Where do potatoes come from?
— From the farmer's field.
Where are little calves born?
— In the stable.
Where do plums come from?
— From the plum tree.
Everyone knows this.
But now ask the same question about money:
Where does money come from? The dollar bill I have in my pocket, where was it born? Who gave birth to it, for what reason, and under what conditions?
Where were the millions and millions of dollars born with which the Government financed the War, the same Government which claimed during the previous ten years that there were not enough dollars in the country to finance common public works?
And where do dollars disappear once they leave our sight? Where did the dollars go during the 1930-1940 Depression, those dollars which had financed the country so well from 1925 to 1929?
Where are dollars born and where do they die?
Ask these questions, and see how many people can answer.
Neither God nor the weather creates dollar bills. And yet dollars do not create themselves! Who creates them? Who knew how much to create to pay for the War? And why did they create the money to finance the War and not the money needed previously to settle the Depression?
In order to clearly understand where money begins and where it ends, one must distinguish between two kinds of money: coin and paper money, and bookkeeping money.
Coin and paper money constitutes our pocket money. This is the money that ordinary people use every day.
Big industry, large retail businesses, are more likely to use bookkeeping money. To make use of bookkeeping money, one simply needs to have a bank account.
Let us suppose that I have a bank account with $2,000 to my credit. I buy an electric washing machine at Sears. It costs $600. I pay for it with a $600 cheque drawn on my bank account. What will happen?
I will receive my washing machine. Sears will deposit my cheque at its own bank. The banker will raise Sears' credit by $600. Sears' bank will then send the cheque to my bank. The banker will decrease the credit of my account by $600. And that is it. Not one dollar will have left a pocket or a drawer. An account will have increased — the retailer's; another one will have decreased — mine. I have paid with bookkeeping money.
Bookkeeping money is the credits in bank accounts.
This kind of money accounts for 90 percent of all commercial transactions. It is the main kind of money in civilized countries such as ours.
Better still, when bookkeeping money increases, pocket money increases, and when bookkeeping money decreases, pocket money decreases. When ten dollars of bookkeeping money goes into circulation, one dollar of pocket money (coins or paper money) enters into circulation. When ten dollars of bookkeeping money disappear from circulation, one dollar of pocket money disappears from circulation. This is the current ratio.
It is bookkeeping money that leads the way. Its quantity is what determines the quantity of the other kind of money.
To find out where money begins and where it ends, we must find out where bookkeeping money begins and where it ends.
Again, bookkeeping money, the money that controls all money, is a credit in a bank account.
Increasing credits in some bank accounts, while decreasing them in other accounts, is merely a transfer of bookkeeping money. If the credits correspond to metal or paper money deposited at the bank, it is a change from pocket money to bookkeeping money. But if the credits in some bank accounts are increased without any corresponding decrease elsewhere, then, new bookkeeping money has been created which increases the total volume of money available.
When I save and then deposit $100 in the bank, the bank writes down $100 to my credit. This gives me $100 in bookkeeping money. But this is not new money; it is merely money that went from my pocket to the bank, or from the account of someone, who has issued me a cheque, to my own account. It is not the birth of new money; it is a simple case of savings being deposited.
But, if instead of bringing my savings to the bank, I come to the bank to borrow a great deal of money, let us say $100,000 to enlarge my factory, what happens then?
The bank manager has me sign some forms and guarantees. Then he hands me a cheque that I deposit with the teller. The teller simply adds $100,000 to my credit and writes this down in my bankbook.
I leave the bank without carrying any cash on me, but I have an additional $100,000 of bookkeeping money to my credit, which I did not have upon entering. This allows me to pay by cheque for machinery, materials and workers for a total amount of $100,000.
Moreover, no other account in the bank was decreased to accomplish this. Not a penny was moved, whether from a drawer, a pocket, or an account. I have $100,000 more, yet no one has a penny less.
This $100,000 did not exist an hour ago, and yet here it is entered to my credit, into my bank account.
Where then did this money come from? This is new money which did not exist when I walked into the bank, which was neither in anyone's pocket nor in anyone's account, and yet it is now in my account.
The banker has actually created $100,000 of new money in the form of credit, in the form of bookkeeping money: Script money which is just as good as coin and paper money.
The banker is not afraid to do this. My cheques to payees will give them the right to draw money from the bank. But the banker knows that nine-tenths of these cheques will simply have the effect of decreasing my account, and of increasing other people's accounts. He is well aware that a ratio of bank reserves to loans of 1 to 10 is enough for him to answer the requests of those who want pocket money. In other words, the banker knows full well that if he has $10,000 in cash reserves, he can lend $100,000 (ten times the amount) in bookkeeping money.
