Lord Turner about Credit, Money and Leverage (Video)

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Lord Adair Turner, former Chairman of the Financial Services Authority made an excellent speech entitled “Credit, Money and Leverage: What Wicksell, Hayek and Fisher Knew and Modern MacroEconomics Forgot” last month. It is well worth a listen if you have 52 minutes to spare.

Speech – pdf 351.18 KB

Slides – pdf 874.55 KB


Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account.


Bank (and non-bank) credit creation can be thought of as one of two possible means to avoid a harmful deficiency in aggregate nominal demand which could arise in a pure metallic money system.

Bank credit creation, unlike government fiat money creation, entails not just the creation of new money and purchasing power, but also the creation of ongoing debt contracts, which themselves can have macroeconomic consequences.

Banks create credit, money and purchasing power: it therefore matters to whom and for what purposes credit is extended.


Standard undergraduate textbook discussions of banking and money still tend to propagate three myths/simplifications.
– First, that banks in sequence “raise deposits” from savers and then “make loans” to borrowers, ignoring their potential to create purchasing power ex nihilo.
– Second, that banks primarily lend money to firms/entrepreneurs to fund investment projects, allocating funds between alternative uses, largely ignoring the other potential functions and impacts of bank lending.
– Third, that the “demand for money” (i.e., for transactions money”) is a crucial issue, and can usefully be captured in the function f(i,y) ignoring the endogenous creation of short term financial assets as a result of credit creation, and ignoring the complexity of the varying features and degrees of “moneyness”.

Advanced macroeconomics textbooks are also largely silent on the role of banks as creators of money, and on the potential importance of the aggregate balance sheet level of resulting debt.

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  • Speedfriend

    ” Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account.”
    The fact that someone like him was ever in charge of the FSA explains verything we need to know about why the banking system was a disaster.
    What he has said is perfectly possible in theory but is wrong in 99% of practice.

    • PJM

      “What he has said is perfectly possible in theory but is wrong in 99% of practice.”
      Please, either provide proof for the veracity of this very bold assertion, or apologize and withdraw it.

      • Speedfriend

        A bank can do exactly what Turner said, create a loan by setting up a loan account and a deposit account, but the fact it can do this is meaningless. Firstly, the fact is that it still needs to have prefunding to actually allow someone to use the loan, because without prefunding it can’t have the central bank reserves to actually allow someone to spend the deposit.

        Secondly, 99% of loans never result in someone taking out a loan and then having it placed in a deposit account to spend. Mortgages – 90% of retail lending, if you have ever had one you will know the loan is only created when the bank pays money over to your solicitor, it never goes into your deposit account (in fact in the UK a large number of people get mortgages from banks where they have no current account). Credit cards – are a loan account that you draw down on, there is no deposit account. Car finance – is a loan account with no deposit account. Corporate credit facility – are loan accounts you drawn down on.

        When I read some of the things Turner has said, I shudder that he was ever in charge of the fSA, no wonder the banks are such a disaster.

        • MareMortal

          Are you kidding us ? if course there is a deposit account, but it is immediately cleared against the payment to a vendor of this car or to a former house owner, etc. Then the money just created is deposited on their accounts , thus injected into the system for circulation. Bank create money and dangerously unleash purchasing power of consumers who in turn create only, but never satisfied demand.

          • Speedfriend

            MareMortal – “Are you kidding us ? if course there is a deposit account, but it is immediately cleared against the payment to a vendor of this car or to a former house owner”

            No, there are no deposit accounts created and immediately cleared. In order for the amounts to be paid over to the vendors, the bank must have PREVIOUSLY raised ther funding.

            “Then the money just created is deposited on their accounts , thus injected into the system for circulation. Bank create money”
            You are quite right with this step, it is the action of the vendor that create the money when they redeposit the loan – but this is different from what Turner is saying. It is the banking system that ctreates money through lending and redepositing, not indivdual banks, like he is implying.

          • Simon

            Correct, all the banks increase their lending in concert, therefore they can expect new deposits to return to them. Problems arise when one or two get out of step, have too many bad loans, and have creditors who want their money back at short notice (Northern Rock). The system itself starts to collapse when the debt burden in society becomes too great, and one bad bank can pull others down with it.

          • Speedfriend

            “Correct, all the banks increase their lending in concert, therefore they can expect new deposits to return to them.”
            In most countries, the banking systems run with far more deposits than loans, meaning the banks never have a need to suck in large amounts of other liquidity. The fact that the FSA and BoE allowed the UK banking system to develop such a massive reliance on short-term wholesale funding was the reason our whole system came close to shut down. Unfortunately the UK was one of the worst regulated banking markets even compared to most emerging markets.

