“The tyranny of fraud is not less oppressive than that of force.”
John Taylor of Caroline, Virginia, 1814
Chapter 7 (You can read previous chapters here)
Our system of money-creation was invented and developed during a time when war was seen as glorious, when the strong robbing and managing the weak was admired as good and right, and when class oppression was thought desirable in the interests of making a strong nation. Banks create money in a way that supports those activities. Today, the world is a different place and our objectives are – officially, at least – more-or-less opposite to the ones listed above. But we are still lumbered with our antiquated system of creating money as debt: all money, even notes and coins, is debt from banks of one kind or another.
The title of this chapter is an accusation. A massive industry of debt-creation (‘financial services’) is today devoted to creating money and value for the rich and debt for the less-well-off. It has become an enormous cancer on humanity, draining life and livelihood from productive workers, the would-be working and the poor. As for the poor, they are now an increasing portion of the world’s population, despite advances in science, technology, entrepreneurship, productivity, mechanisation and organisation. Our money system concentrates power, and is a machine for transferring property from the people to financial predators. The process has taken us so far towards self-annihilation, why not state the obvious: if you believe that riches should be gained in return for contributing something to the common good, we live not under ‘democracy’ but kleptocracy – rule by thieves.
Gaining control of the money supply has always been an ultimate dream of the ambitious. ‘The Richest Man Who Ever Lived’ – Jacob Fugger, a German born in 1459 – kick-started his career by getting control of the Emperor’s silver mines. Command of the money supply brings with it command of much else besides, for the simple reason that money buys not just things, but also labour, production and political advantage. Today, it is not an individual but a class that profits from the way money is made. That class includes governments, predatory financiers and commercial bankers (who are bagmen for the rest).
Secrets, ignorance and lies defend our global financial system from democratic scrutiny. Many examples will appear as the chapter progresses, but here is a summary of the fundamentals:
- ‘Secrets’: it has been actively kept from public notice that banks create money when they lend: the official story, propagated even in academic text-books, has been that banks lend savings which others have deposited.
- ‘Ignorance’: the public in our so-called ‘democracies’ are mostly ignorant of how money is created, of the laws that support that process, and of how citizens are being defrauded in the process.
- ‘Lies’: economists, bankers, politicians, historians and media professionals misrepresent and obscure what is going on. These misrepresentations are now so long- and well-established, that many professionals are unaware of the simple truths behind them.
It is not a small or insignificant truth that is being covered up. Banks creating the money supply opens up a chain of opportunities for destructive behaviour which makes it difficult for those who wish to do right by others to live satisfactory lives. In other words, it enables the bad in humanity to drive out the good. It is no exaggeration to say, the process has gone so far that our world and very survival are in jeopardy. How many people are taking the trouble to understand; how many are pressing for reform? At the moment, very few.
In this chapter I will attempt to outline, in simple language: first, what money is, and how it is created as debt; second, who benefits; and third, how the system feeds bad things including inequality, war, debt, corruption and environmental destruction.
What is money?
We all know what money is. It is something we own which can be swapped for other things that are up for sale. For people who like their truths to be stated with a bit more gravitas, here is an economist saying the same thing:
So long as in any community there is an article which all producers take freely and as a matter of course, in exchange for what they have to sell, instead of looking about at the time for the particular things they wish to consume, that article is money, be it white or black, hard or soft, animal, vegetable or mineral. There is no other test of money than this. That which does the money work is the money thing.
Today, money is mostly numbers in bank accounts. We own those numbers: they are our property and if someone steals them, we hope they will be in trouble. So what are those numbers? What kind of ‘property’ are they?
In our modern world, property, which is such a simple idea, comes in many shapes and varieties: intellectual property, for instance, or mineral rights. Bank-money is just another special case: it is ownership of debt from a bank. The numbers in our bank accounts signify how much the bank owes us. The debt is our property, because the law supports us as the legal owner of that debt.
When we make a payment, what happens? Some of what the bank owes us becomes owed to another person: it is as simple as that. This is how bank-currency works: debt from a bank passes between people as payment.
So – what does a bank actually owe us? It used to be gold. Nowadays it is ‘reserve’ which is another set of digits created by the central bank, an organ of government. Central banks lend or sell these digits to commercial banks. Today, they also supply reserve to banks free, as part of the process known as ‘quantitative easing’, during which a government creates new money and buys back its own debt, profiting in the process.
