English people – who would also be reaping the benefits.

‘It will certainly be an exact piece of justice,’ Broughton wrote, ‘to make the credit of the public beneficial to the public, instead of its being diverted into other methods for the benefit of private persons; and that too, not without danger, as well as loss to the public.’

Here it is worth pointing out that our modern use of the word ‘credit’ is a narrow use of the word. ‘Credit’ is Latin for ‘believes’.  Today, ‘credit’ means the belief of customers that a bank will pay out, on demand, some of its own money either to themselves or to a third party. In its wider meaning, ‘credit’ means any money that has value only because others believe in it. Paper notes and figures in a bank account are credit-money: without general credibility they are worthless. Gold coin is not ‘credit’ because it can be melted down and sold if it’s no longer wanted as money. Credit is money in its purest form: no more (nor less) than the ability to purchase what is offered for sale. How credit is created must be one of the most important factors in any economic system.

Broughton points out some differences in outcome between his National Credit and government borrowing. The differences, if not exactly ‘froth known to any idiot’, would have been quickly understood then by those in public life. In both cases, the government is creating new money-assets. In the case of National Credit, it is printing notes. In the case of borrowing, on the other hand, gives the lender a government bond (of the same value as the loan) that can be traded among merchants and financiers, and so is effectively new money.[11] The most substantial difference between the two outcomes is that in the second case, the government commits future taxes to pay interest – a drain into perpetuity on the nation’s resources into the pockets of lenders.[12]

Concerning over-issue and consequent inflation, Broughton relies on Parliament to determine how much should be issued, to prevent the executive from abusing its power. He contrasts this with the ‘boundless power of bankers’ to ‘extend the credit’. Here the proposal differs from that of Henry Simons (referred to above): during the intervening 250 years, legislatures had become less trusted. Simons proposed an independent authority, governed by single objective of keeping the value of currency steady, which would command the government in how much to issue or withdraw.

Broughton points out that the government, by issuing notes, will not be issuing credit ‘as a banker does’ but ‘as a merchant does, which is to extend his credit to serve his own occasions.’ Confidence in a merchant’s credit rests upon his trustworthiness and solvency; the same would be true of National Credit, which must rest on the honesty, solvency (and hard work) of ‘the Parliament and Estates of England’ – ‘Estates’ meaning people of all ranks and occupations.[13] National Credit is suitable, he says, when governments are strong but limited, and not ‘arbitrary’. His final words praise (flatter?) the government: it is ‘admirably qualified to assist, and equally restrained from oppressing, those under its happy influence.’

Broughton predicted that objectors in the main would be ‘people who have large incomes and make great gains by the present methods.’ Indeed! – And such people were the ruling party! How did he ever think his proposal would be accepted? Lawmakers of the time were notoriously concerned with their own interests: in the words of Sir Lewis Namier, candidates for election ‘no more dreamt of a seat in the House in order to benefit humanity than a child dreams of a birthday cake that others may eat it.’[14] In retrospect, the plan’s rejection was inevitable – and perhaps as great a missed opportunity as England’s failure to develop institutions of local democracy (described by F.W. Maitland as the ‘great blunder of English law’ and a ‘national misfortune’).

Similar plans to Broughton’s – governments should issue money not by borrowing, but as ‘national credit’ – have occasionally been put into operation elsewhere. This happened usually in a time of war or revolution, when the special interests of the governing class were temporarily forgotten or overruled by necessity; or when the governing class itself was being replaced. In such conditions, notes were usually issued in excess. Detailed studies of responsible issues, however, show them to have been very successful: of which, more in a subsequent chapter.[15]

How much notice was taken of Broughton’s suggestion at the time, and how much did it become part of public discourse? His Essay was published and re-published, and thirty years later the influential philosopher and economist Bishop (George) Berkeley repeated the propositions in a book consisting of a series of questions (The Querist, 1735, Questions 199-275). In a second edition of 1750, Berkeley omitted the questions concerning Broughton: the public had lost interest. The new ruling class of ‘capitalists’ was firmly established, and the new poor of England were having a hard time making ends meet. As in England, so in America: Thomas Jefferson (1725) noted ‘an aristocracy, founded on banking institutions and moneyed incorporations under the guise and cloak of their favored branches of manufactures, commerce and navigation, riding and ruling over the plundered ploughman and beggared yeomanry.’[16] Bishop Berkeley added, concerning his omission: ‘It may be Time enough to take again in Hand, when the Public shall seem disposed to make Use of such an Expedient.’ Perhaps now, some three hundred years later?

Broughton’s suggestion would have eliminated at least three toxic outcomes of private commercial banks creating the money-supply: 1, the provision of currency at permanent and continual interest; 2, new money provided in bulk to investors and speculators on prospect of mere profit; 3, new money created for governments and capitalists at the expense of the rest.

Consideration of justice in the matter of money-creation was now taking a back seat. We see it already in Locke, the quintessentially respectable ‘philosopher of government by the gentry’ (Acton). Locke wrote a great deal on money. He recognised that inequality was a threat to national happiness and even blamed it on money (gold and silver); but he included no recognition of bank-credit’s special role in enhancing it.

The second development referred to above was the Promissory Notes Act of 1704, which authorised claims on imaginary assets as currency.[17] This excited the imaginations of speculators and ‘projectors’ – the word then used for inventors of dubious schemes to benefit the human race and – incidentally, of course – themselves.

One of these projectors was a Scotsman, John Law (1671-1729), a professional gambler who escaped from an English prison after killing a fellow gambler in a duel. Law had no trouble recognising that ‘credit is money’.[18] If bank-credit could circulate as money, why not claims on other things? In 1700, Law presented a plan for a ‘land bank’ (its notes to represent claims on land) to the Parliament of Scotland (known at the time as the ‘Parliament of Drunkards’).

His plan was rejected and he made his way to mainland Europe. In France, Law directed his attention to two other kinds of paper claim which could perhaps circulate and become currency, or at least the basis for currency: certificates of government debt and shares in colonial ventures licensed by the monarch. Why could not this kind of paper take over, displacing gold and silver altogether? Charming his way round the gambling salons of Paris, Law found a willing listener and co-conspirator in the Regent (and effective ruler) of France: Philippe D’Orléans, a man suspected of many crimes including incest with his daughter and the murders of several close relations.

Together with the help of royal decrees, the two men merged a variety of paper claims – government debt paper, bank-notes and share certificates – into shares of a new French colonial monopoly, the Mississippi Company. Shares could be purchased with small payments upfront. More bank-paper was issued in extravagant quantities, and by the time second payments were due, the value of the shares had already soared. Speculation fever took hold: an immense financial bubble grew and burst. The finances of France were plunged into disarray. The year was 1720 – the same year as the South Sea Bubble burst in England.

A lesson was learned from these bubbles (temporarily at least): the engine of credit-creation would have to be managed with restraint, otherwise it would run amok and shake down the whole edifice of property and power.

Meanwhile the visible nature of bank-credit had changed: it was no longer mostly numbers in deposit accounts, but promissory notes issued by banks. Bank-notes were displacing coin as domestic currency; but they were not acceptable for foreign payments. For the next hundred years, the word ‘bank’ would tend to provoke discussion about whether paper money issued by banks was a good thing for the internal economy of a nation. Discussion of the predatory nature of banking – Thomas Mun’s ‘froth known to every Idiot’ – simply disappeared.

So – what of justice, in this new world of enterprise and money created out of air? Justice in economic thinking was removed from the arena of ‘what must be worked on by human effort and care’ and given over to a genuine piece of voodoo – an ‘invisible hand’. Curiously, perhaps, this piece of voodoo – and Adam Smith, its inventor – would inaugurate what is now called ‘scientific’ economics. Consideration of all that will have to wait for the next chapter.

Chapter Five: Economists and Banking, Part Two: Adam Smith, some early Americans, and Friedrich List.

This chapter is about economics in transition. Economics means literally ‘housekeeping’ and most early writers on economics (roughly speaking before Adam Smith, 1723-90) treated it that way. They worried about a nation’s solvency, whether fairness generally prevailed in economic dealings, and whether the vulnerable were sufficiently protected against the powerful. By the end of this chapter, however, nationalist economics is promoting a ‘war of extermination’ between nations; and ‘institutions of credit’ – i.e. banks – have become economic weapons in the hands of national elites, for use both at home and abroad.

Economists before Adam Smith noticed that huge quantities of credit, based on very few assets, were passing as money, enabling real property to be purchased by people who had done nothing to gain it besides speculate or fund the speculations of others.[19] The ‘financial revolution’ was inevitably accompanied by a social revolution: the old landed gentry were being bought out and displaced by speculators in finance.[20] Some economists were concerned about the effects on society generally, of such people gaining political and financial power.[21] ‘Every little scoundrel gets a new estate’ commented Charles Davenant in 1701.

In 1707, there occurred one of those momentous turning-points in history which no one much remarks on. The nature of the event probably explains why it is so obscure: debt became a legally-recognised commodity. Not exactly a bit of history to thrill the imagination, and yet it changed the world, transforming how money could be made and leading by slow process to the situation today, when financial operators own most of the world’s wealth.

Buying and selling debt had, in fact, been going on for centuries before 1707, but in a kind of legal shadow-land. The law generally didn’t support creditors unless they were part of the initial loan agreement, so transactions mostly took place between trusted partners: even so, enormous fortunes were built on it.[22]

Pieces of paper acknowledging debt are basically ‘promises-to-pay’. The Promissory Notes Act of 1707 meant that these bits of paper could freely and openly be bought and sold. It opened up possibilities for everyone with money to speculate in debt – and to create valuable debt themselves. ‘Promises to pay’[23] came in three varieties. There was government debt – bonds – that is, a government’s promises to repay money it had borrowed. There was commercial debt – originally a trader’s promise to pay at a later date, but subsequently also stocks and shares, which are not just certificates of ownership but also promises to pay the profits of a ‘joint-stock company’ i.e. a business corporation. Last but far from least, there was banking debt: notes promising to pay money to customers when and as they want it. Always and everywhere, the possibility lurked that debt was being created where no assets existed (or ever would exist) to redeem it. In the case of banking, this was an essential part of the deal. The activity of banking is issuing more promises than can ever be kept. Bankers’ ‘promises-to-pay’ circulate as money, and for as long as they circulate, the banking system (taken as a whole) never has to pay out on them. Bankers’ ‘promises-to-pay’ are claims on assets that, for the most part, don’t exist and never will exist.

The law of 1707 made lending a much more attractive proposition. Normally, when someone lends money, they say goodbye for a time to the money they have lent. But if lenders get a piece of paper acknowledging the debt, and if that piece of paper can be freely bought and sold, then lenders may sacrifice little or nothing by lending: they may even make an immediate gain, as Adam Smith notes below.

So – people were happier to lend. The government began to borrow spectacular amounts of money, to make war in Europe. This began the age of the national debt: nations borrowing off their rich, at no expense to the rich, who are paid interest (and eventually capital) out of taxes on the productive part of the nation.

As for joint-stock companies, they grew like mushrooms, and many of them disappeared just as fast. Stocks and shares could be talked up and down in value, which opened the door to manipulation and wild speculation. Suddenly everyone and their dog were gripped by speculative mania. ‘It was as if all the lunatics had escaped from the madhouse at once’ commented a Dutch observer.[24] English poets, novelists, and playwrights wrote and argued about the virtues and vices of ‘Lady Credit’ – and speculated themselves. A whole century of literature – Defoe, Swift Pope, and many less famous writers – was devoted to satirising the new society of speculators and credit-worshippers. Hogarth did the same in art. The profits of speculation left ‘honesty with no defence against superior cunning’ wrote Jonathan Swift in Gulliver’s Travels.[25] Speculations in credit ‘ruin silently… like poison that works at a distance… by the strange and unheard-of engines of interest, discounts, tallies, transfers, debentures, shares, projects, and the devil-and-all of figures and hard names,’[26] wrote Defoe, author of Robinson Crusoe.

