In this section we try to break down a number of points into bite-sized pieces. You can find them recreated on a single page here.
1. How Money Really Works
In order to show how money really works, we can offer a simple example. We'll build a small financial system that shows how communities create and use money, and how things like banks and debt really work too.
We'll keep it very simple. We'll start with a very small community, a community of just 5 people, who have skills they want to trade among themselves - in what we could call a 'local economy'. We'll show how they can interact with each other through money and doing so will capture how 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 the community members' 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 perfectly well how to get the system up and running.
The reason we have money, of course, is to have a common medium for exchange - something to offer others in return for doing things for us. Using money we can pay people to build things, grow things, repair things, move things around etc. and we can be paid for the things we do for other people too.
By being universally accepted, money overcomes a number of difficulties that would otherwise exist in organizing exchange. And money also provides a means by which to make savings, allowing us to control our balance of giving and receiving over time.
Now 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 knows that he can hire him and pay him right now, right when the work needs to be done, even though he doesn't currently appear to have the money to do so.
In this system, all Sean needs to do is legally agree that he has a reciprocal debt for the value he takes from Mark and that debt itself will create the money that pays Mark:
- 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 some readers may find the ease or simplicity of this process somewhat startling, this really is where most money comes from.
Be sure to go over what you've just seen. This really is the most fundamental expression of the nature of money and finance. Everything else builds up from here.
So... we've just seen money being created. Sean 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 possessor of (he is the 'bearer' of) the corresponding number of legal credits/claims. Mark can now spend that money on whatever he likes. Or he can save it.
But, we also saw something just as important: We saw debt being facilitated without the need to lend or borrow anyone else's money. And that means the justification for taking interest has been removed.
Sean didn't have to 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 money, thus he did not have to enter a lender-borrow relationship or pay interest.
So that leads us to one of the most basic observations we can make in the field of monetary economics: All people can have access to money/credit free of unwarranted lender-borrower relations and free of interest. (Banks can take competitive fees for the services they provide. Household credit, then, can and should be available to all at 0% + fees.)
Let's continue. Lauren would like to extend her property. Lauren's property is also the location of her daycare business, so extending it will allow her to expand her business and her ability to serve the community. Just as above, Lauren can enter into a legally binding 'promise to reciprocate' in order to create the money that will pay for the work to be done. She will take on a debt, 2000 units this time, and Jo - a skilled builder - will carry out the work that will earn him the title to those claims.
- Table 3 -
Once again we can see money being created and the two-sided, relational nature of money. Jo has labored for Lauren's benefit and he is now 2000 currency units better off. Lauren has extended her property and her business, but she is now 2000 currency units in debt.
Notice that Mark and Jo now have money that they can spend, without the need to create more. This confirms that we only need to create money in order to facilitate debt. So long as Mark or Jo wish to spend no more than they already have, they will not need to go into debt and therefore will not need to create more money. Indeed, the economy as a whole won't need to create more money until someone needs to spend more than they have i.e. when they want to go into debt. The money that already exists in the economy will continue to circulate until it has been settled again. That is, until the debt which created it is paid down.
The following table shows a transaction between Mark and 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 -
By comparing Tables 3 and 4 you can see that Mark's account is debited by 1000 and Lauren's account is credited by 1000. Mark goes from +1000 credits to 0 and Lauren's account shows that, while she has a debt of 2000, her credits go from 0 to 1000. Notice that there are still 3000 units of currency in existence (the total in each column), but Lauren now has credits which she can use to pay down her debts, if she would like to.
Let's see how Lauren can transfer 1000 units from her credits column to pay off some of her debt. Notice that when she does so, that money is being 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. And in doing so, she actually removed those 1000 units of currency from the system, leaving only 2000 currency units remaining.
What we've seen - the creation, transfer and settlement of money - covers the whole 'lifecycle' of money. And it is now 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/everyone else, and we can imagine anyone paying down 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 and thus no money and no debts at all.
While there's more we can (and will) go on to talk about, having seen money being created, having seen it being transferred and eventually settled again, we've seen the whole 'lifecycle' of money. And that means we've already seen surely the most important things we can know about money and monetary economies:
We've seen that money comes into existence, as we need it, when we go into debt. And that's because money is that debt.
We've seen that debt is facilitated, not by the "lending" or "borrowing" of 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.
These realities may at first be confusing for those used to thinking about money as physical objects, like banknotes or coins. Obviously, physical monies don't just disappear when you pay them back. But remember, so far, we haven't yet introduced any physical money into our system. Everything we did was done with accounts entries and nothing more; simple, legally enforceable numerical records, recorded on a ledger. And, in later discussions, you'll see that when we do introduce physical money like banknotes and coins, it really doesn't change what is happening underneath. Physical money really just 'adds on' to our money system, in very small quantities, enabling hand-to-hand trades (that is, the transfer of accounts information) outside of the banks' secure communications networks.
