The Technical Details (Advanced)

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This section covers all the nitty-gritty details of money creation by banks. We don’t assume any prior knowledge, but some bits might still be hard going if it’s your first time looking at this, so you may prefer our Banking 101 video course to start with.

The key to understanding what money is and how it is created is to forget everything you think you know about money and start again. The problem is that we have preconceived ideas of banks and money that come from our own viewpoint as customers of banks. As children we thought that money was just cash and were taught that a bank (or a piggy bank) is a place to put money to keep it safe. From inside a bank, it all looks quite different!

  • The vast majority of money is not cash, and
  • Banks are not places where you put your money to keep it safe.

In fact the ‘money’ in bank accounts is just an  accounting entry, and banks manage the accounts, meaning that they have the ability to create and destroy money as they make loans and take loan repayments. (The principle is the same for central banks as well as private ones).

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In Summary:

The key points from this section are:

  • The ‘money’ in your bank account does not represent physical cash that you can hold in your hand; it is simply an accounting liability from the bank to you, and only exists as a number in a computer system.
  • We now use these bank liabilities / accounting entries to make payments for over 99% of all transactions (by value). Therefore we could describe bank liabilities, bank credit and bank deposits (which are all the same thing) as being equivalent to money in the modern day.
  • Banks create bank deposits (the money in your account) when they make loans. They add liabilities to the borrower’s account, and simultaneously add an asset (the loan contract) to their balance sheet.
  • The repayable principal of the loan is recorded as an asset. However, the interest payable isn’t recorded as an asset on the balance sheet, but is just recorded as income as and when the interest is paid.
  • The money that banks use to pay each other – central bank reserves – is itself created out of nothing as an accounting entry by the Bank of England.

In summary, what we use as ‘money’ – the numbers in our bank accounts – are simply accounting entries made by banks. These accounting entries make up over 97% of all the money that we use today.

For more details see:


Where Does Money Come From?

A guide to the UK Monetary and Banking System

Written By: Josh Ryan-Collins, Tony Greenham, Richard Werner & Andrew Jackson


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  • Jack

    if banks create money through lending , in zero reserve requirement and if no one withdraws money (they buy with transfer money), can bank with 10 millions create 1 trillion in loans ?

  • bsnews

    Jack, when the reserve requirement is zero, banks can create as much as their customers are prepared to borrow i.e. there are no limits

    • db1

      Total nonsense. In a 0% reserve situation, a bank need not keep any of its deposits in reserve. In other words it can lend 100% of its desposits, but it cannot lend money it does not have. If banks could really create money in the way you think they do, then they would never be able to run out of money would they?

      • bsnews

        Banks can only create money when they make loans. Their books have to balance so the loan becomes their liability (that’s money you can spend) and the debt becomes their asset (that’s the money you must repay)
        They would argue since there is no net change is assets / liabilities no money was created and yet they are able to charge interest on the newly created money.
        Db1, if you don’t think banks create money, where do you think it comes from?

        • db1

          I don’t disagree with your description of the bank’s balance sheet, but it doesn’t really address my response to the original comment.
          I fully understand how banks create (M4) money by extending credit, my problem with this website is that it gives a distinctly misleading impression that banks are actually doing some far more nefarious.
          By banging on about “money now been electronic accounting records” it gives the impression that banks can literally create (M0) money. This focus on the electronic nature of most transactions obscures the point that fundamentally banks operate the same way now as they did 200 years ago. They takes deposits (or shareholder equity or other borrowings) and they lend it to people. It is no different than if I borrow £10 from one friend and lend £5 to another. the money supply has increased by £5.
          As for charging interest…you can argue about the level, but really, who is going to lend you £100k for 25 years without some profit?

          • bsnews

            But most money is electronic – only about 3% is in the form of cash. Only this tiny fraction is created by the government – the rest is created by private banks when they make loans. Call it money; call it credit – what’s the difference? To most people, the distinction is academic – if they take out a loan, they know they can spend it as money.

            Your example makes no sense. If you borrow £10 from one friend (assuming he’s not a bank manager and the £10 is already in existence)
            and then lend £5 to another, the money supply has remained the same – you have £5; your second friend has £5. In no way can the private IOU held by your first friend be considered money – because they are not able to spend this into the real economy.

            I understand this is not easy to grasp – most people don’t even want to understand; the implications are too drastic to even contemplate. So I do appreciate you even engaging in this way. Take comfort that you’re not alone, as John Kenneth Galbraith alluded to when he wrote “The process by which
            banks create money is so simple that the mind is repelled.”

            He also astutely observed that “Faced with the choice between changing one’s mind and proving that there is no need to do so, almost
            everyone gets busy on the proof.”

            I agree about interest, if the money actually existed then there is a reasonable argument to be made about risks of default, the time value of money and opportunity cost to warrant charging interest. But money created as a loan – where is the real risk? Imagine if a counterfeiter had loaned you money but only later did you detect the forgery. Would you feel
            compelled to pay back the money and with interest accrued?

          • db1

            As I said in the sense that credit is money, then banks create money. But in my example I do exactly the same. I have a liability to my friend of £10, in the same way a bank does if he deposited there. My friend still ‘has’ £10 which he can ask for at any time and I need to provide to him. But I have also extended credit to the sum of £5 to my friend. This is increasing the money supply by £5 in exactly the same way as a bank does. Like a bank I have to manage the liquidity risk…what if friend A ask for his £10 back before Friend B repays me? Although the £s in a deposit account may just be electronic bookeeping entries that a bank can ‘create’ , they need to be, at a moments notice transformed into things a bank cannot real notes out of a cash machine. That is why the bank can only lend what it has in reserves…most loans are used instantly to pay for something.

          • bsnews

            I’m just not seeing how a loan of pre-existing money in any way can be described as increasing the money supply. Surely if you friend loans you £10 there is still only £10 existing. Your friend has a claim on the £10 but he doesn’t actually have the money, which is why he would need to ask for it back. You loaning £5 to the second friend is also not increasing the money supply – you now only possess £5. The original £10 has not somehow morphed into £25 however much you (and most of us) may wich it.

            This is not how modern banking works. When banks make loans, new money is created, the money supply increases. When the debt is paid back, the money is destroyed.

            You say that £’s in a deposit account ‘need to be, at a moments notice transformed into things a bank cannot real notes out of a cash machine’. But how can this be? If 97% of the money supply is in electronic form, how could this possibly be redeemed into actual bank of england notes all at the same time? Its impossible. And banks don’t create real notes – real notes and coins are created by the government and sold to banks at face value – the government makes a profit on this known as seigniorage.

            I think you’re confusing the issue with your example – as you agree in the first sentence, banks do create money – there’s no-one on this site who would argue against that. But us mere mortals can not create money – when we do, we are thrown in jail for counterfeiting.

            The real issue, the impossible contract if you will, is the fact that ever increasing debts are needed simply to pay the past debts. Why? Because when banks make loans they only create the principle. But principle + interest is owed back so there is always more debt in the system than there is money.

            This is evident in the reseach recenly published independently by Margrit Kennedy and Michael Hudson who show that between 30 and 40% of the cost of everything we buy goes to interest. Tradesmen, suppliers, wholesalers and retailers all along the chain of production rely on credit to pay their bills. They must pay for labour and materials before they have a product to sell and before the end buyer pays for the product. Each supplier in the chain adds interest to its production costs, which are passed on to the ultimate consumer

          • db1

            Well really this is the nub of it. What you think banks are doing, they actually aren’t. Because fundamentally there is no difference between my informal lending example and what a bank does except for the scale.

            M4 money = coins and notes in circulation + cash on deposit. In my example my friend has £10 ‘on deposit’ with me and I have loaned my other £5. The money supply has increased by £5, so total M4 would be £15 (not £25 as you implied, which indicates you don’t really know as much as you think you do). Obviously I don’t have a banking licence so the BoE don’t capture my informal loan for incorporation into their M4 numbers, but this is EXACTLY what banks do.

            Lets try another thought experiment. I start a new bank. I have no savings customers and therefore no deposits. If what you think is correct I can go out an issue a loan anyway. So I issue a loan for £100, however the customer instantly wants to cash that loan into real pound notes. Where do these come from? The answer in this example is that I cannot provide them because I have zero reserves and I therefore go bust.