        • DozyHole

          Speedfriend – You have been around here for a few years now and I have taken your comments seriously, I have looked and relooked into what positive money and Lord Turner are saying and they are indeed correct.
          I think what you are doing is looking at the system one transaction at a time and completely ignoring the workings of the system as a whole. This is unacceptable, and is probably the only way you could even have an argument.
          We are never going to agree, it’s like we are looking at an optical illusion that switches depending on how you look at it, I can see both but you seem very stuck on seeing from one perspective only.

          • Speedfriend

            “I think what you are doing is looking at the system one transaction at a time and completely ignoring the workings of the system as a whole. ”
            No, that is what turner has done. He has taken an individual bank and ascribed to it the ability to fund its lending out of self created deposits. It is not the actions of the individual bank that creates money, but the action of the system as a whole (and importantly the action of the person who receives the loan). If a bank can make a loan to me and no money through actions I choose (and there are several ways this can happen) then it follows that lending is not aways accomplished by creating deposits and hence money.
            I don’t have a problem with the concept that bank system lending (in most situations) creates what we understand as money, I have a problem with people representing the idea that an indivual bank doesn’t need to raise deposits to malke a loan, but just magics the money into existence and then charges you interest on this magic money.

          • DozyHole

            Well then we probably agree more than we disagree.
            Although there is a paradox in your final paragraph. You admit that most lending creates deposits, but then say banks don’t magic the money into existence and charge you interest. They either create the deposit or they don’t, no matter how much detail you go into about clearing systems you can’t escape the fact that the loan creates new money(most of the time), the rest is secondary, and just details.
            I am not completely against banks creating new deposits but until we can get past this point the discussion can’t move forward. There is no doubt in my mind that the money creation power has been abused by the banks.

        • Simon

          Speedfriend – With all due respect, the mortgage amount I get is paid to the vendor of the house I am buying. He then uses this new money as he sees fit, very likely putting it into a deposit account. How on earth do you think house prices tripled in ten years from 1997, and where did all the money come from ? You seem unable to see how the system works, and how others have explained it to you. Central bank reserves are only needed by a private bank to settle up with other banks at the end of each day, which means a bank can greatly “leverage up” it’s reserves. In the boom years, the leverage ratio was at least 70 to 1 in some cases (Loan book 70 times greater than reserves). In more recent times, banks have been directed to be more prudent so the reserve ratio is now about 14 to 1, much of this assisted by quantitive easing.

          • Speedfriend


            “With all due respect, the mortgage amount I get
            is paid to the vendor of the house I am buying.”
            Exactly, it is not as Turner says, that it is paid into a deposit account in your name first thus creating the deposit backing the loan to you. The mortgage is paid over to the vendor using money PREVIOUSLY raised by the bank as deposits.

            “Central bank reserves are only needed by a private bank to settle up with other banks at the end of each day”

            Sorry, you are wrong. The UK has had a real time settlement system since 1996, which settles individual large and time sensitive payments in real time as they are made during the day (i.e with no netting). This accounts for 95% of payment value. So when you mortgage loan is made, the payment is instantly made using central bank reserve that have to be on hand at that moment, i.e. they have to be pre–funded.
            Try an experiment if you have a bank account at more than one bank- transfer money from one to the other and see how long it takes. I can trasnfer from my HSBC account to my Natwest and the money appears within an hour i.e. it has been settled with central bank reserves already

          • plainmoney

            The 95% statistic is interestingly high but also I think encouraging for money reformers.

            The more we move towards 100% of payments in commercial bank money being settled by the commercial banks in real time using central bank money, the more apparent the essential superfluousness of the layer of expensive, borrowed-into-circulation commercial bank money becomes.

            As a community of money users we pay enormous interest for the existence of a stock of bank IOUs with which we conduct almost all our business. But it seems that behind the curtain those same banks are settling increasingly with each other simply by mimicking precisely our payments, pound for pound, using our own debt-free, publicly issued central bank money. The redundancy and unnecessary cost of our present two-tier money system are becoming ever more plain to see.

            Why do we the public not have direct access to and use of such an adequate publicly issued money stock? Why is there an unavoidable cartel of commercial banks blocking our access to it and forcing us collectively to use their IOUs, of which they control both the quantity and the initial allocation, the bulk of which recently has been gross misallocation?

            Why do we not have simply an adequate stock of publicly issued central bank money, circulating persistently as a common utility, with which to run our economy, as advocated by Positive Money?
            Commercial banks would then operate under 100% reserve constraints and compete to provide money handling and warehousing services to us, the money users.

          • Speedfriend

            “essential superfluousness of the layer of expensive, borrowed-into-circulation commercial bank money becomes.”

