Chapter 2 - Where does Money Come From?

To progress, we need to ascertain where money comes from. I have used various ways to explain the origin of new money and found that the easiest to understand is a look at the 2015 figures from the Reserve Bank of Australia. To date, the Reserve Bank of Australia has created $67 billion in Cash Currency [Reserve Bank of Australia.]. This is the folding notes that one finds in one’s wallet. This $67 billion is the total of all Legal Tender Cash Currency created by the Reserve Bank. However, the Reserve Bank lists the total money in Australia (M3) to be ~$1760 billion. This clearly did not come from the Reserve Bank. The Reserve Bank has created a total of $67 billion in Cash Currency, yet they list the total Money Supply as ~$1760 billion. It came from, other than the Reserve Bank. This ~$1700 billion appears in bank accounts but did not come from the Reserve Bank. From where did this money come? More in a moment. The next surprising figure is the sum of government debt and private debt. When I add the total Government Debt to the Private Debt (house mortgages, car loans, credit card debt, etc.), the total debt equals $5400 billion. [7] Australia has more debt than money. The volume of debt exceeds the volume of money by a factor of three. I originally thought that I had made a gross error, so I checked in numerous ways, but could find no error. I developed various models to demonstrate that it was possible to have ‘more debt than money’. To confirm my findings for Australia, I checked the figures for other countries. Europe has debt exceeding money by a factor of about 2.6. Greece is about three. The UK is about 2.6. The USA is above three. When the figures are added for all countries for which figures are available, we arrive at a worldwide figure of two times as much debt as money. There is twice as much debt in the world as there is money.

I give you the graph of money and debt for Australia:

Graph of Australian Money Supply and Debt. Creative Commons Attribute - Andy Chalkley.

How is Debt Created?

Debt is interesting stuff. One goes into debt when one needs money. Essentially, someone who has no money borrows money. Do not adjust this sentence to say “someone who has no money borrows money from someone who has money.” because strangely that is wrong. Let us suppose you wish to buy a house. You go to the bank and ask for a loan of one million dollars. The bank person looks at you and says “Yes”. On the appointed day, the bank writes one million dollars with a pluss sign in the account of the house seller. In your account, they write one million dollars with a minus sign. Your house and the signed paperwork is used as backing for the loan. From that moment, there is one million dollars more money in the nation and one million dollars more debt. This is how the graphs are rising each year. The volume of loans increases each year and the volume of debt increases each year. However, the debt behaves in favour of the lender. The debt magnifies. After the first year you owe one million dollars plus ten percent. After two years, you owe one million dollars plus ten percent plus ten percent. The debt magnifies in this progression. 1 000 000, 1100 000, 1 210 000, 1 331 000, 1 464 100, 1 610 510, 1 771 560, 1 948 720, 2 143 590, 2 357 950, 2 593 740, 2 853 120, 3 138 430, 3 452 270, 3 797 500, 4 177 250, 4 594 970, 5 054 470, 5 559 920, 6 115 910, 6 727 500. So the firsst year there is one million dollars more money in the nation and one million dollars more debt, but after twenty years, there is still one million dollars money in the nation being passed from person to person but there is over six million of debt. In practice, there is less than six million more debt as the banks spend a little back into the nation as wagess and operational expenses and some of the rest is used to asset strip the nation. The banks start to own much of the purchaseable assets of the nation. Interestingly, by creating computer entries, they effectively own the housing stock of the nations. The bank has call on your house until you have paid the last repayment. Your loan is shown in this graph:

Graph of a one million dollar loan at ten percent. The debt magnifies in this progression. 1 000 000, 1100 000, 1 210 000, 1 331 000, 1 464 100, 1 610 510, 1 771 560, 1 948 720, 2 143 590, 2 357 950, 2 593 740, 2 853 120, 3 138 430, 3 452 270, 3 797 500, 4 177 250, 4 594 970, 5 054 470, 5 559 920, 6 115 910, 6 727 500. Creative Commons Attribute - Andy Chalkley.