We won't go into any greater detail on the following point here, but it is for the very same reasons outlined above that governments too should have interest-free access to credit on the international stage. Just as domestic banks serve households, international banks serve nation states. And they can and should facilitate international debts and trades in the very same way. We could summarize that by saying: All entities protected by democratic or human rights should have access to money/credit free of unnecessary lender-borrower relations and free of interest.
So, money, banks and debts work very differently to the way we commonly believe. And you've seen that they solve, very cleverly, many of the greatest problems that exist in the economic world - many of the greatest historical problems associated with money, debt and the conflict between rich and poor.
We'll go on to add more to this model in upcoming sections, including adding governments 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 a little on this website already, you'll know that money really does just come into being when people (or in fact 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.
And perhaps one of the most important and obvious points we can make is that it's human beings who create money. It isn't created by anyone or anything else. Every unit of currency ever created like this was created by people. And so it should have been created fairly. For some to wield the extraordinary power of money creation, but then to craft for others an extraordinarily difficult relationship with money, is, in my opinion, the height of wickedness and cruelty.
The only thing that must be stipulated about the system (and it's what makes the system sustainable) is that money comes into existence, most usually, on the condition that we return it. As you'll see, governments can or should be exceptions to that rule, but for everyone else, for 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.
Money - and thus our theoretical magic fountain - is effectively infinite. There's no real upper limit to the amount of money that can be produced. And that of course presents us with a problem. If money creation were allowed to go on unmonitored, it would soon become extremely unfair and might then go on to become unstable. Money, then, must be carefully controlled. And although it doesn't address the fairness of the system, insisting that most money created is returned again is an important part of how we control it.
We can be reasonably sure that money will always be like this. Money is not and surely cannot be some kind of physical 'thing', something inconvenient and expensive to ship 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 of fuss and expense. This is just an inevitable practical reality for money and was surely discovered by those working right at the very beginning of the stories of money and finance.
The one hope we have at this website is that more people will discover how money really works and be able to exert their power to make money democratic and fair. The magic money fountain or tree that exists at the heart of all our economies should clearly be democratic and should be subject to fair democratic rights/rules. Every single unit of currency created should be created according to fair democratic rules. Anything else just perpetuates the injustice of this already troubled world.
3. Public Money Creation
Breaking it Down
We've said that two of the most elementary observations that can be made in the field of monetary economics are:
- Every country should have a debt-and-interest-free national currency base.
- All households and all governments should have access to interest free financing.
And that's because money is created in two spheres:
- The public sector.
- The private sector.
Both of which should be democratically legitimate.
In our first bite-sized piece, we looked at the basic foundation of money and saw why all households (and all governments) should have access to money/credit interest-free (0% + fees). Let's now look at the creation or facilitation of a democratic, reliable national base currency.
It would be pretty straightforward to simply state that every country should have a democratic, debt-and-interest-free national currency base and leave it there. Who would disagree? Most people, if they were to analyze their thinking, would assume that something like that is already the case, that governments create money democratically... because that's what they're there for.
And the idea that governments should have to 'borrow' a national currency base, into existence, as a debt repayable with interest, is illegitimate on its face.
But it's worth exploring more and seeking greater clarification around the nature of these processes and the relationships they engender. And, although it's a largely semantic concern once the core issue has been addressed, it's interesting to ask: If money is inherently debt-based, then would a public, government-issued currency base still be a public debt? If so, to whom?
When we looked at private sector money creation for households, we saw something that should be democratically just but in practice wasn't. Households' access to money (to money creation) is presented to households as 'loans' of already existing money, allowing the financial sector to achieve steep supernormal profits through the taking of interest (compensation for those "putting up" and "foregoing use of" their money). Well, the same structural relationship exists for national governments too. National governments, just like households, 'borrow' money into existence from banks (central banks in this case). And that constitutes the public sector's contribution to the money supply.
In some ways this shouldn't surprise us. We've already seen how banks create the private sector's contribution to the money supply. And we've seen that money is, fundamentally, transferable records of debt which are given their life within the banking system. Thus we've seen that money is, really, "a creature of the banking system". That contrasts well with those who think, falsely, that money is a "creature of the state". So the idea that public money creation might also be taking place through banks might not be entirely surprising.
But we should be surprised that governments too, like households, must 'borrow' this money into existence as 'loans' repayable with interest. These debts are expensive and they weigh heavily on populations all over the world, resulting in the run-down of public services ('austerity') and the transfer of money and assets from an unfairly indebted society to those taken to be "lenders" to the state.
We saw that, in the private sector, money can and should be created much more democratically - interest free. We would expect to see something at least that democratic in the public sector. So, would we expect a national currency base to be "a debt but interest-free" too?