            The problem is that you are thinking of commercial bank money as real money, when in fact it is a made up concept. When you make a deposit, the bank is not storing your money, you are lending it to them for them to on lend and they are giving you immediately liquidity on it. This is a primary function of banking – maturity conversion – allowing you immediate access to money but allowing borrowers to borrow over a longer period, something that is crucial for businesses and homeowners. I used to invest in many emerging markets where there was no ability to borrow long term and it severley hampered economic develpment. Imagine trying to build a factory when all a bank would give you is an overdraft repayable on demand. you either don’t go ahead or you only do it on a massive return basis, passing the cost to consumers.

            “As a community of money users we pay enormous interest for the existence of a stock of bank IOUs with which we conduct almost all our business. ”

            No, if you are a net saver you receive interest for the existence of bank IOUs, you only pay as a net borrower. This is the same situation that would exist is there were no banks and only peer to peer lending. Bank only earn the net interest which rewards them for the credit risk and liquidity risk that they bare

          • Simon

            New money should not be borrowed into existence at all, banks should only lend existing money which is first created by the Bank of England. Commercial bank money is real money in the sense that it is backed by the tax payer up to £85,000 per account, and I can go to the cash machine and get some notes (assuming all account holders don’t do it at once). I can also use my account to pay tax to the government.

          • Speedfriend

            “New money should not be borrowed into existence at all, banks should only lend existing money which is first created by the Bank of England. ”
            They do only lend existing money, as every loan is accompanied by a transfer of cash or central bank money. Banks work no differently to a peer to peer lending system, except that becasue banks guarantee liquidity on their IOU, we then call them money.
            What you are effectively wanting is that if the central bank creates £10 of money, then only £10 can ever be lent. But even if you did away with banks, what is to stop that same £10 being lent 10x, so you end up with loans in the system of £100, IOUs of £100 and £10 in cash. This is no different to a banking system lending that £10 10x over and ending up with a banking system with £100 of loans, £100 of depsoits and £10 of cash. Except the baking system is more efficient in that it offer liquidity and hence lower interest rates. Of course it needs to be properly regulated, but then so would a peer to peer system.

          • Simon

            Speedfriend, where did all the money come from in the ten years from 1997 to triple the money supply, and where did all the money come from to multiply the money supply by 100X since 1960 ? you have said in previous posts that money is created by banks when they make loans.
            Your example above is not the same as how the banking system works. A given bank need only have regard to it’s reserve account when making loans (it needs enough to meet immediate payments, loans and deposits are much greater than the reserve), and I have described already how extra lending generates new deposits.
            If I lend you £10, my account will reduce and yours will increase, and the same would happen if you lent that £10 to someone else, so there is no extra money. This would be genuine peer to peer lending, and is not how the clearing banks work by increasing the money supply. Bank on Dave in Burnley cannot increase the money supply, however the clearing banks as a group can if they feel confident, and there are enough people willing to borrow. The IOUs could only become money if people generally accepted them for goods and services, which is highly unlikely because no one would trust the IOUs. You are conflating central bank money, with commercial bank money (which you and I use). Notable people including ex Governor Mervyn King support our analysis of how the system works. I have become tired of arguing with you, so we will have to agree to disagree.

          • Speedfriend

            “Your example above is not the same as how the banking system works. A given bank need only have regard to it’s reserve account when making loans”

            Actually not, a bank’s ability to lend is determined by it capital, its liquidity holding and the underlying maturity of its funding. The UK banks hold liquid assets of over £100bn each, these are effectively deposits that they cannot lend out due to regulatory requirements. In fact some of the banks are close to a situation where all their demand deposits are offset by liquidity holdings.

            I am not conflating central bank money, with commercial bank money. All commercial bank money is an IOU that we decide to call money because banks give us liquidity on the IOU and other people trust the bank to pay them with central bank money. When I pay you with a cheque, you don’t accept that I have paid you when you get the cheque (i.e. on transfer of the IOU), but when the money appears in your account (i.e. when the transfer of central bank money has happened from my bank to yours). How is a 3 year peer to peer loan, any different to a three year bank deposit – neither can be used for three years, both generate lending in the economy, yet we choose to call the bank deposit money and say that the money supply has increased.

            If the desire to control banks money creation is actually to control the amount of credit extended, the peer to peer lending is really no different. If the desire is to improve stability of the banking sector through reducing the risk of a bank run, then that has been addressed by liquidity requirements. But all I see on here is people who believe that an individual bank creates money out of nothing and then lends that to customer, pocketing all the interest and that is why they want to attack the system. Banking systems happen to work extremely well in most other countries despite being organised exactly like the UK system, the difference being proper regulation.

            And please don’t used notable and Mervyn King in the same sentence – he presided over the almost total destruction of the UK banking sector whilst governor of the BoE, despite significant evidence in the BoE own number of what was developing in the UK banking system with use of wholesale funding and the breakdown of interest margins. He should be up there with Fred Goodwin in the rogue’s gallery.

