Money creation and debts: the system behind impoverishment of citizens

By Tobias Tulinius und Florian Hauschild

Recently, the fundamental questions about our monetary system reached mainstream debates. Because one thing is: The continuing massive expropriation of citizens by an undemocratic debt-based monetary system is only possible as a result of massive illiteracy and ignorance of the same citizens. The major part of world’s populations doesn’t know much about or (due to the wide-spread feeling of helplessness) fails to understand the fact, that the existing monetary system can only lead to forced mass impoverishment. Whatever governments, currencies or countries you use as variables within the existing equation of monetary relationships, the result will be the same, virtually indefinitely, because the system itself doesn’t change.

The basic mechanism behind the system is nonetheless simple:

The money is brought into circulation (created) by the banking oligopoly in form of the interest-bearing debt. However different the winding paths of individual credit lines and payment obligations are, the result is always the same:
At the end it is always some bank earning interest rate charged for the lent money, which the bank itself didn’t possess but simply generated using their exclusive right to do so. The amount of money which needs to be raised by the debtor in order to pay off the interest rate is not included in the amount of money generated through the underlying debt contract. This is why the money volume is forced to be constantly increased, even exponentially, due to the compound interest effect. Absurdly high levels of debts have an exact amount of equally absurdly high asset items on the other side as the result.

Now, all these loans, debts, financial assets and liabilities are purely imaginary accounting entries. This becomes problematic however, if whole populations of citizens stupefied by corporate media and manipulated through political propaganda do actually believe, that all of this is a legitimate debt, which they have to pay for. From imaginary book debts then emerges a palpable physical expropriation of the citizens by so-called “privatizations” and property seizures.

The citizens will just as long get run-around as their massive illiteracy and ignorance of the mechanisms of debt based monetary system prevails. To oppose this, the following article will outline the existing logic of money creation and use this document of the German Central Bank for demonstration.

The minimum reserve

An important feature of the current monetary system is the definition of minimum reserve, which a bank must deposit by the central bank. This reserve accounts within the european area to 2%. This reserve must be deposited by a commercial bank on the central bank’s account and refers to the deposit money, which a commercial bank transferred to the giro accounts of their customers.

Generation of book money

As any commercial bank only needs to possess at least 2% of the actually booked money, the rest is generated or “created” by a bank. To lend a loan of 10,000 € a bank is required only to possess 200 € not otherwise allocated amount of money on their central bank account. Provided such amount of money is available as a reserve at the central bank, a bank may lend the credit directly to its customer: the bank simply assigns a credit of 10,000 € to customer’s bank account. Money, which never belonged anyone else before, generated trough the lending process, an information about the amount of lent money written in the computer file representing giro bank account of the customer.

Although the bank had never been in possession of the money before the credit transition – as this money indeed simply didn’t exist before – it is now entitled to collect interest for this freshly awarded and lent money.

One should also note:
The life-cycle of deposit money starts with its generation through the lending process and ends with its deletion after the credit is repaid; theoretically speaking, would all loans been repaid at once, there would be no deposit money.

The lending process

Classically, borrowers have to demonstrate their “creditworthiness”. But in fact, however, this requirement was already set aside, because the banks have obviously an interest to create more and more borrowers. This is why not only the private households (for example, in the wake of the sub-prime lending), companies but entire countries have amounted and are still increasing their massive debts.
But what exactly is happening then when a credit of 10,000 euros is given by the bank to a customer?

There are several possibilities:

Case One: A commercial bank possesses on its central bank account 200 € as a so-called “excess reserves”. With this € 200 on its account by the central bank this commercial bank can now award a loan with a volume of 10,000 euros.

Case Two: The bank takes a loan from the Central Bank with a volume of € 200 and assigns it a loan of 10,000 €. This is according to the above PDF of the Federal Bank the normal case. For the lent 200 € the bank has to pay the prime rate to the central bank but cashes a much higher loan interest from its customers for the awarded 10,000 €.

Case Three: Another customer pays € 205 in cash on to his bank account and the bank transfers this 205 € to their central bank account. In this case, the bank can use 200 € cash as a hedge for the new 10,000 € loan. The remaining € 5 cash are sufficient as a reserve (demand deposit) for the 250 € for the customer, who has deposited the 205 € in cash. By now, not cash money but deposit money is booked on the customer’s account at a commercial bank.

Case Four: A customer deposits 10,000 € for at least 2 years on a savings account by a commercial bank. Savings deposits must not be hedged with the reserve.
If the customer decides to withdraw cash from his savings account, the bank would need to borrow up to 10,000 € in cash, if it does not have enough cash assets available. This means that in an extreme case the bank would have to borrow 10,000 € by the central bank as a loan to pay off its customer in cash.

Now, imagine a bank lends 10,000 € to a customer who draws on it in cash and transfers it to yet another bank (see case nr. 3). This second bank becomes now the opportunity to place this cash as a reserve at the central bank (10,000 €), turning it again into book money, hedges them with 200 € and uses the left 9,800 € to generate 490,000 € of book money.
How much money banks can generate through credits depends on the behaviour of their customers. If a bank has many small private customers who withdraw large amounts of cash and perform relatively few digital transactions, than this bank will need more cash than a very large commercial bank, which deals with many major customers who conduct their business mostly digital.

