[R-G] [BillTottenWeblog] How Private, Commercial, National and International Money is Created

[Bill Totten]

abridged from the works of Michael Rowbotham

Prosperity (April 2000)


* How banks create money for Private and Commercial needs
* How banks create money for National needs
* How International or Third-World Debt is created
* How Coins and Notes are created
* The World Bank
* The International Monetary Fund

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 four per cent 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 such as 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, pages 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, GBP 5,000. The person taking out the
loan can then spend GBP 5,000 and hey presto! GBP 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 GBP 5,000 of new
spending power has been created; GBP 5,000 of new number-money enters
the economy at the stroke of a bank managers pen, but GBP 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, GBP 5,000 will find its way into the bank account of a car dealer
or DIY store; GBP 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 GBP
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 GBP 50,000,000 of deposits, it is almost
universally believed that it has GBP 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, pages 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 GBP 380 billion. If the private and commercial debt of GBP
780 billion and the national debt are added together, the total
indebtedness associated with the UK financial system stands at some GBP
1160 billion, which dwarfs the total money stock of GBP 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 GBP 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 GBP 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 GBP 26 billion; by 1980 it had risen to GBP 90
billion. The national debt in 1998 stands at nearly GBP 380 billion, and
is likely to reach a trillion pounds within the next twenty to 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, pages 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 et cetera) 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, page 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, page 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 nation's 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 nation's 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
nations 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, pages 14-17)

Also see article here for how Third World debt can be cancelled:
http://www.prosperityuk.com/articles_and_reviews/articles/cantwd.php

_____

Please print out, photocopy and distribute these articles. Also copy and
paste them to emails, and circulate widely, and please include all the
essential contact information below. Thank you.

Essential Further Reading:

Prosperity: Freedom from Debt Slavery - is a four-page quarterly journal
which campaigns for publicly-created debt-free money, edited and
published by Alistair McConnachie. A four-issue subscription is
available for GBP 10 payable to Prosperity at 268 Bath Street, Glasgow,
Scotland, UK, G2 4JR
Tel: 0141 332 2214; Fax: 0141 353 6900
admcc at admcc.freeserve.co.uk  http://www.ProsperityUK.com
Or you can follow this link to our subscribe page:
http://www.prosperityuk.com/get_involved/subscribe/index.php

The Grip of Death: A study of modern money, debt slavery and destructive
economics by Michael Rowbotham [Jon Carpenter Publishing, 1998] and
Goodbye America! Globalisation, debt and the dollar empire by Michael
Rowbotham [Jon Carpenter Publishing, 2000] both available from the
address above.

http://www.prosperityuk.com/articles_and_reviews/articles/moneymake.php


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