We hope this section offers some valuable content. Find below a number of bite-size pieces, which are recreated on a single page here.
1. How Money Really Works
This is our first example of how money really works. We're going to build a small financial system to show how a community creates and uses money, and how things like banks and debt really work too.
We'll keep it very simple. We're going to start with a very small community, a community of just 5 people, who have skills they want to trade in a local economy. We can build up a small financial system to show how they will interact with each other using money and doing so will capture the way we interact with each other in much larger societies, indeed the world as a whole, today.
A Basic Financial System
- Table 1 -
The above table shows each community member's finances at the beginning. The fact that the table is filled with zeros means there's no money in this community yet. But that's not a problem, because Mark, Jo, Cassie, Lauren and Sean all read the moneytruth.org website and they know very well how to get the system going and make everything work.
The reason we have money, of course, is to be able to offer people something in return for doing things for us - to pay them to build things, grow things, repair things, move things around etc. For this first example, let's imagine that Sean needs some emergency repairs carried out on his roof. Although no money exists right now, Sean knows that he can hire and pay Mark - a skilled roofer - to do the job. And he can hire him and pay him right now, right when the work needs to be done, even though it looks like he doesn't have the money to pay him.
All Sean needs to do is accept that he has a reciprocal debt for the value of the repairs carried out on his home and that debt will itself create the money that pays Mark and then goes on to circulate in their economy.
- Table 2 -
What you're seeing above is the actual creation of money. Sean's debt really did create 1000 currency units on the system. And although this may seem a simple process, this really is where money comes from.
Sean now has a legally binding debt on the system and Mark, having provided the materials and labor to repair Sean's roof, quite rightly is the owner of (he is the 'bearer' of) the corresponding legal credits/claims - money. You can see clearly here that money is relational, it is based in debt and has two sides: a legal debt and a legal claim. Mark's money can be spent with anyone else on the system and he isn't tied into an ongoing relationship with Sean.
Notice how this system solved a very important economic problem and avoided two other very important problems also:
Sean didn't have leave his roof in a state of disrepair while he labored elsewhere for a wage, 'saving up' the money to pay Mark.
He also didn't have to seek out someone who could lend him their money, thus he didn't have to enter a lender-borrow relationship or pay interest.
This system, then, cleverly solves many problems that might exist around money and debt. And it achieved it 'endogenously', without having to introduce any type of money from the outside, or any third-parties like lenders (thus traditional lender-borrower relations or interest) either. In other words, many historical problems associated with money, debt and the conflict between rich and poor have been removed.
Let's continue. Lauren would like to employ Jo, a skilled builder, to extend her property. Lauren's property is also the location of her daycare business, so extending it allows her to expand her business and her ability to serve the community. Just as above, Lauren enters into a legally binding 'promise to reciprocate' in order to create the money that allows the work to be done; she takes on a debt, 2000 units this time, and Jo works to earn the title to those claims.
- Table 3 -
Again we can see the two-sided, relational nature of money - Jo has labored and is now 2000 better off. Lauren has an extended property, but she is now 2000 in debt.
We can also see that Mark and Jo, having already earned money, can spend the money they have without creating new money. This reaffirms the fact that we only need to create money in response to the need for debt. So long as Mark or Jo wish to spend no more than they already have, they will not need to create more money. Indeed, the economy as a whole won't need to create any more money until someone needs to spend more money than they have. The money that already exists in the economy will continue to circulate until it has been settled again i.e. until the debt which created it has been paid down again.
So let's now see how the money we've created is eventually settled (that is, 'uncreated' or 'paid out of existence') again. The following table shows a transaction between Mark to Lauren. Mark (the roof repairer) has a young child who he would like to enroll in daycare with Lauren. The charge, for the remainder of the year, will be 1000.
- Table 4 -
You can see that Mark's account is debited and Lauren's account is credited by 1000. Mark goes from +1000 to 0 and Lauren's account shows that, whilst she has a debt of 2000, she also now has credits of 1000 too. There are still 3000 units of currency in existence (the total of either column), but Lauren now has credits which she can use to pay off her debts. And in doing so, the money she created in the previous round will be paid out of existence again.
- Table 5 -
By transferring 1000 currency units from her credit column to her debt column, Lauren paid off part of her debt. In doing so, she actually removed that 1000 units of currency from the system, leaving only 2000 currency units remaining.
From here, it's very easy to imagine almost any transaction we like between members of the community. We can imagine anyone going into debt and creating more money, we can imagine anyone paying money to anyone else, or even to everyone else, and we can imagine anyone paying off debts to eliminate money that their own debts created. We can even imagine everyone paying off all their debts at the same time, returning us to where we began at the beginning, with nothing but zeros in our system - no money and no debts at all.
So, we've seen money being created, we've seen it being transferred, and we've seen it being eliminated again. This is the 'lifecycle' of money. And although there's much more we can talk about, we've already seen the most important things that we can know about a monetary economy:
We've seen that money comes into existence, as we need it, when we go into debt. And that's because money is debt.
We've seen that debt is facilitated, not by "borrowing" anyone else's money, but by creating new money, endogenously, within the system.
We've seen that money is not returned to a previous owner when it is paid back, but is in fact paid out of existence again.
The lifecycle of money, the idea that money can easily be created, transferred through exchange and then destroyed again when it has served its purpose, can be confusing for those used to thinking about money in a different way, for example, if they think of money as physical objects like banknotes or coins (which obviously don't just disappear when you give them back). But remember we haven't introduced any physical money into our system at all yet. Everything we did we did with accounts entries, simple numbers written down on a table, and you'll see later that even when we do introduce physical money, it doesn't change what is happening underneath.