Both these sets of digits are merely typed into ledgers. Money, which buys the produce and human labour of all the world, is created out of nothing. That could be an excellent idea – if it were done fairly and equitably, in a way that benefits everybody. But it is not. Money is created as debt. The simple historical fact is: after slavery, serfdom and the rest were abolished, debt took over as the instrument of oppression and exploitative power. It is now dominant world-wide.
We are apt to think that ‘how things are’ is how they must be. These complex arrangements around how money is created – could they be any different? Certainly they could. The short answer is: money could be created the same way in almost every respect, but without the added ‘debt-widget’ and without allocating the new money to speculators. If we dispense with this primitive, disabling and devastating device, we may yet recover some meaning to the words ‘democracy’ and ‘freedom’. But at present the system is protected – by secrets, ignorance and lies.
Money: the act of creation
The act of creating money happens when a bank lends. If a banker was struck by a bolt of honesty, he or she might say to a customer about to borrow: ‘Starting from nothing, we’re going to agree to owe each other a million pounds. You can use what I owe you, to pay people: they’ll be happy to know that I owe them instead of you, and they’ll happily take debt from me as a payment. In return, your debt to me will be an asset on my books. In the meantime, you’ll pay me interest. So tomorrow, we’ll each have a lot more than we have today! Isn’t that clever!’
When a bank makes a loan, two equal-and-opposite debts are created which add up to zero. Those debts are valuable properties. The customer owns money. The bank owns debt from the customer (most of the assets on a bank’s balance sheet are IOU’s from the loans it has made to customers). The bank has created value out of nothing.
But how does a bank profit from creating debt? The simple answer is: when debt becomes money, the conventional process of borrowing and lending is turned on its head. The bank is ‘in the delightful position of charging interest on money it owes’. The two debts the bank creates are equal in value, but not in yield. The borrower owes the bank in a straightforward way, and pays interest. The debt from the bank has become something valuable: it has become money, and the bank is able to rent it out.
This is confusing, and its ‘confusingness’ has protected it. For centuries, people have argued about the basics while the banks got on with making money – for themselves and for others. In 2014, the Bank of England confirmed that ‘the majority of money in the modern economy is created by commercial banks making loans’. Surely, this simple fact – long known but long denied by most economists and bankers – is now open for general acceptance.
The role of law
Before debt could be freely bought and sold, allowing our money-system to evolve, a change in the law was needed. Debt was long regarded as a private matter between lender and borrower. Systems of law were generally reluctant to enforce a debt except between those who made the original agreement. The first country to make debt ‘negotiable’ – something to be freely bought and sold – was England when Parliament, composed of rich men voted in by other rich men, passed the Promissory Notes Act in 1704. Similar legislation was subsequently adopted by ‘most if not all commercial nations’.
The Promissory Notes Act 1704 opened the most corrupt century in British history. It was also, for better or worse, the foundation of the commercial and military British Empire, financing not just war but also ownership of foreign assets. ‘By 1914 the great loan-issuing houses could not unjustly claim that it was largely by their efforts that Britain held in fee not only the Gorgeous East, but the greater part of the rest of the world as well.’ Today, other countries rival and outdo Britain in the race to ‘internationalise’ their currencies. Nations whose currencies ‘go international’ reap huge profits: like banks, they are able to loan out debt at interest.
Once debt is negotiable, value can be created in a variety of different ways. For instance, when a government borrows it can give the lender a ‘government bond’ in return, equal in value to what it has borrowed. By doing that, a government creates assets for those who lend: within the class of lenders, a bond is equivalent to money, as Alexander Hamilton noted. The lender loses nothing by lending: the public is put into debt. The process takes from one class and gives to another.
Negotiable debt – bank-money and government debt – was the foundation of a new ruling class. The old feudal aristocracy, its privileges on the wane, was joined (and to some extent superseded) by a privileged class of financiers, in those days called ‘money-men’. This was obvious to people at the time and widely commented on.
Negotiable debt is a versatile source of ‘created value’. New ways of creating value based on negotiable debt are still being invented: derivatives, CDO’s, CDS’s, repos and ‘shadow’ banking are some fairly recent additions. With the introduction of computers and sophisticated mathematics, ‘finance’ – the creation and destruction of value – has become faster, ever more inventive, and ever more destructive.
