CHAPTER ONE: THE MONEY SUPPLY: HOW IT CAME TO BE CREATED BY BANKS.
The most important fact in economics today goes unmentioned by most economists and bankers: money is created as debt from banks, and it is cancelled when debts are repaid.[1]
I have asked many economists and bankers why this is so seldom mentioned, and always I get the same response: it’s too difficult for the public and most students to understand.
In fact, it’s not so difficult to understand. A famous economist once wrote: ‘The process by which banks create money is so simple that the mind is repelled.’[2]
Why, truly, is the fact so seldom mentioned? Another venerable quotation supplies the answer: ‘The general ignorance (of banking and finance) is not caused by any peculiar difficulty of this branch of political economy, but because those who are best informed are almost all interested in maintaining delusion and error, instead of dispersing both.’[3]
I introduce these respectably-sourced quotations to show that the statement ‘money is debt from banks’ is not an outrageous and invented claim like so many statements today, but something that has been known for a long time.
For instance, many years ago, if you looked up ‘Banking and Credit’ in the Encyclopaedia Britannica you would find the following paragraph: —
‘When a bank lends… two debts are created; the trader who borrows becomes indebted to the bank at a future date, and the bank becomes immediately indebted to the trader. The bank’s debt is a means of payment; it is credit money. It is a clear addition to the amount of the means of payment in the community.’[4]
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