New opportunities for corruption entered politics, via the magic of money based on nothing. A series of plays satirising corruption so enraged the Prime Minister, Robert Walpole that London’s theatres were shut down: only three were allowed to reopen, subject to heavy censorship.[27] When Walpole covered up the buying and selling of fake share certificates involving the King’s mistress, a new level of corruption had been reached. The system, corrupt in itself, was being topped up by illegality unpunished in the highest places. Obviously, this was the beginning of the modern age. The poet Alexander Pope’s satirical comment was: (to ‘imp’ means to ‘maliciously impersonate’);

Blest paper credit! Last and best supply!

That lends Corruption lighter wings to fly!

Gold imp’d by thee can compass hardest things,

Can pocket States, can fetch or carry Kings! …

Pregnant with thousands flits the Scrap unseen,

And silent sells a King, or buys a Queen.

Adam Smith, the founder of modern economics, was born in 1723, some fifty years later than the writers mentioned above. He was Scottish and spent most of his life in Scotland, at some remove from London society. In his magnum opus, An Inquiry Into The Wealth of Nations, the question of justice in money-creation simply disappears, buried in a general attack on the economists who came before him. The goal to be aimed at in The Wealth of Nations is not justice, but maximized production.

What did Adam Smith make of the three categories of tradeable debt noted above? He noticed that investors lose nothing when they lend to government:

By lending money to government, they [the great merchants and manufacturers] do not even for a moment diminish their ability to carry on their trade and manufactures. On the contrary, they commonly augment it. The necessities of the state render government upon most occasions willing to borrow upon terms extremely advantageous to the lender. The security which it grants to the original creditor is made transferable to any other creditor, and, from the universal confidence in the justice of the state, generally sells in the market for more than was originally paid for it. The merchant or monied man makes money by lending money to government, and instead of diminishing, increases his trading capital. He generally considers it as a favour, therefore, when the administration admits him to a share in the first subscription for a new loan. Hence the inclination or willingness in the subjects of a commercial state to lend.[28]

Smith’s objection to this is not because it is unjust, but because it hurts productivity. Interest is ‘paid by industrious people and given to support idle people’ and industry is hurt as a result. He has similar objections to joint-stock companies. The fact that ownership is remote, and always changing as the shares change hands, means that owners of companies are not directly involved in running them, and they are less carefully managed as a result. ‘Negligence and profusion, then, must always prevail, more or less, in the management of the affairs of such a company.’[29]

Smith’s assumption is that increased productivity is a good thing, full stop. So it hardly comes as a surprise when his principal concern about banking is: does it aid or hamper productivity? In Book Two, Chapter Two, he concludes, after long and confusing argument, that banking (when judiciously conducted) is on balance a plus because ‘the operations of banking turn dead stock into productive capital.’[30] The idea is that a manufacturer borrows paper money on the collateral of money kept for ‘answering occasional demands’ and the borrowed money is put to good use. Banking assists productivity, and is therefore a good thing.

Nowhere does Smith address the theme that bank-money transfers assets from one class to another. He was, however, concerned by the tendency of banks to collapse, and of their notes to become worthless. To protect the vulnerable poor, he recommended that banks not be allowed to issue notes of low value. He also praised the Bank of Amsterdam, which created no more in credit than it had in money and so was not vulnerable to ‘runs on the bank’; but he stopped short of recommending this for all banks. On the contrary, Smith praised paper money for the normal reasons: paper is convenient and it replaces something expensive (gold) with something cheap.

Within its limits, The Wealth of Nations is a ‘great’ book: it set the stage for two and a half centuries of empire-building. It became the Bible of the new commercial ruling class, a place it still keeps today. But its neglect of the effects of created credit on ‘who owns what’ and on the progressive destitution of the poor set a precedent for mainstream economics which it was quick to follow. Neglect of this aspect of money-creation has permeated and distorted every area of economics, to such an extent that ‘since Adam Smith, the development of economics has been one long chain of making rules, refuting them, qualifying them, forgetting them.’[31] It has also meant that economics, since Smith, has been less of a scientific endeavour to understand, more a series of efforts at shoring up the various great and overweening powers which have appeared on the stage, each hoping to use the power of created credit for its own ends: predatory capitalism, socialism, communism, fascism and the enterprise state.[32]

It was left largely to outsiders to make true economic insights into money-creation.[33] The tragedy of this has been that their insights have not been put through a proper scientific process of being scrutinised, tested, then accepted or rejected, to constitute a body of knowledge which could be taught with honour across the generations.

The idea that economics should, like other human disciplines, serve justice did, however, resurface every now and then: most significantly with the early American economists John Taylor (1753-1824), Daniel Raymond (1786-1849), William M. Gouge (1796-1863) and Amasa Walker (1799-1875). The story of this resurfacing is intimately bound up with the hopes and expectations of the founding fathers, and their disappointments that the United States, from promising republican beginnings, swiftly became a corrupt plutocracy.[34]

Adams and Jefferson, second and third Presidents of the United States, blamed this decline partly on the development of party politics, and partly on the adoption of English banking. John Taylor (‘of Caroline, Virginia’) was a critic and friend of both Adams and Jefferson. The two ex-Presidents overcame Taylor’s criticisms of themselves as politicians and wrote admiringly to him concerning his observations on banking. Taylor called banking a ‘machine for transferring property from the people to capitalists’. He called the combination of government and created capital a ‘tyranny of fraud’.

A currency of credit, Taylor wrote,

possesses an unlimited power of enslaving nations, if slavery consists in binding a great number to labour for a few. Employed, not for the useful purpose of exchanging, but for the fraudulent one of transferring property, currency is converted into a thief and a traitor, and begets, like an abuse of many other good things, misery instead of happiness.

Looking at England, then the most successful commercial nation in the world, Taylor saw poverty and destitution plaguing the masses, and immense wealth for a very few. Commerce – ‘the markets’ in modern parlance – had become a means not of producing wealth for all, but of thieving from the people: ‘rich tributes from the four quarters of the globe cannot prevent a frightful degree of pauperism’ he wrote and wealth is diverted way from working people and ‘into the pockets of the government, and of the exclusively privileged allies it has created.’

Taylor wrote that freedom, and the prosperity that goes with it, are vulnerable creatures. Banking and government debt are the instruments of a new ‘paper feudal system’.[35] Taylor’s observations on banking are now long-forgotten, along with Adams’ and Jefferson’s ruminations on the descent of the U.S. from a republic into a ‘tyranny of fraud’.

Daniel Raymond is often referred to with pride as ‘America’s first important political economist’ but his actual insights are also forgotten. There is no modern edition of his major work, Elements of Political Economy (1823).

Raymond is unequivocally critical of banks. They are ‘artificial engines of power, contrived by the rich for the purpose of increasing their already too great ascendency, and calculated to destroy that natural equality among men, which no government ought to lend its power to destroying. The tendency of such institutions is to cause a more unequal division of property, and a greater inequality among men, than would otherwise take place; which necessarily bring in their train, as has already been shown, poverty, pauperism and misery on some portion of the community.’[36]

In Raymond’s day, banks had to supply gold in exchange for notes when asked. He points out that if the public did not occasionally ask for gold, banks could manufacture unlimited amounts of credit-money: in which case ‘they would long before now have become possessed of every foot of property in the country, which would have been paid to them in the shape of interest for their money.’[37]

Many of Raymond’s insights and observations – including his debunking of Adam Smith on banking – deserve enshrinement in some (imaginary) Economics Hall of Fame. Instead, they have been consigned along with all his other wisdom to that general oubliette of history, dusty old books in reserve collections. But a facsimile of Elements of Political Economy (appended to Raymond’s book on constitutional law) can (for the moment) be downloaded here:  https://books.google.co.uk/books?id=r4VIAAAAYAAJ&pg=PR1&lpg=PR1&dq=daniel+raymond+elements+of+constitutional+law&source=bl&ots=XM9nZHq0Zp&sig=0Iivvdn-A42PfKsj47fgmoGWnx0&hl=en&sa=X&ved=0CCYQ6AEwAWoVChMIwbT11cH5xwIVy9YaCh2mhg6y#v=onepage&q=daniel%20raymond%20elements%20of%20constitutional%20law&f=false

Our third economist, William M. Gouge, is revered today as a historian of banking, but forgotten for the work he really cared about: his critique of the banking system, and his proposals for its reform. He, too, saw the promise of America dissolving into a new kind of plutocracy fuelled by banks. Should banking be reformed so that it no longer created money, he argued, the political promise of America would return again to be fulfilled. Here is how he ends his book. In his day, bank-credit mostly took the form of paper money, and he wanted a return to gold and/or silver coins; today, 97% of our money is numbers in bank accounts – all created as debt by the banking system:

A system which has been in operation in different forms for more than one hundred and forty years, must, by this time, have affected the very structure of society, and, in a greater or less degree, the character of every member of the community. It may require one hundred and forty years more, fully to wear out its effects on manners and morals.

In getting rid of paper money and money corporations, we shall not get rid of that principle of evil, in which they have their origin: but we shall get rid of very efficient instruments of evil. Our political institutions will then have their proper influence. Conjoining equality of commercial privileges with equality of political rights, we shall no longer startle those philosophers of Europe who land on our shores, by exhibiting to them a state of society so different from that which their views of republicanism had led them to hope for. We have heretofore been too disregardful of the fact, that social order is quite as dependent on the laws which regulate the distribution of wealth, as on political organization. Let us remove these excrescences by which our excellent form of Government is prevented from answering its intended end, and our country will become “THE PRAISE OF ALL THE EARTH.”

Gouge follows Taylor and asserts that money as ‘false and super-extended credit’ gives ‘to corporations a power which enables them to exercise an influence on society nearly as great as that which was exercised by feudal lords in the Middle Ages.’ As a knowledgeable expert on banking and banking history, Gouge had extremely interesting suggestions for practical reform (as did the other early Americans), which will be examined in a later chapter.

Our fourth economist, Amasa Walker, was if anything even more outspoken about the effects of bank-money on society. He wished to re-instate political economy as a moral science, not as a technique for structuring society towards maximum production.

‘That Political Economy is a science having nothing to do with morals or religion, nor in any way appertaining to human welfare, except so far as relates to the production and accumulation of wealth, is a common opinion… (but)  I have felt desirous, throughout the following work, to show how perfectly the laws of wealth accord with all those moral and social laws which appertain to the higher nature and aspirations of man.’

