Page 29 - Michael October 2021

The technique of a bank loan acle thereby, not only of getting something for noth-
ing, but also of getting perennial interest from it? ”
All that a bank does in lending anybody, say
$1,000, is to open an account in the borrower’s name The community’s life blood
— if he hasn’t already got an account — and write The business world cannot function without bank
Limit: $1,000 across the top of the ledger. The bor- credit, and every person in the community is equally
rower is now free to operate and overdraw on this dependent upon it.
account to the limit indicated.
Stop, or even restrict, bank overdrafts for one
When the account is drawn on the check, and in week and there would be a nation-wide crisis. Con-
turn the check is lodged in another account at the tinue the restriction for three months and this nation
same or another bank, a “deposit” is thus created, would be plunged into a depression, with unemploy-
and the supply of money increases. Thus bank loans ment and bankruptcy for thousands.
create “deposits”, which plainly are not the source of
loan money but rather, the other way around, they Such a crisis happened in the early thirties, as
are the outcome of loans. millions of the older generation remember with sor-
Now for the unassail- row and bitterness. You
may remember that dur-
able authorities on this ing the Depression, there
matter of the creation of was no shortage of goods.
credit by the banks. The shops and stores were
Governor Marriner full. But credit had been
Eccles, a one-time head restricted by the banks.
of the Federal Reserve The life blood did not flow
Bank Board of the United freely, industry died, and
States, said: “The banks unemployment was stag-
can create and destroy gering.
money. Bank credit is Bank credit is the life
money. It’s the money we blood of the community.
do most of our business
with, not with that cur- How money begins
rency which we usually Now let us look at this
think of as money.” (Given credit business a little more
in evidence before a Con- closely. How does it come
gressional Committee.) about?
Mr. R. G. Hawtrey, pre- There is an old eco-
viously Assistant Under- nomic tag that money ori-
Secretary to the British ginates in production and is
Treasury, in his Trade cancelled in consumption.
Depression and the Way Out, says: “When a bank Practically all the community’s money has its roots
lends, it creates money out of nothing.” in production. Most money sees the light of day as a
In his book, The Art of Central Banking, Hawtrey “producer credit”. In other words, it begins its life as a
also wrote: “When a bank lends, it creates credit. debt to a bank, and from the moment it is released as
Against the advance which it enters amongst its a book entry in a bank’s ledger, the credit created by
assets, there is a deposit entered in its liabilities. the bank and loaned to a company or individual trav-
But other lenders have not this mystical power of els through the production system, much of it being
creating the means of payment out of nothing. What used for consumption, and is finally cancelled when
they lend must be money that they have acquired the debt is repaid to the bank by the borrower.
through their economic activities.” That industry — both primary and secondary —
Lord Keynes, the economist and one-time Board cannot function on its own resources which is proven
Member of the Bank of England, states: “There can be by the universal need it has of bank overdraft accom-
no doubt that all deposits are created by the banks.” modation (i.e. bank loans).
Professor Frederick Soddy, the eminent physicist A nation in pawn
and Nobel prize winner of Oxford University, wrote:
“Is it possible in these days of disbelief in physical In other words, this huge total of assets is in
miracles really to caricature institutions which pre- pawn to the banks, and in the event of any individ-
tend to lend money, and do not lend it but create ual or company defaulting in its loan obligations, the
it? And when it is repaid to them, de-create it? And individual or the firm would probably be put into li- u
who have achieved the physically impossible mir- quidation in satisfaction of the banks’ claims.

www.michaeljournal.org MICHAEL October/November/December 2021 29