            Of course the whole banking business model relies on the fact that not everyone wants to withdraw their money at once. If they did they would go bust because they HAVE LENT THAT MONEY TO SOMEONE ELSE…i.e. THEY HAVEN’T CREATED NEW MONEY…JUST EXTENDED CREDIT!!!!!

          • db1

            Another question for you.
            The fact that everything is electronic makes it easier for people to misunderstand what banks do. Lets go back to the age of gold coins, assuming that banks aren’t actually dishonest (a stretch i know) and they didn’t mint their own coins…do you think the banking business model is different now to then? (hint: it isn’t).

          • bsnews

            At one level it could be argued that our difference in the way we believe banks operate is merely semantics. You say banks extend credit – i say when doing this, they create new money. I’m not saying they create cash or coin but they create the means to go buy something with a credit or debit card, cheque book or inter-bank transfer. So I’m using the terms credit and money interchangeably here. I can buy stuff with a credit card, with an overdraft, with savings or with hard cash – that the retailer accepts all these forms of money for the purchase of goods and services, they are all equal.

            Your thought experiment describes a bank run (like the one Northern Rock experienced) but if instead your loan customer wanted to write a cheque on their loan account that would be fine. The receiver of the cheque might even open an account with your bank and deposit their £100 with you. You still have no physical cash but you now have assets of £200

            M4 money (at least according to the FT) includes coins and notes in circulation and other money equivalents that are easily convertible into cash plus short-term time deposits in banks and 24-hour money market funds plus longer-term time deposits and money market funds with more than 24-hour maturity.

            In the age of gold coin, the banks were simply goldsmiths, renting out space in their vaults for people to store their gold. They quickly realised that people were happy to trade their paper receipts rather than withdrawing their physical gold every time they needed to buy something. This convenience of paper receipts meant that when the goldsmith, now more banker, made loans, people would take the loan as a paper receipt rather than physical gold. The sleight of hand that the bankers realised was they they could loan out more receipts than they had actual gold to back them and in normal circumstances, no-one would be the wiser. So in a sense you’re right – the banking business model is the same. One subtle difference is the reserve requirement (which back in the days of the goldsmiths was self-imposed at about 10%i) is much lower these days.

            The fundamental point I would like to convey though is that it really doesn’t matter what backs our money, it’s who controls its quantity that;s important. Why do we allow unelected, unaccountable private bankers to decide how much money circulates, who gets to use it and at what cost? The answer obviously has serious ramifications for any democracy.

          • db1

            “Your thought experiment describes a bank run (like the one Northern Rock experienced) but if instead your loan customer wanted to write a cheque on their loan account that would be fine”
            Until the recipient tries to cash it! That’s the point. Whilst it is within one bank, it is in theory just ones and noughts, but as soon as it leaves the bank it needs to become real money! Since the majoirty of loans leave the bank immediately (e.g. a mortgage) then banks can only lend money they have in reserve. So going bank to the original point, banks cannot lend ‘trillions’ based on a deposit of a million. They can only lend what they have in their reserves. These reserves need to be managed carefully to prevent the bank from having a liquidity crunch.
            So if you truly understand M4 as really just being a measure of credit and think this is ‘creating money’, that’s fine…many economists would agree. However it is really just another way of describing how everyone thinks banks work anyway. This website gives the impression that banks are ‘actually’ creating (M0) money. Which they aren’t.

          • bsnews

            Finally I see what you’re saying. You must know that all the banks form a closed loop – a loan from one becomes a deposit in another – but the transfer still happens with ‘ones and noughts’. The crux of the matter is, as you point out, to do with reserves. Banks create money when they make loans. If at the end of the day, when all the inter-bank transfers have occured, the bank is short of reserves to support the loans it has made, it needs to borrow money short term which is does from the money markets. This fact in no way dilutes the argument that bank loans are new money created when the borrower signs the loan agreement. The reserves are only needed to comply with Basel accords and there any many ingenious schemes that circumvent the need to have reserves before loans are made. For example, some loans have a specific fee attached which is subtracted from the principle the moment the loan is made thus satisfying reserve requiments using newly created money – so cunning these bankers!!

            From Ellen Brown ‘Web of Debt':

            Reserve requirements . . . are computed as percentages of deposits that banks must hold as vault cash or on deposit at a Federal Reserve Bank. . . . As of December 2006, the reserve requirement was 10% on transaction deposits, and there were zero reserves required for time deposits. . . . If the reserve
            requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank
            receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+
            $72.90+ . . . =$1,000).

            It sounds reasonable enough, but let’s have a closer look. First, some definitions: a time deposit is a bank deposit that cannot be with-
            drawn before a date specified at the time of deposit. Transaction de-posit is a term used by the Federal Reserve for “checkable” deposits
            (deposits on which checks can be drawn) and other accounts that can be used directly as cash without withdrawal limits or restrictions.
            Transaction deposits are also called demand deposits they can be withdrawn on demand at any time without notice. All checking accounts
            are demand deposits. Some savings accounts require funds to be kept on deposit for a minimum length of time, but most savings accounts also permit unlimited access to funds.
            As long as enough money is kept in “reserve” to satisfy depositors who come for their money,
            “transaction deposits” can be lent many times over. The 90 percent the bank lends is redeposited, and 90 percent of that is relent, in a process that repeats about 20 times, until the $100 becomes $1,000. But wait! These funds belong to the depositors and must remain
            available at all times for their own use. How can the money be available to the depositor and lent out at the same time? Obviously, it can’t.The money is basically counterfeited in the form of loans.

          • db1

            Thanks, I think we are converging in our understanding. You description above of how the money supply is expanded as the same (M0) money is lent and relent is totally correct. As you say, each one of the depositors can at any time withdraw their money. You therefore say that the loans are ‘counterfeit’, but as long as the bank can pay their depositors on demand then there is no problem. The point is that banks perform ‘maturity transformation’, they turn short term desposits into (usually) longer term loans. This is inherently risky, hence the need to charge interest and the need to have a reserve percentage in the first place. Essentially though I think we agree on how banks work.

            My big problem with this website, is that it implies that banks somehow work differently to how most people think they do. I disagree with this, as I think most people do understand that their money is leant out to others, and that it is up to the bank to manage their reserve liquidity to prevent a bank run. At least it is something I have understood since I was a boy!

          • bsnews

            But most people think bank loans are taken directly out of deposits – they have no notion of the fractional reserve aspect of modern banking, perhaps because they’re never taught this and perhaps because the current system is so foreign to what we would consider the best way of issuing

          • db1

            “But most people think bank loans are taken directly out of deposits – they have no notion of the fractional reserve aspect of modern banking”
            But fractional reserve banking is in no way contrary to the point of view of that loans come from deposits, in fact the two are inextricbly linked! In reality they may also come from equity or short term borrowing, but that doesn’t change the fact that banks can only lend a fraction of their reserves. Hence the name. And despite the obvious surprise this has been for you, I believe most people do understand, at least at a high level how this works.
            By the way, coming back to the original point, do you now retract the following statement “when the reserve requirement is zero, banks can create as much as their customers are prepared to borrow i.e. there are no limits”. Or at least modify it to say, banks can lend as much as they have in their reserves, because clearly if they leant more than they had in reserve they would run out of cash./

          • bsnews

            I too thought we were converging but apparently not.

            You seem to be still thinking that loans come from deposits and I would argue that no deposits are needed for a bank to make a loan. Have you ever tried to withdraw your savings only to be told the bank has lent your
            money to another customer?

            Consider a bank with £100 million in demand deposits and £10 million in reserves (at the Bank of England) – just enough reserves to meet the reserve ratio of 10 percent. The bank plans to issue new mortgage loans totaling
            £5 million for a new housing development.

            Can it do so before it acquires more reserves? Yes it can. Why? Because the bank is allowed to enter the newly-created loan money as a
            deposit on its books. The bank’s assets and liabilities increase by the same amount, leaving its reserve requirement unaffected. When the borrower spends the money, it is transferred out of the bank into other banks, so the
            originating bank has to come up with new money to meet its reserve requirement;
            but it can do this by borrowing the money from the BoE or some other source in the money market. Meanwhile, the banks that got the £5 million now have new deposits against which they too can make new loans. Since they also need to
            keep only 10 percent in reserve to back these new deposits, they can lend out £4,500,000,
            increasing the money supply by that amount; and so the process continues.

