Friday, 26 February 2016

Private banks are counterfeiters.

Counterfeiting traditionally consists of a private individuals printing copies of state issued paper money and spending it. In contrast, private banks print money and hire it out. There really isn't much difference: it’s like the difference between stealing a car and selling it and in contrast, stealing a car and hiring it out.

As William Paterson (who went on to found the Bank of England) put it in the late 1600s "The bank hath benefit of interest on all moneys which it creates out of nothing." And three centuries later Messers Huber and Robertson made the same point in their work “Creating New Money”. As they put it, “Allowing banks to create new money out of nothing enables them to cream off a special profit. They lend the money to their customers at the full rate of interest, without having to pay any interest on it themselves.”

Also, allowing private banks to print money is to subsidise inefficiency and for the following reasons.

Money creation by private banks is clearly more expensive than having central banks do the job because private banks have to check up on the reliability and credit worthiness of those to whom they supply money. Plus they have to allow for bad debts.

And that’s true even where bank customers are after a stock of money or “float” for day to day transactions, rather than a long term loan. To illustrate, in a hypothetical economy where no one wanted a long term loan, but people DID WANT a stock of money with which to do daily transactions, private banks would still have to check on the credit worthiness of those wanting a stock of money and ask for collateral from the less credit worthy.

In contrast, if all money is supplied to an economy by its central bank, there is no need for the central bank to check up on anyone’s credit worthiness: the central bank / government just creates and spends into the economy whatever amount of money is needed to keep the economy ticking over at full employment.

So given that privately issued money is inherently inefficient, how come such money predominates? That is, how come about 95% of the money in circulation is privately rather than publicly issued?

Well the answer is as above.  That is, when it comes to granting loans, if you can simply print the money you lend out, rather than have to actually pay for it by attracting such money from savers, you can undercut existing saver / lenders.

In fact, and as explained by George Selgin, if the only form of money in an economy was base money, and private banks were then introduced and allowed to create money, that private money would eventually drive state money to near extinction. It wouldn’t ENTIRELY extinguish it because private banks need state money to settle up between themselves. Or at least they find state money very useful for settling up purposes. (Incidentally, Selgin doesn't favor the abolition of private money, but he did set out the above "drive to near extinction" phenomenon very nicely.)

And finally, the above paragraphs are not to suggest that all new loans come from freshly created private money. That is, the reality is that once created, private money is scarcely ever withdrawn. I.e. the stock of private money and indeed state issued money expands year after year. But that periodic INCREASE in the stock of money is of course “new” or freshly issued money.

Although . . it’s not entirely unrealistic to say that money vanishes whenever a loan is repaid and that it appears from nowhere when a loan is granted – a point which might seem to contradict the latter point that the stock of money expands year after year. Actually those are just two different ways of looking at the same phenomenon.


  1. Some missing points here:
    1. Counterfeiting involves an attempt to deceive or defraud, which does not apply to bank lending.
    2. Banks can only "cream off a special profit" from lending if they are efficient in "checking up on the reliability and credit worthiness of those to whom they supply money". Even the most efficient will lose from bad debts. Do you have a problem with efficient banks being rewarded with modest profits?
    3. Banks that are inefficient in their lending activities will lose business because they have to charge higher interest rates etc. than their more efficient competitors. Moreover, very inefficient banks tend to go bust.
    4. If deposit-taking banks did not make loans/create money, the needs of businesses for credit would have to be met by other financial institutions. Like existing banks these would have to "check up on the reliability and credit worthiness of those to whom they supply money". So there would still be the costs of checking credit-worthiness and the risks of bad loans. Alternative lending institutions might be less efficient/ have higher costs than existing banks. You don't examine this issue.

    1. 1. To be more accurate, counterfeiting is a PARTICULAR type of deception: it’s an attempt to pass off one thing as something else. Private banks are certainly into that activity in that they give the average bank customer the impression that the pounds / dollars they issue are the same in every respect as genuine state issued pounds / dollars. Of course economically literate customers know there’s a differene, and economists working for private banks know that. But I doubt the average bank customer or even bank branch manager knows it.

      2 & 3. The fact that a business needs to be “efficient” at an allegedly illegal activity in order to make a profit does not justify the basic activity involved. I’ve no doubt the less efficient dealers in illegal drugs are driven out of business by the more efficient dealers.

      4. Clearly you’re right: if loans are not made by deposit taking entities, then the alternative loan granting entities would still have to check up on the credit worthiness of borrowers. However, I didn’t claim there were cost savings to be had in that area. My basic point in relation to “checking up” costs is that when issuing state money, the state does not need to check up on anyone’s credit worthiness. So there’s a cost saving there.

      Next you suggest that “Alternative lending institutions might be less efficient/ have higher costs…”. As regards institutions funded just by equity (as per full reserve banking) the idea that their funding costs are higher than debt funded institutions is demolished by the Modigliani Miller theory in my view.

      Alternative lending institutions’ costs CERTAINLY WOULD be higher under a “no private money” regime in that lending institutions would not be able to undercut existing lender / savers by the simple expedient of printing their own money and lending it out. However, I regard that form of DIY money as a cheat or “counterfeiting”.

      Put another way, as Richard Werner explained, money lenders (but not other corporations) are for some bizarre reason excused the so called “Client Money Rules”, and it’s that that enables them to create money. I don’t see any reason for that privilege being bestowed on money lenders / banks.

  2. Re Werner, see:

  3. My point 4 concerns the costs of checking credit-worthiness, managing loan accounts and bad loans. Like deposit-taking banks, investment banks, loan companies etc. have such costs. You don't address this issue.

    The costs of raising bank capital and the Modigliani-Miller theory etc. are irrelevant.

    Also irrelevant are "Client money rules". Bank deposits are not client money. Period.

    1. I agree with what I think you are suggesting, namely that there is no reason to suppose the costs of checking credit-worthiness would be any different for a deposit accepting institution as compared to a lending institution funded just by equity.

      However my point in relation to credit-worthiness in the above article was that at the point where new money is introduced to the private sector, i.e. where there is an increase in the money supply, that can be done by the state at next to no cost. In contrast, where private banks do the job, they have to check up on the credit-worthiness of those receiving the new money.


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