Well, let's begin by reasserting the most important point of all: If democratic public money creation can be described as a debt, then it must be a very different kind of debt to that which we have today (a debt associated with 'borrowing' and owed by society to those taken to be lenders to the state). If, then, public money creation can be described as a debt, it must be a debt owed by society either to the holders of that currency or to society itself.
Unsurprisingly, this appears to be one of those areas where the public sector is a special case. And we can arrive at the same conclusion no matter what concept we have of money - chartalist, debt-based... - so long as we believe it can be issued democratically by or for national governments.
Public sector money creation, just like private sector money creation, adds to the overall amount of currency in circulation - which we could envisage as a big pool in the heart of our economies. When money is created, the pool grows; when money is repaid, the pool shrinks. All other things being equal, if money is created and paid back in balance, the pool would remain consistent in its size.
We instinctively feel that when money is created for ordinary people, like you and me, we must honor it - that is, we must pay it down again. But not, of course, because it was "someone else's money". The money was created when we needed it and never belonged to anyone prior to that. The reason we must pay this money back comes down to a general sense of fairness and the fact that if everyone could go into debt (which creates money) and not honor it, then we'd all drown in a pool of money growing bigger and bigger without any reciprocal effort to pay it away again.
We pay money back to the financial system, not because it was "someone else's money", but to maintan:
in the system.
Public sector financing, like private sector financing, would expand money through issuance and shrink money by recovering it - which governments do through taxes, or sales of public goods and services to the holders of that currency.
But... should we think of that money as a 'debt', in the way we think of it as a debt for households?
Well, as stated, it must be a debt either to the holders of currency, or to society as a whole. And these groups might be largely indistinguishable. If we take it to be a debt we owe to society, then it is a debt society owes to society, "a debt we owe ourselves"... which surely cannot be described as a debt at all. What does it mean to say that you owe yourself $100, or an ounce of gold? If we take it to be a debt to the holders of currency, then what would we owe them? We would owe them the acknowledgement and respect of their legal titles and their ability to redeem those titles on the system; we owe it to the holders of money to accept their money in payment for goods and services - and note, that's all across society, not just 'taxes'. But this kind of 'debt' is not what we saw with households.
In the case of household debt, we saw it was a very active obligation. Households had to go out and recover the money their debts created in order to pay it away again. To recap, that was to maintain the fairness and stability of the system. It would be no good whatsoever if such debts were passive - a debtor could simply take the money his debt created, lie in luxury on a tropical beach and claim to be "willing to accept common currency in return for his efforts" - efforts he's going to spend the rest of his days choosing not expend. Clearly, no system could work like that.
So, unless someone has a very good reason to make a government do the same thing (i.e. pay out of existence all the units of currency they create), then these cannot be equivalent obligations or debts. Indeed, governments appear to have a very much contrary obligation: to provide a persistent currency base that allows people to make savings, immune from demands for repayment. That wouldn't be possible if every unit of currency in circulation were a debt that someone insisted had to be paid away again.
In fact, let's set aside the slightly nebulous word 'debt' for a minute and try to be more precise. Let's describe the obligation side of money as "an obligation to..." In the case of households, it was "an obligation to recover all the units of currency created and pay them away again." In the case of nation states, it must be something more like "an obligation to do all we can to maintain the system in its fairness and stability." These are two very different obligations for two very different entities: individuals vs the speical case of all of us collectively as a whole.
We should, perhaps, at this point, acknowledge that the only reason public sector currency creation is recorded and regarded as a 'debt' today is because public sector financing too has been established around the notions of 'lending' and 'borrowing'. Under any other circumstances, be they arising from chartalist or debt-based concepts of money, there is simply no reason to record that money as a debt. While governments would clearly benefit from knowing how much they've contributed to a currency's overall supply, there is no reason to record that issuance as a debt.
And we shouldn't let an overzealous attachment to banks' balance sheet accounting conventions lead us astray either. There's no reason for public central banks to record this money as 'liabilities' and there's no reason to 'balance them off' against government assets either. Even if we accept the terms 'assets' and 'liabilities' to describe the creation and circulation of money, the public sector is an obvious 'special case' and we shouldn't expect the government's bank to account for itself the way a private commercial bank should.
Every unit of currency created should be created democrtically - and at a minimum interest free - no matter where that money is created or by whom.
Let's tie this up with an outline of 4 different types of debt that we see again and again:
Debt arising from household's access to financial services: This is a real debt. It might not be the result of 'lending' or 'borrowing', so should not have interest added to it (0% + fees), but it is a debt and should be honored.
Debt arising from the lending and borrowing of already-existing money: This category of debt would be a real debt and interest is sure to be payable. It is, however, in most cases, the most socially destructive form of debt. Few people who have access to banking services in a democratic society should be left to face this kind of option. Both democratic and human rights should offer a high level of protection first, by ensuring universal access to interest-free financing.
