The Banking Secret that Neither Economists Nor Laypeople Know … Which Is Destroying the Real Economy (While Making a Few King)

George Washington's picture

Private Banks - Not the Government or Central Banks - Create 97 Percent of All Money

Who creates money?

Most people assume that money is created by governments ... or perhaps central banks.

In reality - as noted by the Bank of England, Britain's central bank - 97% of all money in circulation is created by private banks.

Bank Loans = Creating Money Out of Thin Air

But how do private banks create money?

We've all been taught that banks first take in deposits, and then they loan out those deposits to folks who want to borrow.

But this is a myth ... The Bank of England the German central bank have explained that loans are extended before deposits exist ... and that the loans create deposits:

The above is from an official video released by the Bank of England. The Bank of England explains:

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks:

  • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

***

One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.

***

In reality in the modern economy, commercial banks are the creators of deposit money .... 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.

***

Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans. *** This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out.

Similarly, the Federal Reserve Bank of Chicago published a booklet called “Modern Money Mechanics” in the 1960s stating:

[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.

Monetary expert and economics professor Randall Wray explained to Washington's Blog that:

Bank deposits are bank IOUs.

Economics professor Richard Werner - who obtained his PhD in economics from Oxford, was the first Shimomura Fellow at the Research Institute for Capital Formation at the Development Bank of Japan, Visiting Researcher at the Institute for Monetary and Economic Studies at the Bank of Japan, Visiting Scholar at the Institute for Monetary and Fiscal Studies at the Ministry of Finance, and chief economist of Jardine Fleming - was granted access to study a bank's books, and confirmed that private banks create money when they simply create fictitious deposits into a borrower's account. Werner explains:

What banks do is to simply reclassify their accounts payable items arising from the act of lending as ‘customer deposits’, and the general public, when receiving payment in the form of a transfer of bank deposits, believes that a form of money had been paid into the bank.

***

No balance is drawn down to make a payment to the borrower.

***

The bank does not actually make any money available to the borrower: No transfer of funds from anywhere to the customer or indeed the customer’s account takes place. There is no equal reduction in the balance of another account to defray the borrower. Instead, the bank simply re-classified its liabilities, changing the ‘accounts payable’ obligation arising from the bank loan contract to another liability category called ‘customer deposits’.

While the borrower is given the impression that the bank had transferred money from its capital, reserves or other accounts to the borrower’s account (as indeed major theories of banking, the financial intermediation and fractional reserve theories, erroneously claim), in reality this is not the case. Neither the bank nor the customer deposited any money, nor were any funds from anywhere outside the bank utilised to make the deposit in the borrower’s account. Indeed, there was no depositing of any funds.

***

The bank’s liability is simply re-named a ‘bank deposit’.

***

Banks create money when they grant a loan: they invent a fictitious customer deposit, which the central bank and all users of our monetary system, consider to be ‘money’, indistinguishable from ‘real’ deposits not newly invented by the banks. Thus banks do not just grant credit, they create credit, and simultaneously they create money.

***

Instead of discharging their liability to pay out loans, the banks merely reclassify their liabilities originating from loan contracts from what should be an ‘accounts payable’ item to ‘customer deposit’ ....

How Can Banks DO This?

Professor Werner explains the reason that banks - but no one else - can create money out of thin air is that they are the only institution exempted from normal accounting rules. Specifically, every other company would be busted for fraudulent accounting if they conjured new money out of thin air by reclassifying a liability (i.e. an accounts payable) as an asset (i.e. a deposit). But the banks have pushed through exemptions so that they don't have to follow normal accounting rules:

What enables banks to create credit and hence money is their exemption from the Client Money Rules. Thanks to this exemption they are allowed to keep customer deposits on their own balance sheet. This means that depositors who deposit their money with a bank are no longer the legal owners of this money. Instead, they are just one of the general creditors of the bank whom it owes money to. It also means that the bank is able to access the records of the customer deposits held with it and invent a new ‘customer deposit’ that had not actually been paid in, but instead is a re-classified accounts payable liability of the bank arising from a loan contract.