Let us consider a nation where the banks issue ten percent more loans each year and the interest rate is ten percent.

The banks issue ten percent more loans each year and the interest rate is ten percent. Creative Commons Attribute - Andy Chalkley.

I added a little extra line there in orange. Suppose the banks are allowedd to issue credit not to exceed ten times the volume of genueine money issued by the cnetral bank. The orange is cnetral bank issued money. The green becomes credit issued by the banks and the red is the debt. zzz[the graph and xls files are in the Downloads directory.]

If you were supprised at the method that money is created, here are some quotes to illustrate the phenomenon. Never forget that money can be created in any quantity at no cost. As individuals, we make the error in thinking that money has value. Money has no intrinsic value. It's sole purpose is to carry the value of one transaction through to the next transaction. Realistically, it only needs to hold 'most' of its value through to the nextt ransaction. It is entirely unnecessary for money to be hoardable. It si actually better if it is not hoarded. Hoarding holds money out of circulation. Hoarding is a mistreatment of money.

I am not a lone voice in the wind. There are many statements about this characteristic of our money system and these should not be drowned out by those that gain from the system and neither should it be ignored by persons who had a ‘formal economics education’ that fudged over this procedure. I list just a few of the many. The first one sounds like a shrill little voice shouting from inside the Bank of England waiting for the world around to wake up to reality:

Bank of England: “Money creation in practice differs from some popular misconceptions – banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.” …

“money is largely created by commercial banks making loans.” …

“Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits – the reverse of the sequence typically described in textbooks.” …

“Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.” …

“Bank deposits are simply a record of how much the bank itself owes its customers.” [1]

Please read the above at least three times. The message becomes more apparent on subsequent readings.

Ralph Hawtrey, Former Secretary of The British Treasury: “Banks lend by creating credit. They create the means of payment out of nothing.”

Bank of England 2014: “Is it difficult to believe that the Central Bank with the blunt instrument of interest rate control can control private corporation lending habits. As inflation continues to flourish, their control appears to be a carefully controlled myth. …

Creating money in the form of cash notes is illegal and called counterfeiting, however, creating money that is equivalent to cash and lending it to people is apparently legal.” [1]

Marriner Eccles, Governor of the Federal Reserve. 1941: “If there were no debts in our money system there wouldn’t be any money.”

Robert Hemphill 1934, Credit Manager of Federal Reserve Bank, Atlanta, Georgia: “This is a staggering thought. We are completely dependent on the Commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”

Federal Reserve Bank of Chicago: “The actual process of money creation takes place in commercial banks.” [2]

Federal Reserve Bank of Chicago: “Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower’s IOU.” [2]

Please read the next quote one, two, or three times. Andrew packs many items into each sentence.You will not see them all in a single reading.

President Andrew Jackson 1837: “In the hands of this formidable power, thus organized, was also placed unlimited dominion over the amount of circulating medium, giving it the power to regulate the value of property and the fruits of labor in every quarter of the Union, and to bestow prosperity or bring ruin upon any city or section of the country as might best comport with its own interest or policy…Yet, if you had not conquered, the government would have passed from the hands of the many to the hands of the few, and this organized money power from its secret conclave would have dictated the choice of your highest officers and compelled you to make peace or war, as best suited their wishes. The forms of your government might for a time have remained, but its living spirit would have departed from it.” [3]

Not only does the creation of credit give the creators tremendous profit and the ability to asset strip, it also puts them into a position where they ccan manipulate the political sytem. This political influence has the potential to manipulate the tax system to fvour their activities and the activities of the well off. Thus we have Income Tax rather than Wealth Tax. We have Sales Tax rather than a General Transaction Tax. Growing cmpanies are forced to pay tax on assets used to expand which forces them to the moneylenders or to sell shares to the moneylending class. Expanding businesses pay tax on sstock increase which again forces them into the hands of the moneylending financiers.