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The Money Reform Party

Banks

Introduction

The supply of money is a direct product of borrowing, and debt maintains this money in circulation. Modern debt is, in aggregate, quite unrepayable.

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What happens when you take out a loan

From The Grip of Death, by Michael Rowbotham

If a bank makes a loan, nothing is lent, for the simple reason that there is nothing of substance to lend. The bank makes what it terms a 'loan' against the money deposited with it at that time. This is easily done. The bank simply has to agree that the person may take out a loan of, say £10,000. The person can then spend £10,000 and hey presto! £10,000 of new number-money has been created. No one with a bank account is sent a letter telling them that the money in their account is 'temporarily unavailable, because it has been lent to someone else'. None of the original accounts in the bank has been touched, reduced or affected. Nobody else's spending power has been reduced, but £10,000 of new number-money enters the economy at the stroke of a bank manager's pen, but £10,000 of debt has also been created.

Therefore, whoever takes out the loan will then make purchases and payments to other people, who will pay that new money into their bank accounts. The result: more bank deposits! As soon as the loan in the example above is spent, £10,000 will find its way into the bank account of a car dealer or DIY store; £10,000 of apparently new money. This money which has supposedly been 'loaned' - but the banking system doesn't distinguish this fact. It simply registers a new deposit, and regards it as new money. The total deposits in the banking system have therefore increased by £10,000. This is the 'boomerang effect' of a bank loan by which a 'loan' rapidly creates an equivalent amount of new bank deposits in the banking system. This effect was neatly summarised in a statement by Graham Towers, former Governor of the Central Bank of Canada; "Each and every time a bank makes a loan, new bank credit is created - new deposits - band new money".

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Superstructure of credit

The 'new money' will provide the banking system with the collateral for more lending. This is the 'bolstering effect' of a bank loan. As the total money held by banks and building societies becomes swollen by loans returning as new deposits this provides them with the basis for further loans.

Perhaps the best description of this process of money creation was provided by H. D. Macleod: "When it is said that a great Londondon joint stock bank has perhaps £50,000,000 deposits, it is almost universally believed that it has £50,000,000 of actual money to 'lend out' as it is erroneously called... It is a complete and utter delusion. These deposits are not deposits in cash at all, they are notheing but an enormous superstrcture of credit".

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It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

Henry Ford, (1863 - 1947) American industrialist and founder of the Ford Motor Company.

The process by which banks create money is so simple that the mind is repelled

John Kenneth Galbraith, (1908 - 2006) Canadian-American economist and author of "Money: Whence it came, where it went" - 1975, p29

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