As well as creating money, banks destroy it
When a borrower repays a debt to a bank, the debt no longer exists: it simply disappears. The act of creation goes into reverse. What actually, literally, happens is: a borrower assembles enough money-digits (debt from the bank and/or other banks) to repay its debt. The borrower transfers ownership of those digits to the bank, after which the debt becomes a debt from the bank to itself. Not only do the debts disappear: the corresponding assets also disappear – money, which belonged to the borrower; and the loan-asset, which belonged to the bank.
This limited life is perhaps the most important quality of bank-money. It means that new money can be continuously created, making new profits for lender and borrower without necessarily increasing the money supply. Again and again, profit can be taken from creating money. The profit in making cash is a one-off: profits from bank-money are taken in a kind of interrupted continuum, transferring assets and income from those who work to those who accumulate.
So, several key differences mark out bank-money from traditional ‘commodity’ currencies. It is created in secret and rented out at interest. It is allocated to specific persons, for the profit of bank and borrower. It is destroyed again once its extra-monetary function (its function of making a profit for banker and borrower) has been fulfilled.
Why have banks been allowed to take over the money supply?
Bank-money has taken over all across the world. It profits a few and disadvantages the majority; but practical reasons have also helped its ascendancy.
First, bank-money is convenient to use. Secondly, some of the profits of banks are recycled to benefit those with bank accounts. Thirdly, the influence on government of those who profit from private issue of money has been consistently very great, and the overlap of personnel is often great too. Lastly, the alternative – that governments create the money supply – has often proved unsatisfactory in the past. Examples of this are held up to show that it should not be allowed to happen. When governments create money – paper or digital – they usually yield to the temptation to create too much: hence inflation and hyper-inflation. Banks, on the other hand (unless they are fraudulent, or are being shored up by taxpayers’ money, as is increasingly the case today) are limited by their own self-interest in how much they create: they need to make a profit on their loans.
Profiting from the money supply
It should surprise no one when a minority manages to commandeer the fruits of human labour and invention. Throughout recorded history, as soon as there is more than enough to keep people barely alive, battle is joined for the surplus. The winners usually make laws to ensure that they carry on being the main profiteers. Usually (as, for instance, in feudalism) these laws have been open and acknowledged but the laws which support today’s oligarchies – laws around the creation of money and financial value – are not publicly understood.
Today, wealth above the bare necessities has never been greater. Machines and computers help to produce stuff in vast quantities. When a new source of profit appears – a new kind of production, a successful enterprise, a new kind of asset (such as digitised personal information) – money is created in large amounts by banks, and allocated to predators to appropriate the source of profit.
The introduction of non-human labour was addressed by the economist David Ricardo nearly two hundred years ago. Economists usually promote the interests of those chasing wealth and power; but Ricardo was struck by a bolt of pure honesty when he wrote in 1821 that machinery shifts wealth and power to those who own and control production:
“If machinery could do all the work that labour now does, there would be no demand for labour. Nobody would be entitled to consume anything who was not a capitalist, and who could not buy or hire a machine.”
He also wrote:
“These truths appear to me to be as demonstrable as any of the truths of geometry, and I am only astonished that I should so long have failed to see them.”
Ricardo came to this realisation late in life. Mainstream economics ignored his observation. Instead, it took an observation known as ‘Say’s Law’ (in Say’s words, ‘the more men can produce, the more they will purchase’) to mean that money from production automatically becomes money for spending. Say’s Law has no relevance to the effects of who gets to create the money supply. For generations, this omission of the ‘money factor’ seems to have absolved mainstream economists from noticing the most obvious outcome of allowing banks to create money, which is the extreme inequality it produces.
As a result of credit-creation relocating assets, wealth accumulates in a golden triangle of banks, governments, and financial predators. Wages, kept to a minimum as is natural in competitive capitalism, remain fairly constant. Inequality grows; and meanwhile the gremlin of debt invades like an invasive weed. For every piece of money there is a corresponding piece of debt, but the two do not stay together; they soon part company, as looked at later in this chapter.
Developing inequality in money and debt brings problems for rich as well as poor. Producers need consumers to buy their products, or their profits will dry up. Eventually, people outside the golden triangle are not spending enough to keep production profitable. In language used by modern economists when the truth needs a bit of modification, there is a ‘demand deficit’. The result is ‘business cycles’ – economies lurching in and out of booms and busts – which are also looked at later in this chapter.
BAD EFFECTS: A QUICK SURVEY
Many of the observations in the following sections have been made frequently in the past, only to be forgotten. Money in the form of credit/debt is the ‘magic’ fountainhead of power: questioning its moral legitimacy is a quick route to the economists’ graveyard.
