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.