Walker’s The Science of Wealth (1866) was published a hundred years after Adam Smith’s The Wealth of Nations. Walker saw the United States dominated by an integrated system of banking, taxes and national debt, designed to take wealth from productive workers and relocate it with an equally integrated power of government, corporations and plutocrats. Building on the last chapter of Adam Smith’s Wealth of Nations, Walker points out that the National Debt is a great gift to the wealthy: they lose nothing by lending, because they get government bonds in return. Meanwhile the interest on the debt – on money that the government spends – is met by those who produce. It is a tax on the productive.[38]

His analysis of various types of currency is perhaps the most fascinating part of the book. The subject is vital to understanding how money-creation may either be impartial, or fuel inequality. Walker was writing at a time when at least one component to the money-supply was hard to manipulate and impossible to create: gold. His analysis of the types of currency then in use contains vital insights into how money may be manipulated by those in power.[39] As far as I know, there is no substitute for reading these chapters (and trying to understand them in a modern context) if one wants to understand the essential simplicity of money, and how complexity has masked the manipulation of money, transforming from a form of abstract property into a weapons-system in the interminable war of rich against poor.[40]

The subject of how money-as-credit, and money-as-property interact with each other was subsequently almost completely ignored in mainstream economics. Knut Wicksell, many years later, caused a stir in economics circles by noticing that there were two kinds of economy, a ‘credit economy’ and a ‘cash economy’; but as far as I know he never followed up his observation with thorough analysis.[41] Keynes made the same observation in his Treatise on Money (1930) but he, too, pursued the matter no further.[42]

Walker saw the United States going down the same route that Britain had taken – towards impoverished masses and a hugely rich ruling class. In contra-distinction to today’s plutocrats, who regard tax as theft from themselves, Walker sees government debt and banking as forms of ‘taxation’ that steal from the independent working poor and give to the rich, reverse-Robin-Hood style:

This is especially apparent in England. What has become of that yeomanry, once the pride of the country? Their little estates have disappeared, have been swallowed up by the terrible system of taxation to which they have been subjected. The pleasant hedges which still surround the small enclosures, once constituting the freeholds of her yeomanry, may yet be seen in all parts of the country. They are the monuments of an industrious, brave, and independent class of men, now extinct. These lands are indeed tilled by the hands of their descendants, no longer yeomanry, but peasants, almost the paupers of the nation.[43]

Fast-forwarding to today, once the independent poor have been robbed into penury they must depend upon a ‘welfare state’ to stay alive. This gives the super-rich plenty of reason to complain at the prospect of some of their money being diverted to supply those they have previously robbed with the bare ‘necessities of life’. In reality, the super-rich mostly avoid paying taxes and the burden falls on the working and middle classes.

So much more could be written about these early American economists. Their works could (and should) be studied, admired, discussed. But by the end of the nineteenth century they had been consigned to more or less total obscurity.

What happened?

The economics of nationalism took over and once again the notion of ‘justice’ in economics went into cold-storage. Nationalist economics is often called ‘Romantic’ – as if that makes it less bad. In reality, nationalist economics involves the development of a strong state which, in collusion with industry and banking, uses created-credit, first to subordinate workers at home so that production is cheap; and then to dominate peoples, territory and resources abroad. Created-credit is the ideal imperialist instrument: as the poet Alexander Pope said, it ‘flits unseen,’ buying not just ‘Kings and Queens’ but all kinds of powerful people. With money created out of nothing, its value maintained by a largely fictional convertibility to base-money, it purchases labour and natural resources from countries less sophisticated in the art of ‘robber banking’.

As luck or fate would have it, the same economist who heralded nationalist economics in the United States also fathered the nationalist (and racialist) economics of Germany: Friedrich List (1789-1846). Reading List after reading Amasa Walker is to jump from the warm and heady waters of imagined justice into an acid bath of realpolitik.

Friedrich List was born in Wurttemberg, Germany. As a young man, he was first imprisoned and then exiled from Wurttemberg for promoting constitutional reform. He arrived in the United States in the company of General Lafayette, a hero of both the American and French Revolutions. In Lafayette’s company, List met many influential people, and in 1827 he published two pamphlets: Outlines of American Political Economy and A Speech given at the Philadelphia Manufacturers’ Dinner.

List’s biographer Henderson writes: ‘With the publication of his two pamphlets, List suddenly found that he had become a public figure… List was now recognised in the United States as an authority on fiscal policy and a leading champion of the policy of protection,’[44] List’s American promoter wrote that his letters were ‘favorably received by the most eminent men of the country, such as James Madison, Henry Clay, Edward Livingston, etc.’[45]

The competition of states, List said, means that a nation must seek international power. List claimed that his ‘American political economy’ was descended in part from the vision of founding father Alexander Hamilton. American industrialists and bankers greeted him with rapture, not because his work was a revelation: it was applause for what they were doing anyway.

A nation, List explains in his Outlines of American Political Economy, is a ‘separate society of individuals who… constitute one body, free and independent, following only the dictates of its own interest as regards other independent bodies, and possessing power to regulate the interests of the individuals constituting that body.’[46] Who will exercise the ‘power to regulate the interests of individuals’? The answer would seem to be ‘a National Convention, composed of men of all parties, for the sole purpose of elevating the welfare of the country’ which in context sounds very like a committee of plutocrats, assisted by compliant politicians and economists.[47] Recognising the inevitability (and under certain circumstances desirability) of war, the nation must pursue power and self-sufficiency as well as prosperity.[48]

In a series of outrageously sycophantic passages List seduced his American audience of manufacturers and plutocrats with the promise that the United States (‘where heroes are sages and sages rulers’[49]) would be the power to dominate internationally – and after, to impose a global order of peace and plenty.

‘in after ages this country will proclaim true cosmopolitical principles. When it shall count a hundred millions of inhabitants in a hundred states; when our industry will have attained the greatest perfection, and all the seas will be covered with our ships; when New York will be the greatest commercial emporium and Philadelphia the greatest manufacturing city in the world; when Albion [England] in industry and wealth will be nearly equal to Pennsylvania, and no earthly power can longer resist the American Stars; then our children’s children will proclaim freedom of trade throughout the world, by land and sea.’[50]

Do we see here the future? It is undeniable that, for the most part, the United States followed the path set out for it by Friedrich List, not the path set out by Taylor, Raymond, Gouge and Walker. Individual freedom is the loser. In nationalist economics, freedom belongs to the nation, not to individuals.

In place of ‘justice today’ List promises a future Utopia after all the struggle is done. Like all systems that promote the interests of a faction, other citizens must be promised heaven at some time in the future to keep them trudging on through loss of freedom, security and prosperity.[51] List looks towards ‘a closer union of nations… the establishment of perpetual peace; and of the general freedom of trade, objects at which all nations should aim, and to which they must continually approximate.’

List’s overarching idea was that when the nations of the world have all become equal, ‘free trade’ will be a good thing: until then, it means that those with power, accumulated capital and ‘great institutions of credit’ will ‘carry on against the manufacturers of all other nations a war of extermination’:

‘a nation which has obtained advantages by a century of continuous or uninterrupted labor, by the accumulation of an immense capital, by a vast commerce, by financial domination through the agency of great institutions of credit, which operate to reduce the price of manufactured goods, and to stimulate manufacturers to exportation (is enabled) to carry on against the manufacturers of all other nations a war of extermination.[52]

List recognises predatory credit as a weapon to be guarded against, but he never mentions it as a weapon to be used; let alone to be outlawed! His approach appears to be a variant on ‘don’t show the weapons you intend to use; only the ones you want to cause fear with.’ It would be wrong to say that List makes no analysis of bank-credit: in his American pamphlet Outlines he accepts that banks issue at least three times the amount in credit as they carry in cash, and then makes the following extraordinary statement:

If only a third part of these circulating notes represent cash, what do the other two parts represent? For, being nothing more by themselves than stamped rags, nobody would take them if they would not represent anything of value. They represent a nominated quantity of money consisting in the value of property and land.[53]

List can hardly have been suggesting that claims against banks were backed by property and land: the early nineteenth century was a great age of bank crashes, each crash leaving a trail of dispossessed depositors and note-holders behind it.[54] Land-banks had been tried, but always failed because the land was never available to back them up. The meaning of this paragraph is fantastic and obscure. Elsewhere, List sets up the modern myth of international capitalism: that pre-existing capital ‘overflows’ from where it is plentiful (along with political power and productive skill) to where it can find better returns.[55]

Nationalist economics had no time for moralising about ‘fictitious’ or ‘imaginary’ credit: it was left to outsiders like Henry Carey Baird, a publisher of scientific and technical books, to analyze created credit as the engine of international commercial power.[56] In 1876, Baird wrote and published Inflated Bank Credit as a Substitute for Current Money of the Realm, a pamphlet explaining how created credit works to enable and support the immense power of Britain’s commercial and military empire.

In Europe, other Utopian messages were brewing to rival ‘nationalist’ economics. Marx would soon be noticing the power of fictitious credit and advocating that the State, not private banks, should have the privilege of creating it (the fifth plank of his Communist Manifesto). Other economists were adding racism to nationalism, envisaging a new Utopia for the benefit of a ‘master race’. Ideas of justice, of good and bad, of responsible moral freedom, that the weak should be protected against the strong, even that prosperity thrives in conditions of justice and freedom, were everywhere giving way to Utopian fantasies of dominion and exploitation, and expectations of plenty to be supplied by overwhelming power.

World domination by America as foretold by List: was it racist? Generally, List likes to imply that peoples can be ‘led, by a desire of enjoyment, to laborious habits and to improvements of their intellectual and social conditions’.[57] But occasionally, racist judgements jump out of the page: for America, he recommends the ‘exportation of black people’ which ‘though diminishing our numbers, may be considered as beneficial; it is an exportation of weakness and not of power.’[58] A page later, he characterises Mexicans as indolent. Twenty years later, he is advocating German dominance in Europe, beginning with the absorption of Denmark and Holland: ‘These two nations belong, besides, by their origin and by their whole history, to the German nationality.’[59] Taken as a whole, List’s work is like a racist glove waiting for a hand to fill it. What America refused to do in this regard, Germany went on to fulfil.

In 1833 List was back in Germany, where he wrote his magnum opus, The National System of Political Economy. After a series of business and political failures, he killed himself.

Since the eclipse of the early American economists, considerations of justice in economics have surfaced only sporadically. For many years now, the professional mainstream has been denying that banks create money at all: an extraordinary stance, since the simple fact has been established over and over again, at least since 1584 when Venetian senator and banker Tommaso Contarini explained it to Venetian politicians. The resistance of economists to this first-base truth means they can avoid even discussing the destructive outcomes of creating money this way. Those destructive outcomes must be a subject for later chapters.

Chapter Six: Economists and Banking, Part Three: The Twentieth Century.

This Chapter will be included only in the final published book.

Chapter Seven: Secrets, Ignorance and Lies: The Bad Effects of Creating Money as Debt.

“The tyranny of fraud is not less oppressive than that of force.” John Taylor of Caroline, Virginia, 1814.

Our system of money-creation was invented and developed during a time when war was seen as glorious, when the strong robbing and managing the weak was admired as good and right, and when class oppression was thought desirable in the interests of making a strong nation. Banks create money in a way that supports those activities. Today, the world is a different place and our objectives are – officially, at least – more-or-less opposite to the ones listed above. But we are still lumbered with our antiquated system of creating money as debt: all money, even notes and coin, is debt from banks of one kind or another.[60]

The title of this chapter is an accusation. A massive industry of debt-creation (‘financial services’) is today devoted to creating money and value for the rich and debt for the less-well-off. It has become an enormous cancer on humanity, draining life and livelihood from productive workers, the would-be working and the poor. As for the poor, they are now an increasing portion of the world’s population, despite advances in science, technology, entrepreneurship, productivity, mechanisation and organisation. Our money system concentrates power, and is a machine for transferring property from the people to financial predators.[61] The process has taken us so far towards self-annihilation, why not state the obvious: if you believe that riches should be gained in return for contributing something to the common good, we live not under ‘democracy’ but kleptocracy – rule by thieves.

Gaining control of the money supply has always been an ultimate dream of the ambitious. ‘The Richest Man Who Ever Lived’ – Jacob Fugger, a German born in 1459 – kick-started his career by getting control of the Emperor’s silver mines.[62] Command of the money supply brings with it command of much else besides, for the simple reason that money buys not just things, but also labour, production and political advantage. Today, it is not an individual but a class that profits from the way money is made. That class includes governments, predatory financiers and commercial bankers (who are bagmen for the rest).