So money, banking and debt work very differently to the way we commonly believe. Our financial systems are really something we call credit systems, because they create, circulate and destroy money in facilitating the economy's debts. And you've seen that they are really very remarkable things, that they solve many of the greatest problems associated with money, debt and trade and they do so in a very clever way.
We'll go on to add more to this model in upcoming sections, including adding a government and a plurality of banks in Sections 8 and 9.
2. Conceptualizing Money
The Fountain of Money at the Heart of All Economics
This one is just a little conceptual aid, for those who might benefit from it. I think it can help to make sense of economic reality and aid in breaking down some unhelpful economic myths.
Now I'm sure you've heard people say "Money doesn't grow on trees!" Right? But how about if I said there really is a fountain of money, or you could think of them as magic money trees, at the heart of all our economies? And they've really always been there.
If you've read the previous sections, you'll know that money simply comes into being when people (or governments) need it, when they 'deficit spend' or go into 'debt'. In other words, without much work or effort or fuss, money really does just come into being, when it is called upon, as if from a magical money fountain or tree. The only stipulation here (and what makes this system possible) is that money comes into existence, usually, on the condition that we return it. As you'll see, governments can be exceptions to that rule, but for everyone else, ordinary people like you and me, money comes into being when we need it, on the condition that we make a (legally binding) promise to pay it back.
In truth, this is just an inevitable practical reality for money, because money is never going to be some physical 'stuff'. It would simply be far too expensive - and pointless - to ship physical money about the planet each and every time a transaction is made, only to be shipped straight back again when the next transaction is made in the opposite direction. Money inevitably resolves to weightless, infinitely transferable numbers that can be sent and received all over the world with the minimum expense and fuss; numbers that are simply recorded up and down, and into and out of existence, as and when we need them, when we go into and out of debt.
Perhaps the most remarkable feature of this system is that it should clearly provide a strong social or democratic foundation for money, therefore also for the economy, for society and for the world as a whole. All people can have access to money, so long as they pay it back, without having to "borrow" anyone else's, or, therefore, pay interest. And few things could be more important, especially when considered against the reality of the world as it is today. Today, entire countries are being crushed by ever growing debts and interest demands.
In a world where governments are required to hand over billions every year, often in the form of valuable national assets, simply for having a national currency, where ordinary working people must pay multiple times for their homes or go without, advantaged elites can ever increase their ownership, control and profit from the productive and administrative elements of society. And unlike the all the rest of us, they don't ever have to earn a penny.
The magic money fountain or money tree that exists at the heart of all our economies should clearly be a democratic facility and should be subject to fair democratic rights and rules. There are many hundreds of trillions of currency units in existence in the world today and they should all have been created according to fair democratic rules.
But the task remains to make that so. The unjust transfer of those systems to unaccountable private elites has allowed the wealth of the world to fall into a very few hands, at the expense of very many others who have been economically oppressed and/or have gone entirely without. A new generation of economically aware citizens can change that. While it is fine for private banks to serve society and participate in the management of money and money creation on behalf of the rest of us, it's unacceptable that they continue these anti-democratic practices. Today, even our governments are required to "borrow" money into existence, at interest, from capitalist banks. In the future, we must ensure that banks respect our democracies and serve us as foundational components of a rights-based and largely interest free economy.
3. Exogenous & Endogenous Money
A Settled Debate
Historically, and even continuing to the present day, there have been two fundamentally opposing views on money.
On one side is the belief that money is, or should be, a physical 'thing' derived from the security and reliability of the physical world, beyond human relationships and - supposedly - beyond the realm of human corruption. Such money, they say, takes the form of precious metals, or other rare or valuable materials that are hard to reproduce or fake. These we can call commodity forms of money; they are physical objects or materials that are believed to still have value and worth even beyond their use as money.
And on the other side is the idea that money is really socially constructed, that it is a product of human relationships and is given its life in society and law. In other words, money is fundamentally non-physical and takes the form of legal agreements, for example, a legal title or legal claim, freeing it from many of the problems and constraints of physical, commodity forms of money.
It's a debate that appears to have been waged for millennia.
A fairly modern reference is economist Joseph Schumpeter (see here), who said that there are two fundamental conceptions of money: the idea that it is commodity-like, like gold or silver, and the idea that money is creditary i.e. debt.
Now, it would seem redundant almost to the point of absurdity to explain why money isn't like gold or silver. And if you've read earlier sections of this website, you already know that money throughout the world today - all the national currencies of the world - is debt. In that sense, it's an absolutely, unequivocally settled debate. However, there's something in the contrast of these two types of money that gives something very important to understand.
One way to think about the differences between these monies is the way in which they are exogenous or endogenous to their users.
The words exogenous (meaning 'outside') and endogenous (meaning 'inside') refer to some frame of reference. So exogenous monies would be monies that originate outside any frame of reference we happen to be concerned with and endogenous monies would be monies which originate within it. Exogenous monies would include physical objects that exist in their own right, outside of human relationships; like, for example, gold or silver. These monies are in some way already existing monies that would have to be introduced into our frame of reference before they can be used. For example, if you want to buy something, the money has to have made its way into your possession by some previous means. Those means might include, for example, prior earnings, or, if you need access to debt, by some type of 'lender'.
By contrast, endogenous monies originate within our frame of reference and therefore do not need to be introduced into it. The money does not need to have been previously earned and it doesn't need to be introduced by borrowing or lending either. Endogenous money is created inside our frame of reference. We can do this because these monies are socially constructed; they are of the realm of human relations and agreements and they don't conform to the same rules or limitations as measures of variously constituted metals.
Understanding these contrasts could hardly be more important, because they clearly point to stark differences in how they work and how we should all relate to money. You may already understand that, while money is categorically endogenous and socially constructed, most of the world's people live hopelessly subject to money as if it were exogenous to them.