***

What makes banks unique and explains the combination of lending and deposit-taking under one roof is the more fundamental fact that they do not have to segregate client accounts, and thus are able to engage in an exercise of ‘re-labelling’ and mixing different liabilities, specifically by re-assigning their accounts payable liabilities incurred when entering into loan agreements, to another category of liability called ‘customer deposits’.

What distinguishes banks from non-banks is their ability to create credit and money through lending, which is accomplished by booking what actually are accounts payable liabilities as imaginary customer deposits, and this is in turn made possible by a particular regulation that renders banks unique: their exemption from the Client Money Rules. [Werner gives a concrete example on British law for banking and non-banking institutions.]

Sound fraudulent? Professor Werner thinks so, also:

But he also makes some more important points ...

What Does It All Mean? The Implications of Money Creation By Private Banks

Mainstream economists believe that private debt doesn’t even “exist as a force that acts on the economy. For example, Ben Bernanke and Paul Krugman assume that huge levels of household debt don’t hurt the economy because more debt among households just means that savers have loaned them money … i.e. that it is a net wash to the economy. To make this assumption, they rely on the myth debunked above ... that banks can only loan as much money out as they have in deposits. In reality, 143 years of history shows that excessive private debt – in and of itself – can cause depressions.

Moreover, Professor Werner points out that attempts to shore up the banking system with capital requirements (such as the Basel accords) are doomed to failure, since they don't recognize that banks create money at will:

Basel rules were doomed to failure, since they consider banks as financial intermediaries, when in actual fact they are the creators of the money supply. Since banks invent money as fictitious deposits, it can be readily shown that capital adequacy based bank regulation does not have to restrict bank activity: banks can create money and hence can arrange for money to be made available to purchase newly issued shares that increase their bank capital. In other words, banks could simply invent the money that is then used to increase their capital. This is what Barclays Bank did in 2008, in order to avoid the use of tax money to shore up the bank’s capital: Barclays ‘raised’ £5.8 bn in new equity from Gulf sovereign wealth investors — by, it has transpired, lending them the money! As is explained in Werner (2014a), Barclays implemented a standard loan operation, thus inventing the £5.8 bn deposit ‘lent’ to the investor. This deposit was then used to ‘purchase’ the newly issued Barclays shares. Thus in this case the bank liability originating from the bank loan to the Gulf investor transmuted from (1) an accounts payable liability to (2) a customer deposit liability, to finally end up as (3) equity — another category on the liability side of the bank’s balance sheet. Effectively, Barclays invented its own capital. This certainly was cheaper for the UK tax payer than using tax money. As publicly listed companies in general are not allowed to lend money to firms for the purpose of buying their stocks, it was not in conformity with the Companies Act 2006 (Section 678, Prohibition of assistance for acquisition of shares in public company). But regulators were willing to overlook this. As Werner (2014b) argues, using central bank or bank credit creation is in principle the most cost-effective way to clean up the banking system and ensure that bank credit growth recovers quickly. The Barclays case is however evidence that stricter capital requirements do not necessary prevent banks from expanding credit and money creation, since their creation of deposits generates more purchasing power with which increased bank capital can also be funded.

Moreover, Werner points out that banks create the boom-bust cycle by lending too much for speculative, non-productive purposes:

By failing to take into account the fact that banks create money, economists and governments are sowing the seeds for future crashes. But the economics field is very resistant to change ... Economics professor Steve Keen notes in Forbes:

In any genuine science, empirical data like this would have forced the orthodoxy to rethink its position. But in economics, the profession has sailed on, blithely unaware of how their model of “banks as intermediaries between savers and investors” is seriously wrong, and now blinds them to the remedy for the crisis as it previously blinded them to the possibility of a crisis occurring.

A wit once defined an economist as someone who, when shown that something works in practice, replies “Ah! But does it work in theory?”

And a 2016 IMF paper notes:

Around [the 1960s] banks began to completely disappear from most macroeconomic models of how the economy works.­

This helps explain why, when faced with the Great Recession in 2008, macroeconomics was initially unprepared to contribute much to the analysis of the interaction of banks with the macro economy. Today there is a sizable body of research on this topic, but the literature still has many difficulties.­

***

Virtually all recent mainstream neoclassical economic research is based on the highly misleading “intermediation of loanable funds” description of banking ...