Secrets, ignorance and lies defend our global financial system from democratic scrutiny. Many examples will appear as the chapter progresses, but here is a summary of the fundamentals. ‘Secrets’: it has been actively kept from public notice that banks create money when they lend: the official story, propagated even in academic text-books, has been that banks lend savings which others have deposited.[63] ‘Ignorance’: the public in our so-called ‘democracies’ are mostly ignorant of how money is created, of the laws that support that process, and of how citizens are being defrauded in the process. ‘Lies’: economists, bankers, politicians, historians and media professionals misrepresent and obscure what is going on. These misrepresentations are now so long- and well- established, that many professionals are unaware of the simple truths behind them.

It is not a small or insignificant truth that is being covered up. Banks creating the money supply opens up a chain of opportunities for destructive behaviour which makes it difficult for those who wish to do right by others to live satisfactory lives. In other words, it enables the bad in humanity to drive out the good. It is no exaggeration to say, the process has gone so far that our world and very survival are in jeopardy. How many people are taking the trouble to understand; how many are pressing for reform? At the moment, very few.

In this chapter I will attempt to outline, in simple language: first, what money is, and how it is created as debt; second, who benefits; and third, how the system feeds bad things including inequality, war, debt, corruption and environmental destruction.


We all know what money is. It is something we own which can be swapped for other things that are up for sale. For people who like their truths to be stated with a bit more gravitas, here is an economist saying the same thing:

So long as in any community there is an article which all producers take freely and as a matter of course, in exchange for what they have to sell, instead of looking about at the time for the particular things they wish to consume, that article is money, be it white or black, hard or soft, animal, vegetable or mineral. There is no other test of money than this. That which does the money work is the money thing.[64]

Today, money is mostly numbers in bank accounts. We own those numbers: they are OUR property and if someone steals them, we hope they will be in trouble. So what are those numbers? What kind of ‘property’ are they?

In our modern world, property, which is such a simple idea, comes in many shapes and varieties: intellectual property, for instance, or mineral rights. Bank-money is just another special case: it is ownership of debt from a bank. The numbers in our bank accounts signify how much the bank owes us. The debt is our property, because the law supports us as the legal owner of that debt.

When we make a payment, what happens? Some of what the bank owes us becomes owed to another person: it is as simple as that. This is how bank-currency works: debt from a bank passes between people as payment.

So – what does a bank ACTUALLY owe us? It used to be gold. Nowadays it is ‘reserve’ which is another set of digits created by the central bank, an organ of government. Central banks lend or sell these digits to commercial banks. Today, they also supply reserve to banks free, as part of the process known as ‘quantitative easing’, during which a government creates new money and buys back its own debt, profiting in the process.[65]

Both these sets of digits are merely typed into ledgers. Money, which buys the produce and human labour of all the world, is created out of nothing. That could be an excellent idea – if it were done fairly and equitably, in a way that benefits everybody. But it is not. Money is created as debt. The simple historical fact is: after slavery, serfdom and the rest were abolished, debt took over as the instrument of oppression and exploitative power. It is now dominant world-wide.

We are apt to think that ‘how things are’ is how they must be. These complex arrangements around how money is created – could they be any different? Certainly they could. The short answer is: money could be created the same way in almost every respect, but without the added ‘debt-widget’ and without allocating the new money to speculators. If we dispense with this primitive, disabling and devastating device, we may yet recover some meaning to the words ‘democracy’ and ‘freedom’. But at present the system is protected – by secrets, ignorance and lies.[66]


The act of creating money happens when a bank lends. If a banker was struck by a bolt of honesty, he or she might say to a customer about to borrow: ‘Starting from nothing, we’re going to agree to owe each other a million pounds. You can use what I owe you, to pay people: they’ll be happy to know that I owe them instead of you, and they’ll happily take debt from me as a payment. In return, your debt to me will be an asset on my books. In the meantime, you’ll pay me interest. So tomorrow, we’ll each have a lot more than we have today! Isn’t that clever!’

When a bank makes a loan, two equal-and-opposite debts are created which add up to zero. Those debts are valuable properties. The customer owns money. The bank owns debt from the customer (most of the assets on a bank’s balance sheet are IOU’s from the loans it has made to customers). The bank has created value out of nothing.

But how does a bank profit from creating debt? The simple answer is: when debt becomes money, the conventional process of borrowing and lending is turned on its head. The bank is ‘in the delightful position of charging interest on money it owes’.[67]  The two debts the bank creates are equal in value, but not in yield. The borrower owes the bank in a straightforward way, and pays interest. The debt FROM the bank has become something valuable: it has become money, and the bank is able to rent it out.

This is confusing, and its ‘confusingness’ has protected it. For centuries, people have argued about the basics while the banks got on with making money – for themselves and for others. In 2014, the Bank of England confirmed that ‘the majority of money in the modern economy is created by commercial banks making loans’. Surely, this simple fact – long known but long denied by most economists and bankers – is now open for general acceptance.[68]


Before debt could be freely bought and sold, allowing our money-system to evolve, a change in the law was needed. Debt was long regarded as a private matter between lender and borrower. Systems of law were generally reluctant to enforce a debt except between those who made the original agreement. The first country to make debt ‘negotiable’ – something to be freely bought and sold – was England when Parliament, composed of rich men voted in by other rich men, passed the Promissory Notes Act in 1704. Similar legislation was subsequently adopted by ‘most if not all commercial nations’.[69]

The Promissory Notes Act 1704 opened the most corrupt century in British history.[70] It was also, for better or worse, the foundation of the commercial and military British Empire, financing not just war but also ownership of foreign assets. ‘By 1914 the great loan-issuing houses could not unjustly claim that it was largely by their efforts that Britain held in fee not only the Gorgeous East, but the greater part of the rest of the world as well.’[71] Today, other countries rival and outdo Britain in the race to ‘internationalise’ their currencies. Nations whose currencies ‘go international’ reap huge profits: like banks, they are able to loan out debt at interest.

Once debt is negotiable, value can be created in a variety of different ways. For instance, when a government borrows it can give the lender a ‘government bond’ in return, equal in value to what it has borrowed. By doing that, a government creates assets for those who lend: within the class of lenders, a bond is equivalent to money, as Alexander Hamilton noted.[72] The lender loses nothing by lending: the public is put into debt.[73] The process takes from one class and gives to another.

Negotiable debt – bank-money and government debt – was the foundation of a new ruling class. The old feudal aristocracy, its privileges on the wane, was joined (and to some extent superseded) by a privileged class of financiers, in those days called ‘money-men’. This was obvious to people at the time and widely commented on (see chapters 3 and 4 of this book).[74]

Negotiable debt is a versatile source of ‘created value’. New ways of creating value base on negotiable debt are still being invented: derivatives, CDO’s, CDS’s, repos and ‘shadow’ banking are some fairly recent additions. With the introduction of computers and sophisticated mathematics, ‘finance’ – the creation and destruction of value – has become faster, ever more inventive, and ever more destructive.


When a borrower repays a debt to a bank, the debt no longer exists: it simply disappears. The act of creation goes into reverse. What actually, literally, happens is: a borrower assembles enough money-digits (debt from the bank and/or other banks) to repay its debt. The borrower transfers ownership of those digits to the bank, after which the debt becomes a debt from the bank to itself. Not only do the debts disappear: the corresponding assets also disappear – money, which belonged to the borrower; and the loan-asset, which belonged to the bank.

This limited life is perhaps the most important quality of bank-money. It means that new money can be continuously created, making new profits for lender and borrower without necessarily increasing the money supply. Again and again, profit can be taken from creating money. The profit in making cash is a one-off: profits from bank-money are taken in a kind of interrupted continuum, transferring assets and income from those who work to those who accumulate.

So, several key differences mark out bank-money from traditional ‘commodity’ currencies. It is created in secret and rented out at interest. It is allocated to specific persons, for the profit of bank and borrower. It is destroyed again once its extra-monetary function (its function of making a profit for banker and borrower) has been fulfilled.


It is NOT just a gigantic conspiracy, that bank-money has taken over all across the world. To be sure, it profits a few and disadvantages the majority; but practical reasons have also helped its ascendancy.

First, bank-money is convenient to use. Secondly, some of the profits of banks are recycled to benefit those with bank accounts. Thirdly, the influence on government of those who profit from private issue of money has been consistently very great, and the overlap of personnel is often great too. Lastly, the alternative – that governments create the money supply – has often proved unsatisfactory in the past. Examples of this are held up to show that it should not be allowed to happen. When governments create money – paper or digital – they usually yield to the temptation to create too much: hence inflation and hyper-inflation. Banks, on the other hand (unless they are fraudulent, or are being shored up by taxpayers’ money, as is increasingly the case today) are limited by their own self-interest in how much they create: they need to make a profit on their loans.[76]


It should surprise no one when a minority manages to commandeer the fruits of human labour and invention. Throughout recorded history, as soon as there is more than enough to keep people barely alive, battle is joined for the surplus. The winners usually make laws to ensure that they carry on being the main profiteers. Usually (as, for instance, in feudalism) these laws have been open and acknowledged but the laws which support today’s oligarchies – laws around the creation of money and financial value – are not publicly understood.

Today, wealth above the bare necessities has never been greater. Machines and computers help to produce stuff in vast quantities. When a new source of profit appears – a new kind of production, a successful enterprise, a new kind of asset (such as digitised personal information) – money is created in large amounts by banks, and allocated to predators to appropriate the source of profit.

The introduction of non-human labour was addressed by the economist David Ricardo nearly two hundred years ago. Economists usually promote the interests of those chasing wealth and power; but Ricardo was struck by a bolt of pure honesty when he wrote in 1821 that machinery shifts wealth and power to those who own and control production. “If machinery could do all the work that labour now does, there would be no demand for labour. Nobody would be entitled to consume anything who was not a capitalist, and who could not buy or hire a machine.” He also wrote: “These truths appear to me to be as demonstrable as any of the truths of geometry, and I am only astonished that I should so long have failed to see them.”[77]

Ricardo came to this realisation late in life. Mainstream economics ignored his observation. Instead, it took an observation known as ‘Say’s Law’ (in Say’s words, ‘the more men can produce, the more they will purchase’) to mean that money from production automatically becomes money for spending.[78] Say’s Law has no relevance to the effects of who gets to create the money supply. For generations, this omission of the ‘money factor’ seems to have absolved mainstream economists from noticing the most obvious outcome of allowing banks to create money, which is the extreme inequality it produces.

As a result of credit-creation relocating assets, wealth accumulates in a golden triangle of banks, governments, and financial predators. Wages, kept to a minimum as is natural in competitive capitalism, remain fairly constant. Inequality grows; and meanwhile the gremlin of debt invades like an invasive weed. For every piece of money there is a corresponding piece of debt, but the two do not stay together; they soon part company, as looked at later in this chapter.

Developing inequality in money and debt brings problems for rich as well as poor. Producers need consumers to buy their products, or their profits will dry up. Eventually, people outside the golden triangle are not spending enough to keep production profitable. In language used by modern economists when the truth needs a bit of modification, there is a ‘demand deficit’.[79] The result is ‘business cycles’ – economies lurching in and out of booms and busts – which are also looked at later in this chapter.


