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How Private, Commercial, National and International
Money is Created abridged from the works of
Michael Rowbotham (Prosperity, April
2000)
The financial system currently adopted by all nations is often described as
"debt based", since the process of going into debt is relied upon almost
exclusively to create and supply money to their economies. By the action of
lending to borrowers, commercial banks create credit and advance this to
industry, consumers and governments. This "bank credit" circulates in the
broader economy until such time as the loan is repaid. Such "bank credit" now
forms 96% of the money stock in most industrial nations, with a mere 4% the
notes and coins created by government, and free from a parallel debt.
Thus, almost the entire money stock is supported in circulation by vast debts in
four main sectors....
* Private debts eg. mortgages, loans, overdrafts, credit-purchases * Industrial
and commercial debts * Government "national" debts * International, including
Third World debt
The supply of money is a direct product of borrowing, and debt maintains this
money in circulation. Modern debt is, in aggregate, quite unrepayable.
Furthermore, difficulty is experienced in the repayment of individual debts in
all four sectors. (The Drive Behind Globalisation, 1998, pp 3-4).
Money is created in each of these four areas....
How BANKS CREATE MONEY for PRIVATE & COMMERCIAL Needs
If a bank makes a loan, nothing is lent, for the simple reason that there is
nothing of substance to lend. The bank makes what it terms a loan against the
amount of money deposited with it at that time. This is all done with the utmost
ease. The bank has simply to agree that a person may take out a loan of, say,
£5,000. The person taking out the loan can then spend £5,000 and hey presto!
£5,000 of new number-money has been created. No one with a bank account is sent
a letter telling them that the money in their account is temporarily
unavailable, because it has been lent to someone else. None of the original
accounts in the bank has been touched, reduced or affected. Nobody else's
spending power has been reduced, but £5,000 of new spending power has been
created; £5,000 of new number-money enters the economy at the stroke of a bank
managers pen, but £5,000 of debt has also been created.
Thus, whoever takes out the loan will then make purchases and payments to other
people, who will pay that new money into their bank accounts. Result: more bank
deposits! As soon as the loan in the example above is spent, £5,000 will find
its way into the bank account of a car dealer or DIY store; £5,000 of apparently
new money. This is money which has supposedly been loaned but the banking system
doesn't distinguish this fact. It simply registers a new deposit, and regards it
as new money. Total deposits in the banking system have therefore increased by
£5,000. This is the boomerang effect of a bank loan by which a loan rapidly
creates an equivalent amount of new bank deposits in the banking system. This
effect was neatly summarised in a statement by Graham Towers, former Governor of
the Central Bank of Canada.... "Each and every time a bank makes a loan, new
bank credit is created -- new deposits -- brand new money."
The new money will provide the banking system with the collateral for more
lending. This is the bolstering effect of a bank loan. As the total money held
by banks and building societies becomes swollen by loans returning as new
deposits this provides them with the basis for further loans.
Perhaps the best description of this process of money creation was provided by
H.D. Macleod : "When it is said that a great London joint stock bank has perhaps
£50,000,000 of deposits, it is almost universally believed that it has
£50,000,000 of actual money to lend out as it is erroneously called... It is a
complete and utter delusion. These deposits are not deposits in cash at all,
they are nothing but an enormous superstructure of credit." (The Grip of Death,
Jon Carpenter Publishing, 1998, pp. 11-13).
How BANKS CREATE MONEY for NATIONAL Needs
A country's national debt is completely separate from, and additional to, the
level of private and commercial debt directly associated with the money supply.
The United Kingdom national debt in 1998 stands at
approximately £380 billion. If the private and commercial debt of £780 billion
and the national debt are added together, the total indebtedness associated with
the UK financial system stands at some £1160 billion, which dwarfs the total
money stock of £640 billion! How did this condition of overall negative equity
come about? This excessive indebtedness -- which is a blatant misrepresentation
of the real state
of economic wealth enjoyed by the nation -- is a position shared by all the
developed nations.
The national debt is actually composed of thousands of pieces of paper called
stocks, bonds and treasury bills. These stocks and bills, known as gilt-edged
securities, or gilts, are essentially elaborate forms of government IOU. These
IOUs are issued because each year the government fails to collect enough in
taxes to cover the costs of its public services and other spending -- and it
borrows money to cover this shortfall. All government budgets overshoot by many
billions of pounds, dollars or deutschmarks annually. This leads to what is
called the borrowing requirement for that budget year. A country's national debt
is therefore the total still outstanding on all past years' borrowing
requirements; thus the UK national debt consists of £380 billion of these gilt
edged IOUs, in the form of outstanding treasury bills and stocks.
The method of issuing these IOUs and administering the national debt is quite
simple. In order to obtain money to cover its annual spending shortfall, an
appropriate number of government stocks and bills are drawn up by the Treasury.