***

In modern neoclassical intermediation of loanable funds theories, banks are seen as intermediating real savings. Lending, in this narrative, starts with banks collecting deposits of previously saved real resources (perishable consumer goods, consumer durables, machines and equipment, etc.) from savers and ends with the lending of those same real resources to borrowers. But such institutions simply do not exist in the real world. There are no loanable funds of real resources that bankers can collect and then lend out. Banks do of course collect checks or similar financial instruments, but because such instruments—to have any value—must be drawn on funds from elsewhere in the financial system, they cannot be deposits of new funds from outside the financial system. New funds are produced only with new bank loans (or when banks purchase additional financial or real assets), through book entries made by keystrokes on the banker’s keyboard at the time of disbursement. This means that the funds do not exist before the loan and that they are in the form of electronic entries—or, historically, paper ledger entries—rather than real resources.­

***

This “financing through money creation” function of banks has been repeatedly described in publications of the world’s leading central banks—see McLeay, Radia, and Thomas (2014a, 2014b) for excellent summaries. What has been much more challenging, however, is the incorporation of these insights into macroeconomic models [how true].

What's the Solution?

We've seen the problems created by failing to take into account the fact that private banks create money. But there are solutions ... Initially, Professor Werner notes that preventing banks from creating new money to loan for speculation and mere personal consumption would prevent booms and busts:

Werner says that the "Asian Miracle" happened for exactly this reason:

Additionally, allowing small community banks to grow would cause the real economy to flourish ... since small banks loan to small businesses (which create most of the jobs), while big banks only loan to giant companies and speculators:

Indeed, big banks are virtually out of the business of traditional lending ... and small banks are the only ones funding Main Street. Werner says this is the secret of Germany's economic success:

Postscript: Due to their unique money-printing powers, banks now literally own the world … including the entire political system.

There's a war raging in connection with banking. Remember that the giant banks tried to kill off community banking through the Trans Pacific Partnership. And as Professor Werner points out, the European Central Bank is currently in a war to destroy community banks:

One of key battles for prosperity and democracy today is decentralization of the banking system.

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MaxDemon's picture

So the take-aways are:

Fractional reserve banking creates money when it creates loans. Well yes, this is they way it is supposed to work, and sometimes it works very well, sometimes not.

Stupid economists don't understand how it really works, and since they leave it out of their models, they aren't even studying it.  Yes, hence the word "stupid".

Stupid regulators don't understand how it really works, but have some controls over it, and worse the hubris to use them. 

 

Are we scared yet?

Lockesmith's picture

These people do not understand.

When the bank "loans" a house buyer their mortgage, what they are doing, in reality, is underwriting that mortgage, secured against the value of the home + the bank's capital.

Say they underwrite a $100k mortgage, they can expect to be paid, in the course of that mortgage, $150k. They are obtaining some fraction the value the housebuyer produced in their productive employment, At the end, the bank has +$50k and the under written money has been erased.

The value which the bank supplies is the enabling of the present consumption of future production by taking on the risk that the house buyer will default on the loan. Without the loan, the buyer might not be able to have such a productive job. The bank is thereby enabling economic activity to take place which would otherwise require less efficent means of capital accumulation [in a free market]

This is no problem with this in a free market

 

The entire problem is that people are forced to use State currency. If this were not the case i.e. people could choose their own currency i.e. the market were free, and banks recklessly and fraudulently underwrote loans, the currencies they abused in this fashion would quickly hyperinflate and become worthless. People would quickly learn not to trust weak bullshit artists with sotring their wealth.

dizzyfingers's picture

"Without the loan, the buyer might not be able to have such a productive job."

?? House loan leverages job possibilities ?? Please explain.

Chupacabra-322's picture

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves."

- Andrew Jackson

numapepi's picture

The fractional reserve banking system is a Keynesian economist's wet dream. Unending demand, driven by unending money printing... any heroin addict would love an an endless supply of Heroin too.

When told the aggregate supply aggregate demand model doesn't work, a Keynesian will say, maybe, but the model is so beautiful.

css1971's picture

This has been known publicly for at least a hundred years and the "secret", known among the rich and powerful itself goes back probably to before Solomon. It's likely his mines were in reality accounting books.

hootowl's picture

Fractional-reserve banking is a centuries-old Jooish/Khazarian/Babylonian/demon-inspired scam and is being used to control all of the commerce and nations of the world and meld them all into a one-world government under control, of course, of a Jooish tyrant/anti-christ for a short time at the end of this insane age of humankind.