Many of the observations in the following sections have been made frequently in the past, only to be forgotten. Money in the form of credit/debt is the ‘magic’ fountainhead of power: questioning its moral legitimacy is a quick route to the economist’s graveyard.[80]

The bad effects of the way we create money tend to be exacerbations of things that happen anyway. Some of these things are inherently bad (like war); others (such as inequality) would not be bad in small doses. An economist has made an analogy for the second type: a domestic cat is generally a well-loved addition to a home: enlarge it into a tiger, and it is less desirable.

Once debt can be bought and sold, complexities arise that boggle the human mind. Most financial workers are only aware of the little patch they work in. People are protected by ignorance from understanding the full implications of what they are involved in. Below, I try to unravel some of the implications. The list is tentative.


Extreme inequality is good for no one. As well as setting the stage for a great deal of human misery it has the effect of seizing-up the economy. Imagine a café with a hundred customers: between them they have a thousand dollars to spend. They are all thirsty, but only one of them has bought a cup of coffee. The café owner is puzzled; he’s not making any money. What he doesn’t know is that one person has all the money; the others are all broke. Soon, the café owner will be broke too. That is a simple picture of economic paralysis due to inequality.

Inequality is of the ‘household cat’ variety. A certain amount is inevitable, perhaps even beneficial. Extreme inequality is a different matter. At the one end, it puts excessive amounts of power in too few hands. At the other end there is poverty, disempowerment and displacement – desperate people searching for how to make ends meet, and many others at a loss how to flourish.

Bank-money is just one of a number of institutions and legally-authorised devices that enhance inequality. Others include trusts, wealth-protecting corporations, laws enabling tax-avoidance, and laws passed to reward those who finance political parties. We allow banks to exist because we believe ‘banks lend savings, so businesses can grow.’ This is a myth on two counts: banks create the money they lend, and very little of the money they create goes to productive businesses: at present, 3% according to economist John Kay.[81]

The most significant inequality is not income but in assets: in ‘what you are worth’. When the politician Bernie Sanders says that ‘one family owns more wealth than the bottom forty percent of the American people’ he is not talking about their income but about their accumulated wealth.[82] This kind of wealth is created by banks making loans.

Banks create money when they lend; they lend when banker and borrower both believe they will make a profit. The new money purchases assets.[83] The process enhances the market value of assets generally, making those with assets relatively richer and those without assets relatively poorer. Income from those assets accumulates with the people who own them: rent, interest, dividends, etcetera. The same assets may be used as collateral for many simultaneous financial dealings, because the same law which makes debt negotiable, makes claims on the assets of others negotiable too.

When banks create the money supply, power and wealth are not just concentrated; they are also placed in the wrong hands. Despite the cultural myths of our age, most people do not wish to give their lives over to getting more and more ad infinitum: they wish for enough to live well, in return for work they can be proud of. Our system of money-creation favours people for whom ‘getting more’ overrides all other considerations (this theme will return).[84]

When Adam Smith (godfather of economics) said ‘All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind,’ he was not saying it approvingly; he was issuing a warning.[85] Extreme inequality is the end aimed at by would-be ‘masters of mankind’. When resistance fails, they succeed.

How bank-created money promotes inequality has been looked at in more detail in Chapter Two of this book.

Debt, National and Personal.

When banks create the money supply, a world in which property is widely distributed is transformed into a world in which property is owned by a few and the rest are in debt. Probably no one will be surprised by this statement. But how does the process work?

It seems obvious that when money itself is created debt, the amount of debt in the world must increase. But the fact that money is debt FROM banks is confusing. If they owe us, surely that’s their problem! But then, for banks, as already mentioned, lending is topsy-turvy. A bank lends its own debts: it is ‘in the delightful position of charging interest on money it owes’.[86] ‘What it owes’ is a bank’s lifeblood. Because ‘what it owes’ is money, it is also the lifeblood of the world – rented out at interest.

How does this contribute to the worldwide debt problem we have today? The sequence of events is simple, but hard to understand because of the double nature of everything involved. A bank creates two equal-and-opposite debts, which add up to zero. Both debts are also valuable assets for the other party. The bank’s asset is its loan, on which a borrower pays interest (the asset will disappear once the borrower has repaid). The borrower’s asset is what the bank owes it; it is money. Money leaves the borrower bit-by-bit, as payments are made; after that, it circulates. The debt, however, stays with the borrower, who must pay interest, and eventually accumulate enough money to repay the loan.

If that is not horrible to keep in mind, I don’t know what is. But the significant point is easy: every bit of money in the world signifies the existence of a borrower somewhere, paying interest on that money. Who are these borrowers, paying interest on the money of the world?

Again, the true story is not obvious. It is a misunderstanding of how vast amounts of money are made, and of the role that debt plays in the process, to suppose that debt lands immediately with the poor and money with the rich. Bank-money is borrowed by people with assets (collateral), in order to make more money: once money is made, it is invested. Too much un-invested money sitting around in possession of the rich is a sign of an unhealthy economy. Instead of being in the ownership of people wishing to spend, it is in the ownership of people waiting to invest. Money that could be circulating is stagnating in pools.

When just a few people own most of the assets, income from those assets accumulates with them too: rent, interest, dividends, etcetera. ‘The few’ do not want to spend this income: – or rather, there is so much of it, they cannot spend it: they want to re-invest it. Money stagnates, while professional finance-workers seek (and invent) ways of making it grow. The world is in a kind of crisis pictured (in extreme form) in the café story above.

To keep going in this kind of scenario, businesses – the café owner, for instance – have to borrow. Individuals also have to borrow, to meet obligations undertaken during the good times. Governments may also have to borrow, to support citizens and industry. If the statistics are to be believed (compilers warn they are unreliable at best, because governments and banks lie about, or misrepresent, what is going on) the money supply of the world is at about 60 trillion dollars, the total national or public debt of the world is about the same, and the total debt of the world is nearly double both of those added together.[87] In other words, half the world’s debt is only indirectly related to government borrowing and money-creation, via the economic conditions these create; and of course some will not be related at all. According to the Wall Street Journal world debt is three times (313%) world GDP, or yearly production of goods and services.[88] Another statistic to boggle the mind: enservitude in action.

National Debts. Laws allowing debt to be bought and sold make it easy for governments to borrow. Banks willingly create money for governments to spend – until a nation’s debt becomes too great for its citizens to fund. Wealthy people are much keener to lend to governments if they get a ‘bond’ – a debt instrument they can sell – in return. As Adam Smith pointed out 250 years ago, once debt can be bought and sold, lenders get an asset in exchange for their money which starts life equal in value to what has been lent, and may well increase in value thereafter.[89]

Again, history supports this account. 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.[90] The South Sea and Mississippi Bubbles (both 1720) are landmark examples of what can happen. Careful management is needed to keep national debt at its job, of funding government spending while simultaneously ‘taking the wealth of the state from those who work and giving it to those who are idle’.[91]

There is an often-repeated cliché that ‘the national debt is a way of making our children and grandchildren pay for what we use today’. This is not correct: everything, from missiles to food, has to be paid for before it is used. When the government borrows in order to pay for things (rather than creating debt-free money) it is creating assets for one class – the class of ‘lenders’ – and burdening another class – passive citizen-borrowers – with interest and repayment.[92] The new assets, created for lenders, act as money within the class of those who possess them.[93] Descendants of those passive citizen-borrowers, are, of course, also in hock; for in this human world of ours, subjugation is an inherited condition.

National debts in some countries – the U.S. for example – have reached such dizzying heights that interest payments, even at very low rates, represent a substantial day-to-day drain on incomes. For the rich, there are positive knock-on effects: low interest rates, necessary for the survival of nations that are heavily in debt, mean that money can be created very cheaply. In these conditions, new money is created not for productive industry (whose value goes down as it becomes less profitable) but for speculation in asset prices, which rise automatically in response to money pouring in (house prices, for instance). The trick is to invest in one class of assets as it is rising, and sell before the market crashes: not a risk-free enterprise, but not difficult either for those prepared to give it time and mental effort.

Private Debt.

Booms-and-busts prepare the ground for private debt. When times are good, banks create easy money for people on the collateral of their homes, businesses or other assets. People get into debt, confident they will be able to pay it off. When the worm turns, incomes dry up and panicky banks call in loans. Debt becomes a burden: borrowers sell assets at a loss, and are in debt. The most familiar examples of this are people who dream of owning their own home. Early comers find success while prices are still reasonable; meanwhile speculative borrowers (who borrow more cheaply as interest rates go lower) push prices up. Homes become unaffordable to those who come later.[94]

Booms and Busts.[95]

When banks create the money supply, borrowing large amounts of money becomes easy for those who have collateral – in other words, for the rich. Large amounts of money are created for speculators to purchase profitable businesses and assets whose price is rising. In booms, ownership becomes located with a few, rather than being widely dispersed among many. Steady production, the profits going to the owners, continues the build-up of money owned by people who already have an excess. They do not spend most of this excess money on consuming things (how many yachts can any human want?); they look for opportunities to invest it.

Money is also created for borrowers who need money to spend, on the security of whatever assets they own. For a while, all seems rosy: then the growing assets of the few and the diminishing assets of the many – in other words, growing inequality – make it obvious the worm will turn: not enough goods are being purchased and businesses are delivering less profit. At that point, feedback goes from positive to negative. Banks respond to a ‘downturn’ by calling in debts and destroying money. Economists have called this characteristic of bank-created money ‘perverse elasticity’ – money is easy-to-get during booms, and hard-to-get during busts. Positive and negative feedback are supplied at precisely inappropriate times.[96]

Soon, the sheer quantity of debt can no longer be funded at conventional rates of interest. In response, governments drive down interest rates, making money even cheaper to rent (borrow) for those who already have it. Speculation replaces investment: new money is used to create ‘bubbles’ in markets such as housing real estate. Huge profits are taken by professional speculators before, during and after the inevitable crash.

Busts would rectify the situation somewhat by reducing capital values and debt, but lawmakers and regulators intervene in the interests of the wealthy, massively reducing interest rates and propping up the value of assets with devices like ‘quantitative easing’. These efforts merely prolong the recession or depression. The underlying cause – the gulf between massive wealth on the one hand, and poverty and debt on the other – remains.

Eventually, economies do emerge from recessions and depressions. Wars, expanding markets, debt reduction and default, falling capital values and other developments may each or all play a part in reducing inequality; upon which the cycle must begin again.[97]

Arms Proliferation.

Banks feed a vicious circle between arms production and purchase by eagerly creating new money for both buyers and sellers. They create money for governments on the security of their citizens paying (permission neither asked nor given). Once demand is guaranteed, banks willingly create money for manufacturers too. Governments naturally compete to acquire arms: if your neighbour gets missiles, you want them too.

Citizens, unaware even of how money is created, remain unaware of how their economies are skewed to arms purchase and/or production. Without bank-money, governments would have to borrow pre-existing money to finance arms purchases. 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.[98]

There is another relationship between economies based upon bank-money and arms production. In economies (such as those based upon bank-money) where massive inequality is a persistent problem, arms production acts as an economic stimulant. Its workers make products that will not be bought by workers (even in America, citizens do not buy missiles and bombs).[99] Armaments workers’ pockets are filled with spending-money that will be spent on other products, rectifying somewhat the ‘demand deficit’.[100]

From the point of view of national profit, selling arms abroad is even ‘better’; owners of corporations get richer, wages are spent in the home country, death and destruction occur somewhere else. Again, banks will create money for all sides – except, perhaps, for those who look like they will lose.

A secondary effect of this is pervasive hypocrisy in international affairs, as politicians and diplomats become salespersons for armaments to sustain the economy. Another is the ‘proxy wars’ being fought in unstable countries, using arms made by rich nations.[101]


Perhaps it’s an impossible dream that humanity should be done with war; perhaps not. Whatever the future holds, it is certain that when money is created out of nothing by banks, and national debt is contracted in the name of anonymous and passive citizens, war is more affordable.