If money were exogenous, like gold or silver, then we would know where it comes from; it would come from mines or other similar production facilities. And we would know how it would be introduced into circulation too; it would be introduced largely as interest bearing loans, in order to ensure the maximized long-term profits of financial capitalists. We know how ordinary people would get access to exogenous money; by borrowing it at interest - if they are allowed to. And we know how governments would get access to it; by borrowing it at interest too. It's almost impossible to imagine exogenous money being given a democratic foundation; it would require massive state intervention and, for example, the nationalization of gold/silver prodction and the establishment of interest free financing for both the public and household sectors. These great improbabilities say nothing of the other impracticalities of commodity forms of money; like, for example, doubling the movement of all transported goods in the world with the transport of physical monies to pay for them.
It's fair to say, then, that exogenous concepts of money aren't only inaccurate, they're profoundly harmful to us all. No such system could begin or be maintained in a state of justice or fairness. Without massive state intervention, all money would be the interest bearing private property of economic elites - because it would all be loaned into circulation. It would be a world in the grip of a wealthy minority, replete with the immense weight of interest bearing debt we're all familiar with under global capitalism. And yet, as mentioned, it is this concept of money which has been fostered in the minds of almost all human beings.
Looking now at endogenous money, where money is endogenous, then we can say where it comes from; it would come into and out of existence as and when people need it, as we go into and out of debt. Ordinary citizens would have access to money, not by "borrowing" it, but through a process of money creation that requires no "lending" and no interest.
Governments too would have a democratic relationship to money and, for example, create money endogenously debt and interest free. A persistent debt and interest free currency base is a good idea if we want people to be able to keep savings, immune from demands for repayment. And governments can hold international debts in the same way we as household hold debts internally within society: facilitated by endogenous money creation and free of both lender-borrower relations and interest.
Endogenous money is also practical to use; it doesn't require the shipment of vast quantities of physical materials in order to pay for all our goods and services and most/all financial transactions can be carried out at low cost, mostly by mere instruction alone i.e. banks can credit and debit accounts simply by raising one number and lowering another. We can say this system would be a lot fairer; it is not the world in the grip of a super-rich minority, vast numbers of other people are not left rightsless and inevitably poor, we are not drowned under an impossible weight of interest bearing debt (most of our debts would be interest free) and it might even offer resistance against the boom-bust business cycle, if banks are deprived of some of their power to create a glut of money one minute and then a dearth of it the next.
Those two conceptions of money point to vastly distinct prospects for society. Thankfully, the former is impossible and the latter, which would support greatly elevated rights for all living people, is already the reality of money.
Is the property of an elevated financial class.
It is 'loaned' into circulation according to unstable cycles (put it in, take it away 'business cycles').
Circulates as interest-bearing debt. (Tribute economy.)
Is a social/democratic institution.
Is issued and accessed according to fair rules, according to human and democratic rights.
Supports a largely interest-free economy.
I'll leave you with a few quotes from industry figures whose words make it clear that money, throughout the world, is creditary and endogenous. We can also be quite confident, I think, that credit is history's oldest and most represented form of money. Money is a social construct, a product of developed society, a legal agreement that comes into being at the point we need it, whenever we go into debt and conversely leaves existence when that debt is repaid. We are not, nor ever were, "borrowing" anyone else's money in order to facilitate debt and we should not be paying interest.
Banks lend by creating credit. They create the means of payment out of nothing.
Sir Ralph Hawtrey, British economist and civil servant.
[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts.
We tend to assume that [...] Banks take deposits from savers and lend money to finance capital investment... But in fact banks create money and purchasing power, and most lending is unrelated to capital investment. [...] we need new approaches both to economic theory and public policy.
Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit "creation"--credit is created literally out of thin air (or with the stroke of a keyboard). The loan is not created out of reserves. And the loan is not created out of deposits: Loans create deposits, not the other way around.
...banks do not have to wait for depositors to appear and make funds available before they can on-lend those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be verified in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries. [...] private banks are almost fully in control of the money creation process.
1. See: Henry Dunning Macleod's The Theory of Credit (1889), Henry George's The Science of Political Economy (1898), Alfred Mitchel-Innes' What is Money? (1913), The Credit Theory of Money (1914) and David Graeber's Debt: The First 5000 Years (2011). ↩
4. Physical Money
Nothing More Than a Communications Device
Physical notes and coins exist in the smallest number possible to facilitate day to day trades, where accounts information needs to be conveyed outside the banks' secure networks. In other words, they are simply durable, reasonably secure communications devices, carrying accounts information, hand-to-hand, across the network. The materials of which modern money is made have no intrinsic value, you could not get anything for the paper or base metals out of which they are made. But neither are they supposed to, for they exist solely to convey information. You could liken money to any other legal agreement that might be memorialized on paper; the paper on which a contract is signed has no intrinsic value either, its value lying in the information or agreement it memorializes.
Creating this kind of physical money, we would think, should be the responsibility of an accountable authority. The reason being that physical money represents the legal claim a bearer has on society, not its commensurate debt. Creating physical money free of its commensurate debt is, of course, the essence of counterfeiting. Equally, when precious metals figured to an extent within the physical money supply, accountable figures would have been expected to assure that such coins did in fact contain the weight and fineness of metals that they purported to.
Today, as we move further and further away from cash handling and make ever more use of electronic payments systems, it becomes easier and easier to appreciate that physical money - notes and coins - makes up only a very small proportion of the total money supply. And that volume is adjusted throughout the year for seasonal differences, ensuring that it really is just the minimum amount required to get the job done, minimizing cash handling and storage risks and costs.
