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Banks really do create money out of nothing

on Saturday, 01 August 2015. Posted in Social Credit

by Oliver Heydorn

Oliver Heydorn is the founder and director of “The Clifford Hugh Douglas Institute for the Study and Promotion of Social Credit” ( He is also the author of two recent books on the subject: “Social Credit Economics” and “The Economics of Social Credit and Catholic Social Teaching.”

Oliver HeydornJust last year, the Bank of England openly admitted that the private banks are responsible for creating the bulk of the money supply out of nothing. This is significant, because although the truth about the bank creation of money has been floating around in the public forum for at least the last one hundred years (largely due to the efforts of C.H. Douglas and others), some bankers and economists have denied this reality, while others, like Reginald McKenna, have been quite open about it:

At the annual meeting of shareholders of the Midland Bank on January 25th, 1924, Reginald McKenna, the chairman of that bank, gave a clear and succinct account of the credit-creation process:

“The amount of money in existence varies only with the action of the banks in increasing or diminishing deposits. We know how this is effected. Every bank loan and every bank purchase of securities creates a deposit, and every repayment of a bank loan and every bank sale [of securities – OH] destroys one.” (Reported in the San Bernardino County Sun on March 15th, 1924, page 24.)

R. McKennaR.McKenna

Even today, there are many people, including many politicians, who are blissfully unaware and/or seriously misinformed regarding the origin of our money supply.

In the Bank of England document “Money Creation in the Modern Economy”, the relevant facts are presented in the paper’s overview as follows:

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

Whenever banks make loans, i.e., whenever they purchase the IOU’s or promissory notes of firms, governments, or individuals, or buy securities, or pay their own operating costs, they create new money in the form of bank credit. This bank credit exists in the form of intangible, electronic numbers. In the typical industrial country, 95% or more of the money supply exists in the form of bank credit and most of that credit is created alongside a corresponding volume of interest-bearing debt (or debt equivalent). Only 5% or less exists in the form of notes and coins, or currency.

The bank creation of the bulk of our money supply is something that should be openly admitted by the banks and it should be part of the population’s general knowledge. It bears repeating: banks do not lend other people’s deposits. Instead, every loan and every bank purchase creates a deposit, or brand new money.

Now, it is easy, on the basis of this startling revelation, to believe that the main problem with the existing financial system is the blunt fact that the banks create most of the money supply out of nothing. From a Social Credit perspective, however, this state of affairs should not be the centre of our concern. After all, someone, whether the banks, the state, or the banks in conjunction with the state, has to create the money supply. The main problem with the system has to do with the conditions under which our money is created, issued, and recalled.

In other words, the main issue has to do with policy: who controls the money supply and for what purposes?

Under the existing system, the money supply is largely controlled by the private banks and the conditions of its creation, issuance, and recall serve the interests of financiers at the expense of the legitimate interests of consumers.

Now, the solution to the private domination of the money supply is not to replace it with a total state or government monopoly control over money. The state could just as easily create, issue, and recall money in order to serve the interests of an oligarchic elite who had assumed control of the state if other financial and economic conventions were not changed. It is, above all, the terms which govern the operation of the money supply that need to be altered in favour of the individual.

In an honest monetary system, ie., one that accurately reflected the relevant realities, individual consumers would occupy the commanding heights of the economy and would, directly or indirectly (i.e., through a National Credit Office), control the conditions of money creation, issuance, and recall so as to ensure that their policy (i.e., the objective that is in line with their best interests) is properly promoted.

What is this alternative policy which the financial system (i.e., the banking and cost accountancy systems) should serve? Answer – The effective delivery of the desired goods and services with the least amount of effort and resource expenditure.

At present, the consumer tends to receive the least amount of goods and services in exchange for the greatest amount of effort and resource expenditure. Until the latter policy-objective is replaced by the former, there can be no genuine economic democracy and no real political democracy either.

The fact that the banks create the money they lend or otherwise issue out of nothing has been admitted by a number of other prominent bankers throughout the twentieth century. Here are just two further examples:

Graham TowersGraham Towers

Graham Towers

Responses of Graham F. Towers, Governor of the Bank of Canada from 1934-1955, to questions posed by Mr. McGeer during the May 3rd, 1939 meeting of the House of Commons Standing Committee on Banking and Commerce:

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

– A. That is right. That is what they are there for.

Q. That is what they are there for and that is what they do. – A. Yes, they do.

Q. And they issue that form of medium of exchange when they purchase securities or make loans? – A. That is banking business, just in the same way that a steel plant makes steel.

Q. So that we are clear on this point that our merchant banks do create and issue 88 per cent of the money medium of exchange in common use in Canada today? That is correct, is it? – A. Roughly.

Source: 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), 287.

“If all bank loans were repaid, no one would have a bank deposit, and there would not be a dollar of currency or coin 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 monetary system. When one gets a complete grasp upon this picture, the tragic absurdity of our helpless situation is almost incredible – but there it is.“

Robert H. Hemphill, former Credit Manager of the Federal Reserve Bank of Atlanta, in his forward to Irving Fisher’s 1935 book, 100% Money.

Oliver Heydorn

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