The bad effects of the way we create money tend to be exacerbations of things that happen anyway. Some of these things are inherently bad (like war); others (such as inequality) would not be bad in small doses. An economist has made an analogy for the second type: a domestic cat is generally a well-loved addition to a home: enlarge it into a tiger, and it is less desirable.
Once debt can be bought and sold, complexities arise that boggle the human mind. Most financial workers are only aware of the little patch they work in. People are protected by ignorance from understanding the full implications of what they are involved in. Below, I try to unravel some of the implications. The list is tentative.
Extreme inequality is good for no one. As well as setting the stage for a great deal of human misery it has the effect of seizing-up the economy.
Imagine a café with a hundred customers: between them they have a thousand dollars to spend. They are all thirsty, but only one of them has bought a cup of coffee. The café owner is puzzled; he’s not making any money. What he doesn’t know is that one person has all the money; the others are all broke. Soon, the café owner will be broke too. That is a simple picture of economic paralysis due to inequality.
Inequality is of the ‘household cat’ variety. A certain amount is inevitable, perhaps even beneficial. Extreme inequality is a different matter. At the one end, it puts excessive amounts of power in too few hands. At the other end there is poverty, disempowerment and displacement – desperate people searching for how to make ends meet, and many others at a loss as to how to flourish.
Bank-money is just one of a number of institutions and legally-authorised devices that enhance inequality. Others include trusts, wealth-protecting corporations, laws enabling tax-avoidance, and laws passed to reward those who finance political parties. We allow banks to exist because we believe ‘banks lend savings, so businesses can grow.’ This is a myth on two counts: banks create the money they lend, and very little of the money they create goes to productive businesses: at present, 3% according to economist John Kay.
The most significant inequality is not income but in assets: in ‘what you are worth’. When the politician Bernie Sanders says that ‘one family owns more wealth than the bottom forty percent of the American people’ he is not talking about their income but about their accumulated wealth. This kind of wealth is created by banks making loans.
Banks create money when they lend; they lend when banker and borrower both believe they will make a profit. The new money purchases assets. The process enhances the market value of assets generally, making those with assets relatively richer and those without assets relatively poorer. Income from those assets accumulates with the people who own them: rent, interest, dividends, etcetera. The same assets may be used as collateral for many simultaneous financial dealings, because the same law which makes debt negotiable, makes claims on the assets of others negotiable too.
When banks create the money supply, power and wealth are not just concentrated; they are also placed in the wrong hands. Despite the cultural myths of our age, most people do not wish to give their lives over to getting more and more ad infinitum: they wish for enough to live well, in return for work they can be proud of. Our system of money-creation favours people for whom ‘getting more’ overrides all other considerations (this theme will return).
When Adam Smith (godfather of economics) said ‘All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind,’ he was not saying it approvingly; he was issuing a warning. Extreme inequality is the end aimed at by would-be ‘masters of mankind’. When resistance fails, they succeed.
How bank-created money promotes inequality has been looked at in more detail in Chapter Two of this book.
Debt, National and Personal
When banks create the money supply, a world in which property is widely distributed is transformed into a world in which property is owned by a few and the rest are in debt. Probably no one will be surprised by this statement. But how does the process work?
It seems obvious that when money itself is created as debt, the amount of debt in the world must increase. But the fact that money is debt from banks is confusing. If they owe us, surely that’s their problem! But then, for banks, as already mentioned, lending is topsy-turvy. A bank lends its own debts: it is ‘in the delightful position of charging interest on money it owes’. ‘What it owes’ is a bank’s lifeblood. Because ‘what it owes’ is money, it is also the lifeblood of the world – rented out at interest.
How does this contribute to the worldwide debt problem we have today? The sequence of events is simple, but hard to understand because of the double nature of everything involved. A bank creates two equal-and-opposite debts, which add up to zero. Both debts are also valuable assets for the other party. The bank’s asset is its loan, on which a borrower pays interest (the asset will disappear once the borrower has repaid). The borrower’s asset is what the bank owes it; it is money. Money leaves the borrower bit-by-bit, as payments are made; after that, it circulates. The debt, however, stays with the borrower, who must pay interest, and eventually accumulate enough money to repay the loan.
If that is not horrible to keep in mind, I don’t know what is. But the significant point is easy: every bit of money in the world signifies the existence of a borrower somewhere, paying interest on that money.