National debts derived from the creation of a national currency base by central banks: This category of debt is really not a debt at all. Public money creation is a basic democratic necessity; a necessary public good and public right.
The international debts of nation states: These are the governmental equivalent of household debts. Just like household debts, these are facilitated by banks and endogenous money creation. They are real debts, but should also be interest-free.
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, to convey accounts information outside the banks' secure networks. In other words, they are simply durable, reasonably secure communications devices, carrying accounts information, hand-to-hand, across the economy. 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, because they only exist to carry information. You could liken money to any other legal agreement that might be recorded on paper; the paper on which a contract is signed has no intrinsic value, its value lies 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 (unless it is done democratically - see here). 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 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 - banknotes and coins - makes up only a very small proportion of the total money supply. While the amount changes over time and fluctuates seasonally, physical money is kept in the smallest amounts 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 enabling trade. And we know that we can make the economy work with no physical money, albeit with some limitations. If all transactions could be carried out by instruction alone (instructing banks to debit this account and credit that one, by, for example, checks, payment cards or online banking/payment services), then we would have a cashless economy in which conceivably vast amounts of trade could be carried on. Entirely cashless economies might be a little unrealistic, even for us today, but appreciating how such a system works enables us to understanding more clearly the role physical money plays. The essence of money is, of course, debt - an entirely non-physical phenomenon itself. But occasionally we need some physical 'stuff' on which to convey that non-physical information.
Let's now imagine that a physical money stock has been created and delivered/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, expensively doing nothing, for no practical reason at all. In reality, if I have $1000 in my account, then there will likely be less than about $50 of physical money in existence to support it; such is our limited need for physical money. So long as enough physical money exists that if I need to make a cash withdrawal I will be able to, then the system will work. And so long as an unusual or unexpected number of others don't want to do the same thing at the same time, then all will be fine.
Now, when I make a cash withdrawal, I'm simply swapping the numbers in my account for pieces of paper with the numbers writen on them instead. (You could liken it to 'buying' physical money with non-physical money.) It's the same information - my legal title/claim - I just now hold it in a physical form, in my own hand. I can then pass that legal title on to whomever I wish to. Should I deposit the cash back in my bank, that process would simply reverse, swapping/'selling' pieces of paper with numbers on them for numbers in my own bank account. The pieces of paper, then, will go on to be used by the next customer who comes to the bank wishing to make a withdrawal so they can hold their numbers on pieces of paper too.
So we can see that physical money really only exists to support the much larger body of money that is just numbers. That's something we should bear in mind when evaluating discussions about money and historical accounts which emphasize the physical medium and overlook the potentially far greater body of legal monetary claims and debts which underlie it.
5. Banks as Credit Agents
For Households and Nation States
This is just a brief look at how the relationship between the financial sector and individuals or their governments should properly be. Inherently, it involves a consideration of the deep and far-reaching conflict between money as a tool for socioeconomic progress and money as a tool for often ruthless domination and extraction.
From almost any angle we might view it, money appears to be one of the most effective tools ever devised. From a 'politically neutral' perspective, merely as a tool for mediating exchange, money's power appears evident in almost every corner of the world today, and also at almost any point in history we might care to look.
But we know that money isn't polically neutral. In fact, one of the great testaments to money's irreplacable power lies in the fact that, despite being arguably the most corrupt medium to exist in our world and our history, it's hard for most of us to imagine life without it.
The hiearchical relations that dominate the world's economies today (and obviously trace far into our history) are built with money at their core. And it's hard to imagine them being able to build such structures without it. But we might equally believe, by contrast, that money can be just as effective in providng a foundation for democratic and human rights.
As already stressed, the debt/credit-based systems of money we have today are not only an inevitable development of money (because they are the most efficient way to mediate exchange, to occupy the space between giving and receiving), but they are also society's greatest opportunity for justice, for decency, for democracy, for human rights.
In the conventional view, banks 'lend' money from an already-existing stock; money that (rightly or wrongly), belongs to other people. Thus there is established a lender-borrower relationship and debtors are expected to pay interest, often in considerable sums. To this day, the idea that debts are facilitated by the lending and borrowing of already-existing money is the fundamental justification for interest taking. (Indeed there can surely be no other.)
Yet it's also clear that lender-borrower relations hold the potential to be among the most corrosive that can exist in society. There's no shortage of stories one can read about the many horrific injustices faced by debtors - not just in history, but continuing in the world today. These are tales of the wealthy extracting ruthlessly from those far worse off than themselves. But let's not fall into the trap of treating this subject with undue superficiality; the lender-borrower relation isn't something that pockmarks an otherwise honest, legitimate financial economy. The lender-borrower relation is of such profound effectiveness in creating and sustaining hierarchy that, for perhaps as long as we have written records, it's been employed systematically, to the very foundational architecture of economic society. Lender-borrower relations today continue to allow those architects to dominate and extract through both the private and public sectors of the world's economies.