            So let’s review: the bank lends money it doesn’t have, and
            this loan of new money becomes a “deposit,” balancing its books. (This is called
            “double-entry bookkeeping.”) When the borrower spends the money, the bank
            brings its reserves back up to 10 percent by borrowing from the central bank or
            other sources. As for the central bank itself, it can’t run out of reserves because
            that is what “open market operations” are all about. Like Santa Claus, the Bank
            of England can’t run out of reserves because it makes the reserves.

          • GWHodgson

            This reinforces how horrendously difficult it is to escape from the snares of orthodox thinking, since you say that “they also need to keep only 10 percent in reserve” which I’m sure is not what you intended.

            Can I introduce a new perspective which may (or not) break the logjam. We’re all on common ground when we say that banks extend credit when they accept a borrower’s undertaking to make future payments constituting principal plus interest. db1 says that is exactly what he does when he lends a friend £5. And that is true. But the borrower also extends credit to the bank in accepting its undertaking to make payments on behalf of the borrower up to the extent of the advance – i.e., in accepting a credit to his account rather than cash.

            I’ve said elsewhere on this site that if the borrower insisted on being paid in cash then no new money would be created, but that is statistically incorrect because the banks’ holdings of cash are not included in statistical measures of the money supply, so under the current system, if the bank paid its loans out in cash, even though it would acquire no additional deposit liabilities, the cash would appear as if from nowhere as new money.

            Nevertheless, the key difference between db1’s extending credit to his friend by transferring to him possession of £5 and a bank’s agreement to extend a £250,000 mortgage to a housebuyer, is that in the latter case, both housebuyer and houseseller extend £250,000 credit to their banks by leaving it to the the banks to arrange payment between themselves and, in the houseseller’s case, to arrange any further payments that the seller may wish to commission. That, I have come to believe, is the essential step whereby bank lending creates money. And it risks the entire economy on the fragile state of bank liquidity.

          • bsnews

            db1 does not extend credit when he gives his friend £5 – what he does is exchange his £5 for a private IOU – this is not extending credit in the way a bank extends credit – no new money is created when db1 lends his friend money. He no longer has £5. He may think he has a claim on the £5 his friend now possesses but this is not the same as having money. He could try and spend his private IOU but there is no legal reason anyone would have to accept it.

            db1 – you’re claiming that banks do create credit but then say banks don’t create money from thin air. But credit is money in the sense you can go buy stuff with it. Most of the experts agree that banks create money. I understand its counter-intuitive but that’s simply the way it is.

            If banks don’t create money, then where do you think it comes from?

            Your explaination of the 3%/97% is incorrect too – you seem to be stating that this is the result of some series of ever decreasing loans. But if the government created more cash relative to privatly created debt-based money then the ration would change. In the 1960s there was relatively more cash in the economy – approx 30-40%

          • Henry B


            ”if I borrow £10 from one friend and lend £5 to another. the money supply has increased by £5”

            No, in this example the money supply remains the same no matter who you borrow from or lend to. Unless, that is, you have created this money yourself.

            You seem very confused about banking and money.

            Legal tender cash is the only medium that is issued free of interest and is always accepted in payment of debts and taxes when other forms of money can be declined.

            There is about £50b cash in circulation and all other forms of money have been created by banks as debt.

            If you continue to claim that banks only lend 1:1 against their cash deposits then please explain how £1.4 trillion (the sum of UK personal debt) has been loaned from a total of £50 billion cash.

            Tell me; who has created the extra £1.35 trillion if not the banks who profit by drawing interest from this excess?

        • db1

          Actually what you said is slightly incorrect,
          A loan to me is indeed my liability, and the banks asset. However my liability is sits on my balance sheet and not the banks. The relevant point here is that the banks assets (loans made and cash) must match their liabilities (deposits and share holder equity). The loan merely turns their cash asset into a loan asset, however they must have assets in the first place.

          • bsnews

            missing a trick known as double entry book keeping. When the bank extends credit, they enter the amount of the loan on their asset column and their liability column – the debt you owe is their asset and the money in your
            account (which you can draw on at any time) is their liability.

            You could perform the same exercise on your own balance sheet – but in reverse. The money in your account is your asset but the load agreement (your promise to repay) is
            your liability.

            If you want to maintain that banks don’t create money, then where do you suggest all the
            newly created money comes from? The UK
            took all previous history of the pound up to the end of 2002 to create the first £1 trillion of money supply (termed M4 in the UK) and only 6.5 years to 2009 to double it. These growth rates are truly staggering and acutely frightening.

          • db1

            As I said, they do create M4 – otherwise knwon as credit . This website gives (intentionally or otherwise) the impression that they are actually issuing loans without having reserves ‘literally creating money out of thin air’. As stated above if banks really did this they would have a problem, since most loans instantly leave the bank to pay for houses, come out of ATMs etc.

          • bsnews

            M4 is the total of the money stock – they don’t create it all – some is created by government

          • bsnews

            Another interesting fact is that when you deposit money in a bank, you are,
            in fact, loaning it to the bank. Crucially, the money is no longer yours as
            depositors in Cyprus
            discovered recently.

            The ‘bail-in’ as it’s known has been codified in a policy document drafted
            jointly by the Bank of England and FDIC in the US.

            Effectively this means if a bank is insolvent; the depositors are treated
            the same way as any other unsecured creditors. Thanks to the Franks Dodd laws
            in the US, in the almost certain case that no government bailouts will be
            allowed following the next big crash, and those holding derivative claims will
            be paid first, the normal depositors are likely to be forced to take a huge
            haircut on their savings.

          • Bradley Bergh

            db1 I think you are getting confused between “assets matching liabilities” and the types of assets and liabilities being created when banks loan money. Both the asset and the liability are created as entries in the books of the bank when the loan is granted. The entries in the books of the bank are Debit: Asset [Customer’s Loan a/c] – Credit: Liability [Customer’s Deposit a/c]. The bank has not switched one asset for another by providing the loan. Both the assets and liabilities of the bank have increased by the same amount. It has created both the asset and the liability at the stroke of a pen. However, there is now new “electronic money” in circulation which can be used to “pay” for things electronically which was not taken from existing electronic money already in circulation.

      • We Need Banking Reform

        Banks don’t lend a customers deposits, this is the whole point. They create money (digits in an electronic account) and lend it out. If they could only lend the deposits they had in the bank then you could not spend the money in your account because it would be lent to someone else in the form of a loan.

        A bank would run out of money if all the depositors tried to withdraw cash (as it does not exist as cash). Think about it, when you got your pay packet was it in cash? When you used your debit card to buy food was it in cash? No, it was digits in your bank account.

        The bank would also run out of money if it is the only bank creating money and no other bank agrees to lend it money. Watch the Banking 101 videos and you will get to the part about settlement where the bank’s reserves at the Bank of England are used to settle all the payment made between banks on any particular day. Only the settlement amount is needed to cover payments, in other words, if I give you £100 and you give me £90, at the end of the day you only need to come up with £10 to pay me back. If I gave you £1000 and you gave me £990 then you still only need £10 to pay me back. This is what happens with all the payments.

        • db1

          Your post is confused. Banks don’t lend out deposits because then people wouldn’t be able to spend their money. But banks would also go bust if people tried to withdraw their money because it doesn’t exist as cash? Your descriptions makes it sound like banks destroy money rather than create it.
          I understand about the netting of payments thanks…interesting but irrelevant.
          Please explain to me how, if banks create money as you say and don’t take this from reserves, then it would be possible for a bank to go bust from bad loans. You can’t because it isn’t.

          • PJM

            db1, your contributions are valued because they stimulate us to think more intensely so that we may better counter your arguments. However, since you made these arguments, the Bank of England itself has written and published a paper explaining how banks work. It is entitled “Money creation in the modern economy” and was published in the BoE’s Quarterly Bulletin for Q1 2014. Here is the URL for it:


            Here is a short excerpt:
            • This article explains how the majority of money in the modern economy is created by commercial banks making loans.
            • Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.

