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Money Creation

Money is like an iron ring we’ve put through our noses. We’ve forgotten that we designed it and now it is leading us around.
~ Bernard Lietaer (1942 age:75), Belgian currency expert
Introduction How Crooked Are They?
Inflation LETS
The Sneaky Flat Tax The Way Out
The Banks’ No-Win Game Books
How Banks Work Links
Black Magic
definition: Manipulating secret symbols to cause harm at a distance.


Where does your money come from? You do favours for other people and in return they give you money. They in turn got their money by doing favours for people in return for money.

But where did the money come from in the first place?

  1. Originally money came from miners who dug and refined gold into coins. They traded the coins for food and other goods. The money had intrinsic value and those that created it were paid for their labour.
  2. Then banks issued receipts for gold held on deposit. The bank acted like a safety deposit box. Writing the receipt itself did not create any new money.
  3. Then counterfeiters learned to forge the receipts.
  4. Then the banks started to lend out some of the gold they had on deposit, perhaps issuing receipts rather than the gold itself. This created the illusion they had more gold on deposit than they really did. This was a species of counterfeiting since it increased the money supply without providing anything of value to back it. This was a bit like a storage locker company that charged you to store you TV, but secretly rented it out and earned money on that too. When you came to collect you TV, they would stall until they could get the TV back, or give you someone else’s from a pool on reserve for such emergencies. They got away with this because nobody cared if they got their own gold coins back, just gold coins of equal value.
  5. Then governments printed currency as receipts to represent gold they kept in vaults.
  6. Then the governments dispensed with the gold reserves. They just printed money and spent it. This is not considered counterfeiting since the country as a whole benefits from the proceeds of the necessary crime.
  7. Then banks learned an accounting trick of lending out money they did not have and putting it in an account of the borrower where it could be lent out yet again in a sort of Ponzi scheme. They enjoy the proceeeds of the this virtual counterfeiting crime, without doing any work. They have succeeded in bamboozling the public into letting them, in effect, print money.

In Canada, new money comes from two sources:

  1. The Bank of Canada, a crown corporation, owned by the federal government.
  2. The chartered banks, such as the Royal Bank of Canada and the Toronto Dominion Bank.
Both these groups have the legal right to create money out of thin air without doing anyone a favour in return.

You were probably aware the Bank of Canada can just print money or create it by entering a line in a ledger, but you might be surprised to learn the chartered banks can do so as well. This was not always the case. Prior to Prime Minister Mulroney, banks were required to maintain an 8% reserve. This allowed them to lend the same money out 12.5 times. Mulroney dropped the reserve rate to 0%. This means banks can lend out as much money as they please, even if they have nothing to back it. (In the USA, reserves are 3% for current accounts and 0% for savings accounts).

When you consider how serious a crime counterfeiting is, it is rather odd for the government to have effectively handed over the printing plates so that banks can create money too. Unlike the Bank of Canada, the banks don’t literally print money; they create it out of thin air with a ledger entry any time they lend money.

It is a strangely generous act of the federal politicians to the Canadian banks who were Canada’s most prosperous institutions even before this boon.


Isn’t creating money inflationary? Yes, of course. Further, it does not matter who does the creating; both kinds of money, Bank of Canada and chartered bank, are equally inflationary. Not all inflation is bad; you need a certain amount of expansion of the money supply to allow an expanded economy to function. However, out of corruption and kickbacks, the federal politicians have handed over control of the money supply to the private banks. When the Bank of Canada creates money, the federal government gets to spend it on programs like education, health and defense, or debt reduction or reduced taxes. When the banks create it, the money goes to the bank shareholders.

The Sneaky Flat Tax

When the Bank of Canada prints money, it lends it to the federal government at some nominal interest rate. But since the federal government owns the Bank of Canada, it gets dividends, so effectively it gets the money and interest free. Releasing new money into circulation slightly inflates the giant pool of money in circulation, so, in effect, everyone who owns Canadian dollars already, pays for this new money through inflation of their slightly less valuable holdings. Printing money can thus be looked on a sort of sneaky flat tax you can’t wriggle out of no matter how clever your tax lawyer.

The Banks’ No-Win Game

When banks create money, they effectively tax everyone to pay for it with inflation, the same as the federal government. But when they create money to lend they simultaneously put a debt on their books with the interest owed. So eventually they get that money back plus interest. Now imagine this game played over and over millions of times. For every $100 the banks create, they create say $150 in debt. Where is the money to come from to pay the interest? The banks create debt at a much faster rate than they create money. There mathematically isn’t enough money in total to pay off all the debt. Somebody has to default! The banks have designed the system so that defaults and bankruptcies are mathematically inevitable. They usually come in waves we call recessions.

It is amusing watching the banks so vigorously go after deadbeat creditors for principle and interest, when the money the bank lent cost them nothing in the first place and when they set up the rules by which a certain percentage of people mathematically had to default. It is a bit like a game of musical chairs.

The banks have the cheek to create the money they lend out of thin air, but insist on being paid back the principal and interest in real money, earned with the sweat of the brow.