– Editor's note: The preceding paragraph was written in 1946, and this ratio (a 10% cash reserve requirement) has changed since then. In 1967, the Canadian Bank Act allowed the chartered banks to create sixteen times (in bookkeeping money) the sum of their cash reserves. Beginning in 1980, the minimum reserve required in cash (bank notes and coins) was 5 per cent, which meant that the banker needed only one dollar out of twenty to answer the needs of those who wanted pocket money. The banker knew that if he had $10,000 in cash, he could lend twenty times the sum, or $200,000, in bookkeeping money.
In practice, banks can lend out much more, since they can increase their cash reserves at will by simply purchasing bank notes from the central bank (the Bank of Canada) with the bookkeeping money they created. For example, it was established in 1982, before a parliamentary committee on banks' profits, that in 1981, the Canadian chartered banks had issued loans 32 times in excess of their combined capital. A few banks even lent sums equal to 40 times their capital. In 1990, in the United States, the total deposits of commercial banks amounted to about $3,000 billion, and their reserves amounted only to $60 billion. This resulted in a ratio of deposits to bank reserves of about 50 to 1. U.S. banks held enough cash to pay off depositors at the rate of only about two cents on the dollar.
Subsection 457(1) of the Canadian Bank Act, enacted on December 13, 1991, states that, as of January 1994, the primary reserve, in the form of cash, that a chartered bank has to maintain is nil, zero. So the banks are no longer limited by law in creating credit, or bookkeeping money. In 1995, Canadian banks had lent out 70 times the amount of their cash reserves. This number reached 100 times their cash reserves, by 1997.
When the Government borrows from the banks, the procedure is the same. The amounts are much greater, because the entire wealth of the country, the whole taxation power, is used as guarantee given to the banker, in the form of bonds (debentures).
At the onset of the War in 1939, the Government, which had been short of money for the last ten years, went to the banks to subscribe an initial loan of $200 million. The banks did not have any more money than they had the day before. For the previous ten years, people had been out of money. When one is out of money, one hardly has any surplus to bring to the banks.
Yet, banks loaned the Government the $200 million. They added $200 million to the Government's credit in bookkeeping money. And the young people, who had been wandering about aimlessly for years because there was no money, were called immediately by the Government, dressed from head to toe, given accommodation, fed, equipped, and transported to Europe to take part in the killing.
And this was the case for all countries. The world had suffered unemployment for ten years, due to the scarcity of money. The same world was able to fight a very costly war, because the banks had created all the bookkeeping money that was needed to finance the War.
Canada's banks thus created, during the War, at least 3 billion dollars of new money to finance Canada's share of the universal genocide.
Money is easy to create, since all that is needed is a banker's pen. And yet, before the War, due to a lack of money, the world was forced into doing penance for ten years, and no government gave the pen the order to create money.
But this bookkeeping money, created by the banks, is created under certain conditions. It must be returned before a given date, and more money brought back with it, in the form of interest.
Thus, when the Government borrows one million at 10 percent interest for a period of twenty years, it is forced to pay back three million dollars within twenty years — $1 million in capital and $2 million in interest.
Since the Government does not create money, and since it cannot draw from the people more money than was put into circulation, it can return to the banker only the money the banker has created. The more the Government tries to meet its obligations, the more it creates a scarcity of money in the country. It must even borrow further amounts so as to be able to repay, indefinitely, the interests on the capital thus created by the banks.
This is the reason why public debts are on the rise, why interests are climbing, and why taxes to pay the interests are more and more burdensome.
As for private individuals who also borrow from the banks, they must either pay back with interest or go bankrupt. If some succeed, it is by extracting from others more money than they had invested, by selling their products at inflated prices. In a system where money begins as a debt laden with interest, if some people succeed, others must fail.
When money is returned to the bank, nine-tenths of it is returned as credit and is simply cancelled out; this money ceases to exist. The bank is both the cradle and the grave of money. It creates money and destroys money.
When loans are called back at a rate greater than the rate at which loans are issued, money is destroyed faster than it is created, this results in a crisis. This is how the 1930-1940 Depression began.
When the amount of new loans exceeds the amount of money called back, money created exceeds money destroyed, and money then becomes plentiful. This is what happened during the War when there was more money than products.
As can be seen, the level of money in circulation is dependent upon the actions taken by the banks. And the banks' actions are in no way related to production or to needs.
In a world where we need money to live, it is easy to understand that a system which gives private interests — the banks — the power to regulate the level of money as they please, places the world at the mercy of the makers and destroyers of money.
In the words of Pope Pius XI, "Those who control money and credit have become the masters of our lives. No one dare breathe without their permission."
One point must be emphasized: It is production that gives value to money. A pile of money without corresponding products does not keep anyone alive. But the farmers, the industrialists, the workers, the professionals, the organized citizenry, are the ones who create the products, goods and services. But it is the bankers who create money based on these products. They call this money theirs, money that draws its value from the products. They lend this money to the very people who create the goods and services. This amounts to legalized robbery.
 Pius XI, Quadragesimo Anno, Paragraph 106.
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