          • Tom Bayley

            Speedfriend, you’re surely being obtuse? ‘What is to stop it’ is that money as a ‘promise’ (an IOU) would be illegal! You could, I suppose, have a black market in IOUs but it seems highly unlikely to be popular unless the backers were reliable institutions. And such institutions tend to stay within the law.

          • Speedfriend

            “What is to stop it’ is that money as a ‘promise’ (an IOU) would be illegal! You could, I suppose, have a black market in IOUs but it seems highly unlikely to be popular unless the backers were reliable institutions. And such institutions tend to stay within the law.”

            No IOUs are not illegal and IOUs issued by reliable institutions is a perfect description of banking.

          • Tom Bayley

            Speedfriend, please, for goodness sake, READ what you’re commenting on.

          • Speedfriend

            Maybe you should actually read what Positive Money is proposing – it still involves banking ‘IOUs’. While I agree with part of what Positive Money are trying to achieve – a more stable banking system and less reliance on debt –
            the proposal has several inaccuracies and illogical statements, and may even introduce factors that damage the economy when a crisis hits. For instance they suggest taking demand deposits and savings deposits, both of which are part of
            broad money and suggest splitting demand deposit off from the banking system and making them 100% reserved. Savings deposits will be renamed as investment accounts and will no longer be instant access, but suddenly they believe that these will no longer be part of the broad money supply, when clearly they are
            exactly the same as part of broad money now. They even give a working example where they fail to notice that their investment account proposal is still creating money when a loan is made. They are clear confusing narrow and broad money.

            And lets examine what the proposal will
            mean for a bank like Lloyds. At the end of 2012 it had £120bn of demand deposits and £77bn of central bank, so it already had 75% reserving of its demand deposits. In addition it had another £11bn of gilts and £117bn of other asset
            that can be repod at central banks for liquidity. So it is sitting with liquidity of double its level of demand deposits anyway. So it is not evident
            that the PM proposal would make Lloyds any safer or less likely to lend, but could certainly impact the economy at time of crisis, where people will
            convert maturing investment accounts to transaction accounts, withdrawing credit from the economy precisely at the point it is needed most, instead of the current situation which sees funds flow to the safest banks, and maintaining credit availability.

          • Tom Bayley

            Nope. Banking IOUs would no longer be equivalent to instant cash – that’s the point. Time deposits would be fully *at risk*. No more bailouts. If a bank can’t convert maturing investments to real cash then, sorry, you lose! Because the bank, in that case, is not ‘safe’, is it?!

            And if you’re going to convince me you have a real point to make, you’re going to have to explain how the ‘current situation’ is different to that at the time of the bail-outs, during which the concept of a bank being safer (or riskier) to depositors was shown to be unmaintainable.

          • Simon

            You are right about immediate payments, I did one yesterday on my computer.
            However, banks can still have a loan book, and depositors/creditors on the other side of the balance sheet, far in excess of their reserves at the central bank, and this situation has existed for many years, that is why it is called fractional reserve banking. Banks only need enough to meet their immediate payment requirements and they use their accounts at the central bank to do this (which are netted off between the big banks, Real Time Gross Settlement, this is not money you or I use, although their reserve accounts at the B of E are affected by transactions. The B of E is effectively the bank for the private banks, and they are account holders.) Also they do not expect all their depositors to turn up asking for their money in a given day (except when there was a run on Northern rock in 2007)
            Banks are now required to hold more capital, including share capital, as a buffer after the financial crisis.
            All the banks increased their lending together in the boom years from 1997, tripling the money supply in the process (source Bank of England stats)
            Have a look at the banking 101 videos on the Positive Money site, and then tell me what you think. These are based on the book “Where does money come from ?”, which was researched using 100s of documents from the Bank of England and elsewhere. I had a similar argument with the Socialist Party of great Britain, who say like you, that pre-funding is required. It is however the loans that come before the deposits, and new loans generate new deposits and money throughout the banking system. The money supply will increase when new loans are made faster than old ones are repaid. We have a circular argument here, chicken and egg situation.

          • Speedfriend

            ” It is however the loans that come before the deposits,”
            No it isn’t
            If I start a bank tomorrow and want to have the ability to lend £10m, then I need £1m in capital to meet capital adequacy rules, so my balance sheet has capital of £1m and central bank reserves of £1m. Now I want to lend you £10m, what you are saying is I now magically create a £10m loan on my balance sheet and a £10m deposit for you to spend. But immediately my bank fails as you try to spend the £10m deposit as I only have £1m central bank reserves. Game over.
            the correct answer is that to lend you the £10m, I have to first raise £9m in deposits, which brings my central bank reserves to £10m and now I can extend you the loan. The depsosit funding has to come before the loan, it is impossible to operate any other way. Of course your £10m loan can now be redeposited in the system, increasing the money supply but by the same token if you bought £10m of bank bonds, the money supply would never increases by the £10m.