The system, of course, MUST consume itself and everyone and everything else, in the end, which grows ever more evident everyday.

GreatUncle's picture

Moreover, Werner points out that banks create the boom-bust cycle by lending too much for speculative, non-productive purposes:

That's the boom part pre-2008 ... you can also put the responsibility for 2008 and the start of the 2nd great depression on the commercial banks too.

Kickaha's picture

Something about the analysis didn't sit right with me, perhaps the lack of dynamism.

Let's take a very simple hypothetical situation and think it through together.

Widget Motor Co. offers to sell a Widgetmobile for zero money down at $20,000.  They use direct marketing.  No local dealership middleman.  They don't use banks for the auto loan, either.  I buy one.  I give them my Note for $20,000, payable with interest in 48 monthly installments.  The practical reality is that I will be owning the car now, but paying for it with future money.  Let's keep it simple and agree that my Note is not a piece of commercial paper readily turned into cash by WM Co. in the market for commercial paper.

That is probably a nutty hypothetical to some degree, because WM Co. could probably never afford to sell a million Widgetmobile's and not be paid for them in full immediately. The cash flow problem would be insurmountable.

So, enter the banks.

They act as an intermediary that provides the cash to allow WM Co. to be paid immediately.

By doing so, have they "created money out of thin air"?  Yes, but I think that characterization implies a randomness and limitless process, where, in truth, they are simply providing the "future money" that I am promising to pay eventually over the next four years.  The banks are pulling money from the future and putting it in the hands of WM Co. today.  It is not random.  It is very much limited.  It is directly tied to estimates of my productive capacity, perhaps enhanced by having a good late model car to get me back and forth to work, and my ability to produce enough value to the economy over the upcoming four years so that I can readily afford to make those 48 payments.

So how can banks get into trouble pulling all of this future money into the present?  Quite obviously, they get in trouble if they give the future money to WM Co. and then I default on the loan, probably because I end up being a doofus who has no ability to provide society with enough value through my labor to make enough money to make the 48 payments.

On a systemic basis, once banks start pulling a lot of future money into the present to provide credit for spending that does not maintain or increase economic productivity, the future money they are paying out now does nothing to grow the economy, ends up producing lots of loan defaults, and probably greatly distorts present and future capital allocations  by directing future money to producers and industries which should never have gotten those injections to grow their intrinsically frivilous endeavors..

To look at this from the opposite perspective, if the loans are made for purposes that increase total production, that increase in production creates wealth which is at least the equivalent of the the money that was pulled from the future into the present to make those increases possible.  Money that was back then printed out of thin air, over time, is replaced with true wealth.

In elder ages, banks wanted collateral for loans.  This capped total new loans by the amount of available collateral, and caused borrowers to have much more skin in the game, thereby lowering the risk of default and the risk that the funds obtained from the bank would be frittered away on things frivolous and unlikely to generate the wealth needed to repay the loan.

If banks go full retard and start loaning money to anyone who can fog a mirror, to be used for entertainment and other forms of personal pleasure, with no collateral requirements (i.e - multiple credit cards for everbody on planet earth), then they are actually "printing money out of thin air" and causing massive capital allocation distortions, and inflation, to the extent those loans are never paid back.  The inflationary period ends when the defaults mount up and wipe out the printed out-of-thin-air money.

My conclusion is that to the extent loans are repaid, the banking activity is just pulling future money into the present to grease the wheels of commerce.  To the extent loans are not repaid, money has been printed out of thin air, then destroyed upon the occurrence of the default.  Certainly, fractional reserve lending poses the possibility of more pronounced booms and busts, as you can have wealth creation on a massive scale prompted by good loans, or massive numbers of defaults accompanied by massive destruction of money, and massive capital misallocations when most loans end in default.

Banks are supposed to vet borrowers and not make bad loans.  When they fail to fulfill that traditional function, the entire national economy gets into trouble, as the future money gets pulled into the present and used for purposes and reasons unrelated to increasing wealth and productivity.

