How Money is Created

This piece is taken from the Autumn 2014 issue of The Social Artist - www.douglassocialcredit.com - Extracted from Money and the Price System, Speech delivered by Clifford H. Douglas (1879-1952) at Oslo on February 14, 1935, to H. M. The King of Norway, H. E. The British Minister, The President, and Members of the Oslo Handlesstands Forening (Merchants Club).

by Clifford Hugh Douglas

I am going to ask you to bear with me while I go over certain features of the existing state of affairs and the misunderstandings which are connected with it. The situation is complicated by a large number of phrases — I don’t know whether you have them in Norwegian but we have them in English — and they are misleading. For instance, we hear, or we did hear in the happy days gone by, that, let us say, Mr. Jones was “making money.” Mr. Jones was a boot-maker or a brewer, or a manufacturer of motor cars.

How Money is Made

Now the first thing I think that we have to recognize — a thing which is quite incontestable — is that there are only three classes of people in the world who make money, in any literal sense of the word. In Great Britain, for example, there is the Master of His Majesty’s Mint, who makes metal coinage, and, after a long and honorable career, he generally gets a little bit of red ribbon — a Knight Commandership of the Bath — and a good salary.

There is a gentleman who sets up a little plant of his own and either makes counterfeit coins or writes very delicately executed signatures on pieces of special paper. He “makes” money, but he gets as a reward fifteen years imprisonment. There is the third who, in regard to this matter, is much less advertised and much more retiring, and that is the banker, and it is he, in the literal sense of the word, who makes over 90 per cent. of the actual money that we use.

When I say “makes it” I mean exactly what I am saying; he makes it in exactly the same sense that the brick-maker makes bricks, and not in the sense that Mr. Jones makes money; Mr. Jones only gets it from somebody else, but the banker makes it.

The method by which the banker makes money is ingenious, and consists very largely of bookkeeping. There is not, I think, in well-informed circles really any discussion in regard to the matter itself. Chairmen of some of the big English banks still deny that bankers make money in the sense that I mean, but I don’t think anybody pays much attention to them. The Encyclopedia Britannica which most people accept as a fairly sound and reputable authority, states that “bankers create the means of payment out of nothing”.

The Chairman of the Midland Bank, the Right Honorable Reginald McKenna, put the matter as shortly as I think it can be put when he said that every bank loan creates a deposit, the repayment of every bank loan destroys a deposit; the purchase of a security by a bank creates a deposit, and the sale of a security by a bank destroys a deposit. There you have, in as short a compass as possible, a quite undeniable statement of where money comes from. All but 0.7 of one per cent. (or over 99 per cent.), in Great Britain at any rate, of the money transactions — without which under modern conditions none of us could exist — are in the form of “bank credit,” which is actually manufactured by the banking system and is claimed by the banking system as its own property. That is undeniably because the banking system lends this money (it does not give it), a condition of affairs which will be accepted by anybody as sufficient proof of a claim to ownership.

Over against that, you have the manufacturer of real wealth, by which I mean things which money will buy, clothes, houses, motor cars, the things that go to raise the physical standard of living, and embroider our civilization. We realize, I suppose, without having it emphasized too much, that the possession of money is a claim upon real wealth: some of us who have not gone into these matters for any length of time are still hypnotized into thinking that money is real wealth. I am sure, in an audience of this calibre, it is not necessary to emphasize this: money is not real wealth. It is a claim upon real wealth. Now classical economics is based unquestionably, in my opinion, on “barter” economics, and this is where the classical economics parts with what we are beginning to call the new and, in my opinion, the real economics.

Money now as a Means of Distribution

The classical economics works on the assumption that the nature of money is that it is a medium of exchange. That idea proceeds from a state of affairs which was, at any rate broadly speaking, true perhaps 200 years ago. It was the assumption that in some sense or other, from the highest to the lowest, everybody worked, and that they exchanged or bartered the fruits of their work with each other through the medium of money, so far as it was used. The idea was that you had a constant exchange of goods and services between, let us say, A, B and C; and the whole of the classical economics is really based upon that idea, that we are all of us producers and consumers in the economic sense, and that the function of money is to exchange between ourselves the goods and services which each of us produces.

Whatever may at one time have been the truth of this, it is, of course, patently not true now. The modern economic production system is not a system of individual production and exchange of production between individuals.

It is more and more the synthetic assembly, in a central pool, of wealth consisting of goods and services which are preponderantly due to the use of power, to modern scientific processes and all sorts of organizations and other constituent contributions of each one of us which will occur to you.

The problem is not to exchange the constituent contributions of each one of us to that central pool, because in fact our contribution to that central pool, in the ordinary sense of tangible economic things, is becoming smaller and smaller. The correct picture — the incontestably exact picture of the modern production system — is to my mind, based upon a kind of typewriter with a decreasing number of operators who are tapping the keys, and, by tapping these keys, fewer and fewer operators can produce all that we require. Through the power of the sun (oil power, steam power and so forth consist of what is generalized as solar energy) the so-called curse of Adam is being transferred from the backs of men to machines, so that a small number of persons operating on this machine of industrial “production”, can produce all that is required for the use of the population; and the problem is not to exchange between the number of the population, who are less and less required to push these keys, but it is to draw from this central pool of wealth by means of what can be visualized as a ticket system.

And the modern money system is in fact losing almost daily its aspect, however much it may at one time have been true, of a medium of exchange, and becoming more and more a ticket system by which people, who are not exchanging their production, can draw from that central pool of wealth. That I believe at bottom to be the fundamental cleavage between, let us say, my own view and those who think with me, and the school of classical economics.

C.H. Douglas