How Banks Invent Money Out of Thin Air

Money as Debt

Directed by Paul Grignon (2006)

Film Review

Money as Debt is the classic primer for understanding where money comes from in contemporary society.

Most people erroneously believe that government issues all the money in circulation by printing bills and minting coins.

In reality, less that 5% of all the money circulating in the global economy is issued by government. More than 95% is issued by private banks as loans to businesses, families and governments.

Most people also mistakenly assume that banks lend money their customers have deposited in savings accounts. The truth is that banks lend out vastly more money than they have on deposit. In fact, every time they issue a loan, they simply create the money out of thin error as a bookkeeping entry.

There is a deliberate effort (by banks and government) to conceal these facts. Even front line bank employees don’t understand this is how money is issued.

The belief that the economy would improve if all government and private debt were repaid is also erroneous. Because nearly all the money in circulation is debt-based money issued by banks, if we paid off all the debt, there would be no money left to run the economy.

A severe shortage of debt triggered both the Great Depression of 1929 and the 2008 economic crisis. Both occurred when banks drastically reduced the supply of new bank loans.

Money as Debt also makes an important link between this debt-based monetary system and the drive for perpetual economic growth. Banks only create (out of thin air) the principal for new loans. Money to pay the interest can only be found by creating more debt through new loans. This pressure to create more and more debt requires a continual increase in production and simultaneous depletion of resources.

The film traces how our current debt based money system first started in England in 1694 and how US founding fathers fought to resist private bank control of the US monetary system until 1913. That was the year Woodrow Wilson signed the Federal Reserve Act, handing control of the US monetary system over to a consortium of private banks called the Federal Reserve.

Filmmaker Paul Grignon is particularly concerned about a system in which governments are forced to borrow from private banks to run military and public services. Because it gives banks far more control than voters over government decisions, he calls it an invisible economic dictatorship.

Check out Positive Money to examine some of the alternatives.

24 thoughts on “How Banks Invent Money Out of Thin Air

  1. Sorry for been off topic but came across this yesterday – Robert Kennedy, now a U.S. senator, objected to suggestions that all LSD experimentation be curtailed…amid rumors that his wife Ethel had undergone LSD therapy, which could explain her husband’s resistance, he said, “. . . we have lost sight of the fact that [LSD] can be very, very helpful in our society if used properly.”

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  2. “The central bank would be exclusively responsible for creating as much new money as was
    necessary to support non-inflationary growth. It would manage money creation directly, rather
    than using interest rates to influence borrowing behaviour and money creation by banks (as
    is the case at present). Decisions on money creation would be taken independently of govern
    ment, by a newly formed Money Creation Committee (or by the existing Monetary Policy
    Commitee). The Committee would be accountable to the Treasury Select Committee, a cross-
    party committee of Members of Parliament who scrutinise the actions of the Bank of England
    and Treasury. The Committee would no longer set interest rates, which would now be set in the
    market.”

    http://positivemoney.org/wp-content/uploads/2014/07/Creating_a_Sovereign_Monetary_System_Web20130615.pdf

    This is a British proposal for the end of a fractional banking system. The problem is that it makes the government directly responsible for all money creation and subsequent economic activities. I believe that government inefficiencies similar to those that plagued the USSR and China a generation ago would result from this system. I know that zero interest rates, quantitative easing, speculation and the exponential growth of the derivatives markets all accelerate capitalist boom-bust cycles. However, if we give the government direct control over money creation, the consequences would probably be far worse than that of its proxies in the Fed controlling interest rates and the money supply.

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    • PeaceFrog I intend to agree with Alan Scott (and Thomas Jefferson, Andrew Jackson and Abraham Lincoln) on this issue. A private corporation by definition meets in secret and their only mandate is to make profit for their shareholders. Wall Street banks will never act in the public interest (nor be publicly accountable) in the area of money creation. They will only act to increase the wealth of the 1% (by making the middle and working class poorer) as they are doing now.

      I think you might be a little confused about how the Federal Reserve operates. The government and media deliberately keep Americans in the dark about how the monetary system operates.