Let’s imagine that we have a new economy, with as yet no physical money. Of course, we wouldn’t be left to stand around, scratching our heads and unable to interact with each other, simply because we had no money. We know that money is created in the process of facilitating debts and their reciprocation. And we know that no physical money at all would need to exist in order for this economy to function, albeit we would have to accept some limitations. If all transactions could be carried out by instruction alone (instructing a bank to debit this account and credit that one, for example by check, wire or chip & pin), then we have a cashless economy in which conceivably vast amounts of trade could be carried out by accounting adjustments alone. Entirely cashless economies might be a little unrealistic, even for us today, but appreciating how the system works in a cashless sense is the key to understanding how money more widely works and the role physical monies serve. The essence of money is of course debt, an entirely cashless, non-physical phenomenon. We simply need a small amount of physical objects on which to convey that non-physical information, hand-to-hand, where other forms of communication are impractical.
Let's now imagine that a physical money stock has been created and delivered or sold into the banking system where people like you and me can get access to it. If I have a positive bank balance of $1000, it doesn't mean that there's $1000 of physical money sat in the bank (or anywhere else) just for me. If that were the case, for all of us, 100% of the money supply would have to be represented by physical notes and coins - the vast majority of it just sat there, doing nothing and gathering dust, for no practical reason whatsoever. In reality, if I have $1000 in my account, then there will likely be less than about $50 of physical money in existence to represent it; such is our economy's limited need for physical money. So long as there's enough physical money such that, if I need to make a cash withdrawal, I will be able to, then the system will work. And I will be able to make that withdrawal so long as an unusual and unexpected number of others don't want to do the same thing at the same time. On an ordinary day, we can tell how much physical cash any bank or community is likely to need.
Now, in making a cash withdrawal, I am simply swapping (perhaps spending, if you like) the numbers in my account for pieces of paper with the numbers on them instead. It's the same information (my legal titles), I just now hold it in a different form. I can then use this physical money to pass my claims on to whomever I wish to trade with. Should I deposit the cash back in my bank, that process would simply reverse, swapping (perhaps selling) pieces of paper with numbers on them for numbers in my own bank account. Those pieces of paper, then, will go on to be used by the next customer who comes into the bank wishing to hold their numbers on pieces of paper too.
The relationship between physical money and the larger body of money, then, must be seen like an iceberg, only the tip of which we can see in circulation. Everything else is nothing more than numbers in the ledgers of the world's banks. Today, the numbers of money are vastly greater than any physical stock which exists to represent them. And that's something we should bear in mind when considering historical accounts which emphasize the physical circulation and overlook the potentially far greater records of legal claims and debts which underlie it.
5. Banks as Credit Agents
For Households and Nation States
As already stressed, credit systems of money are not only an inevitable refinement of money, they are also greatly the more socially just, non-hierarchical form of money. Anything else, anything that takes money away from the just and equal rights of the people, is unacceptable and an attempt to recreate the economics of class, injustice and abuse we are all too familiar with today. Our duty, then, is to ensure that our systems of money work - and can continue to work - as they are supposed to: horizontally, not hierarchically.
If household and national finances can be facilitated free of unnecessary hierarchical, lender-borrower relations and free of interest (and of course they can), then that is what we must ensure. The result will be a new way of doing economics, a new foundation for economic life; a foundation in decency, honesty and real rights for everyone. The ability of the world's people and the world's governments to have a democratic relationship to money, to have access money, free of unnecessary exclusion or exploitation, would transform the global economy, bringing opportunity to billions and represent a multi-trillion dollar annual shift from the few out to everyone else.
Furthermore, it should be clear to the reader that the household is the bedrock of any economy. The ability of people all over the world to have access to the means of buying a home and the opportunity to work, to pay for that home and the lives that are lived within it, is the very foundation of any functional economy. It really is now time to ensure that these vital concerns are recognized and given the protection of Human Rights law.
You already know that this system works in such a way that everyone can have access to money without "borrowing" anyone else's, that banks, rather than being "lenders" over us, are really very much more in a horizontal relationship with us; they are our agents, the recorders/monetizers of our debts; they stand side-by-side with us in our relationship with society. That's simply - and thankfully - how currency systems work. Banks monetize our debts and then release that money/debt onto society; it's much more helpful, therefore, to recognize our debts as debts we owe to society. We owe those debts back to society through agents licensed to facilitate it - banks. That is a much more accurate portrayal than the conventional idea that we've "borrowed" and must return other people's money (with interest, of course). Banks are really just our bookkeepers, keeping score of who owes and who is owed. And in performing that role, banks create the medium through which we all exchange and makes the life of the economy as we know it possible - money.
For the time being, let's say that banks' role can be summarized as facilitating the lifecycle of money. They facilitate the creation, the circulation and the eventual settlement of our money/debts. We've discussed money creation and will discuss it again, so let's turn now to the fact that banks' responsibility to create money is balanced by a responsibility to uncreate that money again. Banks must ensure that the money they create - because it is a debt - is settled/honored again. And that, of course, is the very same responsibility the debtor has her or himself.
Let's explore the proper role of banks through a couple of examples; household mortgage debt and national sovereign debt:
Household Mortgage Debt
When the debts of ordinary people are used to create money, for example, to buy homes, there is first the appearance of new money on the system followed by the exchange of money and property between buyer and seller. It's clear that there's an outstanding debt, it's clear that it is the acquirer of property who is indebted and it's clear that the process can only work if it's reversed again, if the debt/money is honored/paid down. If that didn't happen, the system just couldn't work.
It is first the debtor's responsibility to pay her/his debts and it is the role of the bank to stand next in line, to backup or to underwrite the debtor in that responsibility. So long as the debt is secured, the bank can seize the securing property and use its sale to settle the account. If the debt is unsecured or insufficiently secured, then it is right that the bank should take a loss. This is what we pay them for. It is the banks' service and the risks they face that we pay for, not compensating them or anyone else for the "foregone use" or the "time value" of money.