      • We need banking reform

        You said the bank cannot lend money it does not have, considering that only 3% of money is actual physical bank notes and coins where did the other 97% come from?

        • db1

          Do you actually understand what “3%/97%” graph shows? M4 money = coins and notes in circulation + desposits (in simple terms). The 97% actually represents money held in savings accounts, as gilts etc etc. That same money has been leant out to others so in a sense the same money is being double/tripple counted. It is not new M0 money. M4 is a measure of credit, banks are merely matching those with excess funds with those in need of them.

          • GWHodgson

            The 97% represents the liabilities banks have entered into to make payments to, or on behalf of, their counterparties: their depositors and their monetary creditors. Gilts are not liabilities of banks, commercial or otherwise. However, let’s be brutally honest about this. M4 is the best guess of economists (who know virtually nothing about accountancy or double-entry bookkeeping) as to what constitutes the money stock so that their treasured identity that money stock times velocity equals prices times transactions can be expressed in figures. But that aside, it really is depressingly the case that if you know how double-entry bookkeeping works, you just know that bank lending creates deposits.

          • db1

            “if you know how double-entry bookkeeping works, you just know that bank lending creates deposits”.
            This is confused. Bookeeping is a system for recording financial transactions, double-entry booking the standard used today. How does the use of this system imply that lending creates deposits? Surely a bank can issue a loan (recorded as an asset) balanced by a corresponding increase in Equity? I think you are confusing a system that represents reality with reality itself.

          • bsnews

            I thought we’d got beyond the ‘new loans come from old deposits’ stumbling block.

            Consider this example: Bank A issues a loan for £100, which becomes a deposit, which becomes a check, which is written to a customer at Bank B, who deposits it in Bank B. Bank B, meanwhile, issues a loan for £100 to another customer, which becomes a deposit, which becomes a check, which is written to a customer who deposits it in Bank A. The two checks net out, so there is no need for either bank to borrow reserves to cover the checks at the end of the day. But two new deposits of £100 each have been created, increasing the money supply by £200; and two depositors each have £100 more to spend into the economy.

          • db1

            Yes but the point your missing is where does the original £100 pounds that Bank A lends to “customer A” come from? Bank has no idea where that money will go once the customer withdraws it, so it takes it from its reserves. The fact that it may later end up being deposited back into Bank A is irrelevant. Keep it simple…where does the original £100 come from ??

          • bsnews

            The first loan of £100 is an advance of credit – the bank need not know where it’s going to be spent – for all they know, the borrower could just leave it in his account. The point is this money is created when the borrower signed the loan agreement – it is additional money.

            If banks could not create money in this way, the total money stock, M4 would not be able to increase in the way it has.

        • db1

          Let me give an example that helps explain how 97%/3% graph comes about.

          Lets imagine a new country with no money. The central bank mints £100 pounds, the only money in this country and gives it to me. M0 = £100 and M4 also equals £100.

          I deposit this money with bank. I have no money, but the bank has an obligation to pay me £100 in cash whenever I ask for it. M0 still equals £100 and M4 still also equals £100.

          Now, the bank lends someone £90, leaving £10 in reserve. They still have a liability of £100 to me..but that is their risk to manage. At this point M0 still equals £100, but M4 now equals £190 (my £100 on deposit + £90 in cash).

          The person then desposits £90 in another bank, which lends £80 pounds of it and keeps £10 in reserve. M0 still equals £100 but M4 now equals £270. This would give a ratio of 33% cash (M0 money) to 67% M4. Extrapolate this many times and you get to the 97/3 ratio. Note that at no time in this example does anything happen other than a bank lending a customers deposit.

          • bsnews

            Now i really know that you don’t understand this at all. The 97%/3% is not some mathematical function, a series of transactions resulting in a definitive number. The 3% is simply the proportion of the money supply in the form of cash. The 97% is in electronic form.
            In the 1960’s there was much less electronic or cheque book money and so the proportion of cash was much higher.
            Of course these days we use less and less cash – most companies pay their staff via electonic transfer, and most purchases don’t involve cash but debit/credit card electronic money.

          • db1

            Oh dear, I’m afraid it is you who don’t understand. From this very website “More than 97% of all the money that exists is created by banks when they make loans”, in other words only 3% of the M4 measure is central bank money. My post above was an example to show how the M4 measure can rise and rise given a static M0 figure. The exact ratio on 97/3 is just what we have in this country at present and depends on amongst many other things the reserve ratio. If you look up Fractional Reserve on Wikipedia you will see a similar example but in a tbable so easier to understand.

          • bsnews

            How does it depend on the reserve requirement? This I have to see!

            Actually most countries have similar ratios. In the US, the government only creates coins – only 1/1000th of the total money stock. The notes are created by a private bank, known as the Federal Reserve Bank.

          • bsnews

            Why would the bank use your actual deposit (or 90% of it) to make a subsequent loan? If they did this, the money stock has not increased – there is £10 in the bank vault and £90 in the hands of the banks first customer. You have a claim to £100 but this is only a claim -its not money.

          • Henry B

            I think it is more accurate to say ”a bank lending a customers deposit again and again, thereby creating obligations which the bank cannot meet with cash if ever called on to do so by demands that exceed the £100 of cash held on deposit.

            Please don’t say they could draw it from other cash deposits.

            The fact remains that with a debt to money ratio of 97:3, there are 32.3 claims against each £1 of cash available and a bank can only remain solvent by converting those claims to something other than cash and persuading its customers to accept that substitute in place of cash.

          • Flawless Bank

            Fractional or no-reserve banking is perfectly suited for our future’s fast pace economy and perfectly rational from the macro-economic view point; and competing banking entities (lenders) vs. borrower density set the interest rate (banks’ profit margins). Take a look at Nirvanic Movement by Global Stock eXchange to see how Fractional reserve banking may enable Flawless Bank to accept gold bullion reserves and pay interest rates upward of 25% per year, While for a loan with a 5% reserve setting the bank will be happy to lend at 1.5% interest levied against borrowers. Further more zero reserve banking can enable the virtuous act of usury free (interest free) lending. I apologize for not having updated the sites in a long time, but I have been very sick as well as very busy, so there has been little time for that. I am not however sure if all banks are and will be destroying all repaid debts’ principal amounts, as loans are being repaid. Not doing so would be a huge rip off to say the least.

    • db1

      As discussed extensively below, a bank can only lend what it has in reserves (deposits + shareholder equity + short term borrowing). This is because almost all loans leave the bank immediately to pay for things e.g. houses etc and at that point they have to become ‘real’ money. So there are limits..the banks reserve.

  • db1

    Quote from above “In actual fact the ‘money’ in bank accounts is merely bookkeeping entries, and banks are the holders of the books. Those who hold the books may alter them, and in doing so create and destroy money.”
    Yes but that would be called fraud. You seem to be implying that this is implicit in the banking business model which is isn’t

    • GWHodgson

      It would only be fraud if the changes were unauthorised. The point being made is that it is the operation of the banking system that creates and destroys money.

      • bsnews

        There is no law which I’m aware of allowing banks to create money. Who authorises this exactly?

        • GWHodgson

          Two thousand years of judges and legislators and regulators. Every legal challenge that banking is fraudulent has been thrown out. The record is traced case by painful case in chapter 3 of Jesus Huerto de Soto’s “Money, Bank Credit and Economic Cycles” available at,%20Bank%20Credit,%20and%20Economic%20Cycles_Vol_4.pdf
          He says the judgements are mistaken and therefore not binding, but what is legal is what judges and legislators say is legal.

          • bsnews

            Not every legal challenge…as Ellen Brown describes:

            First National Bank of Montgomery vs. Daly was a courtroom drama worthy of a movie
            script. Defendant 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 the money it lent “out of thin air,” 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.

          • GWHodgson

            According to Wikipedia:

            “The immediate effect of the decision was that Daly did not have to repay the mortgage or relinquish the property. However, the bank appealed the next day, and the decision was ultimately nullified on the grounds that a Justice of the Peace did not have the power to make such a ruling.”