          • Simon

            I am talking about the banking system as a whole generating new loans, then new deposits and money, Speedfriend, not an individual bank. This is what happened in the boom years, more lending creating new deposits. The bank in your scenario could expect new deposits to return to it, because other banks are also increasing their lending at the same time. It is not reasonable to look at one bank in isolation which you have done in your example, and Positive Money could perhaps explain this a bit better. However PM are trying to show how money gets created, to a general audience, some of whom do not have expertise or knowledge, and do not want to spend days studying the system.

      • PJM

        Well, Speedfriend, either provide the proof for your irrational assertions, or forever ‘hold your peace’!

    • reissgo

      Adair is correct, this vid explains how: http://www.youtube.com/watch?v=CI5CFQXJxcA

      • Speedfriend

        You have got to be kidding. That video explains nothing. Firstly attempting to show how a system works using a single bank is nonsensical as no banking systems have single banks and it is this very factor that determines how a banking system interacts. By conveniently ignoring the role that central bank money plays in the system (which is the only real money as all other concepts of money are made up) means that it explains absolutely nothing
        Second, the example given can be shot down very easily, if the car buyer borrow cash from the bank (i.e. a loan is created) and pays the seller who then puts the cash under their mattress. Hmmm suddenly a loan and been created but no deposit has been created and hence no money was created. That kinda of destroys the argument that lending creates money as well as the argument that the bank doesn’t need the deposits first, because otherwise they wouldn’t have had the cash to lend int he first place.

        It is not lending that creates money (broad money that is) but the action of the depositor.

        • PJM

          Speedfriend wrote: “Second, the example given can be shot down very easily, if the car buyer borrow (sic) cash from the bank (i.e. a loan is created) and pays the seller who then puts the cash under their mattress. Hmmm suddenly a loan and (sic) been created but no deposit has been created and hence no money was created.”
          So tell us Speedfriend, have you ever borrowed cash (i.e. the stuff you can put under a mattress) from a bank? My experience is that banks lend only by creating a deposit in my account, not by handing me the folding stuff at the teller’s window.

          • Speedfriend

            “My experience is that banks lend only by creating a deposit in my account”
            Really – so when you get £200,000 mortgage, the bank creates a deposit in your account? When you spend on credit card , they deposit the money in yor accoumt, when you biuy a car on HP, they deposit the money in your account?
            Anyway, if you understand the accounting transactions in the banking system, if you did get the loan, took it out in cash and the vendor put it under theiur mattress, then the loan made to you has not created money in the system.

          • http://fishwickmains.com Peter Wilson Close

            Speedfriend if you haven’t the mental capacity to understand what we’re on about then please drop out of the discussion! Of course when you get a mortgage the payment is made to the seller! When you spend on credit card the seller is paid; when you buy a car on HP the car dealer is paid. As far as your mattress mate is concerned the cash is real BOE money but to give him that it has to have come out of another “account” at the bank where it has a 97.5% chance of having been created ex nihilo. The real scam of course is when commercial banks buy treasury bonds. They can’t create a loan for themselves to buy the bonds but they do create loans to other banks for them to buy bonds – and vice versa. So the state funding has been via money created as a debt by the private banks — when it could easily have been created as an interest free asset by the central bank. It is no more likely to create inflation than is money creation by the banks – in fact less so since the banks are driven by greed on the part of their executives. It’s the amount of money in circulation that determines inflation, not its source.

          • Speedfriend

            Given that I an a qualified accountant and have professional investment qualifications from three continents, I am pretty sure that I have the mental capacity to understand anything you can come up with. And given that over the past 15 years, I have met with the management of well over a hundred banks from most countries banking systems, as well as banking regulators, central bankers and
            senior staff from finance ministries (up to Minister of Finance level at times) from many countries, I probably have a far better idea than you of how banks and banking systems work.

            But aside from that, you clearly don’t understand the accounting flow through in the banking system or even what constitutes money. And as for you explanation of how banks buy treasury bonds, well that gave me a laugh. So a bank is going to make an interbank loan that has regulatory capital and liquidity requirement impacts at a rate that allows another bank to buy government bonds with it. They would have to be pretty stupid to do that. I think you might be getting a bit confused with what a repo is, a collaterised short term loan.

            ” So the state funding has been via money created as a debt by the private

            Strange then that less than 10% of government debt is owned by banks…

            ” when it could easily have been created as an interest free asset by the central bank.”

            No it can’t as central bank money is not interest free. The money used for QE pays 0.5% and once the economy recovers will ended up paying a lot more.