Sometimes wars are started to divert public attention from economic troubles at home: the war started by Argentina’s General Galtieri on the Falklands is a typical example. Some economists maintain that war can solve those economic problems too. There is strong disagreement between different schools of economists about this.[102] Barring the obvious attractions of thieving other nations’ belongings, and making a defeated nation pay, the idea that war can be economically ‘a good thing’ is both illogical and repulsive. War involves the murder of many people who could be building a better world, the destruction of property and productive industry, and the laying waste of agricultural land.

And yet, there is a very specific context in which war can be economically ‘beneficial’. The logic is quite simple. As explained above, an economy can be paralysed by the kind of extreme inequality which is aided and assisted by banks creating the money supply. A period of war is one way to cure the disease although, like many clumsy cures it may kill the patient too. It works as follows.

In war, governments undertake massive spending. The money goes to ordinary people in wages. What they produce is destroyed (used up in war). There is little for workers to spend their money on, and often that little is rationed. Furthermore, luxury purchases may be discouraged out of ‘patriotic duty’. As a result, people use their money not just to buy basics but also to pay off mortgages and debts.[103] 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.[104]

Bank-money makes it easier for governments to finance war: they can borrow without asking permission: banks will lend as much as citizens can afford to pay. 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”.[105] As already mentioned, England’s head-start in making national debt negotiable (1704) also gave it an advantage in war.

Arms development and proliferation, as described in the previous section, makes war more likely – and more destructive. The hope that advanced weaponry (such as nuclear bombs) makes war inconceivable is optimistic: it has been frustrated many times in the past, and is not an idea to be relied upon. In the 1890’s, for instance, people believed that airships and high explosive bombs made war between civilised nations inconceivable: who in their right mind would declare war when their cities could quickly be reduced to ruins? And yet, fifty years later (1944) how many cities were indeed in ruins?[106]

It can be argued that democratic scrutiny of the way money is created and spent might make war not less, but more likely, the theory being that people love war, or at least prefer it to peace. It is only under exceptional circumstances, however, that ‘ordinary’ people (as opposed to politicians, bankers and profiteers) wish to throw life, limb and property into the mayhem of war, especially modern war. A fair financial system would help nations steer clear of the kinds of ‘exceptional circumstances’ that make people resort to wanting war.

Finally, a fairly obvious point: there are better ways to cure economic paralysis than the massive and unnecessary destruction of war.

Plunder and Predation at Home and Abroad:

(i) Plundering the Home Country.

If you are an influential person in a country where corruption is the norm, 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 a friendly government may put public money towards shoring up the bank. Government and the judicial system may be in on the racket, with ministers taking percentages and the judiciary turning a blind eye.

This month’s newspapers (April 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.’[107] In Malaysia, a ‘billion-dollar political scandal’ involves two brothers, a banker and the Prime Minister.[108]

Poor countries are particularly vulnerable to such robberies. In Western ‘democracies’ this kind of behaviour is less individual, more systemic. Systemic corruption is indicated by Western banks increasingly needing and taking injections of public money to shore them up.

Plundering abroad.

(ii) International predation.

Nations with strong economies and 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 becomes international currency, or sits somewhere as a storage of value.[109]

Laws authorizing the buying and selling of debt ensure that newly-created money has parity with local currencies. In this way, 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): Private predatory finance acts in a similar way; but it transfers ownership into private, usually corporate hands. 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.[110]

These two processes make it easy for a strong country to appropriate resources, labour and production. The process becomes seamless with the corruption of the weaker nation’s government and political/civil process. 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 is done today by finance is a continuation of what used to be done by conquest. The English economist Piercy Ravenstone wrote in 1821: ‘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 countries that have in one way or another contributed to their ruin by stealing wealth, selling arms, corrupting governments and destroying habitats.

Straightforward Corruption in Politics.

Many countries in the world suffer from the simplest form of corruption – favours handed out by politicians and bureaucrats in return for payment. In such countries, money manufactured secretly by banks for private citizens makes transparency in public affairs difficult, if not impossible, and bribery very easy. 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.[111]

In a substantial number of countries, public life is corrupt to an extent that politics and business cannot function without corrupt payments. This gives outside agencies the opportunity to disrupt the political process by selectively disclosing corruptions. The technique is actively being used with devastating results by (for instance) agents of Putin’s Russia, the intention being to destabilize existing governments and install Russia-friendly regimes.[112]

Democracy Itself Corrupted.

One outcome of allowing banks to create the money supply is corruption of the democratic process so that it favours those who finance political parties. Money-creation is such that almost every group competing for power wants it to continue – so they can control it.[113] In the United Kingdom, the Green Party is the only large party to have bucked this trend: they wish new money to be issued free of debt, and spent on democratically-approved projects.[114]

Criminal and Semi-Criminal Behaviours.

This chapter is mostly about the legal bad effects of banks creating money. It also has the unfortunate effect of facilitating criminal and semi-criminal behaviours. Not only is bank-money created and allocated in secret; it is created with an equal-and-opposite debt: who owns the value, and who pays the debt become separate as soon as spending takes place (see the section ‘Debt, National and Personal’ in this chapter). This is pretty much an open invitation to criminal activity. Unlike the legal (systemic) bad effects, these kinds of incidents appear in the press and media when they are detected. Governments make healthy incomes from detecting them, fining the corporation, and letting the individuals go free.

The function of law is to make crime difficult. Negotiable debt makes crime so easy that a mass of regulations is needed to keep it under any kind of restraint. 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. http://www.finance-watch.org/hot-topics/blog/1186-jenkins-bank-misdeeds [115]

If money was created in a just and equitable and transparent manner (see the last section of this chapter) there would be nothing like the same opportunities for engaging in criminal practice, evading the law or establishing corrupt regulations without the electorate noticing.

Capitalism – Good and Bad.

Capitalism supposedly consists of savings and accumulated profits lent, via banks, for investment. Entrepreneurs make creative use of the savings to produce goods and services. This kind of capitalism is a pretty good idea: it is incredibly agile at satisfying human wants and needs. If it was the story whole and true, who would object?

But it is only a small part of the true story. Money is created by banks, and the money they create dwarfs true savings. The narrative of ‘banks-lend-savings’ is no longer valid (though it is propagated in many economics textbooks). It has been swallowed up and superseded by the narrative outlined in this chapter. The deceit looks threadbare when interest rates are near or below zero. Who but a mad person would lend savings, only to get back less than they lend?

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.

The Cultivation of Ignorance.

Concentrations of wealth and power, fostered by bank money, lead to journalism and economics that dare not speak truth. Good journalism has its origin in moral belief that humans want and need to know the truth. 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 from today’s paper (28/05/2016): ‘Billionaires seize control of the information flow’: http://www.nytimes.com/2016/05/28/business/media/behind-the-scenes-billionaires-growing-control-of-news.html?_r=0

Nature Destroyed: the Need for Economic Growth.

A steady-state economy is inconceivable when the money supply takes from many 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 money that would otherwise sit idle, pouring into new factories, new employment, and the pockets of workers. The café situation referred to above is cured.

This need for growth means that resources and environments are plundered and destroyed. Human welfare is not served, but destroyed.

Unemployment and Forced Idleness.

When bank-money is used to purchase existing businesses, profits must be made by reducing costs, and among those costs are the wages of workers. But surely, reducing costs is good: isn’t it called ‘maximising efficiency’? True ‘maximised efficiency’, however, means workers earning just enough to survive (or even less, if the state is willing to provide the rest) and maximised profits for owners.

As wages are driven near or below subsistence level, and other workers are made redundant, many extra people must be looked after by the state. The money for this comes out of taxes paid by workers (or more national debt). Human workers become more expensive; machines and computers gain an unnecessary advantage.

As workers become more expensive, jobs are outsourced to where labour is cheaper: this supposedly leads to greater prosperity in low-paid countries, but most noticeably it leads to greater riches among corporate shareholders in wealthy countries.

Extremist Politics.

An extremely important secondary effect of the corruptions listed above is the drift to extremist politics. When ordinary people know they are being cheated and denied the rudiments of a decent life, political extremists sense their opportunity. Nationalist extremists of right and left appeal to a cheated public.

Example from today’s paper (12/05/2016): A ‘new strongman of Manila’, Rodrigo Duterte, is elected President of the Philippines. An unashamed advocate of extrajudicial murder, citizens elected him because they are angry with the old élite which ‘seemed impervious to their pleas for economic equality.’[116] His rise to head-of-state seems particularly surprising in light of his boast that he has personally killed 1,700 people unlawfully. The rise of Donald Trump in the United States looks pale in comparison – so far, at any rate.


It may seem that the claims made in this chapter are too wide-ranging, but I believe the opposite is the case: some important secondary effects of money-created-as-debt, such as the nihilism of global ‘high’ culture, have not even been mentioned. Ditto its effects upon climate change, and scientific integrity.

We like to assume the world is run on lines that are just. But we are in a period of transition from oligarchies based on class and money towards democracy, and sometimes it seems we are stuck in the worst of both worlds, under an oligarchy that dominates by deception. Money and power are in adjacent rooms, with a revolving door between them. True democracy (if people want it) needs concerted thought and action.

Humans are fond of blaming others for things that are their own fault. Patriarchal societies blame women for the evils of the world (from the Bible we have Eve corrupting Adam; from Greek mythology we have Pandora releasing the evils of the world from a food storage jar). Christians have long blamed Jews for destructive financial arrangements even though money-creation has long been a protected Christian activity. Today, citizens blame politicians and bankers for the madness of the world – even though they (we) have the collective ability to demand change, if we are determined to use it.

Only citizens can make reform happen. It is unrealistic to expect an oligarchy to voluntarily give up the source of its power, even when the world is collapsing all around it.[117] Power attracts those who want more: it is an addiction. So, in large amounts, is money, and the comforts and diversions that it provides. The world and its beauties, human life, our ideals of freedom and democracy, are being degraded and destroyed. How lazy are we? Do citizens, voters, ordinary humans feel no compunction to intervene?

Removing laws that support negotiable debt would be a start. It would have far-reaching effects. A form of cash could be created which could still be borrowed and lent, but would not be debt from the very outset.[118] Today, digital systems would make this relatively easy.

We could go further. Sharing the benefits of human achievement, past and present, implies the justice of a basic income (provision of spending money for every citizen, regardless of need). What might follow from such a provision is an interesting topic – to be considered in the next chapter, which will be on Reform.

[1] The best discussion of Holt’s reasoning in the light of scant historical evidence is in Daniel Coquillette, The Civilian Writers of the Doctors’ Commons, London.

[2] Huerta De Soto, Money, Bank Credit and Economic Cycles.

[3] Petty, Tracts, Chiefly Relating to Ireland. Petty published his estimate to counter the opinion that ‘not one eighth of them (the Irish) remained at the end of the wars.’

[4] Petty: Tracts, Chiefly Relating to Ireland, and The Life of Sir William Petty by Lord Edmond Fitzmaurice.

[5] Political Arithmetick.

[6] Verbum Sapienti.

[7] W.J. Thorne, Banking (1948).

[8] Thorold Rogers, The First Nine Years of the Bank of England.

[9] Bagehot, Lombard Street; and Holdsworth, A History of English Law.

[10] Downloadable at https://archive.org/details/essayuponnationa00daveuoft

[11] In the words of Adam Smith some sixty years later, ‘The merchant or monied man makes money by lending money to government, and instead of diminishing, increases his trading capital.’