 

 

css1971's picture

And you've discovered the meaning of Yahweh.

northern vigor's picture

This is why when someone hacks your credit card, the banks do not hesitate a second before picking up the $5,000 loss. For they know they are thieves themselves, being robbed by another thief. They have lost nothing of value...that they can print more where that came from. It is professional courtesy amongst the Thieve's Guild. 

But if they didn't pick up the loss, the wary consumer would refuse to use their plastic cards and use cash. Then the thieves, er I mean banks would be in trouble, because that would actually be a drain on their assets. That must never be allowed to happen. 

Dragon HAwk's picture

Pussy.... is Money, everything else is Debt.

Dragon HAwk's picture

So Basically the Bankers get their Pussy for Free, and you my Lad have to labor for it.

New_Meat's picture

"money for nothing and chicks for free"

Dem Texan Philosophers were on to somethin'

Hail Spode's picture

Leverage is what we are talking about here, and leverage is like fire. It is useful, but dangerous if not contained. When times are good banks are foolish not to leverage to the moon and buy up the earth. When times are bad, a tiny loss of value can cause it all to come crashing down- except that the banks which now have claims on everything through money conjured from thin air are now so big that they pressure the political system to shift the losses to the taxpayer's books.

This issue is one of many addressed in Localism, a philosophy of government. Leverage has to be limited. It starts with taking money out of the government's hands, for they always default on it when they can. It has been happening since the Roman Emperors cut the silver in their denarius. It happened in the US until now we are pure fiat. Private mints can't get away with that. Once money is private you simply say that banks must have on hand 20% of the value of all deposits in the form of monetary metals. Leverage is limited so that small changes in asset values don't cause bank insolvency. Also, bank manages are personally liable for the assets of the bank. These are just a few of the proposals suggested for America 2.0 in Localism.....https://www.amazon.com/Localism-Philosophy-Government-Mark-Moore/dp/0692...

numapepi's picture

How can there be "losses" in any real term when the money was printed in the basement to begin with?

Hail Spode's picture

The article was a little one-sided. If Smith gets a home loan the bank does just put money in his account but that money will soon be transferred to the account of Jones who is selling the home. Even if Jones uses the same bank he will spend the money over time. So what the bank has to do is tell another bank "Hey Smith here has borrowed 100K at interest from us. Jones got the money and now he wants to withdraw it. Would you loan us 100K against this assest?" So long as other banks who have "unused" money on their books are willing to do that, all is cool. Should the value of the home drop below 100K and Smith quit paying on the loan, the original bank gets squeezed.

prymythirdeye's picture

Hence, mortgages, car "loans," and yes, even credit card debt are all fraudulent agreements.  If there is no consideration, there is no contract.

JailBanksters's picture

We all know what is destroying the economy

But saying so is Politically Incorrect and Racist, so I won't say.

 

Hoffman Lenz's picture

"The issue which has swept down the centuries, and which will have to be fought sooner or later, is the people versus the banks." — John Acton (1834-1902)

Olympus Mons is not a Volcano's picture

 

"It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford

Elco the Constitutionalist's picture
Elco the Constitutionalist (not verified) Mar 14, 2017 4:15 AM

Who creates money? Jews. Jews create money. Usury is a mortal sin (it is evil and always leads to murder and war) and should not be tolerated.

New_Meat's picture

there used to be the "pound of flesh" cure that was applied.  Nowadays, not so much, unless the guy is self-identifying as a gal.

jthepapershredder's picture

And this is news? boooooring...

prymythirdeye's picture

I certainly wouldn't call this boring news asshole.  Just because you know this doesn't mean everyone else does.

acetinker's picture

Two things, Mr. Washington:

1) Just as the amount of currency increases based on burgeoning loans outstanding, so too it disappears upon repayment.

2) What did you think Alice Through the Looking Glass was all about?

1.21 jigawatts's picture

It all started thousands of years ago when one Jew was entrusted with storing the town people's gold.

css1971's picture

~3000

Solomon, or David. They were just the successful ones, but it probably started earlier. Double Entry Accounting was invented by the Babelonians.

It's no coincidence that you get banking in conjunction with DEA. e.g. The Medicis.

JackieG's picture

It really got rolling when the British monetized signatures on paper.

What does the bank always want from you??