            “Actually I’ll qualify that since the interest payments on the debt created money is a drag on the economy”

            Interest is not a drag on the economy on its own, in fact the income approach version of GDP includes interest as one of the GDP factors.

            “Of course when you get a mortgage the payment is made to the seller! When you spend on credit card the seller is paid; when you buy a car on HP the car dealer is paid.”

            for agreeing with me on these as it goes against what Turner is saying…

          • http://fishwickmains.com Peter Wilson Close

            Given that the vast majority of accountants, bankers and economists – and virtually all politicians – actually haven’t a clue how the banking system currently works your latest outburst lacks fundamental support. What you must understand is that 97.5% of the money in circulation [M4] has been created by commercial banks as a debt to themselves.In 1970 the ratio of BOE money to new money created by the banks was 1:1. M4 now amounts to nearly £2 trillion of which the banks have created £1.9 trillion. More shocking is the fact that our national debt in the form of treasury gilts/bonds is approaching £1.4 trillion on which we as taxpayers are forking out 43 billion pounds a year as interest – and much of that to the banks who created it! Interestingly last year the BOE cancelled £35billion interest on re-purchased gilts

            – if that’s not the same as cancelling them i don’t know what is; just like RBS cancelled £8 billion of its own risk-impaired bonds in 2009 after buying them back at half price and logging a paper profit of £4billion! When you say central bank money is not interest free I think you are perhaps getting confused! BOE doesn’t pay interest to anyone when it creates money. When a bank borrows from BOE – eg. to top up statutory reserves if it can’t borrow elsewhere – of course it pays interest! Usually this is at a higher rate than LIBOR which is why banks prefer to borrow from one another rather than BOE. I suggest you look at Turner’s video speech from the Philadelphia conference. He supports bank capital requirements being raised to 30% and the new money required to sustain the economy without causing inflation to be injected as an asset by central banks. I am not convinced going the whole hog, as positive money suggest, is do-able but Michael Kumhof [IMF] also gives a pretty good – if a bit stilted – presentaion in support: bsd.wpengine.com/2013/04/video-from-the-conference-fixing-the-banking-system-for-good/

        • http://fishwickmains.com Peter Wilson Close


          Ellen Brown, July 3rd, 2007

          Post your comments here

          It has been called “the most astounding piece of sleight of hand ever invented.” The creation of money has been privatized, usurped from Congress by a private banking cartel. Most people think money is issued by fiat by the government, but that is not the case. Except for coins, which compose only about one one-thousandth of the total U.S. money supply, all of our money is now created by banks. Federal Reserve Notes (dollar bills) are issued by the Federal Reserve, a private banking corporation, and lent to the government.1 Moreover, Federal Reserve Notes and coins together compose less than 3 percent of the money supply. The other 97 percent is created by commercial banks as loans.2

          Don’t believe banks create the money they lend? Neither did the jury in a landmark Minnesota case, until they heard the evidence. First National Bank of Montgomery vs. Daly (1969) was a courtroom drama worthy of a movie script.3Defendant Jerome Daly opposed the bank’s foreclosure on his $14,000 home mortgage loan on the ground that there was no consideration for the loan. “Consideration” (“the thing exchanged”) is an essential element of a contract. Daly, an attorney representing himself, argued that the bank had put up no real money for his loan. The courtroom proceedings were recorded by Associate Justice Bill Drexler, whose chief role, he said, was to keep order in a highly charged courtroom where the attorneys were threatening a fist fight. Drexler hadn’t given much credence to the theory of the defense, until Mr. Morgan, the bank’s president, took the stand. To everyone’s surprise, Morgan admitted that the bank routinely created money “out of thin air” for its loans, and that this was standard banking practice. “It sounds like fraud to me,” intoned Presiding Justice Martin Mahoney amid nods from the jurors. In his court memorandum, Justice Mahoney stated:

          Plaintiff admitted that it, in combination with the Federal Reserve Bank of Minneapolis, . . . did create the entire $14,000.00 in money and credit upon its own books by bookkeeping entry. That this was the consideration used to support the Note dated May 8, 1964 and the Mortgage of the same date. The money and credit first came into existence when they created it. Mr. Morgan admitted that no United States Law or Statute existed which gave him the right to do this. A lawful consideration must exist and be tendered to support the Note.

          The court rejected the bank’s claim for foreclosure, and the defendant kept his house. To Daly, the implications were enormous. If bankers were indeed extending credit without consideration – without backing their loans with money they actually had in their vaults and were entitled to lend – a decision declaring their loans void could topple the power base of the world. He wrote in a local news article:

          This decision, which is legally sound, has the effect of declaring all private mortgages on real and personal property, and all U.S. and State bonds held by the Federal Reserve, National and State banks to be null and void. This amounts to an emancipation of this Nation from personal, national and state debt purportedly owed to this banking system. Every American owes it to himself . . . to study this decision very carefully . . . for upon it hangs the question of freedom or slavery.