[12] From an earlier, moral point of view, these interest payments might have been justifiable if the lender was forgoing the use of the money lent, as opposed to gaining an resource of equal value.

[13] When Maitland addressed this question two hundred years later (from the point of view of creditors of the National Debt) he came up with almost exactly the same answer: ‘the creditor has nothing to trust but the honesty and solvency of that honest and solvent community of which the King is the head and ‘Government’ and Parliament are organs.’ The Crown as Corporation; also Moral Personality and Legal Personality,

[14] Lewis Namier, The Structure of Politics at the Accession of George III.

[15] Consideration of these will have to wait for another chapter. Some examples, and discussions of their later disparagement by economic writers, can be found in Richard A. Lester, Monetary Experiments and Bray Hammond, Banks and Politics in America from the Revolution to the Civil War.

[16] Letter to William B. Giles, Dec. 1825.

[17] Blackstone: ‘

[18] Money & Trade Considered.

[19] For instance, Bolingbroke: ‘A new interest has been created out of their fortunes and a sort of property, which was not known twenty years ago, is now increased to be almost equal to the terra firma of our island.’ See Chapter Three of the present book.

[20] For the old aristocracy’s impoverishment and desperate need for money, see R.H. Tawney, Historical Introduction to Thomas Wilson’s Discourse Upon Usury and his essay ‘The Rise of the Gentry’.

[21] Malynes’ Saint George (1601) contains a detailed list of the social effects of fictitious credit a full hundred years before it was legitimised.

[22] For instance the beautiful cities of Florence, Siena and Lucca were built on the banking fortunes of the Medici, Bardi and other Italian banking families.

[23] All of today’s tricks of finance are based on ‘negotiable debt’, powered by the fundamental ‘magic trick’ of creating multiple ‘promises to pay’ on the same assets.

[24] From Charles Wilson, England’s Apprenticeship p. 316, via Patrick Brantlinger Fictions of State p. 57.

[25] I,vi,39: the actual quote is ‘honesty hath no fence against superior cunning.’

[26] Defoe had previously been in favour of credit; in his eyes she was a lady bountiful whose virtue was easily compromised. Quotes in this paragraph are taken from Fictions of State by Patrick Brantlinger and Writing and the Rise of Finance by Colin Nicholson.

[27] After which, ‘there began for the English stage a melancholy epoch of over a hundred years of sterility, which was broken only by the comedies of Sheridan and Goldsmith.’ (Noel Annan, Hansard, 1966.) The censorship body set up by Walpole was modified in 1843 but only abolished in 1966.

[28] Wealth of Nations Bk V, Ch. 3.

[29] Wealth of Nations Bk V, Ch. 1, Part III, Art.1.

[30] For ‘confusing’ see ‘The Evolution of Adam Smith’s Theory of Banking’ by James A. Gherity, in History of Political Economy 26(3) 1994.

[31] Written by Freeman Tilden in 1935, but just as relevant eighty years on.

[32] For the ‘enterprise state’ in relation to freedom and civil society, see Michael Oakeshott, On Human Conduct; also, with specific reference to economics, his essay The Political Economy of Freedom.

[33] For instance, the poet and essayist Samuel Taylor Coleridge: see Patrick Brantlinger, Fictions of State pp 124-133.

[34] See The Adams-Jefferson Letters ed. Capon; also Chapter Two of my book, In The Name of the People.

[35]  Pp 290ff. of his Inquiry into the Principles and Policy of the Government of the United States, 1814. Section the Fifth, ‘Banking’.

[36] Elements of Political Economy (1823) p. 121.

[37] Id., p. 179.

[38] The Science of Wealth (1866) pp. 365-6.

[39] An example would be the surreptitious and gradual replacement of gold by government-produced ‘cash’ as the ‘reserve’ in fractional reserve banking.

[40] A variation on this theme was noticed by J. K. Galbraith: ‘The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.’ Money, p. 5

[41] I wrote, “as far as I know”, because I do not read Swedish or German, and not much of Wicksell’s work has been translated into English.

[42] Treatise on Money Volume 2, p. 70.

[43] The Science of Wealth (1866) p. 369.

[44] Henderson, Friedrich List: The Making of an Economist.

[45] Matile, from Preface to U.S. edition of List’s National System.

[46] Id. pp 9, 10.

[47] A Speech given at the Philadelphia Manufacturers’ Dinner, p. 7.

[48] The National System of Political Economy, tr. S.S. Lloyd, p. 148.

[49] A Speech given at the Philadelphia Manufacturers’ Dinner, p. 3.

[50] A Speech given at the Philadelphia Manufacturers’ Dinner, p. 5.

[51] Michael Oakeshott’s The Tower of Babel (the second of two essays with the same title) is a mythological elaboration of this idea; it was published in On History (1983).

[52] The National System of Political Economy, tr. Matile p. 378.

[53] Outlines of American Political Economy, Appendix page 8.

[54] Perhaps List was implying that in a world without limited liability, land and property of owners of banks could be sold to pay off creditors (if there was enough of it); but in practice, limited liability was already pretty effectively enshrined in contract, and owners and directors of banks enjoyed many other types of protection against the claims of depositors. Ruined depositors were, repeatedly, the actual consequence of bank failure.

[55] Outlines of American Political Economy, p. 20.

[56] Among them are books by the man he was (presumably) named after, the economist Henry Carey.

[57] Outlines of American Political Economy, Letter V.

[58] The National System of Political Economy tr. Matile, p. 24.

[59] Id. p. 265.

[60] In England for example, 97% of money is debt from commercial banks to customers; the other 3% – including notes and coins – is part of ‘reserve’, which is debt from the Bank of England to commercial banks. ‘Reserves are an IOU from the central bank to commercial banks’ says the Bank of England and ‘there are three main types of money: currency, bank deposits and central bank reserves. Each represents an IOU from one sector of the economy to another. Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves.’ Bank of England Quarterly Bulletins 2014 Q1 and 2010 Q4, available online.

[61] John Taylor, friend and correspondent of John Adams and Thomas Jefferson, described bank-money thus in 1821. Adams and Jefferson were in full agreement with Taylor on this. See Chapter Five of this book.

[62] The Richest Man Who Ever Lived: The Life and Times of Jacob Fugger, Greg Steinmetz (2015).

[63] For those with a stomach for detail, a painstaking analysis of what happens when a bank lends is provided by Professor Richard Werner: http://www.sciencedirect.com/science/article/pii/S1057521914001070.

[64] Frances Walker, 1888.

[65] Profits for government include buying back its own debt with newly-created money and paying less interest on reserve than they get from holding interest-paying assets as security for commercial banks’ reserves (‘seigniorage’).

[66] The final chapter of this book will address the subject of reform.

[67] Frank D. Graham, ‘Partial Reserve Money and the 100 Per Cent Proposal’. American Economic Review, 1936.

[68] ‘…rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.’ The Bank of England, Quarterly Bulletin 2014 Q1. The truth has been known for a long time by anyone who cared to acknowledge it: see, for instance, Charles Franklin Dunbar (1893): ‘deposits are created by the act of the bank when loans are increased, and cancelled when loans are repaid.’

[69] Joseph Story, Commentaries on the Law of Promissory Notes (1845).

[70] ‘Never before in English history had so much money passed so quickly through so many hands and, inevitably, some of it stuck as it passed.’ Henry Roseveare, The Financial Revolution 1660 – 1760, p 44. See also Brantlinger, Fictions of State (1996).

[71] W.J. Thorne, Banking, 1948 p. 31. For ‘war’ see Dickson, The Financial Revolution in England (1993); for ‘resources’ see Banking (1948) p.31 (also pp 97-9 for a simple description of how bank-loans create deposits).

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

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

[74] A somewhat later comment (1832): ‘The direct tendency of the principles of the Economists is … to replace the feudal aristocracy, from which Europe has suffered so much, with a monied aristocracy more base in its origin, more revolting in its associations, and more inimical to general freedom and enjoyment.’ John Wade, The Black Book.

[75] ‘…repaying bank loans destroys money just as making loans creates it.’ – Bank of England Quarterly Bulletin 2014 Q1.

[76] The threat of losing expensive ‘reserve’ to other banks means that individual banks have to be competitive. C.A. Phillips, misunderstood and little-read nowadays, provides the best explanation (Bank Credit, 1931).

[77] Ricardo, Works VIII: 399-400 and Works VIII, 390.

[78] In the language of economics: ‘aggregate production necessarily creates an equal quantity of aggregate demand’.

[79] An older-school economist says the same: ‘Full regular employment of the factors of production demands the maintenance of a proper proportion between the production of consumable commodities and that of capital goods; that proportion varying, of course, with changes in methods of production. In other words, there exists at any given time an economically sound ratio between spending and saving. Excessive spending (as in the war) encroaches on saved capital, and impairs future productivity. Excessive saving operates, through deficient demand for commodities, to slacken the sinews of production and produce more capital goods than are able to be put to full productive use.’ J.A. Hobson, The Economics of Unemployment (1922).

[80] The banker’s tricks of the trade may be ‘hardly worthy of even a third-rate magician’ but kept secret they are the devastation of the world. W.J. Thorne, Banking (1948) p. 133.

[81] Other People’s Money (2015) p.1 and Chapter 6.

[82] Widely reported Jan/Feb 2016 as part of Sanders’ campaign to become presidential nominee. Sanders also points out that Walmart employees are paid so little, the government has to supplement their wages; thus the richest family in America is also the biggest profiteer from welfare payments.

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

[84] 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).

[85] Wealth of Nations (1776) Book III, Chapter IV.

[86] See earlier in this chapter, under MONEY: THE ACT OF CREATION.

[87] Estimate from the Wall Street Journal: http://blogs.wsj.com/economics/2013/05/11/number-of-the-week-total-world-debt-load-at-313-of-gdp/

[88] http://blogs.wsj.com/economics/2013/05/11/number-of-the-week-total-world-debt-load-at-313-of-gdp/

[89] See footnote 13.

[90] Mitchell, British Historical Statistics (1990) and Ritschl, ‘Sustainability of High Public Debt’ (1996).

[91] The quoted words are from Montesquieu, De l’Esprit des Lois (1748) Part 4, Book 22, Chapter 17.

[92] Just as banks create money as negotiable debt, so governments create debt as a negotiable commodity. The difference is that banks charge interest on what they owe; governments pay interest on what they owe. Here we see the worst of all collusions between governments and money-power.

[93] See note 13, above (Alexander Hamilton).

[94] http://www.thisismoney.co.uk/money/article-2968673/Homeownership-England-falls-2-hit-lowest-level-29-years-high-house-prices-lock-young.html

[95] Schumpeter, a leading 20th century economist, asserted that the old-fashioned argument used in this paragraph to explain business cycles is ‘contemptible’ and ‘beneath discussion’. Apparently, ‘it involves neglect of the elementary fact that inadequacy or even increasing inadequacy of the wage income to buy the whole product at cost-covering prices would not prevent hitchless production in response to the demand of non-wage earners either for ‘luxury’ goods or for investment.’ If this were true, the trillions being held today (2016) at near-zero interest rates would be busy employing the poor to make luxury goods and build new factories.

[96] 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.’

[97] ‘Business cycles’ do not seem to have existed before bank-money and negotiable debt.

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

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

[100] 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. http://www.multpl.com/us-gdp-growth-rate/table/by-year. 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.

[101] 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. http://www.nytimes.com/2016/04/20/opinion/obama-saudi-arabia-trade-cluster-bombs.html  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.

