If you, who are not a Banker, have $100, you are able to lend to someone or to several others a total amount of $100, but no more. And the $100 that you lend you have no more.
He, the Banker, is able to lend $1,000 for each $100 that he has in ready cash, all the while keeping this $100. This is what his privilege consists of. He will lend, let us say, $100 to Peter, $100 to Andrew, $100 to James, $100 to John, and so on to ten individuals: that will make ten times the $100, without touching it. And it is on ten times $100 that he will ask for interest.
If it is you who deposited this $100 at the bank, you will be able to receive from the Banker, at an interest rate of 3½ percent, $3.50 interest in one year.
But he, the Banker, will lend at 6 percent, and, at one and the same time, he will lend ten times your amount, thus getting $60 in interest in one year.
You see the difference. It is you who earned this $100 by your work, and it brings you $3.50 annually. He, the Banker, did not earn this $100, but the traffic of credit that he creates on the $100 brings him $60 annually.
It is you, the deserving one; it is he, the profiteer. That will not prevent some moralists of preaching to you to earn your living by the sweat of your brow, and the Banker to preach savings to you, adding that his bank is there to take care of it.
The Banker reaps a good of civilization: the confidence that the citizens mutually exchange in their commercial relations, without caring about the form or the nature of the monetary instrument used in these relations. As, in fact, we have first gradually learned to make confidence in paper money as much as in gold or silver coins, likewise we have since learned to have confidence in cheques, in scriptural money, as much as there is coins or notes.
The borrower who has obtained a simple credit of figures at the bank will be able to make his payments in signing cheques on this credit amount. The one who receives the cheque can deposit it at the bank. And in this case, which is very common in commerce, there will be but a credit transfer in the Banker's ledger: a reduction in the signatory's account, and an increase in the beneficiary's account who deposits the cheque. A simple arithmetical operation, not moving one cent in coins or notes.
If the one receiving the cheque wants to cash it for palpable money, as it happens, for example, for many who receive a salary, he goes to the bank, and there, the Banker really brings out cash (notes or coins) for the amount of the cheque. But it does not take too long before the money returns back to the bank, deposited by shopkeepers or owners. The same money can thus serve for several successive cheques.
On the whole, in Canada, the bank does not need more than one cash-dollar to thus sustain ten dollars of scriptural money. This is why the Banker does not have to worry as long as his credit creations do not surpass 10 to 12 times his liquid reserves.
There is absolutely nothing wrong for Canadians to thus have confidence in cheque money. Nothing is wrong whatsoever, either, for them to suffice to writing operations to create money, purely scriptural money, serving as well as the other in commercial transactions. This is even a substantial progress in disproving the theory that money is linked to gold: this accountancy permits, in effect, if one wishes, to regulate the volume of money, not in relation to the gold quantity that one can bring out from the mines, but in relation to the goods which the country's production can offer, and that consumers desire.
The defect it not in the mechanism, but in the diversion of the end of which the mechanism ought to serve.
The evil is not that money can be created by the stroke of a pen. The evil is that money thus created is considered by the Banker as his own, whereas, in reality, it ought to be owned by society, regulated in accordance with the needs of society in front of the country's possibilities to produce.
This creation of credit-money by the Bankers has been going on for a long time. Major Douglas, the founder of the Social Credit school, wrote:
"The banks, or the Treasury, can create money in five minutes, and they have done it for centuries."
But this mechanism had not been exposed or explained to the public. And when Douglas began to unveil it in his writings, there was a general outcry: from the highest to the lowest grade, the Bankers denied their role of money creators. The banks, they maintained, lends but their depositor's money. In front of the evidence, however, they had to admit the truth. The few small Bankers who keep on saying that the banks do not create money are latecomers.
Beginning with its edition of 1910, the Encyclopedia Britannica, which is accepted as an authority, writes in big bold letters: "Banks create the means of payment."
On March 22, 1933, in a radio program on the BBC network (in England), R.G. Hawtrey, the Assistant-Secretary to the Exchequer, went as far as to say:
"Moreover, I am in agreement with him (Major Douglas) on the fact that the banks create money, and that trade depressions arise from faults in the banking system in the practice of that vital function."
This same Hawtrey, in a writing entitled "Trade Depression and the Way Out", thus expressed himself:
"When a bank lends, it creates money out of nothing."
And in his book, "The Art of Central Banking":
"When a bank lends, it creates credit. But other lenders have not this mystical power of creating the means of payment out of nothing. What they lend must be money that they have acquired through their economic activities."
Reginald McKenna, then chairman of the Midland Bank, the biggest commercial bank of England, and former Chancellor of the Exchequer (England's Minister of Finance), said to a meeting of the bank's shareholders:
"The amount of money in existence varies only with the action of the banks in increasing and decreasing deposits and bank purchases. We know how this is effected. Every loan, overdraft, or bank purchase creates a deposit, and every repayment of a loan, overdraft, or bank sale destroys a deposit."
On another occasion, the same McKenna went as far as to describe the immense power that this credit creation confers to the Bankers.
"The banks," he said, "control the nation's credit, direct the Government's policy, and hold in the hollow of their hands the destiny of the people."
This is almost the same expressions that Pius XI used in his Encyclical Letter "Quadragesimo Anno" to denounce this despotic financial domination on the economic life of nations and individuals:
"This domination is most powerfully exercised by those who, because they hold and control money, also govern credit and control its allotment, for that reason; supplying, so to speak, the life blood of the entire economic body, so that no one dare breathe against their will."
Eccles, when he was at the head of the American banking system (the Federal Reserve Bank Board), was no less clear:
"The banks," he said, "can create and destroy money. Bank credit is money. It is the money we do most of our business with, and not with the currency that we usually think of as money."
At home, in Canada, Graham Towers, responding to questions asked before the Committee on Banking and Commerce of the House of Commons, in 1939, was very categorical.
Question: "But there is no question about if that banks create the medium of exchange?"
Towers' answer: "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."
Before the New Zealand Royal Commission on the monetary system, in 1955, H.W. Whyte, Chairman of the Associated Banks of New Zealand, responding to questions, declared that the banks create new financial credit when they make loans or advances. He added:
"They have been doing it for a long time, but they did not quite realize it, and they did not admit it. Very few did. You will find it in all sorts of documents, financial textbooks, etc. But in the intervening years, and we must all be very frank about these things, there has been a development of thought, until today I doubt very much whether you would get many prominent Bankers to attempt to deny that banks create credit. I have told you that they do, Mr. Ashwin (Secretary of the Treasury) has told you that they do, and Mr. Fussell (Governor of the Reserve Bank, the central bank) has told you that they do."
There is no need to prolong these quotations, since the fact of money creation by the banks is now admitted.
But it is necessary that new money begins somewhere, and the capital point to consider, it is not who practices this function, but the end pursued in the practice of this function, in its essence of a social function.
Major Douglas wrote:
"The first step towards dealing with the problem is the recognition of the fact that what is commonly called credit by the Banker is administered by him primarily for the purpose of private profit, whereas it is most definitely a communal property." (Economic Democracy, p. 119.)
The Banker appropriates a common good; he robs the community.
The vitiation of the financial system caused, and still causes, so much evil that we will return frequently on this subject.