Again, the true story is not obvious. It is a misunderstanding of how vast amounts of money are made, and of the role that debt plays in the process, to suppose that debt lands immediately with the poor and money with the rich. Bank-money is borrowed by people with assets (collateral), in order to make more money: once money is made, it is invested. Too much un-invested money sitting around in possession of the rich is a sign of an unhealthy economy. Instead of being in the ownership of people wishing to spend, it is in the ownership of people waiting to invest. Money that could be circulating is stagnating in pools.
When just a few people own most of the assets, income from those assets accumulates with them too: rent, interest, dividends, etcetera. ‘The few’ do not want to spend this income: – or rather, there is so much of it, they cannot spend it: they want to re-invest it. Money stagnates, while professional finance-workers seek (and invent) ways of making it grow. The world is in a kind of crisis pictured (in extreme form) in the café story above.
To keep going in this kind of scenario, businesses – the café owner, for instance – have to borrow. Individuals also have to borrow, to meet obligations undertaken during the good times. Governments may also have to borrow, to support citizens and industry. If the statistics are to be believed (compilers warn they are unreliable at best, because governments and banks lie about, or misrepresent, what is going on) the money supply of the world is at about 60 trillion dollars, the total national or public debt of the world is about the same, and the total debt of the world is nearly double both of those added together. In other words, half the world’s debt is only indirectly related to government borrowing and money-creation, via the economic conditions these create; and of course some will not be related at all. According to the Wall Street Journal world debt is three times (313%) world GDP, or yearly production of goods and services. Another statistic to boggle the mind: enservitude in action.
Laws allowing debt to be bought and sold make it easy for governments to borrow. Banks willingly create money for governments to spend – until a nation’s debt becomes too great for its citizens to fund. Wealthy people are much keener to lend to governments if they get a ‘bond’ – a debt instrument they can sell – in return. As Adam Smith pointed out 250 years ago, once debt can be bought and sold, lenders get an asset in exchange for their money which starts life equal in value to what has been lent, and may well increase in value thereafter.
Again, history supports this account. National debts became significant as soon as debt could be traded: in fact, they became exploding phenomena. English national debt went from 6% of national income to 137% of national income in the half-century after the foundation of the Bank of England. The South Sea and Mississippi Bubbles (both 1720) are landmark examples of what can happen. Careful management is needed to keep national debt at its job, of funding government spending while simultaneously ‘taking the wealth of the state from those who work and giving it to those who are idle’.
There is an often-repeated cliché that ‘the national debt is a way of making our children and grandchildren pay for what we use today’. This is not correct: everything, from missiles to food, has to be paid for before it is used. When the government borrows in order to pay for things (rather than creating debt-free money) it is creating assets for one class – the class of ‘lenders’ – and burdening another class – passive citizen-borrowers – with interest and repayment. The new assets, created for lenders, act as money within the class of those who possess them. Descendants of those passive citizen-borrowers, are, of course, also in hock; for in this human world of ours, subjugation is an inherited condition.
National debts in some countries – the U.S. for example – have reached such dizzying heights that interest payments, even at very low rates, represent a substantial day-to-day drain on incomes. For the rich, there are positive knock-on effects: low interest rates, necessary for the survival of nations that are heavily in debt, mean that money can be created very cheaply. In these conditions, new money is created not for productive industry (whose value goes down as it becomes less profitable) but for speculation in asset prices, which rise automatically in response to money pouring in (house prices, for instance). The trick is to invest in one class of assets as it is rising, and sell before the market crashes: not a risk-free enterprise, but not difficult either for those prepared to give it time and mental effort.
Booms-and-busts prepare the ground for private debt. When times are good, banks create easy money for people on the collateral of their homes, businesses or other assets. People get into debt, confident they will be able to pay it off. When the worm turns, incomes dry up and panicky banks call in loans. Debt becomes a burden: borrowers sell assets at a loss, and are in debt. The most familiar examples of this are people who dream of owning their own home. Early comers find success while prices are still reasonable; meanwhile speculative borrowers (who borrow more cheaply as interest rates go lower) push prices up. Homes become unaffordable to those who come later.
Booms and Busts
When banks create the money supply, borrowing large amounts of money becomes easy for those who have collateral – in other words, for the rich. Large amounts of money are created for speculators to purchase profitable businesses and assets whose price is rising. In booms, ownership becomes located with a few, rather than being widely dispersed among many. Steady production, the profits going to the owners, continues the build-up of money owned by people who already have an excess. They do not spend most of this excess money on consuming things (how many yachts can any human want?); they look for opportunities to invest it.