Banking, then, does involve costs and risk (that would have to be passed on in prices). What banking doesn't involve and must be removed is the unfounded story that they are "lending" and we are "borrowing" other people's money, requiring us to compensate them with interest. The money did not belong to anyone before it was "loaned" and it will not be returned to anyone when the debt is paid down; there is simply no need to pay and nobody to compensate with interest. Banks can charge transparent, competitive fees for the services they provide; they have no need and no right to mislead customers in order to increase profits.
With regard to risk in this sector, in order to be exposed to risk, the bank must face an uninsured loss in the value of securing assets, such that their sale can no longer cover any outstanding sums against them (plus any administrative costs). Falling house prices, uninsured properties burning to the ground or being washed away in floods might present such risks. But even at today's historically low interest rates (e.g. 5%), a homeowner will pay twice for their home over 30 years. If these payments were tied to risk, it would have to mean that, each 30 year period, around 50% of the entire nominal value of mortgaged housing stock would have to be lost or destroyed, without insurance, before any sums were paid against them. Which is patently absurd.
Banks' interest taking isn't tied to risk (an argument commonly advanced), they're taking interest because they can. The competitive market fees for originating, maintaining and settling a mortgage account would be a fraction of their current cost, perhaps a fraction of 1%, if expressed as an interest rate. Banks are taking many thousands of dollars, many years of life and a great deal of opportunity away from working people (and then often taking the house as well) simply because we've been led to believe, falsely, that we are "borrowing" other people's money.
From Households to Banks: The Gift that Keeps on Giving
In what is surely an inevitable depravity once interest on household mortgage debt has been accepted, the front-loaded mortgage allows banks to keep cashing in. Here, banks not only take huge sums of interest which they have no right to take, front-loading that interest simultaneously keeps the outstanding principal, on which interest is charged, as high as possible and delays its payment for as long as possible, pushing back as far as possible any claim a homeowner might have to her/his own home; something which will pay yet again when the bank gets to take the home itself, in the next routine collapse of the capitalist system.
Over the 35 year period 1973 to 2007, mortgage interest rates averaged around 9.3%, almost exactly the rate required to make householders pay three times for their homes; once for their home, twice simply as a gift to the already rich. Every time a working person spends 30 years laboring to pay 3 times for a home, the rich are in for a windfall. The beneficiaries of that interest can buy lavish homes and profitable assets (including the firms for which the working man toils), without ever having to lift a finger in contribution to the economies they take their lavish lifestyles from. And this is a process that is repeated for each property, every time time a mortgage is channeled through it. Each mortgaged property in the land might net the rich and powerful 10 or 20 times its value across its lifespan. If nowhere else the class structure of capitalism is plain to see, it is plain to see here.
National Sovereign Debt
Just like households, governments are entities for which money should work honestly and democratically.
And just the same as with households, when a state instructs its bank (a central bank) to deficit (debt) spend, that money is created in that process. Just as with households, the dominant class would have us believe that the state, on our behalf, are "borrowing" their way into debt. But the truth, again, is that that is created money; it is no more "borrowed" than our household debts.
In fact, the story here is even more compelling: it's only by convention that we call this money creation a "debt" at all. In the case of households' deficit spending, we clearly did have debts that must be honored i.e. money created must be paid away again. If we didn't do that, the system wouldn't work. But in the case of state money creation, it's clear that we do not have that same obligation to recover money and pay it away again. In fact, the opposite appears to be true. It appears to be self-evident that every nation should have a currency base that is democratic, free of debt and free of interest, which allows members of the public to keep savings immune from demands for repayment.
As it stands, governments, at least in the capitalist world, are effectively "borrowing" their currencies into existence. The dominant class are not only taking interest on all this money, the notion that these are real debts is being used as a political and economic weapon, to dominate, dictate, contain, impoverish and extract money and assets at a global scale. It's possible that every nation on Earth today is subject to these overarching, unnecessary and wholly fabricated "lender-borrower" relations.
In the developed nations of the world, our so-called national debts are towering sums that transfer billions upon billions every year to the dominant class, deprive us of a functional public sector and public rights, as well as serve as a political football to smear political opponents or tell us we're "living beyond our means". In the poorest nations, those already most damaged by imperialist economic practices, these so-called national debts may be the reason many don't eat, or have basic infrastructure like roads, hospitals or schools. In a pattern repeated all over the world, these so-called "debts" are foisted upon nation states deprived of democratic alternatives and then used to justify the deprivation of the public sector and the transfer of valuable public assets into private hands.
For those who wish to look at how the criminality at this level of finance goes even further, John Perkins (find him on Facebook), in 'Confessions of an Economic Hitman; How America Really Took Over the World, gave us graphic examples of how countries are targeted, as a matter of foreign policy, to be saddled with heavy, odious "loans", where large sums of (again, created) money are squandered on projects which profit banks, corporations and a compliant (often installed) rulership, but are of no benefit to the citizenry who are required to pay for it.
In our effort to challenge the immense corruption of it all, we propose, simply, basic economic literacy as the foundation for greater rights for all. Although we won't discuss much more about point 3 below on this website, we've already seen ample reason that numbers 1 and 2 should form the necessary foundation for our economic lives. And point 3 is really just an extension or enlargement of the very commons that gives life to numbers 1 and 2:
A democratic, debt and interest free national currency base.
(Nations are currently required to "borrow" their currencies into existence from capitalist banks.)
Interest free access to money for households all over the world.
(Banks create and destroy money as we go into and out of debt; interest beyond fees is unwarranted and unnecessary.)
The return of public resources and industries that allow the public sector to pay for itself, reducing taxes and bills on working families.
(Capitalist states privatize national profits while socializing public sector costs, resulting in heavy taxation on working famlies - around 40% of their incomes, effect tax rate.)
