How Banks Create Money Banks actually create money when they lend it. Here's how it works: Most of a bank's loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank once again holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times. The tricky part of monetary policy is making sure there is enough money in the economy, but not too much. When people have the money to demand more products than the economy can supply, prices go up and the resulting inflation hurts everyone. While in the United States we get concerned when inflation climbs above 3 percent a year, we've been more fortunate than some other countries. Just imagine trying to survive in post-World War II Hungary, for instance, where inflation for awhile averaged nearly 20,000 percent per month! http://www.dallasfed.org/educate/everyday/ev9.html If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon. Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta in the Great Depression, wrote in 1934: "Thus, our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess." - Irving Fisher Some of the most frank evidence on banking practices was given by Graham F. Towers, Governor of the Central Bank of Canada (from 1934 to 1955), before the Canadian Government's Committee on Banking and Commerce, in 1939. Its proceedings cover 850 pages. (Standing Committee on Banking and Commerce, Minutes of Proceedings and Evidence Respecting the Bank of Canada, Ottawa, J.O. Patenaude, I.S.O., Printer to the King's Most Excellent Majesty, 1939.) Most of the evidence quoted was the result of interrogation by Mr. âGerryâ McGeer, K.C., a former mayor of Vancouver, who clearly understood the essentials of central banking. Here are a few excerpts: Q. But there is no question about it that banks create the medium of exchange? Mr. Towers: That is right. That is what they are for... That is the Banking business, just in the same way that a steel plant makes steel. (p. 287) The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all. (pp. 76 and 238) Each and every time a bank makes a loan (or purchases securities), new bank credit is created â new deposits â brand new money. (pp. 113 and 238) Broadly speaking, all new money comes out of a Bank in the form of loans. As loans are debts, then under the present system all money is debt. (p. 459) Q. When $1,000,000 worth of bonds is presented (by the government) to the bank, a million dollars of new money or the equivalent is created? Mr. Towers: Yes. Q. Is it a fact that a million dollars of new money is created? Mr. Towers: That is right. Q. Now, the same thing holds true when the municipality or the province goes to the bank? Mr. Towers: Or an individual borrower. Q. Or when a private person goes to a bank? Mr. Towers: Yes. _Q. When I borrow $100 from the bank as a private citizen, the bank makes a bookkeeping entry, and there is a $100 increase in the deposits of that bank, in the total deposits of that bank? Mr. Towers: Yes. (p. 238) Q. Mr. Towers, when you allow the merchant banking system to issue bank deposits which, with the practice of using the cheques as we have it in vogue today, constitutes the medium of exchange upon which I think 95 per cent of our public and private business is transacted, you virtually allow the banks to issue an effective substitute for money, do you not? Mr. Towers: The bank deposits are actual money in that sense, yes. Q. In that sense they are actual money, but, as a matter of fact, they are not actual money but credit, bookkeeping accounts, which are used as a substitute for money? Mr. Towers: Yes. Q. Then we authorize the banks to issue a substitute for money? Mr. Towers: Yes, I think that is a very fair statement of banking. (p. 285) Q. 12 per cent of the money in use in Canada is issued by the Government through the Mint and the Bank of Canada, and 88 per cent is issued by the merchant banks of Canada on the reserves issued by the Bank of Canada? Mr. Towers: Yes. Q. But if the issue of currency and money is a high prerogative of government, then that high prerogative has been transferred to the extent of 88 per cent from the Government to the merchant banking system? Mr. Towers: Yes. (p. 286)_ Q. Will you tell me why a government with power to create money, should give that power away to a private monopoly, and then borrow that which parliament can create itself, back at interest, to the point of national bankruptcy? Mr. Towers: If parliament wants to change the form of operating the banking system, then certainly that is within the power of parliament. (p. 394) Q. So far as war is concerned, to defend the integrity of the nation, there will be no difficulty in raising the means of financing, whatever those requirements may be? Mr. Towers: The limit of the possibilities depends on men and materials. Q. And where you have an abundance of men and materials, you have no difficulty, under our present banking system, in putting forth the medium of exchange that is necessary to put the men and materials to work in defence of the realm? Mr. Towers: That is right. (p. 649) Q. Would you admit that anything physically possible and desirable, can be made financially possible? Mr. Towers: Certainly. (p. 771) âThat is what our money system is. If there were no debts in our money system, there wouldnât be any money.â Marriner S. Eccles, Chairman and Governor of the Federal Reserve Board "Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes such as mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create money and control credit." - Sir Josiah Stamp 1920 - Director of Bank of England
The point about Chinese having a "super kill weapon" the US can't deal with was entertaining. I had a good chuckle. Oh, this wasn't comedy? Er...forget what I said. Great article!
So how many FXP do you own, or how are you short ?> How long have you been short? How are you making money from this knowledge ?