Holden Caulfield's picture

A good read on the subject is "The Web Of Debt" by Ellen Brown.

acetinker's picture

Or, if you're not a reader, The Secret of Oz by Bill Still.  As I recall, Dr. Brown is a prominent character.

JackieG's picture

Graham F. Towers, 

IN THIS AGE OF PLENTY - APPENDIX E

Some of the most frank evidence on banking practices was given by Graham F. Towers, Governor of the Central Bank of Canada (from 1934 to 1955), before the Canadian Government's Committee on Banking and Commerce, in 1939. Its proceedings cover 850 pages. (Standing Committee on Banking and Commerce, Minutes of Proceedings and Evidence Respecting the Bank of Canada, Ottawa, J.O. Patenaude, I.S.O., Printer to the King's Most Excellent Majesty, 1939.) Most of the evidence quoted was the result of interrogation by Mr. Gerry” McGeer, K.C., a former mayor of Vancouver, who clearly understood the essentials of central banking. Here are a few excerpts:

Q. But there is no question about it that banks create the medium of exchange?

Mr. Towers: That is right. That is what they are for... That is the Banking business, just in the same way that a steel plant makes steel. (p. 287)

The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all. (pp. 76 and 238)

Each and every time a bank makes a loan (or purchases securities), new bank credit is created — new deposits — brand new money. (pp. 113 and 238)

Broadly speaking, all new money comes out of a Bank in the form of loans.

As loans are debts, then under the present system all money is debt. (p. 459)

Q. When $1,000,000 worth of bonds is presented (by the government) to the bank, a million dollars of new money or the equivalent is created?

Mr. Towers: Yes.

Q. Is it a fact that a million dollars of new money is created?

Mr. Towers: That is right.

Q. Now, the same thing holds true when the municipality or the province goes to the bank?

Mr. Towers: Or an individual borrower.

Q. Or when a private person goes to a bank?

Mr. Towers: Yes.

Q. When I borrow $100 from the bank as a private citizen, the bank makes a bookkeeping entry, and there is a $100 increase in the deposits of that bank, in the total deposits of that bank?

Mr. Towers: Yes. (p. 238)

Q. Mr. Towers, when you allow the merchant banking system to issue bank deposits which, with the practice of using the cheques as we have it in vogue today, constitutes the medium of exchange upon which I think 95 per cent of our public and private business is transacted, you virtually allow the banks to issue an effective substitute for money, do you not?

Mr. Towers: The bank deposits are actual money in that sense, yes.

Q. In that sense they are actual money, but, as a matter of fact, they are not actual money but credit, bookkeeping accounts, which are used as a substitute for money?

Mr. Towers: Yes.

Q. Then we authorize the banks to issue a substitute for money?

Mr. Towers: Yes, I think that is a very fair statement of banking. (p. 285)

Q. 12 per cent of the money in use in Canada is issued by the Government through the Mint and the Bank of Canada, and 88 per cent is issued by the merchant banks of Canada on the reserves issued by the Bank of Canada?

Mr. Towers: Yes.

Q. But if the issue of currency and money is a high prerogative of government, then that high prerogative has been transferred to the extent of 88 per cent from the Government to the merchant banking system?

Mr. Towers: Yes. (p. 286)

Q. Will you tell me why a government with power to create money, should give that power away to a private monopoly, and then borrow that which parliament can create itself, back at interest, to the point of national bankruptcy?

Mr. Towers: If parliament wants to change the form of operating the banking system, then certainly that is within the power of parliament. (p. 394)

Q. So far as war is concerned, to defend the integrity of the nation, there will be no difficulty in raising the means of financing, whatever those requirements may be?

Mr. Towers: The limit of the possibilities depends on men and materials.

Q. And where you have an abundance of men and materials, you have no difficulty, under our present banking system, in putting forth the medium of exchange that is necessary to put the men and materials to work in defence of the realm?

Mr. Towers: That is right. (p. 649)

Q. Would you admit that anything physically possible and desirable, can be made financially possible?

Mr. Towers: Certainly. (p. 771)


Maestro Maestro's picture

Worse than the bankers rigging gold and silver prices and not having the gold that they sold you (or selling gold that they don't have via fraudulent COMEX Futures contracts) is the fact that we don't even have MONEY today.  Therefore all financial transactions and economic numbers predicated on the existence of money are FRAUD and FORGERIES presently.