Consider the tyrant who, merely by professing his own self-importance, lays claim to the major institutions of economic society, declaring to run them for his own private profit and returning a wage to those willing to serve him. Such behavior, being conspicuous, is likely to invite the anger and resentment of many of his now disenfranchised economic subjects. While it's true that some may continue to feel enfranchised, for having the opportunity to serve and earn a wage, many will recognize both the injustice of the tyrant's claims and the loss of their own rights and opportunity. The victims of colonial rule, of other forms of imperial domination and of slavery were contemptuous of those schemes and those behind them. Many dedicated themselves to rebellion and revolt. That isn't to say such methods didn't work, just that they're not the most stressless methods by which to conquer and extract from large numbers of people.
Now consider the tyrant who fashions an economy to be in debt to him. In all but the most gratuitous examples, what we expect to see are people quietly, obediently, handing up their own wealth and opportunity, along with national/public wealth, in order to satisfy the tyrant's supposed claims. Both tyrants deliver as much injustice, but they invite starkly contrasting reactions. The reason for that is surely that claims made about finances are disarming for people who are often ill-equipped to make sense of them, let alone enough sense to raise objections.
The extreme social inequalities and the great 'unpayable' volumes of debt that plague the world today are not new. Ancient rulers, understanding that such debts were so corrosive that they made the life of society unsustainable, periodically renounced them, initiating a kind of 'reset', albeit for a cycle of abuse that would begin all over again.
The kinds of highly exploitative financial relations that are the backdrop for these stories were of such notoriety to have been labelled and condemned by history as 'usury'. And it might even be one of the most important messages earlier civilizations sought to pass down.
The advantage we have today is that we know the foundation for these hierarchical relations is false. We know that the 'loanable funds' model of bank 'lending', the foundation for interest taking, is just not an accurate description of how we facilitate debts. We know that banks create the money we need, when we express demand for it. We know that none of us, nor our governments, are actually 'borrowing' anyone else's money. We know that every unit of currency created in the global economy should be created democratically. But we also know that, by the telling of one small story about 'lending' and 'borrowing', in fact all that money is created anti-democratically, hierarchically.
We can say, then, that we understand both the injustices committed by powerful financial actors, as well as how to stop them.
Household Mortgage Debt
Almost any discussion of real world economics could begin with the observation that the household is the foundation of economic life. The ability of people in every corner of the world to have a home and the opportunity to work, to pay for that home and the lives lived within it, is the very bedrock of any functional modern economy.
And if the truth is that we don't have to rely on banks 'lending' us other people's money when we seek out things like a mortgage, then it's clear that:
Anyone, everyone, can have unexploited, interest-free access to credit.
Banks participate in a relationship with their customers that should fit a horizontal rather than a hierarchical description.
Banks are the recorders or monetizers of our debts, they stand side-by-side with us in a relationship that debtors ultimately have with society. When money is created for our use, it is society that must accommodate that money and honor it whenever and wherever it is presented. Banks are facilitators of that process, agents through which these fundamental relations can take place.
I discussed in a previous article how, when the debts of ordinary people create money, for example to buy homes, that there is a real, outstanding debt which debtors have to pay; not because it was "someone else's money", but because the system can only work if the process is reversed again, if the debt/money is paid down. If that didn't happen, the system would be unfair and couldn't be sustained.
It's clearly first the debtor's responsibility to pay her/his debts. But it's also clear that in some circumstances debtors may not be able to do that. An important part of what the bank does, then, is to stand next in line, backing-up or underwriting the debtor in that responsibility. Where debts are secured, as they naturally are with household mortgage debts, the bank can seize and sell the securing property to settle the account. Only when the debt is un- or insufficiently secured are banks at risk of losing money. Banks, then, do face risks and costs in making their services available to us. That is what we should be paying them for. What we should not be doing is compensating them or anyone else for the "foregone use" or the "time value" of money. Banks can and should charge transparent, competitive fees for the services they provide; they have no need and no right to mislead customers in order to make supernormal profits at their expense.
Let's have a quick closer look at risk, in part because, when confronted with the fact that banks don't actually 'lend' other people's money, some will quickly switch to claiming that it is risk, rather than the 'foregone use' of money that is the basis for taking interest.
Well, 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 costs of administration). Falling house prices, uninsured properties burning to the ground or being washed away in floods would indeed present such risks. But even at today's historically low interest rates (~5%), a homeowner will pay twice for their home over 30 years. If these payments were tied to risk, it would mean that, over each 30 year period, approx. 50% of the entire nominal value of mortgaged housing stock would be lost or destroyed without insurance, before any sums were paid against them. Such a belief or claim is obviously absurd.