These are then sold in fact they are auctioned off in the money markets to the
highest bidder. This is done throughout the year to meet the shortage of revenue
as it arises, and the announcements, in the form of government advertisements,
can be seen regularly in the financial press. These stocks and bills are bought
because they promise to repay a larger sum of money at some future date, and are
sold at a price that promises a good return to whoever buys them. They are
usually denominated in considerable sums of £1,000 or more per bond and are
bought by insurance companies, pension funds, banks and trust funds... anywhere
that money accumulates as savings. By selling these stocks, the government
obtains the additional money it needs for the public sector, making up the
annual shortfall in what it can gather by taxation.
As these government stocks mature and become due for payment, the government has
to find the money promised on those stocks, and pay it to the financial
institutions that bought them. But governments are unable to pay this money
owing on their past stock issues. Indeed, each government is confronted by the
current year's annual shortfall in taxation receipts. The whole reason for the
government issuing stock in the first place was because it could not cover its
expenditure through taxation, and this annual shortfall is constant. There is no
way a government can pay the money it owes. How then can the government pay up
on its maturing stock? It has underwritten promises it cannot keep. What happens
is that the government obtains the money to meet the payments due on maturing
national debt stocks by selling more government stock to the financial
institutions -- promising even more money in the future. The government draws up
enough new stock to cover the repayments due on the old stock, sells this, and
uses the money to pay off the old stock. Of course, when this new stock matures
it too has to be paid off from the sale of yet more stock. The government
manages to pay off the national debt, and not pay it, at one and the same
time...
There is a pretence that this is not the true arrangement, since repayment of
national debt stocks is actually accounted as coming from taxation, not from the
sale of more bonds. But this repayment from taxation creates such a massive
shortage in government revenues that can only be made up by the sale of more
bonds so the net effect is that repayment is constantly deferred by the sale of
further government bonds. This is what is referred to as interest on the
national debt although it is not really interest in the conventional banking
sense, but a constant rescheduling of a completely un-repayable debt. This
deferral is not, however, the end of the story....
At the same time as deferring and re-mortgaging the existing level of national
debt, the government has to sell yet more stock to cover the amount by which
taxation falls below what is needed to support its public services. The national
debt therefore escalates, increasing by the amount required to re-mortgage the
past national debt, plus the shortfall in revenues to fund the public sector. In
1960, the UK national debt was £26 billion; by 1980 it had risen to £90 billion.
The national debt in 1998 stands at nearly £380 billion, and is likely to reach
a trillion pounds within the next 20-25 years. In America, the national debt in
1960 stood at $240 billion; by 1997 it had reached the level of $5,000 billion,
or $5 trillion!
It should also be remembered that the money held by pension funds and insurance
companies, or whoever buys the government stocks, is money that had to be
borrowed into existence in the first place. In other words, by this process,
governments borrow money which has already been borrowed into existence, and
they thus create a second massive institutional debt in respect of money which
already has a debt behind it! Adding the national debt to the total of private
debt places a country and its people in a position of overall negative equity,
owing far more on paper than the amount of money that exists in the economy. The
Grip of Death, pp. 96-98.
So, in summary: Governments draw up official treasury bonds, and these are
auctioned on the money markets. The bonds are bought by both the banking and
non-banking sectors. When the non-banking sector (pension and insurance funds
etc) purchases the bonds, saved monies are recycled into the economy through
government spending. When the banking sector buys government bonds, banks and
lending institutions create credit: There is an increase in the money stock.
This money is spent into the economy through government spending. (Creative
Accountancy, 1998, p. 29).
How COINS and NOTES are CREATED
The significant point about coins and notes money created by the government is
that this money is created debt-free, and spent into the economy by the
government. This is a vital consideration, and it is therefore important to
appreciate precisely how this injection of debt-free money is managed. Coins and
notes are minted and printed by the government at no cost, apart from that of
materials. Of course, governments have no particular need of these coins and
notes; banks are the institutions requiring a supply of cash. The government
therefore sells the coins and notes that it creates to banks, who pay by cheque,
and the government acquires the face value of those coins and notes in
number-money. The sum of money which the government obtains, and which is
debt-free so far as the government is concerned, is then added to whatever
taxation revenue has been raised to fund the public sector. Thus, coins and
notes are created by the government, and an amount equivalent to the face value
of those coins and notes is spent into the economy as a direct, debt-free input.
(The Grip of Death, p. 14).
