A counterfeiter is someone who produces a form of currency which is such a close imitation of the official national currency that it’s widely accepted in lieu of the real thing. Thus it goes into circulation, and displaces the real thing. Plus the counterfeiter profits from the process.
Here’s why private banks are counterfeiters on that definition of the word.
It is now widely accepted that “loans create deposits” to quote a popular phrase. Or as the opening sentence of this Bank of England article put it, “This article explains how the majority of money in the modern economy is created by commercial banks making loans.”
Put another way, the private bank system when granting loans, DOES NOT NEED to obtain money from anywhere: it can simply credit the account of borrowers with money produced from thin air (much like a traditional backstreet counterfeiter produces money from nowhere using paper and ink).
Now people and firms do not borrow money just to sit on it: they borrow so as to SPEND it. And that extra spending will be stimulatory / inflationary. But assuming the economy is already at capacity, the extra demand stemming from that new money has to be negated in some way, else inflation rises too much. And governments do that “negation” by imposing deflation in some way, e.g. by confiscating money from the population at large: by raising taxes and/or cutting public spending. An alternative deflationary measure is to INDUCE the private sector to give up immediate access to some of it’s “official national” money by raising interest rates.
So there is at the very least a close similarity between traditional counterfeiters and private banks. That is, for every £X produced by traditional counterfeiters, the state has to withdraw about £X from the private sector in order to keep inflation under control.
Likewise with banks: for every £X printed and loaned out by banks, the state has to confiscate official money from the private sector to compensate.
As for the PROFIT that private banks make from creating and putting their home made money into circulation, that comes about in a slightly different way as compared to traditional counterfeiters.
Traditional counterfeiters print money and spend it. In contrast, private banks print money and LEND it. But that doesn’t alter the fact that private banks PROFIT from their money creation activities (and remember that PROFIT was one of the elements in the definition of “counterfeiter” at the start above).
Imagine the going rate of interest for a mortgage is 5% and you can simply print money and lend it out at 5%, that would be nice little earner, wouldn’t it?
Banks have to PAY to attract funds.
There is however a slight reservation to be made about the latter point. This reservation doesn’t DESTROY the point. But for the sake of accuracy, the reservation is as follows.
It was stated above that when granting a loan, a bank “can simply credit the account of borrowers with money produced from thin air..”. Notice the word “can”. That is a private bank does not NECESSARILY obtain much or all of the money for a loan from thin air: i.e. to some extent, banks obtain funds from depositors, bond-holders and so on.
Now in that a bank is engaged in the latter activity, it’s doing what most people THINK banks do: attracting deposits and lending on those deposits. Obviously no counterfeiting is involved there.
Put another way, possible counterfeiting is involved only in that banks print NEW MONEY. But the indisputable fact is that the money supply expands year after year. Thus there is no question but that a significant amount of “printing” and thus possible counterfeiting takes place every year.
Borrowers share in the profits.
A further point that complicates the issue, but doesn’t destroy the point that private banks are engaged in counterfeiting, is that it’s not just banks that benefit from counterfeiting: borrowers do as well, and for the following reasons.
If a bank is going to print and lend out money, clearly it has to undercut the going rate of interest. Now in that banks lend out HOME MADE money, that undercutting is easily done: after all, it costs a bank virtually nothing to come by that money. But that artificially low rate of interest benefits borrowers of course.
So another distinction between traditional backstreet counterfeiters and private banks is that the former keep the profit for themselves, whereas banks share the profit with borrowers.
I.e. the agreement between banks and borrowers is to a significant extent along the following lines.
Bank to potential mortgagor: “Ere mate. I’ve got a sack-full of freshly printed £50 notes. You want several thousand for your mortgage. How’s about I lend you the sack-full? I’ll charge you less than the going rate of interest. You’re happy. I’m happy. Everyone’s happy.”
So: are private banks counterfeiters?
The answer is a definite “yes”. That is, what private banks do fits the description of counterfeiting set out at the start. To reiterate, that was as follows (word for word).
A counterfeiter is someone who produces a form of currency which is such a close imitation of the real thing that it’s widely accepted in lieu of the real thing. Thus it goes into circulation, and displaces the real thing. Plus the counterfeiter profits from the process.