Money is also created for borrowers who need money to spend, on the security of whatever assets they own. For a while, all seems rosy: then the growing assets of the few and the diminishing assets of the many – in other words, growing inequality – make it obvious the worm will turn: not enough goods are being purchased and businesses are delivering less profit. At that point, feedback goes from positive to negative. Banks respond to a ‘downturn’ by calling in debts and destroying money. Economists have called this characteristic of bank-created money ‘perverse elasticity’ – money is easy-to-get during booms, and hard-to-get during busts. Positive and negative feedback are supplied at precisely inappropriate times.
Soon, the sheer quantity of debt can no longer be funded at conventional rates of interest. In response, governments drive down interest rates, making money even cheaper to rent (borrow) for those who already have it. Speculation replaces investment: new money is used to create ‘bubbles’ in markets such as housing real estate. Huge profits are taken by professional speculators before, during and after the inevitable crash.
Busts would rectify the situation somewhat by reducing capital values and debt, but lawmakers and regulators intervene in the interests of the wealthy, massively reducing interest rates and propping up the value of assets with devices like ‘quantitative easing’. These efforts merely prolong the recession or depression. The underlying cause – the gulf between massive wealth on the one hand, and poverty and debt on the other – remains.
Eventually, economies do emerge from recessions and depressions. Wars, expanding markets, debt reduction and default, falling capital values and other developments may each or all play a part in reducing inequality; upon which the cycle must begin again.
Banks feed a vicious circle between arms production and purchase by eagerly creating new money for both buyers and sellers. They create money for governments on the security of their citizens paying (permission neither asked nor given). Once demand is guaranteed, banks willingly create money for manufacturers too. Governments naturally compete to acquire arms: if your neighbour gets missiles, you want them too.
Citizens, unaware even of how money is created, remain unaware of how their economies are skewed to arms purchase and/or production. Without bank-money, governments would have to borrow pre-existing money to finance arms purchases. In normal times ‘lend me some money to buy weapons’ is not a popular request, particularly if the lender has to do without the money lent, while it is entrusted to a dangerously bellicose government.
There is another relationship between economies based upon bank-money and arms production. In economies (such as those based upon bank-money) where massive inequality is a persistent problem, arms production acts as an economic stimulant. Its workers make products that will not be bought by workers (even in America, citizens do not buy missiles and bombs). Armaments workers’ pockets are filled with spending-money that will be spent on other products, rectifying somewhat the ‘demand deficit’.
From the point of view of national profit, selling arms abroad is even ‘better’; owners of corporations get richer, wages are spent in the home country, death and destruction occur somewhere else. Again, banks will create money for all sides – except, perhaps, for those who look like they will lose.
A secondary effect of this is pervasive hypocrisy in international affairs, as politicians and diplomats become salespersons for armaments to sustain the economy. Another is the ‘proxy wars’ being fought in unstable countries, using arms made by rich nations.
CODA: THE FEW AND THE MANY
It may seem that the claims made in this chapter are too wide-ranging, but I believe the opposite is the case: some important secondary effects of money-created-as-debt, such as the nihilism of global ‘high’ culture, have not even been mentioned. Ditto its effects upon climate change, scientific integrity, the power of giant corporations, war, corruption, strong nations plundering the weak, and extremist developments in politics. Further observations on the bad effects of bank-money are being published on the author’s website blog www.ivomosley.com
We like to assume the world is run on lines that are just. But we are in a period of transition from oligarchies based on money and class, towards democracy. Sometimes it seems we are stuck in the worst of both worlds, under an oligarchy that dominates by deception. Money and power are in adjacent rooms, with a revolving door between them. True democracy (if people want it) needs concerted thought and action.
Humans are fond of blaming others for things that are their own fault. Patriarchal societies blame women for the evils of the world (from the Bible we have Eve corrupting Adam; from Greek mythology we have Pandora releasing the evils of the world from a food storage jar). Christians have long blamed Jews for destructive financial arrangements even though money-creation has long been a protected Christian activity. Today, citizens blame politicians and bankers for the madness of the world – even though they (we) have the collective ability to demand change, if we are determined to use it.
Only citizens can make reform happen. It is unrealistic to expect an oligarchy to voluntarily give up the source of its power, even when the world is collapsing all around it. Power attracts those who want more: it is an addiction. So, in large amounts, is money, and the comforts and diversions that it provides. The world and its beauties, human life, our ideals of freedom and democracy, are being degraded and destroyed. How lazy are we? Do citizens, voters, ordinary humans feel no compunction to intervene and insist upon change?