Relationship between the amounts of cash and deposit money

As it has been shown in the description of the lending praxis above, only a part of the booking money exist ready to cash out. Nevertheless, the banks attempt to create the impression that any customer could withdraw his/her money at any time. It is in the interest of the banks that the volume of deposit money appears to be congruent with the amount of cash. However, only cash (i.e. central bank money) is considered indeed a functional currency.

Commercial banks need as much business as possibly done digitally without the use of real cash because a commercial bank can not receive loans from the central bank in indefinite amounts (except: see an example which provides an example of at least one exception). Because for those it also needs to provide securities. The exact business practices between commercial and central banks are very complex and not open for the control of the citizens.
As a customer you can diminish the power of banks by withdrawing as much cash from your own account as possible.

Repayment of the loan

The deposit money is deemed to be deleted after the loan is paid back, which is the reason for the rising incentives for the banks to delay repayments as long as possible. The monthly redemption payments proposed by the bank are usually much lower that the monthly payable interest. Unscheduled repayments are not always possible. Contractual commitments make it impossible to terminate the credit relationship ahead of time, even if customer’s solvency allows it. The aim of the banks is to keep customers as long as possible in their interest payment obligations.

The interest rate system as a further element of unjust monetary system: The permission to collect a price (interest) for a commodity (cash), which is created solely as a digital processing unit, is a unique and exclusive feature of the banks. The book money is constructed to attract more money. Those in possession of money assets are granted in our existing monetary system with more and more: all monetary assets parked in accounts or savings accounts are earning interest, which adds to the total sum and contributes its part to the future interest income, the so-called compound interest effect.
From the point of view of mathematics there is an exponential function: an income-curve that rises slowly first to explode after a few decades upward.

Those indebted, however, must not only pay off their debt, but have also to finance the the interest rates falling due for their credits. It is also relevant to note that the accumulation of money on the bank accounts of the rich make it difficult or even impossible for those indebted to fulfil their obligations. As indicated above, the book money is created out of debts. If this money is not spent but put into saving accounts, then more debtors have to be “created” in order to produce enough book money for the repayment of the already granted loans: the spiral of debts winds up and higher.

Also the fact that the interest rate is never a part of the generated book money, proofs to be beneficial for the formation of additional debt. The interest must either be taken from the existing monetary assets of other market participants or it must be financed from the new debts (made by the debtor him/herself or by other market participants who are involved into financial relationships with the debtor). A classic Ponzi scheme.

Special case of deposit money creation

It is often claimed that banks can not simply create deposit money for themselves. The Bundesbank [=german central bank] contradicts this statement clearly, see page 72 within the .pdf-document from the German Central Bank:

A commercial bank may credit the amount needed for a purchase of an asset to the seller’s account. This bank is then the owner of the asset. This can be for example a property, real estate used for its own purposes or for the generation of rental income. A property, paid for and financed with deposit money generated by the bank itself.


The current regulation of money supply, requiring the banks to hold only 2% of minimum reserve in EU (10% in USA, 21% in China), builds the environment for money creation.
This process of money generation through debts (the amount of generated and lended money equals each other) coupled with unequal distribution of cash, enforces an endless spiral of debts. Interest rates, being the price for money generation, are not contained in the amount of created money lended to the customer and need to be either earned or financed yet again through new loans.

Bearing in mind these, often hidden, mechanisms of our monetary system, we can draw conclusions about the genesis of the modern financial capitalism. The huge amounts of deposit money are screaming for investment opportunities. This is, among other things, a reason for the explosion and diversity of financial products on the market.
Compared with a borrowing deal between two private individuals, lending of the bank money turns the underlying incentives completely downright. Normally, a lender would have interest in his money paid back as quickly as possible, as he/she would have to abstain from using this cash for own purposes.

But a commercial bank will be obliged to destroy the deposit money after the repayment of the corresponding loan thus meaning only the end of the business interest for the bank.

The question about whether we want to live in a democracy or in a dictatorship of financial markets depends centrally on the nature of the established monetary system that we are using.

Judged from the perspective of the democratic theory, the existing system of money creation must be sharply criticized for its oligarchic domination.
As a first emergency measure we propose here to revoke the license for the money creation from the commercial banks and put it into the hands of citizens meaning by it the hands of a democratically organized society. It is also possible, parallel to the current monetary system, to establish new, community- and public-driven monetary systems, compatible with the basic tenets of democracy.

Considering democracy as a standpoint following questions occur:

Why have the governments transferred the license for the creation of money into the hands of private banks?

The direct lending from the central bank to the public sector is prohibited within the euro area since the second stage of European Monetary Union starting 1994, meaning that a state has only the option to borrow the money needed from commercial banks or from the bond market.

Why do our governments and with them all the tax-payers, indebt ourselves by the private banks in monetary units which those banks create?

Why is the provision of a functioning monetary system viewed largely as a private and not primarily as a public responsibility?

Why are there no municipal, public banks, allowed to create money?

Any decent discussion about these questions can only lead to a further crucial question: Namely, how can a democratic political system and a stable economic order exist without a democratic and fair monetary system?

Translation by  from Geld und Geldschöpfung – Einblicke in ein Enteignungssystem

Spanisch Translation: here

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