6. It's Just Not Scientific
The World's Most Powerfully Misused Words
The words 'lend' and 'borrow' already have their use and meaning in the world outside of finance. Say I have a bicycle and you would like to 'borrow' and make use of it for a period before returning it to me, I could 'lend' that bicycle to you and the interaction between us really would be an example of what our language ordinarily conveys by the words 'lending' and 'borrowing'.
And if we invoke the legal construct of the 'reasonable person', I'm sure that if you approached a 'reasonable person' in the street and asked them what they thought those words mean, you'd get the very same definition I offered there.
But banks of course don't do that. Banks record money into and out of existence in the process of facilitating our debts. In the case of households, we understand that these really are real debts, but we understand they are not the result of any "lending" or "borrowing" in the commonly, reasonably accepted understanding of what those words mean. Money is endogenous and creditary; money is debt and it comes into and out of existence when we go into and out of debt.
In my experience, it's not too uncommon to find other economists or finance professionals who understand that money works this way (something they might call "multiplying money" or "expanding banks' balance sheets"). What is much harder to find are those among them who recognize that there's something fundamentally wrong in couching these processes in the extraordinarily misleading language of 'lending' and 'borrowing', or indeed show the right concern for its consequences - the establishment of very cruel and unnecessary, hierarchical lender-borrower relationships which crush and loot the economies and people of the entire world.
Recording money into and out of being, as records of outstanding indebtedness, is, clearly, an existentially different phenomenon to that of the borrowing and returning of already-existing money that is the rightful property of the lender. This is a basic fact any schoolchild could readily understand. Yet we find our highest academic, financial and political communities and authorities perpetuating this language and then raising far too few concerns about the damages being done as a consequence.
This is a clear case of the abuse of, or at best the unscientific treatment of, language. I'm sure there are many professionals who use these terms unconsciously or uncritically, who, for a lack of a better understanding themselves, believe or have assumed that banks really do 'lend' 'borrowers' other people's money. But even so, that isn't what we expect from professionals. From the professional community we expect honesty and accuracy. And as much as there may be some whose use of this language could be considered uncritical, there are clearly many others who know this is an inappropriate and misleading language, yet use it anyway.
The economics community is suffering a crisis of reputation, as I'm sure it does permanently - and certainly every time the world descends into even more calamity and it's revealed that those at the top have simply been plundering all along. With the rise of communications technology, more people every day are coming to understand that this type of economics is systematically unjust, that society is lost to corruption and about as far from the ideals of decency and democracy as economies ever have been.
If you know, as children can and should know, that money is created for us when we need it, when we go into debt, would you still be happy to hand up large sums of your hard-earned income - many thousands of hours of your working life - in interest payments to people who are not only already rich, but simply did not earn and do not deserve that money? Would you be happy to see the great majority of the working population around you do the same? At 9.3% (the 35 year average mortgage rate to the 2007/8 crash), a working families will pay almost 3 times for their home; twice as a mere gift to the already rich. We don't need to look much further to see how it is they acquired that wealth in the first place, or how such small numbers of people come to own everything of value in society - and now just about everything of value on Earth.
If you knew that very much of the world's "national debts" were also the result of simple money creation, not the actual lending and borrowing of anyone's money, would you continue to accept the endless mainstream chatter about deficits, over-spending and the cost of public services and public debt? Would you accept "austerity", the loss of public rights and public assets in the name of "paying up" and "living within our means"? Would you accept the unconscionable drain private international banks inflict on many of the poorest nations in the world? Would you still believe the capitalist system is one of justice and fairness, where wealth is "earned", where we reward 'enterprise', 'endeavor' and 'merit'? Or would you suspect that this is all just wallpaper for great frauds and corruption; perhaps the greatest examples of such in all of history? I don't imagine for a minute that you'd fail to have serious concerns about what is going on; I think you'd look very differently at how property, income and opportunity has been allocated under capitalism and I think you'd wonder exactly what alternatives we are being deprived.
So maybe we can go from understanding it's all set up by and for a corrupt few to actually doing something about it. Basic economic literacy is the foundation for a better economic future, for genuine democracies and for economics founded on the real rights of all. Let's do something now, if only for the sake of the world's poorest (enormous numbers of whom lose their fight against global capitalism every day). Let's make sure we're still around to see life and opportunity returned to those from whom they are currently being stolen. And that's pretty much every last person on Earth, including economists. What might the world look like then?
The Basics Economics
- Fig 1 -
In our earliest studies of economics, we're introduced to the idea of supply and demand (click the pictures to enlarge them) and, despite the many complications that this simple analysis can gloss over, I think it can be an important thinking tool nonetheless.
In his book Debunking Economics, economist Steve Keen, drawing on the work of Italian economist Piero Sraffa, points to the likelihood that the supply curve is not, in fact, upward sloping. At least, not in the estimation of business leaders or by empirical measurement of the world around us at this time. For Keen, the supply curve (the upward sloping line) is more likely to be horizontal, or even downward sloping (see Fig 2). What this would show is that our ability to produce, to create and to supply is not being constrained by the conditions of supply, but rather by the conditions of demand; we could potentially produce more and at lower unit costs than the economy outputs at the present time. In other words, we're being held back; we're losing out and we're watching a lot of our potential simply go to waste. And that's a conclusion that fits with our wider assumption or suspicion that capitalism is unfairly excluding people and allocating market power to an undeserving minority. It also shows that fixing it isn't a matter of improving the conditions of supply (such as technology), but allowing the economy to get demand power back into the hands of the people where it rightly belongs. (This would push the demand curve - the downward sloping line in Fig 1 - outwards to the right.)
- Fig 2 -
So this provides more support for the idea that the problems of capitalist economics are systemic and internal; they are not 'natural' features or limitations of either the natural world or our own capacity. Indeed, until we can be free from the perverse influence of systemic economic injustice, it's going to be very hard for us to understand what those limitation might be.
