The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled.
— John Kenneth Galbraith, Economist
If we ever hope to have a sustainable Canadian society we must change, among other things, a systemic flaw in our monetary system: the way we create and circulate money.
- In Canada, a majority of the money in circulation has been created by private banks out of thin air as interest-bearing loans: money created as debt. 1 In essence, we’re borrowing from the future in the hope that continued economic growth will allow us to pay off this debt.
- Canadian banks are part of the fractional reserve banking system. In fractional reserve banking, banks have to keep a certain amount of money (a fraction, say 10%) in the bank for every dollar they loan out. But in the 1990s, the reserve requirements in Canada were phased out and today there are none. Reserve requirements normally determine the money supply multiplier effect, which, in Canada’s case, now appears to be infinite.
- Money to pay the interest on the debt is not created at all and so must come from the money currently in circulation. But that money is already owed because it was created as debt.
- Because more money needs to be paid back than was borrowed (principle plus interest), the total money supply has to continually increase to avoid loan defaults. That is, the amount of debt has to keep growing simply to put more money into circulation in order to cover the interest owed on past debts. Alternatively, some people must—and do—default on their loans.
- When someone defaults on their loan, say a mortgage, the private bank will repossess the home. Thus, the bank ends up with real wealth—the house—for simply creating the initial money out of thin air. In other words, the private bank puts essentially nothing of its own assets on the line in the transaction but, in this case, ends up owning a real asset.
- If the private banks stop giving out loans (i.e., stop putting more money into circulation), the system will collapse, thus the private banks have control over the money supply, not the people of Canada.
- The amount of debt is always greater than the amount of money in circulation and thus can never be fully repaid.
- Inflation is inherent in this money creation process as the money supply tends to increase faster than the amount of goods and services available. It is important to understand that this money supply is debt, not wealth.
- Economic growth is inherent in this monetary system in order to ensure that interest on the debts can be paid, but never ending economic growth is impossible on a finite planet with finite resources (see Economic Growth).
- When economic growth stops, due to outside factors such as peak oil, the system will begin to collapse.
Once a nation parts with the control of its currency and credit, it matters not who makes the nations laws. Usury, once in control, will wreck any nation. Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile.
– William Lyon Mackenzie King, Prime Minister of Canada, 1935
The power to create money is, perhaps, the most important power of a sovereign nation. The following actions will help bring money creation back into the hands of an agency that acts in the interest of all Canadians, rather than the government being beholden to the private lenders as they are today.
- Government borrowing from private lenders must be forbidden.2
- The Government, through the Bank of Canada, rather than the private banks, must issue all the money and spend it into circulation free from debt.
- Inflation would be prevented by tying government taxation and expenditure to the money creation. Remember, it’s not who creates the money that causes inflation, it’s how much is created and how it circulates.
- The ability of the private banks to create money from thin air would be forbidden; the private banks must stop lending money they don’t have.
- Because banks can issue loans that are far in excess of their deposits (fractional reserve banking), they can create money. If they only made loans from their money already on deposit, no new money would be created.
- Private banks would still be able to lend money but they would not be able to create money, they would lend only the money they have on deposit and they would be required to hold 100% reserves.
1 see How the Bank of Canada [and the private banks] Creates Money for the Federal Government: Operational and Legal Aspects. “… money is also created within the private banking system every time the banks extend a new loan, such as a home mortgage or a business loan. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. Most of the money in the economy is, in fact, created within the private banking system.”
2 Ideally, all government borrowing should be forbidden. If the government couldn’t borrow monies, it would have to balance its budgets. Were the government to spent more than its income, politicians would feel immediate voter wrath because the government would have to immediately raise taxes to cover the deficit.
The imperative of perpetual growth implicit in interest is what drives the relentless conversion of life, world, and spirit into money.
— Charles Eisenstein
Web sites and articles
- The web site of Ellen Brown, Web of debt, discusses money as debt and freedom from debt through public banking. See her article, Funding Public Health Care with a Publicly-owned Bank: How Canada Did It
- Enough Debt: Reforming the Monetary System, Chapter 7, p. 64 Enough is enough.
- The Committee on Monetary and Economic Reform advocates for necessary changes in monetary policy, and for economic reform.
Money as debt
Money Creation: The Crash Course
The Secret of OZ
The crime of the Canadian Banking System