Electronic digits and paper fiat currencies in use today are NOT money, according to the law of the country that issues the reserve currency of the world, the US Dollar (Article 1, Section 10 of the US Constitution); or by the tenets of the science of Economics (i.e., fiat currencies are not money because they are not a store of value nor a unit of account due to the fact that NOT ONE fiat currency's value is actually determined or stipulated in concrete legal terms).  Dollars and Euros and Yens are not even lawfully DEFINED as to what they all are exactly; what their economic worth and transactional value is. Hence, fiat currencies simply cannot constitute the legal foundation of any lawful contract!

(Also, there cannot be either inflation nor deflation in the ABSENCE of money.  Both inflation and deflation are monetary events which cannot take place where there literally is no money.)

What we have today is massive GLOBAL FRAUD mascarading as a monetary system based on the (fraudulent) US dollar because all fiat currencies are basically only a derivative of the US dollar, including the Euro, the Yen, the Yuan, the Rouble, the Shekel and the Riyal.

Furthermore,

Why do a few people get the right to print fake fiat money out of nothing and buy your goods and  services with it whereas you have to WORK to obtain the same worthless money created out of nothing?

THAT is the question at the heart of the matter.  That the bankers manipulate interest rates or the price of gold via fraudulent Futures trading (by selling gold that they don't have) with fiat money is a moot point.

To put it differently: why do the bankers get to have anything that they want without working for it and you, you don't?

All this talk about market rigging, monetary theory and fraudulent (paper) gold trading is a cover-up for INJUSTICE.

The US Constitution FORBIDS the use of debt as money; the US Constitution proscribes (debt) notes which is what the US dollar is presently.  Think, all other currencies are just another name for the US Dollar.

What passes for money today is a CRIME, no more no less.

 
People,

You are all aiding and abetting this crime every time you buy, sell, pay or get paid.

And then you ask, Why our leaders, the politicians, the bankers, and our military men and women are EVIL?

The answer is, because they are just like YOU. They are your sons and daughters.

George Washington's picture

Regarding money as debt ...

In a hearing held on September 30, 1941 in the House Committee on
Banking and Currency, then-Chairman of the Federal Reserve (Mariner S.
Eccles) said:

That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.

Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, said:

If all the bank loans were paid, no one could have a bank
deposit, and there would not be a dollar of coin or currency in
circulation. This is a staggering thought. We are completely dependent
on the commercial Banks. Someone has to borrow every dollar we have in
circulation, cash or credit. If the Banks create ample synthetic money
we are prosperous; if not, we starve. We are absolutely without a
permanent money system. When one gets a complete grasp of the picture,
the tragic absurdity of our hopeless position is almost incredible, but
there it is. It is the most important subject intelligent persons can
investigate and reflect upon. It is so important that our present
civilization may collapse unless it becomes widely understood and the
defects remedied very soon.

And the Bank of England writes:

Just as taking out a new loan creates money, the repayment ofbank loans destroys money. For example .... if the consumer were then to pay their credit card bill in full at the end of the month, its bank would reduce theamount of deposits in the consumer’s account by the value ofthe credit card bill, thus destroying all of the newly created money.

Odd, right?

How's about this: 

Maestro Maestro's picture

Thank you, Sir, for your excellent work, and for sharing it with us. You are the only zerohedge contributor who is consistently a must read.

SidSays's picture

Nothing new under the sun...

The Origins of Central Banking: The Babylonian Woe...

"Woe...

Woe...

Woe..."

They'll say.

Radical Marijuana's picture

"Nothing new?"

Except globalized electronic monkey money frauds, backed by the threats of force from apes with atomic weapons, are trillions of times worse than the previous banking systems which were based up metal money, backed by swords and spears, which became paper money, backed by gunpowder weapons.

While there is no reasonable doubt that studies of history can trace the currently established Globalized Neolithic Civilization back to its origins, which can be metaphorically referred to as beginning with Babylonian Banking, what exists today is almost infinitely worse than what existed thousand of years ago.

SidSays's picture

And FFS, that's not money.