How Banks Work

The original idea of banking is you would give your money to the bank for safe-keeping. They would lend some of it out and give you a cut of the interest they received. In return the bank took the risk of the loan defaulting and handling all the details of making the loans and collecting the payments. The bank attempts to lend money mainly to people who don’t need it since they have the best chance of paying it back, hence the invention of the credit card and minimum montly payment.

The banks today don’t quite create money out of thin air to lend, but close.

Consider this simplified version. Imagine an isolated town with only one bank. Somebody comes into the bank and deposits $1000.

The bank then lends out $900 of that money to other people in the town. The borrowers, of course, keep the money in the same bank. Even if they spend it, say at the town lumberyard, the lumberyard will deposit that money back in the bank. So the bank still has $1000 on deposit, even though it also has $900 of it out on loan, generating interest for them.

So they lend $900 of the $1000 on the books out again. The government used to insist they keep some 8% of it on hand in case someone made a withdrawal. Since Brian Mulroney, the bank is not required to maintain any reserves at all, though common sense insists they have to keep some reserves to handle daily withdrawals.

The bank can lend the same money out over and over and over. This is equivalent to creating money.

This all falls apart if for some reason people start withdrawing money, since the bank doesn’t have the money. It is mostly out on loan. The bank has insurance to rescue them should they get an unexpected run of withdrawals.

The bank lends the borrowers money the bank does not really have, but the borrowers pay back with real money plus interest, quite a sweet deal for the banks.

The same process works even if there is a bank with two branches in the same isolated town, two indepdent banks, two independent banks in two towns, or 5 banks with hundreds of branches in an entire country. They work as an coordinated whole. Who gets the profits from which branches is irrelevant to this process of relending the same money over and over. I don’t mean relending the same money after a loan completes, I mean lending the same money over and over at the same time to different people.

If the banks could do the same thing with paintings, you could leave your fine art with them for safekeeping and they could rent that same original painting out to dozens of people at once. It would be considered a form of temporary counterfeiting.

The whole game depends on the fact that when people borrow money, they usually keep it in a bank, not necessarily the same bank, even though they are not strictly required to, so that it becomes subject to relending.

The right of the banks to lend out the same money over and over is equivalent to the right the print temporary money. Just like printing real money, this ability causes inflation. The more money there is, the less each dollar is worth. Many people, myself included, think there is no reason banks should be be granted what effectively amounts to a get-out-of-jail-free-for-counterfeiting card. The ability to be the goose that lays the golden eggs should be reserved for the government. Otherwise it forfeits much of its control over the money supply and inflation.

How Crooked Are They?

Paul Martin, the Liberal Leader, had yet another sweetheart deal with the banks. Instead of borrowing money from the Bank of Canada at effectively no cost principle and interest, he borrows it from the chartered banks at the going interest rate. Presumably Stephen Harper is continuing the practice. Both cause equal inflation. Why would he blow billions of the taxpayers’ money so needlessly? Just look at the favours the banks do Martin at election time to repay his generosity with your money.

LETS (Local Exchange Trading System)

In Argentina, the major banks such as Citibank and the Bank of Nova Scotia simply fled the country with the deposits and left everyone high and dry. The people turned to a local-currency barter system when the government peso failed. With computers, it is possible to streamline barter, using local electronic currency. There are many ways to set up a LETS.

In one scheme, scheme, LETS money can be created simply with a transaction. When A sells B a good or service, A’s account in incremented and B’s is decremented by the amount of the sale. The total balance of all accounts is still 0, just like a bookkeeping general ledger.

One big advantage of a LETS scheme is that it recirculates money in the local economy and encourages people to buy locally produced goods and services. It can function no matter what the IMF (International Monetary Fund), crooked politicians and big banks have done to the national currency.

The Way Out

Part of the solution is to make the banks retain reserves as they did prior to the corrupt Mulroney administration. The government should remain in firm control of the money supply. The bonanza from printing money should accrue to the taxpayers, in the form of reduced taxes or improved services. It should not be handed over to the private banks. They are powerful and rich enough. They got this bonanza through crooked means and it should be taken away.

The savings would be so drastic, that Canada could abolish the hated GST (Goods and Services Tax) or institute a guaranteed annual income.

Nature teaches us that the more diversity there is in an ecosystem, the more stable it is. Nature teaches that if you want something not to fail, you have to have a backup system and a backup system to that. Putting all your eggs in one basket is a recipe for disaster. So it seems to me, the solution is to develop and use three parallel currency systems: local, national and international.


book cover recommend book⇒Funny Money, A Common Sense Alternative to Mainline Economicsto book home
by Paul Hellyer 978-0-9694394-2-4 hardcover
birth 1923-08-06 age:94
publisher Chimo
published 1994
Published by Chimo Media. Hellyer is the former defense minister of Canada famous for his bureaucratic miracle of unifying the Canadian armed forces. His argument basically is why let the banks create money when we the people already own a bank — the Bank of Canada. Why should the banks reap the benefits? Why should government projects be funded at high interest, when the government’s own bank can lend to them at low or no interest?
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