          • bsnews

            Not true GW – the decision was never overruled. Yes the bank appealed the next day but their appeal was rejected on the grounds that they (the bank) attempted to pay for the appeal (a very small administrative sum) using Federal Reserve notes – the judge had just ruled, and the bank manager had admitted on the stand and under oath, that such money was created by the Federal Reserve out of thin air. Had the bank paid the cost of the appeal in quarters, the judge would have had no choice but to hear it.

            If a Justice of the Peace, an autonomous court dating back to frontier days, did not have the powers to make such a ruling then why did the banks lawyers not mention that before the trial began? Why did they allow the bank’s manager to take the stand and admit 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.

            These courts have been largely phased out now, probably due to the Daly case. Justice
            Mahoney went so far as to threaten to prosecute and expose the bank. He died less than six months after the Daly trial, in a mysterious accident that appeared to involve poisoning. And therein lies the lesson to any future judge who make come to the same conclusion – as Daly wrote following the verdict, every American owes it to himself to study this decision very carefully . . . for upon it hangs the question of freedom or slavery.

            You seem more than happy to continue to be a slave and to pay the cost of your own slavery. Hope that’s working out well for you.

          • db1

            Ok, so in this story, what did the original owner or builder of the house receive in payment for it? I am assuming that received real money for it it which must have presumably have come from the mortgage? Unless thery were happy with a photocpy of the “accounting entry” then some real money must come from somewhere. Answer that one…if you can.

  • Nikola

    db1 is right. Not all banks create money. Only central banks do.

  • Mmadan

    double entry accounting is fair, if every asset the bank creates has a liability, how does it create money, the excess money it takes in as interest is existing money and is in hard cash form, not created by the bank. when you take out a loan from a bank the bank creates an asset (the money you have to repay not including interest) and a liability (the money you took out), to not confuse yourself dont think of it as electronic money, as you can take it out in hard cash.

    so to recap, the bank gives you hard cash and you pay back hard cash, no money created eletronically. they extra money you pay the bank is money generated by the banks activity, but not created by the bank.

    I’m not an economist, i’m an accountant and auditor, not a big fan of banks, but this is ridiculous.

    if somebody disagres with the above, please study double entry bookkeeping, if you still disagree, ill give you the capital and open up a bank, see if you can make money.

    • bsnews

      So if banks are not creating money, why is it that total debt and the money supply rise at roughly the same rate? Who is creating the money if not banks? If government created money (as they should) there would be nowhere near as much debt in the economy.

      • Mmadan

        my friend,

        first, the basic accounting rule
        assets – liability = equity (worth).

        the theory on this site is that banks (all banks commercial and central) create money and that they do through lending in a way that is fraud but they rigged the rules so they can do it all over. my argument above clarifies that banks dont create money, and there is no fraud in the process of lending money, its all accounting ok, no fraud.

        total debt increasing at the same rate as the money supply does not prove that banks (commercial) create money.

        just because because someone is dead, dosent mean he died from the big mac he ate.

        Banks do “make” money through profit from interest, they dont create it, they earn it.

        think about this, if i have a sandwich shop although i am not allowed by law to loan money, i could, and i can record it in my books just as a bank records it, so am i creating money?

        i just cant believe that a whole site is dedicated to this, i mean, i hate banks, i dont borrow or deposit my money for interest with banks, and social equality and the rest of the stuff is all good, but you cant put up a theory like its fact, when any decent accountant can tell you it makes no sense.

        this is counter productive to the cause, people should look at the real reasons that banks “make” (earn) so much money, and not think that they simply create it.
        and focus on the other reasons that can be proved, funds, corporations, politics, war, slavery (old and new).

        • bsnews


          Thank you for your response. Before getting into the technicalities of money creation, would you mind answering these non-techie

          If it transpires that banks do in fact create money, would you be outraged? Would you feel that this power should be in the hands of
          an elected and accountable body or would you be happy for us to continue to rent our money supply?

          If as you say banks don’t create money who do you think does?

          I’m not sure your death via big mac (or not) is
          equivalent to my observation that money supply increases with levels of overall indebtedness.

          In your fictional sandwich shop you would be presumably lending money that you already possess. There is no law preventing this so the
          operation would be perfectly lawful. You could sell your sandwiches on credit – allowing your customers to settle their bill at the end of the month. So the answer is no – you’re not creating money because if you lend money, you cannot spend that money yourself until the borrower repays it. This is not how banks
          lend – bank deposits do not decrease when they make loans – the (instant access
          account) saver and the borrower can both withdraw their funds at any time.

          The booklet Mondern Money Mechanics explains in detail how banks create additional money but this from Michael Rowbotham Grip of Death is much clearer:

          If a bank makes a loan, nothing is lent, for the simple reason that there is nothing of substance to lend. The bank makes what it terms a ‘loan’ against the money deposited with it at that time. This is easily done. The bank simply has to agree that the person may take out a loan of, say £10,000. The person can
          then spend £10,000 and hey presto! £10,000 of new number-money has been created. No one with a bank account is sent a letter telling them that the money in their account is ‘temporarily unavailable, because it has been lent to someone else’. None of the original accounts in the bank has been touched,
          reduced or affected. Nobody else’s spending power has been reduced, but £10,000 of new number-money enters the economy at the stroke of a bank manager’s pen, but £10,000 of debt has also been created.

          Therefore, whoever takes out the loan will then make purchases and payments to other people, who will pay that new money into their bank accounts. The result:more bank deposits! As soon as the loan in the example above is spent, £10,000 will find its way into the bank account of a car dealer or DIY store; £10,000
          of apparently new money. This money which has supposedly been ‘loaned’ – but the banking system doesn’t distinguish this fact. It simply registers a new deposit, and regards it as new money. The total deposits in the banking system have therefore increased by £10,000. This is the ‘boomerang effect’ of a bank loan by which a ‘loan’ rapidly creates an equivalent amount of new bank deposits in the banking system. This effect was neatly summarised in a statement by Graham Towers, former Governor of the Central Bank of Canada; “Each and every time a bank makes a loan, new bank credit is created – new deposits – band new money”.

          “I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people.” Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders in 1924

          • Mmadan

            Matt joy, i am not an economist, nor i am familiar with the monetary policies of different countries. my argument goes against the statement that “banks (commercial banks) create money from thin air”, where money comes from is not for me to answer.

            as for bsnews

            Michael Rowbotham point is the weakness in fractional reserve banking so is modern money mechanics, which allows the bank to grow fast (with great risk) as it grows on debt and not just the capital it has, in a lot of countries this is limited to a certain ratio to prevent the faliure of banks and people losing their deposits.

            which means that as every time they lend they have a liability (the money they lent you) a bank might collapse if everybody alot of people (depending on their ratio) withdrew their funds at the same time, as the assets they have to satisfy this liability is not liquid, apart from the statutory reserve that they are legally forced to keep (differs from country to country). their assets are mostly monies that the people have to pay the bank back over certain years.

            any business is able to operate the same way a bank does in the area of lending money, banks dont create (out of thin air) money by lending, and if this is the foundation of your theory then you have to demonstrate clearly how banks create money out of thin air by lending.

            Lets take the sandwich shop, i can lend just like a bank, although illegal as i dont have that within my activities, but loan sharks do illegally lend money, and they dont create money out of thin air, they take money from the customers.

            i have 500$ in the bank and i have no liabilities, my equity is 500$.

            i loan john 300$, that he dosent need right away, i have created an asset because john owes me money now and a liability that i have to pay john 300$

            now it seems that i have 300$ due from john while still keeping my 500$, but the liability i have on my books can only be discharged by paying john his 300$

            so i end up with 800$ of assets, the 500 i have in cash and the 300$ that john owes me,

            however i still owe john 300$

            leaving my equity (assets- liability)at 800-300=500$, i am back where i started.

            my net assets are the same. i have not created money.

            and i can keep doing that and lend 1m$ to different people to which i will create an asset of 1m$ and liability of 1m$, m assets increased but my liabilities also increased, leaving me where i started.

            my equity will only increase by taking an interest, which is earning money not creating.

            its not an accounting trick, banks create huge assets and huge liabilities, the net assets is what matters, the net assets are the banks worth.

            as i mentioned earlier i am not an economist, but i am an accountant, and i think it is irresponsible to advocate the following statements. if you are not familiar with basic bookeeping and able to understand it fully.

