We all have heard or read of people who "made lots of money”. A father will say to his son, just graduated from school: “Now, my boy, look for a good job where you can make money.” Or a lecturer to his audience: “If you want to make money, you must leam to work, save and invest.” Or a schemer in search of a dupe: “Joe, I have an A-1 proposition; if you bring in your share as a partner, we will both make lots of money in no time..."
The fact is that none of these people do make a single dollar. They may earn money. They may wring or rob money from those who have it. But make money? Produce money which did not exist before? Increase the total amount of money in existence? No — not unless they happen to be bankers.
The industrialist, his employee, the farmer, the fisherman, the miner, the woodsman, may work very hard, they may produce an abundance of goods — but they will not for all that produce the least little bit of money. In return for their work or for their goods, they will receive money, but they definitely did not produce that money.
Who is the producer of money? Where does money originate? The answer is: Money is created by the banking system.
Somewhere else in this issue, three kinds of mon
ey are mentioned, equally accepted as means of payment: coins, paper money and check money. The first two are often called currency. Check money, which functions by transferring amounts from one credit account to another in the bank's ledgers, is often called financial credit.
If you are allowed to visit the Mint of Canada, you may see how coins are produced out of silver or nickel, or alloys. If you are allowed to visit the plant of the Canadian Bank Note Company you may see how paper money is printed. Much of this production is simply to replace worn out pieces of the same denomination, the old ones being destroyed, dollar for dollar. Only when more is produced than destroyed — which is done strictly on order — is there an increase in the volume of currency.
But even when new coins or new notes are added to the existing amount, these new coins and new notes are not put into the Government till, to be used for public projects. The Government says repeatedly, that it has no money but what it gets from the taxpayers. And the new coins and new notes are not distributed to the citizens to increase their purchasing power.
New money can get into circulation only through the banking system. And no new money is let out by the banking system, except in some form of loan, creating a debt to be repaid with interest.
Coins and notes are but a minor part of the total amount of money. More than 90 per cent of payments of all kinds are made with financial credit. And financial credit is a pure creation of the banking system.
Banks create financial credit when they grant loans or overdrafts, or buy Government securities. Financial credit is destroyed when it is repaid to the bank, after being pumped from the public, in taxes if the refunder is the Government, in prices if he is a private borrower.
Banks create the means of payment. Banks create money, since financial credit is the bulk of our money.
But how is that done?
No better way to understand the operation than see it in the making. This is how Maurice Colbourne describes the creation of money:
"The scene is a banker's office; seated, the banker; and by him, seated also, an industrialist. The latter is asking 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 security offered to be sufficiently secure, he nods, and the loan is granted.
"Arabic numerals – say, a one and six noughts (1,000,000) – are written in the bank's ledger, the securities are locked in the bank's safe, and hey presto! a million pounds have been created.” (The Meaning of Social Credit, p. 136).
But the million pounds (or with us dollars), taken from nowhere and just written in the bank's ledger, is that real money?
Sure it is. As real money as if it were a deposit made by the industrialist himself. When you save $20 and bring it to the bank, the $20 is no more in your pocket, but is written as a deposit in your bank account; and you can draw checks on that deposit and pay anything with your checks, up to the amount thus deposited. You do not doubt that the $20 transferred for you into written money is just as good as when it existed as bills or coins in your pocket.
Well, the million NOT brought to the bank by the industrialist, yet written just the same on the credit side of his account by the banker, will buy and pay just as well as if it were deposited savings. In Colbourne's words:
"The industrialist draws checks 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 to eat of the Sunday joint bought with some of those million pounds. From banker's nod to the reality of roastbeef!” – (Ibid., p. 137).
Of course, the machinery installed by the contractor has not been produced by the banker; the workmen's time and efforts have not been supplied by the banker; the banker has not raised the animal from which the roastbeef is cut. The wealth, the real wealth, comes from the community's resources and efforts. But the means of payment, without which all economic life is paralyzed, comes from the banker's pen, according to the banker's assent, and at the banker's terms.
But is that truly a creation of money? Could it not be merely a conversion of the borrower's security into money, just as the twenty dollars deposited by a saver is converted from pocket money into ledger money?
"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 safekeeping instead of in the lending bank as collateral security against the million pounds. No amount of argument will obliterate the fact that after the loan was made, a million pounds came into existence which were not in existence before.” — (Ibid., p. 137).
In the case of the depositor, there is no new money brought into existence; the $20 existed before the deposit. Not so in the case of the borrower: the million pounds was non-existent before, and it is now in the borrower's account, to be used exactly in the same manner as a saver's deposit.
Perhaps a few questions to the banker, if he is willing to answer them, may help either to confirm or to knock down our conclusions.
Questioner — Mr. Banker, I accompanied Mr. Jones, the business man who just obtained a loan from your bank. I am a student interested in money matters, and would appreciate your help. This Mr. Jones did not bring any money to your cashier. Indeed, he came to borrow money. Yet, without bringing in any money, he has a million deposited to his account.
Banker — Yes. He need not carry money along. The million in the book is just as good, and much safer against gangsters. You can't rob an account. Mr. Jones will write cheques and make payments at will, up to the amount of that million.
Questioner — So that is money?
Banker — The soundest money in the world.
Questioner — Fine. But how can it be a deposit, when he did not bring in any money?
Banker — The bank deposited for him; he is a borrower, you see.
Questioner — Yes. But where was that money before it was transferred to his account?
Banker — It is the bank's money.
Questioner — Excuse me. But as I see it, Mr. Jones now has one million which he did not have before; and yet all the money which was in the bank when he came in is still in the bank when he goes out. Perhaps you have depleted some of your customers'accounts, to a total of one million?
Banker — Banish that idea from your mind. The clients' money is theirs. Never will a banker take one cent away from a client's account until he gets an order (a cheque) to that effect from the client himself.
Questioner — But then, where was that million, before it went into your ledger, as a deposit to the credit of Mr. Jones?
Bunker — Where? Well, nowhere. It is a new deposit.
Questioner — Obviously. But, before the loan, there was just so much money of all kinds in the country; and after the loan, there is one million more than before, since that million comes from nowhere. Is is not then an increase in the total amount of money in existence?
Banker — I don't like to put it that way. But I must admit that there is one million dollars more in our books.
Questioner — And you say it is sound money. Then, it is one million dollars new money, born at your nod, following Mr. Jones' request, the minute your employee wrote the numerals in the ledger. Brand new money, made by the stroke of a pen. So you, bankers, create the money you lend. Sound money, because producers have goods which your money can buy. Others produce the real wealth; bankers produce the means of payment.
Banker — But this is only loaned money. Mr. Jones will have to extract this amount from circulation and bring it back. It will then disappear, as it has appeared today. So, the total amount is not increased permanently.
This completes the picture. The banker creates the money he loans; he destroys the money on re-payment. So the game has to be repeated, or there will be lack of money.
If the rate of loans beats the rate of repayment, the amount of money in circulation increases. If the rate of re-payment beats the rate of loans, the amount of money in circulation decreases.
This may go far to explain so-called cycles of prosperity and slumps.
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