So banks' interest taking isn't tied to risk. Banks take interest simply because they can, because bank customers don't understand the basic terms of the relations between them. The competitive market fees for originating, maintaining and settling a mortgage account would be a small fraction of their current level. If expressed as an interest rate, it would be surely a small fraction of 1%. Banks are taking tens or hundreds of thousands of dollars, many years of life and a great deal of opportunity away from working families (and then often taking their home as well) simply because they have us believing we're "borrowing" other people's money.
From Households to Banks: The Gift that Keeps on Giving
In what is surely an inevitable travesty 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 economy.
Over the 35 year period 1973 to 2007 (up to the crash), mortgage interest rates averaged around 9.3%, almost exactly the rate required to make households pay three times for their homes; once for their home, twice as a gift to the already rich. And this will be repeated for each property, every time time a mortgage is channeled through it. Can we really understand the vast economic consequences of making the great majority pay so much extra for a home and sending it all to a few at the top?
And this says nothing of the much wider catastrophe of allowing such ruthless exploitation of people's need for a home. We are basically saying that people must pay three times for a home (or as much to rent), twice as a gift to the rich, or go without. Under these circumstances, it's impossible to believe that the neofeudal economy can provide housing security to many, let alone to all. Many millions of families globally face extreme economic disadvantage and the fact that they will never enjoy secure or adequate housing. All for the benefit of a small financial elite.
National Sovereign Debt
I've already covered how money created by governments for domestic spending cannot be conceived as a 'debt' in any conventional sense - that any obligation associated with this kind of public money creation is an obligation only to maintain the fairness and stability of the system. There is absolutely no requirement on nation states to 'collect back' all the money they issue. In fact they appear to have a quite counter obligation to provide a national currency base that is immune from such demands for repayment. This is true even though today money is created for governments as 'loans', thus as debts, in exactly the same way money is created for households and the wider private sector.
So there's a very important class of public debt - that associated with national currency creation - that should not be a debt at all.
But there are other areas worthy of brief consideration. For example, in the case that a government might have, or be perceived to have, debts to foreign entities denominated in any currency. Well, the reason we have money and banks exactly as they are is so that access to money - to debt - can be facilitated on demand without the need for any actual lending or borrowing. Governments are not excluded from that. Banks create money through the process of recording into being our (or our governments') outstanding debts; no lending, no borrowing and no interest should be present.
The simplest thing to remember here, at least as far as we've got with household and public debt, is that if it's something we're told is 'loans' and 'borrowing', then it really is not and cannot be. To the extent these are real debts, they should be interest free.
Finally, there's the idea that governments can provide savings instruments in the form of interest bearing bonds. Governments can sell bonds, not because they need to raise money (which is what they must do today, but in reality should have the ability to access any money they might need democratically), but to allow savers to make savings in a way that is safe and offers some protection against inflation (the decline in the value of our money over time).
The problem that exists here is the potential for wealthy investors to be in the market, not to protect the value of modest savings, but to enjoy a rate of return at the taxpayer's expense. In a democracy, it's natural that people will ask "Who should be entitled to a rate of interest courtesy of taxpayers/the state?"
I've only touched very lightly on the main points of public debt here, but it's enough for good thought and action. Public debt is a domain of much criminality - surely among the greatest criminality any of us could ever bear witness to. John Perkins ('Confessions of an Economic Hitman') gives us good insight into how the US power structure (as just one example) employs public debt as an unconventional weapon. This shouldn't surprise us. Nobody should read that and think 'conspiracy theory'. The most obvious fact of them all is that finance itself is a weapon in all domains. So long as the world has capitalism, the world will be at war. The fact that finance is also a weapon for targeting nation states cannot possibly be a surprise to anyone.
Help us fight to end all that nonsense, replacing it with basic economic literacy and real rights for all:
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 credit for households and all governments.
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 their revenues, reducing taxes and bills on working families.
The privatization of national profits while socializing public sector costs results in higher bills and a heavy tax burden on working families. We all have a 'commons' and we can protect it.
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 Basic 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 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). And what that shows is that our ability to produce and to supply is not being constrained by the conditions of supply, but rather by the conditions of demand. We could potentially be more productive and produce at lower unit costs than the economy outputs at the present time.
Another way of saying that is we're being held back - we're missing out and we're watching a lot of our potential simply go to waste. And that's a conclusion that fits with our wider view that capitalism unfairly distributes market power towards a few at the expense and often the exclusion of everyone else. It would also suggest that fixing it isn't a matter of improving supply side conditions like technology, but rather demand side improvements that put opportunity back in the hands of the ordinary majority. (This would push the demand curve - the downward sloping line - outwards to the right.)
- Fig 2 -
So this would seem to provide support for the idea that the problems of capitalist economics are systemic and internal, rather than limitations imposed either by the natural world or our own capabilities. If so, then what we're dealing with are distortionary pressures which render the majority unable to demand that which we are able to produce. And it's a truly basic economic fundamental that if it cannot be demanded, it will not be produced:
Hanauer conveying very clearly the primacy of demand in driving production, consumption and employment.