            “Banks create money out of thin air”

            “its an accounting trick”

            “its double entry bookkeeping that allows banks to retain the money and also create an asset creating money ”
            Accounting is like math 1+1=2 , get with some good accountants run some scenarios and prove what you are saying by basic bookkeeping.

            and to repeat again, i dont disagree with all that you say.

            and following is an analysis of the example you mentioned.

            1)person takes out loan and spends it

            bank creates an asset of 100$ and liability for the person who took the loan as he can withdraw 100$ (no creation of money of money), the 100$ in the name of the person is not money (its not cash), its number-money as you have explained, but to settle it the bank would have to lose an asset, which is hard cash equivalent to the amount (no creation of money).

            so debt has been created but so is an asset, net effect is 0.

          • Henry B

            You have overlooked two important factors:

            1: The principle the banks create and lend is extinguished when it’s repaid.


            2: The banks issue only the principle of the loan not the interest. The interest is not extinguished it is retained and becomes the banks profit.

          • Linda

            Here’s one example of a bank creating money, one which doesn’t require the acquisition of reserves later (reserves are often needed in order to settle payments, but not always):
            Say Bank A is a fairly large bank – and there are, of course, a lot of fairly large banks in most modern banking systems.
            And lets say that a bank customer, Robert, takes out a loan with Bank A. That, then creates an asset for Bank A (the loan agreement) and a liability for Bank A (the amount owed to Robert).
            Nothing new in the discussion so far.
            Then, let’s say that Robert spends the amount owed to him at a bike shop via his debit card (or a check from Bank A).
            And let’s say that the bike shop owner also has an account at Bank A.
            In this case, the settlement of accounts doesn’t require Bank A to acquire reserves to cover the payment. All that needs to happen is for the bank to debit Robert’s account and credit the bike shop owner’s account.
            Bank A’s balance sheet is still in balance. The existing bank loan as an asset suffices.
            And nothing but bank created credit is needed in the exchange, not even “after the fact.”
            That’s why transfers among customers at the same bank occur immediately – it’s simply an automatic number change between two liability entries on the same balance sheet.
            It’s not that funds from customers making deposits aren’t used – they are actually in high demand at banks because they cost them the least interest.
            It’s just that there are other alternatives, such as borrowing from other banks and from the CB (created money a little further up the chain, but initiated via the loan/deposit that was initially created that might eventually need the backing of reserves), so that if a bank is shy some reserves at the time when a customer would like a loan, a bank is not dependent upon having reserves available at the time of creating the loan/deposit. Reserves from depositors, from other banks, from the CB can always be acquired after the fact.
            Further, as described above, sometimes payments are made between a Bank’s customers, in which case, liquid assets aren’t needed to back a payment – just a corresponding change in liabilities.
            I don’t know of a loan shark or a sandwich shop owner who can manage that.

          • Calum

            You literally have no idea.

          • Alessio Ragnoli

            I would also ask you one thing as I’m not confident in matter.
            As the net worth of the bank doesn’t change (until interests are gained), and as they only have to keep the 10% in reserves of the amount lent, don’t you think that they effectively create money loaning something they don’t own? If the equity is 100$, a bank has the possibility to loan up to 1000$ (simply writing virtual numbers) giving a leverage x10, thus creating 900$…(sorry for my english). Yes, equity is stil 1100-1000=100$ but they have the power to introduce (or not) money into real economy only aiming to short term goals.

          • therealme

            Intrest is not earned money. If I checked two boxes, one labeled asset and one labeled liability, and charged you 2000$ I didn’t earn anything.

          • Henry B


            “I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people.” Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders in 1924”

            I’m afraid this quote, which has been doing the rounds for decades, is far from accurate.
            McKenna’s speech was given on 24 Jan 1924 and can be examined online via the Times archive and while it’s correct to say that McKenna did say that banks created and destroyed money as bookkeeping entries he did not use the words given above except for these:

            ”banks can and do create money”.

            Which I suppose is all that really matters and all that anyone needs to know, anyway.

          • bsnews

            Actually its not really all that matters as there are some serious implications that arise from this important fact.

            Banks only create the principle but the borrower is expected to pay princiuple plus interest. So where is the interest to come from bearing in mind that most (97%) of money is created as a debt in this way?

            The answer is that the interest can only come from more debt – we are, collectively as individuals, households, businesses and government, required to go further and further into debt simply to repay existing loans. I hope its clear by now that the debt problem cannot be solved in the current system – it will just get bigger and bigger until we can no longer afford to pay even the interest on the total debt mountain.

            The other less obvious implication is the futility nay stupidity of the government’s austerity measures.

            If as George Osborne says we should all endeavour to reduce the debt burden, they what we are being told to do and what the government is aiming to do is to
            reduce the money supply – this at a time when there is patently not enough money to go around in the first place.

            Its hard to believe I know because we tend to think of national economies as household economies. In fact politicians often deliberately compare the two which is extremely dangerous and misleading.

            If a household reduces its debt, or pays it off completely then yes there is more disposable income. But if an entire economy pays of all its debts, there will be no money left. Why? Well as discussed at length above, debt is created in parallel with money and you cannot have one without the other. No debt equals no money so I think we can agree that this age of austerity is a deliberate, almost global policy resulting in a race to the bottom in terms of living standards, workers rights and social welfare.

            Compounding this state of despair is the recent bail-in template presented as a joint paper by the US Federal Deposit Insurance Corporation and the Band of England which allows banks to effectively confiscate deposits of ordinary people. I doubt most people will believe it until it happens, by which time it will be too late but one only needs to ask Cyprus bank customers, some of whom lost 60% of their deposits when just two banks ran foul of the Basel regulations. And lets be clear, the Basel regulations were not voted on by any citizen in any country – they are simply
            imposed by a group acting on behalf of the international bankers.

            As John Butler makes clear in his April 2003 article in Financial Sense, “someone has to pay. Will it be you? If you’re a depositor the answer is yes.”

          • Henry B

            When I said: ”Which I suppose is all that really matters and all that anyone needs to know, anyway” I was referring to the spurious quote from McKenna.

            As for the education re interest etc? Thanks but I had it in the bag almost 40yrs ago. In fact I brought to the attention of the poster ‘Mmadan’ only 9hrs ago on this very page….


            ”You have overlooked two important factors:

            1: The principle the banks create and lend is extinguished when it’s repaid.


            2: The banks issue only the principle not the interest. The interest is not extinguished it is retained and this becomes the banks’ profit.

            In this way what the banks do get to keep has not been created by them.”

            End Quote.

        • Matt Joy

          Mmadan … can you tell us who does actually print/create the money? physical or otherwise? In your statements this fact seems to be missing..

          where does the the money that arrives to a bank come from? and before you say from deposits let me ask the same question another way.

          Where do the depositors get the money from?
          where does the money originate from? ..

          • chewbaka

            bank of england has been given full rights to print money in the uk . they then dish it out to commercial and our government at interest.

        • therealme

          Your Statement is all predicated on zero defaults. That is just not how reality works.

    • richard322

      I understand double entry bookkeeping quite well (it’s not difficult), but you don’t understand how a balance sheet of a company differs in fundamental aspects from a bank’s balance sheet. If I loan money to a company, then it goes to that company (recorded as a liability on their balance sheet) and I can’t use that money myself to make purchases. My spending power has been reduced. But if put my money in a bank (and thus loan that money to a bank, where it’s recorded as a liability on their balance), then I can still use that money to make payments by transfering my money to another person’s account AND the bank can simultaneously loan almost that same amount to somebody else (i.e. 95% of it, as they have to keep a few percent as a reserve for those few customers who will demand their deposit back in cash = an asset). My spending power ISNT’T reduced while another person gets new spending power worth 95% or more of my Original spending power. Or, while we began with 100% spending power, we now have 195% spending power. Then, the person who got the loan will spend that money (that’s the only reason he took out the loan) and it ends up as a new deposit (a liability) in that same bank or another bank. Then on the basis of that a new loan of 95% of the deposit is handed out, which becomes a deposit, which becomes a loan, which becomes a deposit, and on, until (if the reserve ratio is 5%) the total money supply will have grown with a factor 20, e.g., 2000%.
      This is just standard textbook economics, it’s called the money multiplier of fractional reserve banking. Positive Money critizes the money multiplier but in fact they use that model with a few minor corrections.

