8. Accounting for Money Creation - 1

Introducing Governments and Banks


We've seen how money, banking and debt, in truth, basically work and we've considered a few conceptual ideas to strengthen our understanding of what is going on, what is going wrong and how we might fix it.


Let's now return to our original example and expand on the basic financial/credit system we built in section 1. We'll look more closely at how the creation, transfer and settlement of money is or can be accounted for. And we'll build the system up to capture more of the real world, including adding a government and a plurality of banks.



This is where we left our community:



Name Credits Debts
Mark 0 0
Jo 2000 0
Cassie 0 0
Lauren 0 1000
Sean 0 1000


- Table 1 -




Introducing Governments


Let's now introduce a government (which we'll assume is Mark, Jo, Cassie, Lauren and Sean themselves). We want to see government finances and government money creation in action, so we'll have the government simply credit each community member with 1000 units, either for no reason at all other than that they might have some money, or in payment for their contributed labor - perhaps for building some roads.



Name Credits Debts
Mark 1000 0
Jo 3000 0
Cassie 1000 0
Lauren 1000 1000
Sean 1000 1000
Government 0 5000


- Table 2 -



This action created a body of money (5000 units) which now allows community members to make savings without an accompanying real debt. You can see that this money creation is called a 'debt' solely by the convention of the language we use within this accounting structure i.e. money creation is conventionally associated with debt; as would be correct for all other actors acting in their own capacity. But does it really make any sense that the community members, having earned or been given this money, should collectively "owe" it back again? No, even if we were to consider this a debt, we'd have to consider it a debt that the community owes itself i.e. is just not a debt at all. The community can theoretically create as much money as they like, it's only concerns are 1. the social justice of these actions and 2. that it doesn't contribute to excessive inflation. Ignoring those concerns for the time being, it's quite clear that the community just created some money, democratically, for itself and doesn't "owe" anyone anything for doing it.


The next thing to observe is that only the most tyrannical, criminal oligarchs would fracture this community in order to keep some members in the dark about what is going on and lead them to believe that they, through their government, have "borrowed" money, have a real debt and owe it back with interest.


Consider for a moment the staggering sums that are being passed off as "loans" to governments all around the world. Billions of people, in surely most if not all nations, being led to believe that many trillions of dollars of simply created money are "borrowed" and are owed back with interest. The amounts of money that must have already been taken in interest, as well as in valuable public assets handed up in the name of paying off these so-called "debts", are just too frightening to imagine. I'm sure they'd require a very serious research project to determine (if anyone cares to fill me in...). I personally can't conceive of a bigger criminal racket and I find it almost impossible to believe that this is the reality of the world that exists around us right now.


I understand that some will object to governments being able to create money. However, we've just seen that such money creation plays an important role in the economy and it also seems that it's going to remain a fact of life that none of us are going to change anyway. So it seems we only have two choices: either we educate ourselves about public money creation or we remain as we are, ignorant and abused. Certainly, governments creating money seems the far lesser concern in the face of the real criminality we've just laid bare. In our example of government money creation, the government just created a base money supply and allowed community members to make savings of 1000 each, without having to burden anyone with real debts. It may also have aided them in organizing themselves to build roads. Finally, just like anybody else honoring a debt, governments can always eliminate money by taxing it out of the economy and out of existence, should it be considered necessary to do so. Here, the government taking taxes is conceptually little different to Mark charging for his services as a roof repairer.



We're still quite early in building our system, and whilst we can see that it comes with some concerns to iron out, let's take a moment to contrast it with capitalistic systems, where money (among other things) has been taken away from democracy and the realm of democratic/common rights. In the capitalist system, the underlying mechanics of money are the same, but all instances of money creation are passed off as "loans", meaning money circulates:



  • As the property of a capitalist elite.

  • At their discretion (put it in, take it away 'business cycles').

  • As an interest bearing debt to them (tribute economy).




Introducing Banks


Our small community system has given us a good start in understanding how money, banks and debt really work. And we can see that the system should be able to work much more honestly, much more democratically and much more inclusively than what the world has known under capitalism. Let's now make it a little more realistic by introducing banking as a formal practice.


The following is a representation of the conventional accounting structure used by banks. And we'll work with it, even though I'm sure it's as misrepresentative as the language and should really be replaced. The reason I have no fondness for this structure is that this, just like its language, is an accounting structure that would work for exogenous money; the wholly inaccurate conception of money we're all being so harmed by today, yet which the wealthy and powerful have every incentive to perpetuate.


We're still keeping it as simple as possible, so just one bank to cater to the whole community and still no physical cash stock; all money is no more than the non-physical numerical records you see in the tables and all payments will be performed by instruction i.e. by chip & pin, checks, wire, telephone, internet etc. We'll take the numbers from above and put them into a new table:



Banks Individuals
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
0 1000 Mark 1000 0
0 3000 Jo 3000 0
0 1000 Cassie 1000 0
1000 1000 Lauren 1000 1000
1000 1000 Sean 1000 1000
5000 0 Government 0 5000


- Table 3 -



The language of 'credits' and 'debts' has been changed to 'assets' and 'liabilities'. And we can see the bank accounts for its own financial position alongside those of its customers. Any adjustments made to an individual's account will also be reflected in the bank's own accounts, as the bank's accounts mirror those of its customers (a customer's debt is an asset for the bank and the bank's debt is an asset for the customer).


When somebody goes into debt, the process of money creation is captured by the bank creating a checkable deposit (spendable money) for that person to draw on, recording it as an 'asset' for the debtor and balancing it by their 'liability' to repay it. Commensurately, banks take a mirror position: they record that newly created money as a liability for themselves (as if they're 'holding' this money in a physical sense and have the liability to give it back) and record the credit agreement as an asset - a document which allows the bank to collect repayment + interest, as well as access the legal system if a debtor falls delinquent.


So, whenever the bank creates new money, we'll see all 4 columns along the row adjusted by the same number. This is why money creation by banks is often called a balance sheet expansion. Let's imagine that Cassie needs a credit of 2000; the bank's books would be adjusted to add 2000 to each column accordingly:



Banks Individuals
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
0 1000 1000 0
2000 3000 3000 2000


- Table 4 -



2000 new currency units were made available to Cassie, recorded both as an asset and liability of her own, but now also mirrored for the bank: Cassie's asset is the bank's liability and her liability is the bank's asset.


The whole table now looks like:



Banks Individuals
Assets Liabilities Assets Liabilities
Loans Deposits Deposits Loans
0 1000 Mark 1000 0
0 3000 Jo 3000 0
2000 3000 Cassie 3000 2000
1000 1000 Lauren 1000 1000
1000 1000 Sean 1000 1000
5000 0 Government 0 5000


- Table 5 -



We can perform any operation required on these numbers, including any transactions, as well as facilitating any reasonable level of debt for any member, without anyone "borrowing" anything from anyone. All processes consist either of creating numbers, transferring those numbers by instruction (by debiting one account and crediting another), or eliminating numbers when debts are paid down (when positive numbers are paid into negative balance accounts). So, even though we've introduced a bank, we've retained an honest, inclusive and interest free financial system which can accommodate all community members (and a government) without anyone having to "borrow" anything from anyone. And it's for that same reason that we might consider repayment conditions being made flexible enough to ensure far fewer people have to lose property during hard times.


And that, of course, was what we set out to achieve, to show that banks can serve the community, that introducing them into our model didn't have to condemn the community to class hierarchy and systemic usury.


In the next section we'll develop the model to introduce a plurality of banks and consider the attraction of an alternative model to account for these financial relationships.










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