Capitalism is, to any casual observer, a staggeringly distorted system. For a few (who I'm sure many would regard as the least reputable among us) capitalist economics provides astonishingly well. We've already seen how much wealth is available to those who do not lift a finger in contribution to the economies that provide so phenomenally well for them. But it is surely for most of humanity that life is made crushingly difficult. The wealth and power that rules the world are notorious for their corruption and their ever increasing cultivation of a system that serves themselves at the expense of everyone else. While a few are able to rig the system and cheat their way to unimaginable wealth, many are left facing poverty, misery and struggle, perhaps a lifetime of economic subjection/slavery, at the hands of a few that abuse them.
Capitalism is the problem. The problem lies in the exclusivity of economics under capitalism, its proclivity to serve an undeserving few at everyone else's expense and that is what we are able to observe and identify as a clear and obvious assault on wider demand; that is, the income and opportunity normal human beings all over the world can ever hope to have. Billions of people are being reduced by this system and forced to live a precarious existence, while favor is lavished on the rich and immeasurable amounts of human potential are rendered dormant or destroyed.
Capitalism's many problems, then, are not a reflection of our limited productive potential, or our inability to do economics better, they are a product of distortionary pressures which render the majority of us unable to demand that which we can produce. And it's a truly basic economic fundamental that if it cannot be demanded, it will not be produced:
Hanauer, speaking principally about employment, but clearly conveying the primacy of demand in driving production, consumption and employment.
What readers of this website will know is that capitalism is exclusionary and it is distortionary by design, that it splits the world into two fundamental groups: the few who own and control the economic world and the many who are then rendered 'subject' to them. The simple fact of what they have done is steal the commons (where money comes from) and common rights. That's what capitalism is; the theft of the commons and common rights. And they've rendered the subject population sufficiently economically uneducated as to simply not know what's going on. Indeed, they've managed to make many millions of people among the subject classes believe capitalism is nothing short of "freedom" itself.
In the terms of our supply and demand analysis, what that means is that the demand curve is being pushed back towards the left, leaving many people excluded and production (Q) distorted towards the indulgences and demands of a power class. (A bloated military, unending wars for profit and bailouts/tax breaks for the rich are sure to be examples of such.)
It seems reasonable, then, to suggest that Keen and orthodox, neoclassical economic theory might find some resolution by drawing the following graph. Here, diminishing marginal productivity and rising marginal costs do set in eventually (as orthodox theory claims they should), but at a level of output/demand much higher than is realized under capitalism.
- Fig 3 -
Here, the return of people's human and democratic rights allows the demand curve to move outwards to the right, economically including a great many more people (all people we would hope!) along with their inventions, innovations and enterprise. Note that the needs of 7+ billion people must be produced within Q. As we have it, many of the world's people are simply excluded and left totally outside of the scope of analyses such as these. By swapping the unearned privileges and the exploitation of the rightsless under capitalism for real human and democratic rights, all human beings can be brought back into the embrace of human industry. And it's surely only through such means that we can give substance to the heretofore largely 'in name only' human right to life.
Let me just finally point out that I think it would seem to make little difference if Keen's assertion turned out to be wrong. Even if it is the case that today, under capitalism, the conditions of supply are more constraining than Keen believes them to be, and supply curves do in fact rise, the conditions of supply and demand are so entwined with one another that it seems reasonable to believe that a demand curve being pushed out to the right will take the supply curve with it. People who are economically excluded are obviously very limited in their ability to be productive, to pursue an education, to drive communities and industries forward through innovation and enterprise; people who are economically included face far fewer limitations. Stated another way, the economically included can and do make unproductive parts of the world around them productive. Needless economic subjection and exclusion are in and of themselves both offensive to human dignity and harmful to the economy - to both supply and demand - and that is enough to condemn capitalism as an inefficient, distortionary and unacceptable system. So even if supply curves do rise under capitalism, widespread economic inclusion would push the demand and supply curves out to the right, which is just about what it'll take to create the conditions in which the needs of 7+ billion people are included within Q.
- Fig 4 -
1. See: Debunking Economics, chapter 5, 'The Price of Everything and the Value of Nothing'. ↩
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:
- Table 1 -
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.
- 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).
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:
- 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:
- 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:
- 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.
9. Accounting for Money Creation - 2
Introducing a Plurality of Banks
In the previous section, I tried to establish that a basic financial system could exist, that included a bank and a government, that had a form that was democratic and fair, that did not reduce the rights of the people, that did not condemn the community to hierarchy and systemic usury and therefore did not transfer money, power or property from the many who are deserving to the few who are not.
The challenge is now to retain the efficacy of that system as we add a plurality of banks. But there are a couple other fundamental questions we might want to consider first. Firstly, what exactly should be the extent of this system, where should its boundaries lie? And, second, can banks as we know them really serve society or must the very structure of finance be changed?
Where Should This System's Boundaries Lie?
Money is, of course, an infinite source; it must be subject to limitations or it can't work. So what should this system's limitations be?
I think this question has a graceful and appealing answer. I think all money creation, thus the extent of the body of formal currency as a whole, should be tied to our human and democratic rights. In other words, money not created with respect to just and fair human and democratic rights should not be created at all. We can have money creation for households and we can have money creation for democratic nation states. And that should be it.
In seeking out debt, there are of course 2 logical options:
To create new money.
To turn to the extant stock of money and actually 'borrow'.
Number 1, I posit, should be the realm of democratic and human rights and nothing more. This option, free of all unnecessary exclusion or exploitation, should be the very foundation of human rights law and the cornerstone of any democratic society. In fact, it seems clear enough that there can be no democracy and no real human rights without it.