[102] A statement such as ‘The Second World War, not the New Deal, ended the Great Depression’ is guaranteed to get different schools of economists arguing.

[103] 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.’

[104] 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.

[105] 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.

[106] In Ewen Monteith’s story The Witches’ Clutch (1894) the inventor of the airship says: ‘I say my discoveries will make war impossible. Consider how soon I could make the proudest city on earth a seething mass of ruins.’

[107] http://www.nytimes.com/2016/04/12/opinion/bangladeshs-other-banking-scam.html?_r=0

[108] http://www.nytimes.com/2016/04/19/world/asia/malaysia-nazir-razak-cimb.html?_r=0

[109] 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?’: http://www.cnbc.com/id/45031100 and http://www.nytimes.com/2003/05/06/international/worldspecial/06BANK.html

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

[111] Today’s example: banks are being investigated for providing money for bribes in international soccer:  http://www.wsj.com/articles/u-s-considers-role-of-banks-sponsors-in-soccer-bribery-probe-1460937132

[112] See for instance the Legatum Institute report Is Transition Reversible? The Case of Central Europe (2016). http://www.li.com/activities/publications/is-transition-reversible-the-case-of-central-europe

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

[114] https://policy.greenparty.org.uk/ec.html

[115] 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.

[116] http://www.nytimes.com/2016/05/12/opinion/rodrigo-duterte-philippine-election-manila.html?_r=0

[117] The French and Russian revolutions are classic examples.

[118] This has consistently been the recommendation of those who wish for justice, common sense and economic well-being in money-creation. The websites publishing these chapters, Positive Money and The Cobden Centre, both have detailed proposals towards that end. See the paper published by Positive Money: Digital Cash: Why Central Banks Should Start Issuing Electronic Money (Jan 2016) and The Cobden Centre’s page of proposals to replace bank liabilities with money that is property, and credit backed by genuine savings.

Reforming Money and Banking

(Reproduced from: http://ivomosley.com/2016/09/12/reforming-money-and-banking/)

September 12, 2016

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

What is ‘Money’?

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

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

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

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

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

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


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

Reform the laws, or change the regulations?

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

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

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

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

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

Opposition to Fundamental Legal Reform.

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

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

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

Reforming the Regulations.

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

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

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

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

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

Time for Reform: Why Now?

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

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

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

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

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

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

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

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

A Devastating Plague of Kleptocracy

Reproduced fom: http://ivomosley.com/2017/01/16/a-devastating-plague-of-kleptocracy/

January 16, 2017

The West has unleashed a devastating plague of kleptocracy upon the world that is threatening all our futures. After deregulation of finance, the giant engine of Western money-creation devoured ex-Communist countries, sharing ownership of the spoils with corrupt kleptocrats whose political machinery integrated robbery and political domination. The rest of the world was already corrupted in the same way; and so now we have 8 (eight) individuals owning as much as half the rest of the world’s population.

How this kleptocracy (rule by thievery) works is simple, but apparently not a subject the mainstream press will admit for discussion.

Chief among the fundamentals is not some sexy item like ‘weapons of mass destruction’. It is ‘negotiable debt’ which means ‘debt you can buy and sell’. As I will explain, laws supporting negotiable debt mean that value can be created out of nothing on a vast scale and used to purchase the lives, work, possessions and freedom of others.

Like the most boring devil in hell, the subject of ‘negotiable debt’ is protected from scrutiny by its supreme boringness. In various forms, it has been introduced into many civilizations, and it has always been highly damaging, producing extreme inequality, social dislocation and eventually a stark alternative: reform or collapse. Some of its ancient manifestations were debt-slavery and tax-farming. (With debt-slavery, the debtor and the debtor’s family became the property of the creditor to buy and sell. With tax-farming, rulers auctioned off the tax-obligations of the citizens to the highest bidder.) The principle modern manifestations of negotiable debt are bank-money, national debt and ‘financial instruments’ that create value out of nothing.

Negotiable debt means simply ‘debt which can be bought and sold’. When the power of pure money begins to become greater than other powers in a nation – than the sword, for instance, or religion, or land, or manufacture, or business – laws are made that turn debt into a commodity. The content of such laws is, simply, that the State will enforce the collection of a debt by its current ‘owner’ regardless of whether that ‘owner’ made the loan in the first place.

The introduction of negotiable debt transforms a society. Without it, prosperity for all is in everyone’s interest – rulers included. With it, a whole new layer of people is introduced, given legal authority and power to grow spectacularly rich by squeezing every last penny out of those who work, driving them into penury, debt-bondage, and (finally) slavery or welfare.

We are all aware of ‘negotiable debt’ in one form or another: governments selling student debt perhaps, or mortgage companies flogging off mortgage debt. But these are just sideshows to the main event. The main event is this: Once debt is valuable, value can be created out of nothing. This is how bank-money works. This is how national debts work. This is how ‘financial instruments’ work which are created and destroyed (for profit) to the music of trillions of dollars each year.

It is easy to demonstrate how value is created once debt becomes a commodity. First, take a situation in which no value is created. Take two ordinary citizens: me and you, perhaps. I lend you some money. I no longer have the money; you have it. I won’t have it again until you return it, whereupon you will no longer have it. No value has been created. If, on the other hand, I lend money to a government or corporation, I get a ‘bond’ in return, equal in value to what I have lent. This ‘bond’ is negotiable, and effectively money, circulating among the wealthy and related in value to the money used by everyone else. Value has been created for those who lend.

National debts profit those with money to lend because those lenders get bonds, which are effectively money. In the words of the godfather of economics, Adam Smith: ‘The merchant or moneyed man makes money by lending money to government, and instead of diminishing, increases his trading capital.’ Montesquieu: ‘National debt takes the wealth of the state from those who work, and gives it to those who are idle.’ Hume: ‘The taxes, which are levy’d to pay the interests of these debts, are a check upon industry, heighten the price of labour, and are an oppression of the poorer sort.’ Everywhere, national debts grow in step with the predominance of bank-money – because they depend upon the same law.

Banks create money for private profit. Today, money is created, by central and commercial banks, by the simple device of creating two equal and opposite debts – which add up to nothing. When a bank makes a loan, it creates a debt from bank to borrower, and a debt from borrower to bank. The debt from the bank becomes money (the Bank of England describes how this works in its Quarterly Bulletin, 2014 Q1). What we own, when we have money in our account, is negotiable debt from a bank. It circulates among us as money, but it was created for the profit of borrowers and banks.

In practical terms, this means that when a bank ‘lends’ a billion for some purpose or other, it has, in fact, created that billion out of nothing for the profit of itself and the borrower. These billions are ‘retired’ – they disappear – when profits have been taken and the ‘loan’ is repaid. The whole process can then be repeated. The value being created and destroyed in this way comprises, at any given moment, the whole of our money supply. Unfashionable as it is to believe in devils, ‘diabolical’ seems the only word adequate to describe such an arrangement. No wonder 8 individuals have come to own more than the poorer half of the world’s population!

You would have thought the ability to ‘create money’ would be a ticket to secure and endless wealth, but banks are vulnerable because of the way they create it. When borrowers default, banks lose their assets, but their debts remain, circulating as money. Conversely, when a bank goes bust, its customers – owners of its debt – lose their money. The system is inherently unstable. Although there is a lot of money to be made in banking, the main beneficiaries of the system are not banks: they are speculators, plutocrats and – governments.

‘Negotiable debt’ supplies assets to both governments and plutocrats, so they share an interest in keeping the system going. Socialism in its current guise offers no improvement. Impressed by the power of negotiable debt (euphemistically called ‘credit’) Marx wanted to take over all its sources for the State (‘plank 5’ of his communist manifesto). Today’s socialist movements are stuck in this broken groove, suggesting no advance in justice, merely ever greater concentrations of State power.

What effect does negotiable debt have on the wider world? Here are the words of a historian (stripped of jargon): ‘Negotiable debt is not just a way of oppressing the lower classes. It has other functions too. First, by creating large concentrations of capital, it allows governments to create military power and exercise control over wide areas. Second, it involves wealthy people in government, where they all profit together. Third, it creates a system of dependence, poor on rich, which ensures social stability. Fourth, when debt itself becomes money, a huge variety of speculative techniques opens up, by which the wealthy may increase their wealth. Lastly, negotiable debt enables governments to reward supporters with stable and long-lasting incomes.’

This short summary was included in a book celebrating the creation of value out of nothing. It says a lot, but not nearly enough. A more critical account would include many other things. Here are some: ‘Negotiable debt allows corrupt payments to be made without scrutiny. It enables predation on a vast scale by nations, corporations and individuals. It creates extremes of inequality. It favours monopolization. It transforms democracy into unstable plutocracy. It makes ‘steady-state economy’ an impossibility: because most money ends up in the hands of a few, economic growth becomes a necessity for an economy to merely function. When growth is pursued as a ‘public good’, an increase in environmental destruction must inevitably follow. Arms production and war are financed invisibly and in secret, from created money. In conditions of extreme inequality, arms production and war become, perversely, an economic corrective, as workers and soldiers earn (and spend) without producing for public consumption. Arms production and proxy wars become, monstrously, a source of economic health.’

In these ways, the development of our modern world has been profoundly affected by profoundly unjust law. It is only to be expected that as society changes, ruling powers will try, and to some extent succeed, in making laws that favour themselves. Feudal law is an obvious example – a fact easily acknowledged, because feudal law is now defunct. As conditions change, laws that favour a ruling order must yield eventually to reform, either peacefully or by violence. Feudalism yielded in France only after a Revolution; in England, only after a Civil War.

The effects of ‘negotiable debt’ have got a great deal worse over the past thirty years or so, because restraints have been removed (financial deregulation). A partial reform would be to bring back some of those restraints. Proper, radical reform would result in law only enforcing recovery of a debt if the claimant made the loan in the first place. This would put an end to value created out of nothing for the benefit of those with power.

While reform would not be difficult, arriving at a place where reform is seriously considered looks difficult, if not impossible. There is little public discussion of the significance of negotiable debt and its relation to the ills that plague us. The public is bewildered and bemused. Self-interested opposition among the powers-that-be, and the dull complexity of the subject-matter, keep even simple facts (such as those referred to above by Smith, Montesquieu and Hume) beneath the radar of public debate. When people are desperate, and reform is out of the question, they look to destruction of the whole edifice of exploitative power.

Getting rid of negotiable debt would mean that our money-supply would consist of simple units of ownership, not ownership of debt. A program of replacement, unit-for-unit, would not be difficult. In the interests of justice, it should be accompanied by some form of debt reduction. Restructuring our institutions around the new arrangement would bring new life to our tired and ailing world.

There is another aspect that makes everyone nervous about the prospect of reform, victims and profiteers alike. The system itself has become a tyrant. For those it robs, earning a living is increasingly precarious. For those it profits, who own mostly debt, their own wealth also looks precarious: the burden of created debt is now so great that a reasonable rate of interest has become an impossibility. Defaults look inevitable.

Vast wealth accumulated as debt always involves the destitution of many people and, without reform, is always, sooner or later, followed by societal collapse. We are puzzled by the kinds of monsters now emerging as political ‘leaders’, but we shouldn’t be. People are looking to robbery-by-dictator as preferable to robbery by a system that they do not understand, which is growing more extreme day by day.

It’s basic enough to be a historical cliché: Degraded humans look to vicious leaders; vicious leaders produce more degradation. We are lodged in a classic vicious circle that can only be broken by timely reform – or catastrophe. Solon founded Athenian democracy by outlawing debt-slavery. Perhaps we could found a true democracy for ourselves, by outlawing its modern equivalent: bondage to negotiable debt.

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