          Needless to say, however, the decision failed to change prevailing practice, although it was never overruled. It was heard in a Justice of the Peace Court, an autonomous court system dating back to those frontier days when defendants had trouble traveling to big cities to respond to summonses. In that system (which has now been phased out), judges and courts were pretty much on their own. Justice Mahoney, who was not dependent on campaign financing or hamstrung by precedent, went so far as to threaten to prosecute and expose the bank. He died less than six months after the trial, in a mysterious accident that appeared to involve poisoning.4 Since that time, a number of defendants have attempted to avoid loan defaults using the defense Daly raised; but they have met with only limited success. As one judge said off the record:

          If I let you do that – you and everyone else – it would bring the whole system down. . . . I cannot let you go behind the bar of the bank. . . . We are not going behind that curtain!5

          From time to time, however, the curtain has been lifted long enough for us to see behind it. A number of reputable authorities have attested to what is going on, including Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920s. He declared in an address at the University of Texas in 1927:

          The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . . Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.

          Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta in the Great Depression, wrote in 1934:

          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.6

          Graham Towers, Governor of the Bank of Canada from 1935 to 1955, acknowledged:

          Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created — brand new money.7

          Robert B. Anderson, Secretary of the Treasury under Eisenhower, said in an interview reported in the August 31, 1959 issue of U.S. News and World Report:

          [W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.

          How did this scheme originate, and how has it been concealed for so many years? To answer those questions, we need to go back to the seventeenth century.

          The Shell Game of the Goldsmiths

          In seventeenth century Europe, trade was conducted primarily in gold and silver coins. Coins were durable and had value in themselves, but they were hard to transport in bulk and could be stolen if not kept under lock and key. Many people therefore deposited their coins with the goldsmiths, who had the strongest safes in town. The goldsmiths issued convenient paper receipts that could be traded in place of the bulkier coins they represented. These receipts were also used when people who needed coins came to the goldsmiths for loans.

          The mischief began when the goldsmiths noticed that only about 10 to 20 percent of their receipts came back to be redeemed in gold at any one time. They could safely “lend” the gold in their strongboxes at interest several times over, as long as they kept 10 to 20 percent of the value of their outstanding loans in gold to meet the demand. They thus created “paper money” (receipts for loans of gold) worth several times the gold they actually held. They typically issued notes and made loans in amounts that were four to five times their actual supply of gold. At an interest rate of 20 percent, the same gold lent five times over produced a 100 percent return every year, on gold the goldsmiths did not actually own and could not legally lend at all. If they were careful not to overextend this “credit,” the goldsmiths could thus become quite wealthy without producing anything of value themselves. Since only the principal was lent into the money supply, more money was eventually owed back in principal and interest than the townspeople as a whole possessed. They had to continually take out loans of new paper money to cover the shortfall, causing the wealth of the town and eventually of the country to be siphoned into the vaults of the goldsmiths-turned-bankers, while the people fell progressively into their debt.8

          Following this model, in nineteenth century America, private banks issued their own banknotes in sums up to ten times their actual reserves in gold. This was called “fractional reserve” banking, meaning that only a fraction of the total deposits managed by a bank were kept in “reserve” to meet the demands of depositors. But periodic runs on the banks when the customers all got suspicious and demanded their gold at the same time caused banks to go bankrupt and made the system unstable. In 1913, the private banknote system was therefore consolidated into a national banknote system under the Federal Reserve (or “Fed”), a privately-owned corporation given the right to issue Federal Reserve Notes and lend them to the U.S. government. These notes, which were issued by the Fed basically for the cost of printing them, came to form the basis of the national money supply.

          Twenty years later, the country faced massive depression. The money supply shrank, as banks closed their doors and gold fled to Europe. Dollars at that time had to be 40 percent backed by gold, so for every dollar’s worth of gold that left the country, 2.5 dollars in credit money also disappeared. To prevent this alarming deflationary spiral from collapsing the money supply completely, in 1933 President Franklin Roosevelt took the dollar off the gold standard. Today the Federal Reserve still operates on the “fractional reserve” system, but its “reserves” consist of nothing but government bonds (I.O.U.s or debts). The government issues bonds, the Federal Reserve issues Federal Reserve Notes, and they basically swap stacks, leaving the government in debt to a private banking corporation for money the government could have issued itself, debt-free.