Removing laws that support negotiable debt would be a start. It would have far-reaching effects. A form of cash could be created which could still be borrowed and lent, but would not be debt from the very outset. Today, digital systems would make this relatively easy.
We could go further. Sharing the benefits of human achievement, past and present, implies the justice of a basic income (provision of spending money for every citizen, regardless of need). What might follow from such a provision is an interesting topic – to be considered in the next chapter, which will be on Reform.
 In England for example, 97% of money is debt from commercial banks to customers; the other 3% – including notes and coins – is part of ‘reserve’, which is debt from the Bank of England to commercial banks. ‘Reserves are an IOU from the central bank to commercial banks’ says the Bank of England and ‘there are three main types of money: currency, bank deposits and central bank reserves. Each represents an IOU from one sector of the economy to another. Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves.’ Bank of England Quarterly Bulletins 2014 Q1 and 2010 Q4, available online.
 John Taylor, friend and correspondent of John Adams and Thomas Jefferson, described bank-money thus in 1821. Adams and Jefferson were in full agreement with Taylor on this. See Chapter Five of this book.
 The Richest Man Who Ever Lived: The Life and Times of Jacob Fugger, Greg Steinmetz (2015).
 For those with a stomach for detail, a painstaking analysis of what happens when a bank lends is provided by Professor Richard Werner: http://www.sciencedirect.com/science/article/pii/S1057521914001070.
 Frances Walker, 1888.
 Profits for government include buying back its own debt with newly-created money and paying less interest on reserve than they get from holding interest-paying assets as security for commercial banks’ reserves (‘seigniorage’).
 The final chapter of this book will address the subject of reform.
 Frank D. Graham, ‘Partial Reserve Money and the 100 Per Cent Proposal’. American Economic Review, 1936.
 ‘…rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.’ The Bank of England, Quarterly Bulletin 2014 Q1. The truth has been known for a long time by anyone who cared to acknowledge it: see, for instance, Charles Franklin Dunbar (1893): ‘deposits are created by the act of the bank when loans are increased, and cancelled when loans are repaid.’
 Joseph Story, Commentaries on the Law of Promissory Notes (1845).
 ‘Never before in English history had so much money passed so quickly through so many hands and, inevitably, some of it stuck as it passed.’ Henry Roseveare, The Financial Revolution 1660 – 1760, p 44. See also Brantlinger, Fictions of State (1996).
 W.J. Thorne, Banking, 1948 p. 31. For ‘war’ see Dickson, The Financial Revolution in England (1993); for ‘resources’ see Banking (1948) p.31 (also pp 97-9 for a simple description of how bank-loans create deposits).
 Alexander Hamilton, from Report on Public Credit (1790): ‘It is a well known fact, that in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money. Transfers of stock or public debt are there equivalent to payments in specie; or in other words, stock, in the principal transactions of business, passes current as specie.’
 Adam Smith, 1776: ‘the security which it [the government] grants to the original creditor is made transferable to any other creditor; and from the universal confidence in the justice of the state, generally sells in the market for more than was originally paid for it. The merchant or moneyed man makes money by lending money to government, and instead of diminishing, increases his trading capital.’ Wealth of Nations, Book V, Chapter 3.
 A somewhat later comment (1832): ‘The direct tendency of the principles of the Economists is … to replace the feudal aristocracy, from which Europe has suffered so much, with a monied aristocracy more base in its origin, more revolting in its associations, and more inimical to general freedom and enjoyment.’ John Wade, The Black Book.
 ‘…repaying bank loans destroys money just as making loans creates it.’ – Bank of England Quarterly Bulletin 2014 Q1.
 The threat of losing expensive ‘reserve’ to other banks means that individual banks have to be competitive. C.A. Phillips, misunderstood and little-read nowadays, provides the best explanation (Bank Credit, 1931).
 Ricardo, Works VIII: 399-400 and Works VIII, 390.
 In the language of economics: ‘aggregate production necessarily creates an equal quantity of aggregate demand’.
 An older-school economist says the same: ‘Full regular employment of the factors of production demands the maintenance of a proper proportion between the production of consumable commodities and that of capital goods; that proportion varying, of course, with changes in methods of production. In other words, there exists at any given time an economically sound ratio between spending and saving. Excessive spending (as in the war) encroaches on saved capital, and impairs future productivity. Excessive saving operates, through deficient demand for commodities, to slacken the sinews of production and produce more capital goods than are able to be put to full productive use.’ J.A. Hobson, The Economics of Unemployment (1922).
