Last week we looked at Fiat Currency – I doubt that I told you much you didn't already know. What I’m going to tell you this week will probably be a surprise and shock to many people (some of you won’t believe me!).

The Bank of England is the only institution that prints money but not the only institution that creates money. Lending banks literally create money out of thin air. And each time they do this they are skimming off the rest of us.

Banks are not like any other business – most businesses make something or provide a service that they sell for money – Lending banks create money. Every time a loan is taken out, be that a mortgage or credit card loan, money is being created.

Watch the magic;

Sally has £20, Joe has £10 – there is £30 in the system. Sally deposits her £20 into shatwest bank.

lending1

John Jones wants to build a house, he needs £15 to pay Berttie the Builder, he borrows the money from shatwest and pays Berttie, over 25 years he will repay the money. There is now £45 in the system. Sally believes she has £20, but Berttie has also been paid his £15.

lending2

Notice something – because there is more money in the system Joe’s £10 is worth less after the transaction than before – before the transaction he has 33% of the money in the system – afterward he has only 22%. Notice as well that Joe did not take part in the transaction, he got skimmed and he didn’t even know it - this is immoral.

The “bit of magic” is that sally believes she still has the £20 – if all the savers demanded their money back at the same time the bank would be rumbled, they do not in fact have her money, this is why a bank-run is pretty much the worst thing that can happen to a bank.

Most of the time however the smoke and mirrors work, the effect being that lending banks are constantly increasing the money supply, this is why western economies are “debt driven” – it’s not just that we love credit cards, our economy is litterally driven by debt, the vast majority of our money supply is a result of debt creation.

There are some rules: the banks cannot lend everything out that they get in, they have to keep a bit of the deposit back. However the amount of money created is actually much more than in my simple example because Berttie will take John’s money and deposit it in another bank, which will (after keeping x% back) lend it out again, creating more money – a single £1 deposit creates many ££s of debt.

Should this even be allowed? I don’t think so. It seems to me to essentially a fraud. I’m a big fan of capitalism and I’d like to point out that you could have capitalism without allowing this parasitic activity.