          Theft by Inflation

          M3, the broadest measure of the U.S. money supply, shot up from $3.7 trillion in February 1988 to $10.3 trillion 14 years later, when the Fed quit reporting it. Why the Fed quit reporting it in March 2006 is suggested by John Williams in a website called “Shadow Government Statistics” (shadowstats.com), which shows that by the spring of 2007, M3 was growing at the astounding rate of 11.8 percent per year. Best not to publicize such figures too widely! The question posed here, however, is this: where did all this new money come from? The government did not step up its output of coins, and no gold was added to the national money supply, since the government went off the gold standard in 1933. This new money could only have been created privately as “bank credit” advanced as loans.

          The problem with inflating the money supply in this way, of course, is that it inflates prices. More money competing for the same goods drives prices up. The dollar buys less, robbing people of the value of their money. This rampant inflation is usually blamed on the government, which is accused of running the dollar printing presses in order to spend and spend without resorting to the politically unpopular expedient of raising taxes. But as noted earlier, the only money the U.S. government actually issues are coins. In countries in which the central bank has been nationalized, paper money may be issued by the government along with coins, but paper money still composes only a very small percentage of the money supply. In England, where the Bank of England was nationalized after World War II, private banks continue to create 97 percent of the money supply as loans.9

          Price inflation is only one problem with this system of private money creation. Another is that banks create only the principal but not the interest necessary to pay back their loans. Since virtually the entire money supply is created by banks themselves, new money must continually be borrowed into existence just to pay the interest owed to the bankers. A dollar lent at 5 percent interest becomes 2 dollars in 14 years. That means the money supply has to double every 14 years just to cover the interest owed on the money existing at the beginning of this 14 year cycle. The Federal Reserve’s own figures confirm that M3 has doubled or more every 14 years since 1959, when the Fed began reporting it. 10 That means that every 14 years, banks siphon off as much money in interest as there was in the entire economy 14 years earlier. This tribute is paid for lending something the banks never actually had to lend, making it perhaps the greatest scam ever perpetrated, since it now affects the entire global economy. The privatization of money is the underlying cause of poverty, economic slavery, underfunded government, and an oligarchical ruling class that thwarts every attempt to shake it loose from the reins of power.

          This problem can only be set right by reversing the process that created it. Congress needs to take back the Constitutional power to issue the nation’s money. “Fractional reserve” banking needs to be eliminated, limiting banks to lending only pre-existing funds. If the power to create money were returned to the government, the federal debt could be paid off, taxes could be slashed, and needed government programs could be expanded. Contrary to popular belief, paying off the federal debt with new U.S. Notes would not be dangerously inflationary, because government securities are already included in the widest measure of the money supply. The dollars would just replace the bonds, leaving the total unchanged. If the U.S. federal debt had been paid off in fiscal year 2006, the savings to the government from no longer having to pay interest would have been $406 billion, enough to eliminate the $390 billion budget deficit that year with money to spare. The budget could have been met with taxes, without creating money out of nothing either on a government print press or as accounting entry bank loans. However, some money created on a government printing press could actually be good for the economy. It would be good if it were used for the productive purpose of creating new goods and services, rather than for the non-productive purpose of paying interest on loans. When supply (goods and services) goes up along with demand (money), they remain in balance and prices remain stable. New money could be added without creating price inflation up to the point of full employment. In this way Congress could fund much-needed programs, such as the development of alternative energy sources and the expansion of health coverage, while actually reducing taxes.

    • solutrean

      I’ve often pondered that during his time at the FSA Lord Turner must have been a follower of the conventional theory of economics. You know, the money multiplier and all that goes with it. The financial crisis must have come as a terrific wake up call to him. He now seems to have a better perspective of how the system operates. Better late than never I suppose.

    • PowerLaw

      Speedfriend I have just finished reading your comments here and have a question. When you where getting your accountant / investment qualifications where you aware of the idea that banks create money? I mean did you ever hear of it, ponder it or dismiss it out of hand?


  • PJM

    I’ve watched the video and read the text of Lord Turner’s speech.
    He often used the phrase “the fundamental question is”, but he failed to ask, and answer, the fundamental question as to why we should all be so collectively stupid as to even allow private banks to create 97% (and rising) of our money supply as interest-bearing debt to them, when we could perfectly well have a Money Creation Committee create our money supply for us interest-free and debt-free and hand it, as a gift, to the government, which would then be able to reward us with a consequent reduction in overall taxation — which is, more or less, what Positive Money is calling for. What about it, Lord Turner? Are you up for the discussion?

  • Simon

    Fractional reserve banking got a mention on the Jeremy Vine program on BBC Radio 2 this morning. Few people (including politicians) understand how this works, a brief explanation of sorts was given.

  • http://fishwickmains.com Peter Wilson Close

    Speedfriend was, I’m afraid, at the back of the queue when the brains were dished out – it’s not worth the effort trying to educate him enough to have a sensible debate!

  • Telemachus_1

    That PDF does have anywhere near all the slides. Maybe the complex ones. But it would be nice to have them all.

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