 The banker’s tricks of the trade may be ‘hardly worthy of even a third-rate magician’ but kept secret they are the devastation of the world. W.J. Thorne, Banking (1948) p. 133.
 Other People’s Money (2015) p.1 and Chapter 6.
 Widely reported Jan/Feb 2016 as part of Sanders’ campaign to become presidential nominee. Sanders also points out that Walmart employees are paid so little, the government has to supplement their wages; thus the richest family in America is also the biggest profiteer from welfare payments.
 The comedian Bob Hope: “A bank is a place that will lend you money if you can prove you don’t need it.”
 In Keynes’ version of a better future, ’The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.’ (‘Economic Possibilities for our Grandchildren’, 1930).
 Wealth of Nations (1776) Book III, Chapter IV.
 See earlier in this chapter, under MONEY: THE ACT OF CREATION.
 Estimate from the Wall Street Journal: http://blogs.wsj.com/economics/2013/05/11/number-of-the-week-total-world-debt-load-at-313-of-gdp/
 See footnote 13.
 Mitchell, British Historical Statistics (1990) and Ritschl, ‘Sustainability of High Public Debt’ (1996).
 The quoted words are from Montesquieu, De l’Esprit des Lois (1748) Part 4, Book 22, Chapter 17.
 Just as banks create money as negotiable debt, so governments create debt as a negotiable commodity. The difference is that banks charge interest on what they owe; governments pay interest on what they owe. Here we see the worst of all collusions between governments and money-power.
 See note 13, above (Alexander Hamilton).
 Schumpeter, a leading 20th century economist, asserted that the old-fashioned argument used in this paragraph to explain business cycles is ‘contemptible’ and ‘beneath discussion’. Apparently, ‘it involves neglect of the elementary fact that inadequacy or even increasing inadequacy of the wage income to buy the whole product at cost-covering prices would not prevent hitchless production in response to the demand of non-wage earners either for ‘luxury’ goods or for investment.’ If this were true, the trillions being held today (2016) at near-zero interest rates would be busy employing the poor to make luxury goods and build new factories.
 Lester, Richard A. Monetary Experiments (1939, 1970) p. 291; and on p.292, ‘If the monetary system is to moderate rather than magnify the business cycle, money must be segregated from banking.’
 ‘Business cycles’ do not seem to have existed before bank-money and negotiable debt.
 As mentioned below, this is not the case when the lender is given negotiable debt (‘bonds’) in return.
 See, for instance, Joan Robinson, Freedom and Necessity Chapter 8, for a conventional account.
 Examples: During the ‘arms race’ in the Cold War, the U.S. enjoyed a rare stretch of financial growth and stability: between five and ten percent per year for several decades. http://www.multpl.com/us-gdp-growth-rate/table/by-year. Today, Russia is resorting to massive armaments production to restore spending money to a plundered populace; and North Korea (where the credit-creation facility belongs not to private banks but to the state) builds nuclear weapons despite, or because of, the poverty of its people.
 Examples: ‘In the first six years of the Obama administration the United States agreed to transfer nearly $50 billion in weaponry to Saudi Arabia’ which then went to war with one of the poorest countries on Earth: Yemen. http://www.nytimes.com/2016/04/20/opinion/obama-saudi-arabia-trade-cluster-bombs.html The five permanent members of the UN Security Council (China, France, Russia, the United Kingdom and the United States) are tasked with maintaining global peace and security, but companies based in these nations manufacture 71 per cent of the world’s arms (Roslyn Fuller, Beasts and Gods: How Democracy Changed Its Meaning and Lost its Purpose (2015) page 159) and the same arms companies contribute heavily to political campaigns. Sometimes the same government will fund several opposing factions: the activities of the United States in Central America are well-documented; Syria today is another example.
 The French and Russian revolutions are classic examples.
 This has consistently been the recommendation of those who wish for justice, common sense and economic well-being in money-creation. The websites publishing these chapters, Positive Money and The Cobden Centre, both have detailed proposals towards that end. See the paper published by Positive Money: Digital Cash: Why Central Banks Should Start Issuing Electronic Money (Jan 2016) and The Cobden Centre’s page of proposals to replace bank liabilities with money that is property, and credit backed by genuine savings.