How INTERNATIONAL or Third-World DEBT is CREATED
The financial position of even the wealthiest nations is one of acute financial
pressure, with massive private and national debt, and budgetary difficulty
dominating the economy. How can the wealthy nations, from a position of such
perpetual monetary shortage and insolvency, lend money to the developing
nations? The answer is that they do not. The money advanced to Third World
nations is not money loaned from the wealthy nations. These sums consist almost
entirely of monies that have been created, via the commercial banking mechanism,
specifically for the purpose of the loan concerned. In other words, the same
debt-based, banking process used to supply money to national economies is also
employed for the creation and supply of funds to debtor nations. Thus, these
monies are not owed by debtor countries to the developed nations, but to
private, commercial banks.
The WORLD BANK
Holding only a nominal reserve contributed by the wealthy members, the World
Bank raises large quantities of money by drawing up bonds and selling these to
commercial banks on the money markets of the world. Thus, the World Bank does
not itself create the money it advances to Third World nations, but sells bonds
to commercial banks which, in purchasing these bonds, create money for the
purpose. The World Bank therefore functions along the lines of a country's
national debt. Just as with the government bonds of a country's national debt,
when a commercial bank makes a purchase of World Bank money-bonds, the
commercial bank creates additional bank credit. In essence, the World Bank acts
as broker for commercial banks, who are the actual money-creation agents and
who hold World Bank bonds in lieu of monies they create in parallel with debts
registered against Third World nations. Although these loans may be denominated
in pounds, dollars or Francs, such loans advanced under the World Bank have no
connection with respective national economies, and in no sense represent monies
loaned by these nations, nor debts owed to them by developing nations. The debts
are owed to private, commercial banks (via the World Bank) in respect of money
they have created through the purchase of debt bonds.
The INTERNATIONAL MONETARY FUND
The IMF presents itself as a financial pool an international reserve of money,
built up with contributions, known as quotas, from subscribing nations – that
is, most nations of the world. However, credit creation accompanies almost every
aspect of IMF funding....
Twenty-five percent of each nation's IMF quota is paid in the form of gold, the
remainder in the nations own currency. The 25% gold quota is the only component
of IMF lending capacity that does not, in some way, constitute additional money
created in parallel with debt.
The 75% of a nation's quota payable in national currency is invariably funded by
the government concerned through the sale of bonds, thus adding to that nation's
national debt. Therefore the IMF, whilst not itself creating credit, places
monetary demands on member countries for quotas that can only be funded via each
country's national deficit. This involves the sale of government bonds to
commercial banks, leading to money creation by those banks. This source of
revenue forms the main fund of IMF monies available to developing nations.
Since the monetary demands on the IMF are constantly increasing, due to rising
demand for Third World loans, the quota demands by the IMF have reached the
point where (so-called) creditor nations such as America and Britain are
reluctant to undertake yet more bond issues and further national debt to supply
these funds. So, in recent years the IMF has begun to circumvent the
restrictions of its overall quota. By co-operating directly with commercial
banks to organise more substantial loans than it can fund from its own quota
resources, the IMF administers loan packages made up in part from its own quotas
and in part from commercial sources. For example, of the $56 billion loan
advanced under the IMF to South Korea in the wake of the Asian crisis, only $20
billion was contributed by the Fund; the remaining $36 billion was arranged by
direct co-operation with international commercial banks, which created money for
the purpose.
The total funds of the IMF were substantially increased and its function and
status as a money-creation agency clarified when, in 1979, the IMF instituted
Special Drawing Rights (SDRs). These SDRs were created, and intended to serve,
as an additional international currency. Although these SDRs are credited to
each nations account with the IMF, if a nation borrows these SDRs (defined in
dollars) it must repay this amount, or pay interest on the loan. Whilst SDRs are
described as amounts credited to a nation, no money or credit of any kind is put
into nation’s accounts. SDRs are actually a credit-facility just like a bank
overdraft if they are borrowed, they must be repaid. Thus, the IMF is now
creating and issuing money in the form of a new international currency, created
in parallel with debt, under a system essentially the same as that of a bank...
the IMF reserve being the original pool of quota funds.
In summary, of the $2,200 billion currently outstanding as Third World or
developing country debt, the vast majority represents money created by
commercial banks in parallel with debt. In no sense do the loans advanced by the
World Bank and IMF constitute monies owed to the creditor nations of the World
Bank and IMF. The World Bank co-operates directly with commercial banks in the
creation and supply of money in parallel with debt. The IMF also negotiates
directly with commercial banks to arrange combined IMF/commercial loan packages.
As for those sums loaned by the IMF from the total quotas supplied by member
nations, these sums also do not constitute monies owed to 'creditor' nations.
The monies subscribed as quotas were initially created by commercial banks
through the agency of national debts. Therefore both the contributing nation and
the borrowing Third World nation carry a burden of debt associated with these
sums. Both quotas and loans are owed, ultimately, to commercial banks. (The
Invalidity of Third World Debt, 1998, pp.14-17). ####
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