      The people on the Federal Reserve aren’t “government proxies” – they are Wall Street bankers. Moreover the Fed has no control over the money supply – they don’t even keep track of it any more. Banks are free to create as much money as they want, both in the form of loans and in the form of derivatives. The current value of outstanding global derivatives is estimated at $1.2 quadrillion – 20 times the size of global GDP: http://www.nakedcapitalism.com/2013/03/worldwide-derivatives-market-estimated-as-big-as-1-2-quadrillion-as-banks-fight-efforts-to-rein-it-in.html

      As we have seen since 2008, reducing interest rates has virtually no effect on the amount of money in circulation. In 2008, the Fed reduced interest rates at their window to virtually zero – in other words giving banks free money – in the hope they would issue more loans for business and investment. The banks didn’t. Instead they used the money to buy back their own stock (to increase the share price) and to give lavish bonuses to their CEOs.

      At the moment, a federally run bank probably wouldn’t work in the US without Constitutional reform – owing to the corporate capture of Congress.

      Ellen Brown is advancing a proposal to begin monetary reform in the US by creating a network of state owned banks like The Bank of North Dakota: http://ellenbrown.com/fixing-the-economy-with-state-owned-banks/ Under President Andrew Jackson, who ran on a platform of abolishing the first private central bank, state banks issued the currency used to run the US economy.

      If you haven’t seen The Secret of Oz or The Money Masters by Bill Still, they’re really excellent for explaining how the American people lost control over their monetary system:

      I’ve done a summary of The Money Masters as it’s quite long:

      http://stuartjeannebramhall.com/2013/09/24/the-role-of-foreign-banks-in-us-history/

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      • I will have to do some research on this to have a truly informed opinion. Low interest/borrowing rates have prompted share buybacks and massive growth in the derivatives market. One suggestion being talked about, that could put more money in the real economy, is negative interest rates. This would mean that when banks hold money at the Fed, ECB, BOJ, etc., they are charged for doing so. This is not a comprehensive solution, but it seems it might provide a partial remedy by promoting more lending. I believe that the Fed has considered negative interest rates, but I’m not sure whether it was actually in one of their monthly reports:

        http://www.investopedia.com/terms/n/negative-interest-rate-policy-nirp.asp

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  3. Henry Pomeroy Davison, founding father of the League of Red Cross Societies.
    Today I was researching the Red Cross and Lee Oswald and came across this In 1909 he became a senior partner at JP Morgan & Company, and in 1910 he was a participant in the secretive meeting on Jekyll Island, Georgia that may have led to the creation of the{ Federal Reserve }and has generated much speculation over the years.His oldest son, F. Trubee Davison, was a director of personnel for the Central Intelligence Agency. His other son Henry Pomeroy Davison, Jr. was a director at Time magazine and a Yale University graduate and member of the Skull and Bones society.https://en.wikipedia.org/wiki/Henry_Pomeroy_Davison

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  4. I stood as a Social Credit candidate for parliament in New Zealand back in the 80s, and I can personally vouch for how difficult it is to get people to accept the truth of this fact – and how hard the establishment will fight to ensure serious opposition is stamped out.
    In reply to PeaceFrog, there are three activities that should not be delegated to the greed of private entrepreneurs: education, health and the creation of a nation’s money. No government could do a worse job. The point is, not a centrally planned economy, but a money supply managed by the state so that genuine private enterprise can flourish. Why should taxpayers pay interest to private bankers so that the state can build necessary public projects?

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    • Interesting to hear about your Social Credit background. I have a friend in Stratford who stood as a Social Credit candidate in 2005 and 2008. I think he’s left the Social Credit party, but he’s been helping us organize our anti-TPPA protests.

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  5. Scary! I read ‘Meltdown’ by Ben Elton, which was a story about the 2008 recession, and the way that people had ‘banked’ on money that never actually existed, and the impacts this had on one family in particular. Really, really scary. And I wonder why we are told we need to live rich, instead of live well?

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    • You make a good point, Nicci. Money was invented as a convenience for us to exchange goods and services. We’ve a created a situation where private banks can manipulate the money supply to strip people of their property by foreclosing on them, as well as forcing them to accept starvation wages.

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    • I love what Henry Ford had to say about the Federal Reserve:

      “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

      Liked by 2 people

      • This reminds me of this quote GHW Bush:

        “if the American people knew what we have done, they would string us up from the lamp posts,”

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  6. Folks going to Positive Money’s website might want to find British MP Michael Meacher’s talk during last year’s discussion/debate on money creation and reform in the Parliament. Sadly, Mr. Meacher passed away recently at the age of 73. One has to believe there are politicians who know monetary reform would bring better living standards for the most people, but taking on such powerful people is potentially extremely high risk.

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