But commercial firms and risky business ventures? I don't think they should have the same rights as human beings and I don't think there's any economic justification for allowing them access to that commons either. Human beings and the structures that democratically represent them are the only entities that should have access to number 1. Firms, without human/democratic rights, should be required to use number 2. So I say banking splits very naturally between interest free, commons based and public service banking, where money is endogenously created and clearly attached to human/democratic rights, and interest bearing investment banking where money is handled as exogenous, rather than created in the process of granting access to it. If we could achieve that, or perhaps anything near it, then we'd have achieved a paradigm shift from the dark age systems of exclusion, power and privilege we have today.
Can Private Banks Serve Society?
There are some who insist that private banks, given their record, cannot be trusted to operate; simply, they will inevitably turn into predatory institutions that use their power over money to dominate and subjugate the communities beneath them. Although anyone familiar with the capitalist financial system or the history of capitalism could certainly understand that view, I still believe that private banks can serve the community according to new rules and based in a new popular literacy. For me, the problem isn't that banks are private, it's that popular economic illiteracy has made corruption phenomenally lucrative and thus inevitable; banks just haven't been held to standards that would be imposed upon them by informed citizens. Plus we'd have the difficulty of imagining what should replace them.
Surely the most prominent alternative put forward is public banks. In advocating a commons, I already advocate that some of our resources and industries should be commonly owned. But I also believe that private firms can and should serve the commons. What private entities can't be allowed to do is take, steal or otherwise enclose them (which they did do in constructing the social order of/under capitalism). But I think they can and should be encouraged to serve the commons all day long. If I were to have to compromise, I'd perhaps accept the public running of the endogenous, interest free system (number 1 above). But I do not have a preference for it and I cannot see public entities running the banks that serve the commercial sector (number 2). Perhaps public banks will be a part of a future financial landscape, but I'm sure we'll continue to see, the commercial domain particularly, dominated by private banks.
Introducing A Plurality of Banks
Let's get back to where we were and now introduce a second bank. I'll just cut the table through the middle and move Lauren, Sean and the Government to Bank 2. I've also included a row for totals, so we can see the total assets and liabilities for the bank and its customers. The one thing I haven't changed which I'd like to is the word "Loans". I haven't yet thought of an appropriate term to use, so we'll stick with convention for the time being. None of you believe these are actual loans, so I'm hopefully not going to mislead:
- Table 1 -
We can see that there are still 9000 currency units in circulation. We want to see how how moving money between customer accounts at these banks works out. But we can already see a problem. Money has been moved and now Bank 1 has assets far below its liabilities (which by convention would mean it's failing) and Bank 2 has assets far above its liabilities, meaning it's doing excessively well.
Because customer deposits are liabilities in this model, transferring them between between banks would change their asset-liability ratios. Banks taking deposits would take on greater liabilities and worsen their financial position; those transferring them out would see theirs improve. To tackle this problem within this structure, we can introduce another layer of banking. By introducing a bank for banks - a central bank (CB) - banks can hold accounts at the CB and move assets and liabilities among themselves. In other words, when a customer deposit (bank liability) is moved from one bank to another, an asset can move along with it. So let's take the government out and make its bank the central bank. To make this work, I've had the central bank create 10,000 for each bank so that we have some assets to move around:
|CB Cash||CB Debt|
|CB Cash||CB Debt|
- Table 2 -
We can now move customer deposits between banks 1 and 2 and see that assets as well as liabilities can move. We'll have Cassie spend her 2000 'loan' equally between Lauren and Sean. Notice that we begin (above) with Bank 1's net assets at -5000 and Bank 2's net assets at 0. Previously, if we had moved customer deposits from one bank to another, that would have raised the sending bank's net assets and lowered the receiving bank's. Now, when Cassie's bank (Bank 1) transfers her payments to Lauren and Sean at Bank 2, it makes a net 2000 transfer of assets from its account at the CB to Bank 2's:
|CB Cash||CB Debt|
|CB Cash||CB Debt|
- Table 3 -
So now, although payments have been made and liabilities transferred between banks, because assets moved alongside them, both banks' net assets remain unchanged: Bank 1 at -5000 and Bank 2 at 0.
With the introduction of this tiered system and a central bank, we have a structure that has the appearance of being capable of supporting a plurality of banks, including in terms of financial regulation also. But in taking this approach, we've potentially reintroduced an old problem: Because banks appear to be required to transfer their assets to another bank in processing these customer payments, we've reintroduced the idea that the bank is now 'paying' on their customers' behalf. We've reintroduced the idea that customers are "borrowing" and should rightly pay interest to banks, which is the very idea our system is required to oppose.
But then the endogenous money solution can surely offer something at this tier also, even if it's just banks "borrowing" those currency units into existence, interest free, from the central bank. We'd then have endogenous and interest free money working at both tiers of the system to ensure non‑usurious, non‑exploitative access to money for all.
So no matter what problems we might encounter in trying to understand how the system should work, it's clear how the system should work overall: interest free and democratically just. This is true for governments' finances also. And that implies not only that governments have the ability to create and maintain a base of democratic, debt and interest free money, but that they should be able to hold interest free international debts in just the same way households should be able to hold interest free domestic debts. At the international level, banks do for governments what highstreet banks do for citizens; facilitate exchange by endogenously recording into being/monetizing debts. Taking interest beyond fees is just as inappropriate here as it is for taking interest beyond fees on household debts.
Another alternative to consider whether or not a more appropriate accounting structure might be better from the ground up. After all, the structure we've taken here is that of the capitalist finance system and is a structure that would be appropriate for exogenous and capitalistic, rather than endogenous and democratic forms of money. My suspicion is that if we were to begin again, we'd probably design it differently. And we'd certainly find new, more appropriate language to describe how it works.