      • SandySure

        “AND the bank can simultaneously loan almost that same amount to somebody else (i.e. 95% of it, as they have to keep a few percent as a reserve for those few customers ”

        You may seriously misunderstand money creation. You seem to be following the line of the multiple relending model/money multiplier.

        It isn’t like that (as the linked articles to BoE explain). My post here to Mmadam explains the principles.

    • Kishmoyu

      I think there’s a misunderstanding here about the difference between money and wealth. For example central banks can theoretically create unlimited amounts of money at the stroke of a pen and place it in circulation through loans to commercial banks. However as you’ve noted the capital of a country will not be increased by a single cent in this manner as assets and liabilities will always balance each other. In other words no genuine wealth will have been created in this manner. But the money supply will nonetheless have increased even though it does not represent any growth in capital. It will only represent the debt that was incurred by placing it in circulation in the first place. And that is precisely the point. Banks can “create money” by simply making loans that are backed up by nothing more than the promise of enforcement and the future creation of capital. What is perverse here is the arbitrariness of it all. In other words you do not need to give me capital to open a bank. You only need to give me the political right to loan people assets I don’t really have and then just sit back while they get busy creating actual wealth and giving it back to me with interest. And this is the main reason why so many are furious with the current financial system. It allows those who are least responsible for the actual creation of wealth to accrue the largest share of it.

    • SandySure

      The principle is simple. First, don’t talk about money to begin with.

      If I take out a loan of value X, I give the bank an IOU for X (they debit an asset a/c) and they credit my account (a liability of the bank) for X.

      Dr Loans X, Cr Deposits “SS” X.

      Now, if I wish to buy something valued a X from you, and you use the same bank, I write you a cheque for X, you deposit it and the bank does:

      Dr Deposits “SS” X, Cr Deposits “MM” X.

      So it seems I could buy from you by transferring a deposit to you. Since I can use a deposit to buy things, it must be money, in that the defining role of money is it can be used to buy things.

      If you do not use the same bank, there are Cr reserves at my bank (instead of Cr “MM”) and Cr “MM” at your bank and Dr Reserves.

      At the Central Bank, Dr MyBank, CR YourBank. (corresponding to the reserve account entries at each bank.

      Try it..3 T-accounts for each bank and 2 for the central bank.

      Note: the only money in the system is deposits…and that is because we agree to use them to buy and sell, therefore we call them money.

      What happens if you now send me a cheque for X?

      How much money is left?

  • Robert

    Only one thing is plain from the above exchanges – and it’s as plain as a pikestaff. It is:- that what each proponent argues is predetermined by the ideology s/he has embraced beforehand. That ideology having been adopted, the meanings of the terms each proponent thereafter uses is so tailored as to cause the arguments advanced to fit-in with the pre-selected ideological position. No genuinely objective, empirically-derived, conclusion can possibly result from this process, only cacophony.

    For example:- “…as Daly wrote following the verdict, every American owes it to himself to study this decision very carefully . . . for upon it hangs the question of freedom or slavery. You seem more than happy to continue to be a slave and to pay the cost of your own slavery. Hope that’s working out well for you”. How is any unbiased person supposed to evaluate this extraordinarily impassioned (and manifestly politically-driven) outburst – other than as sheer rhetoric of course? (Personally, on a scale of 1-10, as rhetoric I’d give it a 2; as argument I’d give it a minus because it has the effect of exposing the whole of this poster’s preceding argument as having been just a string of debating-points designed to serve a political end, one not disclosed until the final few lines).

    (It seems to me that Daly’s argument turned on the meaning of the word “money”, and by extension on the contention that what the bank had on its own candid admission (by no means original, by the way) created out of thin air could not be “money” a) just for that reason and, b) because no statute had given the bank the right to do that. Yet Daly had himself used the loan the bank advanced him to buy something – namely a house costing something in excess of $14000 with (it can be assumed) an equivalent market-value. If what was borrowed was not “money”, how was he able to acquire ownership of such a property largely in exchange for it? Was he not himself guilty on his own argument of not having tendered the consideration he purported to be doing when he signed the deed of purchase?)

    The moralistic fulminations (his and the poster’s) are bunkum:- the cold fact is that Daly defaulted on a debt and then proceeded to don the shining armour of a crusader for justice and freedom. Not an entirely convincing masquerade IMO, more like a shyster lawyer’s dodge.

    To come back to my point. If – like Jesús Huerta de Soto, Murray Rothbard and many others – you start from the position that anything less than 100% reserve banking is fraudulent, tantamount to counterfeiting, the question of whether loans are money-creation or just credit is academic. Any law which makes a deposit the property of a bank (instead of remaining the depositor’s) is simply wrong, and likewise so is the taking of the deposit onto the bank’s balance-sheet either as asset or liability. The legal judgments which permitted this were aberrant and the practices ought to be outlawed forthwith. Simple.

    If on the other hand you regard fractional reserve banking as being morally neutral or even as being what “banking” is actually all about, that banks create money will be seen as a sine qua non and the – political – issue will become how best to prevent that power from being misused for the benefit of a privileged few at the expense of the wider society. Arguments about the minutiae of definitions of money then come to resemble mediaeval arguments about angels and heads of pins.

    • bsnews

      Goodness Robert! What a veritable contribution of misapplied ingenuity. You managed to touch upon all aspects of the argument yet deliberately overlooked or misunderstood the
      important points.

      Yes of course this is ideological and politically driven, no need to state the blindingly obvious – the entire site is about taking back the power to create a nations money supply and restoring it to a democratic and accountable public body. What could be more ideological and political than freeing ourselves from the control of our owners? Yes, owners – you may disagree with that word (and you’re welcome to disagree) but the modern banking system determines what the average persons housing costs will be, how much their car repayments are and whether they have a job or not – that is total control.

      Like it or not, money affects every human being on the planet and indirectly, probably every other species too. It is naive at best to place something so important into the hands of a few profit seeking private corporations. Why would anyone
      believe in the benign intents of those establishments extracting wealth from the poorest quarters of society? Why should people pay rent for the temporary use of what is clearly the property of the entire nation?

      I admit that during the course of the above exchange, I could have been more sensitive to the level of awareness of other posters when revealing the oft overlooked bankers’ sleight of hand. This truth is undoubtedly ugly and one must be careful about the way it is told. But let us not assume that the truth should be avoided or shrouded in incomprehensive jargon and technical language just because some people may respond badly to it.

      In my defence it’s obvious that those arguing on this thread have not researched the subject extensively and yet feel quite able to make bold assertions – I’m no expert and yet I feel like one of Maeterlinck progressive spirits, opposed by a thousand
      mediocre minds appointed to guard the past.

      I do understand this is difficult – well it’s been deliberately been made to appear difficult but there are plenty of excellent resources out there for those willing to take the time to understand the issues. ‘The ultimate ignorance is the rejection of something you know nothing about and refuse to investigate’ – Dr. Wayne Dyer

      I only mentioned the Daly case to dispute an earlier assertion that every legal challenge to the fraudulent nature of fractional reserve banking had been dismissed.

      You have fallen into this trap of thinking this whole subject rests on the definition of terms like money and credit. Call it what you want but as I asked earlier, what is the difference? The Daly case was all about contract law – in fact most law
      is contract law. He hadn’t, as you write, ‘acquired ownership’ – the bank had, as do all banks and mortgage lenders, retained the title deeds to the property. Ownership was the crux of the matter and is what Justice Mahoney was being asked to adjudicate on.

      For a contract to be valid, equal consideration must be offered up by both parties. Daly had pledged a mortgage – a legal promise to pay with the understanding that his home being the collateral would be seized in the event of failure to fully pay.

      The question, answered in court when the bank manager took the stand, was what the bank had offered by way of consideration to make the contract valid.

      A simple example would be to imagine you borrow money from Giles who unknown to you, is a counterfeiter. After you spent the money you discover it was all forged bank notes. Would you, despite enjoying the material trappings the money has paid for, feel any compulsion to repay Giles?