Codwell's picture

One of the things the Fed manages because of this fractional reserve system is how much physical cash is needed in each of their districts daily. Seems easy, but if they ever screw up and there is a shortage of physical cash, panic may induce making the problem worse.

And it is all done secretly, that is, the Fed will not release how much physical cash is needed by the system. If this information was known it would let the cat out of the bag about how much the fractional system is leveraged, and how much reserves actually are.

If the system goes cashless, the black hole gets even bigger.

George Washington's picture

Bernanke proposed the elimination of all reserve requirements:

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

And – according to Steve Keen – about 6 OECD countries have already done
away with reserve requirements altogether (Keen confirmed that
Australia requires no reserves; I know that Mexico doesn’t require
reserves; and Canada, New Zealand, Sweden and the UK supposedly require no reserves as well).

Reaper's picture

Reserve banks create an irresistible moral hazard.   Banks must be allowed to fail, with bankers punished for any deceit.   Depositors should diversify their deposits for protection and/or insurance should be available.   

Trump should have the FBI seize the Fed's records of outflows to show the cash rightly belonging to the people being sent out of the US.  Public outrage enables Congress to end the Fed.   An audit is only the opinion of the auditor.  $4 trillion dollars in Fed assets corrupts absolutely.  Corrupting both internal bank employees/banks, whose thefts would not be reported by Yellin to prevent calls for audit, and any auditor. 

New_Meat's picture

insurance for deposits in certain banks is also high on the list of moral hazard.   It encourages people to make deposits into the wrong places.  It discourages any kind of thinking as to where the deposit should be placed.

Chris88's picture

Except that degree of credit expansion could never take place absent the government, AKA Fed/FDIC.  

Memedada's picture

The FED/FDIC are not the government but private owned entities.

I know it doesn’t fit the (imposed) ideological world view of the US-based segment of ZH’ers but the power today is in the hands of capitalists. It is the hand  of the 0,01 % who privately owns the shit show (and no, it is not the fairy tale version of “meritocracy” or “laissez faire”-markets that capitalist ideologues promises but the reality of what an unregulated capitalist economy ends up in = the concentration of all the wealth in the hands of a tiny minority. Think: the end stage of a game of monopoly. That is where we are).

 That the capitalist/ownership class took control of the monetary system and turned it into a Ponzi scheme is old news. The fact that only a tiny minority understands the implications of this (that politics are irrelevant and only a theatre) is telling of the power of the corporate propaganda machine. The same power that have turned most ZH’ers (again, from US) into mouthpieces for the ownership class.

StateofFraud's picture

"The FED/FDIC are not the government but private owned entities."

The Fed and its owners have become the defacto goverment. You get things half right with this: "That the capitalist/ownership class took control of the monetary system and turned it into a Ponzi scheme is old news. "

That is a very broad stroke. I believe in free markets and respect for property rights. That places me in the "class" above, but I can assure you I have not attempted or willingly abetted a takeover of the monetary system.

It is an error to blame the "unregulated capitalist economy" as if freedom and liberty are the problem. This is like attacking the Earth's atmosphere as inherently a bad thing becase some choose to pollute it.

Capitalism is, as a expression of a property respecting free market, self-regulating by its participants. You imply lack of "regulation" is the root of the problem. I would suggest to you that regulation using the centralized, coercive power of the state always becomes the captive tool of those being regulated, who then turn that power against the free-market to crush competition. For evidence review the sections and video in the original article on what the goverment-protected banks are doing to community banks.

The problem is not, as you suggest, free-market capitalism, it is that the the people have allowed criminals to use the coercive power of government to destroy a free-market monetary system (legal tender, for example) and replace it with financialism. Thing thing is, the free market will ultimately prevail over the statists and self-correct. The question is, how bloody will it be?

Start here: http://www.zerohedge.com/news/2016-12-19/financialism-not-capitalism

Please stop blaming freedom.

peippe's picture

employment contracts create money too, so

look in the mirror

CRM114's picture

The World is not what it was in 1929. The banksters will be following in the tumbrel tracks of the French aristocracy when this one goes pear-shaped.

gregga777's picture

Banks are the alpha parasites that suck the lifeblood from humanity. They are the ultimate and only beneficiaries of their "something for nothing" fractional reserve banking scam.