The money system causes constantly growing debt Electricity comes to us from the plug, drinking water from the tap and money from the bank. But most people do not know how money is created. Who makes money? Or, as the experts ask: how is money created? Cash in Germany is issued by the German Central Bank (Deutsche Bundesbank) and the European Central Bank. A maximum of 10% of money in existence in Germany is cash. Germans love to pay in cash. Other countries use cash much less and the long-term trend is away from cash. Most money only exists digitally as deposits in bank accounts and is created by commercial banks when bank loans are created. This system of money creation is the same all over the world: money is created through credit. Thus money and debt are two sides of the same coin. For each Euro of debt someone else in the world has a Euro of wealth. What does money creation through credit mean? When a bank gives a 100,000 Euro loan, for example to buy a house, then in principle it creates this money ‘out of nothing’. The bank must keep a minimum reserve of 8% (1) to cover this loan and will demand some kind of collateral, for example in the form of a mortgage; thus credit creation is not unlimited. The bank can, with or without our savings accounts, give credit and thus create money. Banks are actually not only – as is often claimed – intermediaries for money. “In the field of economics, money creation theorists may be compared to people who create hats from aluminium foil in order to protect themselves from thought-reading aliens. It is thus all the more surprising that the Bank of England writes in a 2014 text: ‘There is a widespread misunderstanding that banks simply act as intermediaries to further lend out the savings of depositors.’ No: ‘Banks do not lend out other peoples’ deposits but create new deposits through giving credit’, explain the central bankers. The German Central Bank describes the process quite simply in a book aimed at schoolchildren: ‘Generally the commercial banks grant customers credit and write the relevant amount into their bank accounts as a demand deposit.’ The Bank of England writes: ‘Neither does the amount of cash reserves or similar deposits with the central bank limit the ability of banks to give loans nor does the Bank of England control the amount of available bank reserves. It is rather the case that banks first give loans then search around for the best deals on the required central bank deposits.’ (Quote from Handelsblatt 27 April, 2015 “Yesterday crazy, today mainstream: the thesis that banks create money from nothing enters the textbooks.“) The banks have a monopoly on money creation and simultaneously enormous power because they determine through credit creation in which direction the economy can develop. Commercial banks use this immense privilege to do business. They have used this business model to excess and created too much credit. They have built up mountains of debt, which are growing ever bigger through compound interest. Banks have made vast profits, have grown enormously and are now so great and ‘system relevant’ that the state or the tax payer had to rescue them in 2008 so that the whole system did not collapse. Although gigantic sums of money are sloshing around the financial markets looking for investments, for most people money is scarce. Why is that? Imagine, for the sake of simplification, a bank with a closed economic circuit of only ten people. You are one of them. The bank lends each person 100,000 Euros. Thus it gives out one million Euros. After one year, the bank wants not only one million Euros returned but a little more – perhaps 1,000 from each person or 1%, totalling 10,000 Euros. However, it only gives out one million, which it has created for the loan. Where do you get the 1,000 Euros from then? You can only take it away from someone else possibly through competing for desired services. Money becomes scarce through the need for interest repayments or servicing capital or the costs of capital. Ever more debts are in the system as money. Individuals can manage to pay back their debts plus interest but across the whole system that does not work. Generally, people who do business in a ‘debt money’ system are always in debt to the banks. Interest increases wealth and debts As soon as interest and compound interest come into play it becomes clear: not only wealth increases through these mechanisms but also debt. Debt grows exponentially through the effects of compound interest. For example, indebted states easily get into a downward debt spiral when the national debt increases to more than 50% of GDP. When debts can no longer be repaid and only the interest can be repaid, one is caught in a debt trap. Can debts grow indefinitely? No, because sooner or later the capacities of the debtors to repay will be exhausted, even those of the greatest and final debtor – the state. What is interest and how does it relate to growth and redistribution of wealth? Read more introductory articles about the problems of our money system on our website (Growth, Redistribution, Crises) or watch this short video from MONNETA for a summary. (1) In order to create a loan a commercial bank is only required to retain a small proportion of the loan total as a minimum reserve – 8%, according to the Basel III accords.