Capitalism, of course, is hierarchical/distortionary by design. Looking still at the demand side of our supply-demand analysis, disenfranchising the majority and leaving so many economically excluded can be shown as the demand curve being pushed backwards towards the left, leaving many to fall outside the scope of the graph. It also means that productive output (Q) is directed away from what people really want (rendering that demand latent) and towards the wants or demands of an unjustly empowered few.
It seems reasonable to postulate, then, that Keen's observations and orthodox neoclassical economic theory might find some eventual resolution by drawing the following graph. Here, diminishing marginal productivity and rising marginal costs do set in eventually (the supply curve sloping up), but at a level of output and demand that meets the needs of many more people than can be achieved under capitalism.
- Fig 3 -
Fig 3 shows the potential effects of democratic and human rights, including and enfranchising many more people, pushing the demand curve outwards to the right. Note that the needs of 7+ billion people must be produced within Q. Democratic and human rights, then, may allow people all over the world to be brought back into the embrace of human productivity.
And that sounds a lot better than the horrors that exist all around us today.
I gave good reason why we should prioritize demand in our analysis. But supply and demand are inherently entwined and it's a supply side argument that some might make to defend capitalism and the status quo. If on one side we say that capitalism is unfair, that it is exclusionary and distortionary, on the other, one could argue that class hierarchy, domination and extraction are drivers of productivity. Here, it is the capitalist whip that makes us all productive and keeps us from falling into a life of "indolence". It's a "slavery is productive" kind of argument, but it's an argument nonetheless. Could real democratic and human rights bring about a catastrophic collapse in labor participation or discipline?
We can observe that withdrawing cultural and legal support for slavery didn't bring about a collapse in economic productivity, even though many at the time proclaimed that it would. But then, the wider conditions of economic subjugaton and coerced labor were left intact. Society was and remains steeply hierarchical.
We would expect democratic and human rights to produce supply side effects by changing the lives and the conditions of the working and poor; we want people to have greater rights, greater freedoms, greater opportunity and the ability to derive greater benefit from their work. We want the economy to change very considerably. But would people still "slave away" at their jobs, or at other jobs, in a post-capitalist economy? Would they need to in order to remain productive? It's an unpleasant argument to evaluate, the idea that capitalism might be "doing the right thing" by dominating and dictating, by opposing democracy and human rights globally, by whipping the working class into action. It's horrible to think that the rich ruling over and extracting from the poor is what's "better for everyone". And it's utterly stomach churning to think that this hierarchical misery is the best humanity can hope for.
In response I would offer the following: In a world run by and for elites, enormous numbers of people are economically excluded, disenfranchised, unemployed and underemployed. Furthermore, the content of any participation, being ultimately for the benefit of elites and not employees, is deeply dehumanizing and demotivating for us all. Yes we do expect people who are miserable in their work lives to benefit from democratic and human rights by rejecting the conditions of their misery in search of a better life. Our hope is that they and everyone else can find it. Such an economy, one which is much more "of and for the people", which is richer and more rewarding for ordinary people, may well balance any fall-off in labor discipline with increased participation and motivation.
If people who today are economically excluded are tomorrow included, they will bring their ingenuity, their creativity and their enterprise into the productive realm. People who are deprived their rights, dispossessed and overlooked can't participate in life as they would like to; they will simply never receive the inputs and opportunities they need to develop their productive potential. Economically enfranchised people are much more likely to, indeed, may be the only ones who really can.
So, supply side factors that affect productivity positively in a post-capitalist, democratic society, might balance or even outweigh productivity losses brought about by undermining the 'disciplining' conditions of capitalism and economic subjugation. And that could mean that, even if Keen's assertion turned out to be wrong, if the conditions of supply today are indeed more constrained than Keen believes them to be and supply curves do slope upwards, the inclusion of so many disenfranchised people through democratic and human rights could ensure that even upward sloping supply curves can be pulled outwards by outward shifting demand curves. These are the developments, the inventions, innovations and opportunities that economically included people can bring.
- Fig 4 -
I'm convinced that the humiliating economic subjection and injustice of capitalism is not only offensive to human dignity, but also harmful to both the supply and demand conditions of the economy. And that would be enough to condemn capitalism as inefficient as well as distortionary. I would struggle enormously to believe that we run such a cruel, hierarchical system for 'the greater benefit of all', rather than for the simple greed and covetousness of powerful economic elites. But anyone who thinks they can convince me otherwise is welcome to try.
