Imagine you borrow $100 from Aunt May. She would have to pull it out of her purse or take it out of her bank account in one way or another. She would be out of pocket by $100 to give you the loan. Some people, if not most people imagine that when they deposit money in a bank, the bank loans their money to borrowers - a kind of two step process similar to the way you borrow money from Aunt May. The reality is nothing like that at all. When people deposit money in a bank (or have it transferred into their bank account), their money is on call at any time. When others take out a loan, that borrowed money is also on call. Borrowers and depositors can access their money at the same time. Therefore borrowers CANNOT be borrowing depositors' money. In contrast to the out-of-pocket loans that individuals and non-bank institutions make, banks create new money every time they make a loan. The banks employ a process called credit creation which enables them to create money out of nothing when they make a loan
If, as most people probably imagine, banks loaned money that has been placed there by depositors, their existence would be perfectly justified. People should truly be free to deposit their money with any institution they chose to on the understanding that that institution will be lending that money out to other parties. This would be a fair and justifiable application of the 'free market' principle.But what is really happening when banks make loans? With a process called credit creation banks create new (electronic) money with every loan. The banks just enter the loan amount into two ledger columns - a credit and debt column. Their credit is the money you owe them on account of the loan; their debt is the money you can withdraw or spend. New money is created in this fashion. From an accounting point of view, the one cancels the other in what is called a double entry.
Let's try to apply a kind of 'ethical logic' to the argument about the right of private banks to exist.
- It is a valid argument that a person should be able to deposit money (loan) with any institution she chooses to. This is a private and freely agreed arrangement between two parties ( a 'free market').
- Likewise such an institution has a right, within the bounds of the law, to loan that money out to another party. Again, this is a private and freely agreed arrangement between two parties which includes repayment schedule, interest rates and so on. Note: even pawn shops have such rights to enter into loans of this kind.
- If such institutions (banks) have a freely entered agreement with the commons, they are entitled to enjoy the right of credit creation.
Now the above logic is all perfectly sound. The moot question is: has the commons - which is to say, society collectively - ever freely entered into such an agreement? To enter freely into an agreement, one has to have been informed of the agreement and given the opportunity to debate and examine the terms and implications. No such debate and examination has ever been undertaken by the commons. If the commons did ever did do such a thing, it would have to 'have rocks in its head' to consent to private entities being given the right of credit creation. The right of private entities to enjoy credit creation capacity is similar to the various free trade agreements: the commons has never been given the chance to debate and examine the agreements. The 'agreements' in both cases have been made without our consent. These agreements may be called 'odious agreements' in the same vein as odious debts (which are described as 'a legal theory that says that the national debt incurred by a despotic regime should not be enforceable').
The right to credit creation should be the sole right of the commons - not of profit making enterprises - in the same way that we accept that the right to print notes and coins should be the sole reserve of a central bank owned by the people. In Australia about 95-96% of our money supply is created by private banks, not the Reserve Bank of Australia. In other words, the banks increase the supply of money printed by the RBA by a factor of 20-25. The interest on your mortgage that you slave away at paying for twenty-something years is on money created by a keyboard entry. The work that you do is real; the money created is 'fictitious'. Interest payments - earned by real work - is garnered from money that has been 'fictitiously' created. The only reason that private banks have this outrageous power is that the public has been duped, that the central banks which are supposed to be public institutions are in fact run by, and for, private banks, and that the right to credit creation has been duplicitously handed over to private concerns in the form of bank licences.
Because, as is shown in this website elsewhere, private banking is absolutely critical for the advancement and survival of Capitalism (see the paragraph below), it needs to be borne in mind that it is not a form of expropriation to deny banking licences to private entities. It is not an undue restriction on how people can use their money - an infringement of the free market principle. It is a matter of refusing to give a licence for credit creation - from the commons, to private entities.
In Why banks, corporations, land and natural resources should not be privately owned we explore how the institutions of share owned companies and freehold land ownership are a necessary consequence of private banks. We also explore why and how they wouldn't have a continued existence if private banks did not exist. Given the enormous consequences of retracting the right of credit creation from private entities, it is of utmost importance that we grasp the fact that credit creation is the sole right of the commons.