      Of course what Daly borrowed was not counterfeit money – but in the eyes of the judge, it was equivalent – the bank had created something of value out of nothing and as he poetically concluded, only God can do that. In the legal sense, the bank had not offered any consideration and so the contract was void. With no contract, there is no valid claim by the bank for ownership of the property.

      Had the decision gone the way you seem to wish, the bank would own a property which it had not paid a cent for. Now that sounds more like a shyster lawyer’s dodge to me.

      So yes Daly defaulted – no one was arguing this was not the case – the issue was the validity of the contract.

      In your penultimate paragraph you conflate 100% reserve banking with ownership of deposits – not sure if these two aspects are directly related.

      If private banks were forced into 100% reserve banking, this would simply be a return to what most people (certainly most on this thread) believe banks do at present, take in time deposits (pay interest to savers) and make loans (charge interest to borrower) and profit from the interest spread. The crucial aspect which you allude to in the final paragraph is 100% reserve banking would take away the power of a privileged few from creating the nations money – there would be no need to prevent misuse – the power would no longer rest with the privileged few, the private bankers but would be with a democratic, accountable public body.

      As to the law which makes customer deposits the legal property of the bank and treats the customers as unsecured creditors – well I agree with you – the legal judgements
      which permitted this were aberrant.

      I’ll end by quoting Ellen Brown in full and wish you all the best in your investigations and learning.

      Although few depositors realize it, legally the bank owns the depositor’s
      funds as soon as they are put in the bank. Our money becomes the bank’s, and we
      become unsecured creditors holding IOUs or promises to pay. (See here
      and here.)
      But until now the bank has been obligated to pay the money back on demand in
      the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into
      “bank equity.” The bank will get the money and we will get stock in the
      bank. With any luck we may be able to sell the stock to someone else, but when
      and at what price? Most people keep a deposit account so they can have ready
      cash to pay the bills.

      The 15-page FDIC-BOE document is called “Resolving Globally Active,
      Systemically Important, Financial Institutions.” It begins by
      explaining that the 2008 banking crisis has made it clear that some other way
      besides taxpayer bailouts is needed to maintain “financial stability.”
      Evidently anticipating that the next financial collapse will be on a grander
      scale than either the taxpayers or Congress is willing to underwrite, the
      authors state:

      An efficient path for returning the sound operations of the G-SIFI to the
      private sector would be provided by exchanging or converting a sufficient
      amount of the unsecured debt from the original creditors of the failed company
      [meaning the depositors] into equity [or stock]. In the U.S.,
      the new equity would become capital in one or more newly formed operating
      entities. In the U.K.,
      the same approach could be used, or the equity could be used to recapitalize
      the failing financial company itself—thus, the highest layer of surviving
      bailed-in creditors would become the owners of the resolved firm. In either
      country, the new equity holders would take on the corresponding risk of
      being shareholders in a financial institution.

      No exception is indicated for “insured deposits” in the U.S., meaning those
      under $250,000, the deposits we thought were protected by FDIC insurance. This
      can hardly be an oversight, since it is the FDIC that is issuing the directive.
      The FDIC is an insurance company funded by premiums paid by private banks.
      The directive is called a “resolution process,” defined
      elsewhere as a plan that “would be triggered in the event of the failure
      of an insurer . . . .” The only mention of “insured deposits” is in
      connection with existing UK
      legislation, which the FDIC-BOE directive goes on to say is inadequate,
      implying that it needs to be modified or overridden.

  • Chris Steward

    I think the comments below show just how much confusion there is around the creation of money and banking in general.

    Please watch the banking 101 videos on this site which I think offer the most comprehensive and accurate explanation available online.

    The fact that banks create money is just that …. a fact. The challenge is educating the general public so that the discussion can move beyond whether they do or not and we can start having informed discussions about how to change it.

    The change in itself is a very simple, practical adjustment. Educating the general public is a much greater challenge.

    • CalmerthanyouR

      So it appears to me that the only real issue here is that banks PROFIT and COLLECT INTEREST on money that doesn’t exist in the real sense. The “fact” that they create money isn’t really a big deal because A) if it is repaid, that created money is destroyed, so it doesn’t continue to inflate the money supply and weaken the value of each unit; and B)if that “created” money digitally ends up deposited in a competitor bank, it becomes “real” money because it gets subtracted from their reserves.

      does this sound about right?

      • mohammad ejaaz

        My friend, i believe this is the main cause of bubble markets. Since banks are able to digitally create money at will, they inflate property prices and other financial markets, thus affecting the economy as a whole.

  • rollotomazi

    A good reference of how money works can be found in the archives of
    The Austria model of a levy for parking money worked very well and the very low transaction charges ensured that the medium of exchange re-entered circulation instead of being hoarded, it was eventually taken out of course as the main players would soon loose control of the money.
    Also seek out Margrit Kennedy
    What everyone here has failed to recognise here is, is that it is the peoples labour/skills that is ultimately being exchanged for money/basically tokens, here-in lies the ultimate wealth, control of the labour. It is being used very unfairly by TPTB, who continually moth ball whole societies on the huge profits made from the slavery model, currently China, it is the wests turn to take a back seat, unless anyone hasn’t noticed.
    Another scenario to take note of is, What I call the “Electronic Baton”, the digital token paradigm rapidly taking over from the physical cash, he is the warning sign for total control of the labour and raw material markets, gold included, which will have to be parted with if we ever went fully cloud based.
    If and when it does, everyone here will be effected, nobody will have an alternative, you will have nothing but thin air and your skills to survive with.
    Its coming.

  • kiran

    in the condition of bank insolvency if we have 4 lacs in saving account how much money rbi will return

  • Damian Penston

    If the liquidity ratio is set to zero and banks don’t require cash deposits in order to make a loan, for what purpose do they want the public to open bank accounts and deposit their money? Besides using the funds to buy interest bearing bonds, I don’t see how it affects the capital adequacy ratio or otherwise motivates the bank.

  • Can

    I am wondering how international payment systems work. Say, US imports goods from China and pays for them with USD. What happens if Bank of China intervenes? What happens if it does not? Can you help me go through this transaction through use of balance sheets of economic agents?(Importer, Exporter, Chinese bank, US bank, FED, Bank of China) What happens to bank reserves in US? Thank you?

  • brent

    Perhaps it would be worthwhile for people here to read up on Modern Monetary Theory for example at New Economics Perspectives ( and as taught at the University of Missouri Kansas. There are a lot of things that need fixing in the financial sector and it is important to understand how money works so we can begin a proper clean up.

  • Guest

    We believe that what the fewest people understand about complementary currencies is that they should have negative interest rate, while that should be the baseline in the first place.
    (picture shows Cyclos4 Communities worldwide)

  • Alessio Ragnoli

    I only have two main questions…First: how to preserve the independence of the Monetary Policy Committee? I guess both banksters and politicians to be interested in altering inflation…Second: how could italians (3rd power in Eurozone) be so stupid to not to have a local movement affiliated to IMMR? Sorry for my rusty eglish

  • Green_Lightning

    The right to create money is community owned. Therefor banks should pay rent to the community for using our rights. Else the only banks should be state owned.

  • Mohammad Ejaaz

    To positive money, if you say that banks create electronic money every time they make a new loan, then what happens if the borrower withdraws all of the borrowed cash? How is it then that they create “electronic money” when the borrower clearly withdrew cash? If that is the case, the bank has merely created a new money account, but not actual cash. So my question is, where do they get the cash from? is it the Central Bank’s reserves? or from the deposited money of other consumers (fractional reserve)? Thank you to whoever answers.

  • Paul

    Actually banks extend credit out of thin air and charge interest, that’s fraud. The bank only creates the principal, the only way the interest and principal can be paid is if the debt in society grows exponentially, in other words a ponzi scheme, more debt to cover more debt. When the credit expansion slows and defaults mathematically have to happen, remember the only source of credit + interest is the banking cartel, banks foreclose and exchange their fraudulent credit for real assets in the economy.

  • A Name

    Where’s the factual source of the assertion about 97% and why isn’t it cited?

  • Igor Voloshyn

    I don’t understand quietly how an issue of corporate bonds creates money. Please help me to understand this question.

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