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 recorded as a debt. And for the purpose of continuing with banking conventions, we'll continue to record it as such throughout these examples. But here you can see why it is that this money is called debt and why it is, falsely, assocaited with 'lending and borrowing'. It is solely by these conventions that this language is used; it really does not mean that any of the community members, having earned or been given this money, should "owe" it back again. I discuss here how, even with debt-based currencies, public money creation is an obvious special case; if it can be described as a debt, it is a "debt we owe ourselves" and therefore not a debt at all. The community can theoretically create as much money as they like, their only concerns are to maintain 1. the fairness and 2. stability of the system. Overlooking such details for the time being, it's quite clear that the community just created some money, it did so democratically and doesn't "owe" anyone anything for doing it.
Some will surely object to governments being able to create money. However, someone has to. And every unit of currency created should be created fairly, democratically. In our example of government money creation, the government created a base money supply and allowed community members to make savings of an extra 1000 each, without having to burden anyone with real debts and thus demands for repayment. It also aided them in organizing themselves to achieve something in the first place, like building roads. Finally, just like anybody else honoring a debt, should it be necessary to do so, governments can always eliminate money by taking it out of the economy through revenues and out of existence. Here, the government's revenues are conceptually no different to Mark charging for his services as a roof repairer.
We're still quite early in building our system, but we can already contrast it with capitalistic alternatives. In the capitalist economy, because all money, whether issued through the private or public sector, is issued as 'loans', we can see very clear structures of extraction and control. In the capitalist economy, 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.)
Those hierarchical or 'class' relations do not exist in our sample economy.
Our little community system has given us a good start in understanding how money, banks and debts really work. Let's now make it a little more realistic by introducing banking as a formal practice.
In the following examples we'll use a conventional accounting structure. But the reader may observe that the language and conventions are very much those of exogenous, rather than endogenous concepts of money. It remains entirely possible that better conventions could exist to account for the creation, circulation and eventual settlement of money.
We're keeping it nice and simple, 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 are performed by instruction i.e. by credit/debit cards, checks, 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'. By showing the bank's accounts alongside those of its customers, we can see how any adjustments made to an individual's account are reflected in the bank's own accounts. The bank's accounts can be seen to 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 goes to the bank for 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 -
If you've seen the first of our little pieces 'How Money Really Works', you'll know that we can perform any operation required on these numbers, any transactions, as well as facilitating any reasonable level of debt for any member, without any need to invoke language like "lending" or "borrowing". No actual lending or borrowing is necessary to facilitate this community's debts or, as you've seen, any pulic money creation. 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 (positive numbers paid into negative balance accounts cancels money out of existence). So, even though we've introduced a government and a bank, we've retained what we started with: 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.
We've showed that banks can serve a community, that introducing them into our model didn't have to condemn us all to class hierarchy and systemic usury. In the next section we'll develop the model to introduce a plurality of banks.
9. Accounting for Money Creation - 2
Introducing a Plurality of Banks
In the previous section, I built on our earliest look at how money really works and established that we could continue to develop that example economy, to include a government and formal banking, and retain a form that was democratically legitimate and fair, that did not subjugate the community to class hierarchical relations and systemic usury.
And although I think we proved right at the beginning that our financial systems can work to support the democratic and human rights of people everywhere, we can continue build our example economy, adding more realism, this time by introducing a plurality of banks.
Introducing A Plurality of Banks
Picking up from where we left off, let's 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. Despite the misnomer, we retain the word "Loans".
- Table 1 -
We can see that there are still 9000 currency units in circulation (the total of customer deposits/bank liabilities). What we want to explore is how moving money between customer accounts at these banks works out; we just want to ensure that nothing unpleasant materialises that would threaten the system and reintroduce notions of lending and borrowing. Because of our arbitary slicing of the table into two separate banks, we can see that 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 here are liabilities, transferring them between banks would change their asset-liability ratios. Banks taking deposits would take on greater liabilities and thereby worsen their financial position; those transferring deposits out would see theirs improve. To tackle this problem, we can introduce another layer of banking - a bank for banks. Here, this will be the central bank (CB). And this allows banks, who hold accounts with the CB, to move assets between themselves. This means that when a customer deposit (bank liability) is moved from one bank to another, an asset can move along with it, neutralizing the effect of moving that money from one bank to another. Because the central bank is also the government's bank, we'll put the government's account there too. To give us some assets to move, I'll have the central bank create 10,000 for each bank:
|Central Bank||CB Customers|
|CB Cash||CB Debt|
|CB Cash||CB Debt|
- Table 2 -
We can now move customer deposits between banks 1 and 2, showing both liabilities as well as assets moving. 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'd 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, 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, we have a structure that can support a plurality of banks. And although unrelated to our present discussion, this structure is also an important part of financial sector regulation.
At no point in this examination did we need to introduce concepts of actual lending and borrowing. The nature of this system, as readers here will be more than aware of, negates the need for lending and borrowing because money is created endogenously within the banking system as and when it is needed. And this is true at whichever level we are looking at it; be it the public sector and the central bank, or the private sector and commercial banks.