The scene is a banker's office; seated, the banker; and by him, also seated, the industrialist. The latter is asking for a loan from the former. He explains why he wants it, states its size, and then takes out of his pocket various bonds, mortgages, stocks or shares which he is prepared to deposit against the loan as collateral security. If in his turn the banker approves of the uses to which the loan is to be put, feels reasonably sure of getting his money back, with interest, and considers the securities offered to be sufficiently secure, he nods and the loan is made.
Arabic numerals — say a one and six noughts are written in the bank's ledger and hey presto! a million pounds have been created. For, watch the subsequent activities. The industrialist draws cheques on that million; one he pays to a contractor, let us say, for the installation of some new machinery; the contractor converts the cheque into wages for his workmen, on Friday; on Saturday the workmen's wives go shopping; and on Sunday workman and wife sit down and eat of the Sunday joint bought with some of those million pounds (or dollars). From banker's nod to the reality of roast beef!
At first sight it may seem that the new million pounds is nothing after all but part of the securities deposited as collateral and transferred in some way to the bank's ledger. But the said securities remain untouched. They continue to draw their interest as before, and behave in every respect as though they were in the industrialist's bank for safe-keeping instead of in the lending bank as collateral security against the million pounds: and no amount of argument will obliterate the fact, a fact as solid as roast beef, that after the loan was made a million pounds came into existence which was not in existence before.
It is perfectly true that the depositing of securities was a condition of the manufacture of the million pounds, but the latter were new for all that. Moreover the bank had the power to create them unconditionally had it chosen to exercise this power. If this is not creation, what is? The term is a strong one. But it is not an exaggeration, for nothing on this earth is created except from some sort of materials already existing, and money, with its materials of faith, pen and paper is no exception. To boggle at the use of the term, "creation" because of these, or to question the brand-newness of the million pounds, because the deposit of securities was a condition imposed by the lender for its manufacture, is equivalent to quibbling that the birth of a child is not a "creation" and to denying that the child increases the population, on the ground that it could not have been born without the collaterai existence of its mother. In any case, we have the authority of Mr. Reginald McKenna, who said, as Chairman of the Midland Bank: "The amount of money in existence varies only with the action of the banks. Every bank loan creates a deposit."
Although, then, we are stressing the function of the banking system as a manufacturer of money, it is far from our object to impress the reader with any suspicion that such manufacture is criminal. It is, on the contrary, both necessary and beneficial. Our object is to impress upon the reader the importance of the fact that it is a private body, not responsible to the nation, which actually manufactures and controls the manufacture of money, and by doing so controls the nation's means of life.