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Letter: Who's Spreading Confusion?

Dear Editors

I wish I could say thank you for your review of my book The 1% and the Rest of Us (May Socialist Standard). But I can say thanks for bothering to read the book. So thanks.

I'm sorry, however, that you are extremely misguided and it is people like you who fail to do proper research that keeps up the confusion around money and the problems faced by the working classes of this world. How we produce money in our society and how it is allocated is of incredible consequence for inequality and the future of the planet (e.g. what we invest in like energy/food/shelter etc). Your review gives me little hope that this one day might be addressed based on evidence rather than conjecture.

Not only does Martin Wolf of the Financial Times recognize that banks create money out of thin air but so too does Positive Money (I wonder whether you even visited their site or read their literature) among many others who have bothered to actually do research rather than pontificate out of conjecture on the web.

Moreover, I wrote my book in late 2013 early 2014, which Zed's production team did not get out until this year. What we have known for a while thanks to various statements, leaks and logic, has now been empirically confirmed and published in the peer reviewed journal: the International Review of Financial Analysis in late 2014 (when my book was already in press, hence it is not cited). It is written by Richard A. Werner from the London School of Economics which you may or may not be familiar with.

As it turns out, banks do indeed create money out of thin air when they make a loan. It appears as an asset on their balance sheet and a (deposit) liability for the borrower. No reserves are checked with the central bank and money does not move from a saver to a borrower.

I doubt you have seen or heard of the article or probably care given your penchant for Biblical Marxism and love of this 19th century economic religion.

So, given the evidence (of which you martial [sic] absolutely none) the bad news is that your review is bad . . . really bad. In an honest world, after you've actually considered the evidence you'd retract your review, or at least amend it. But following the Church of Marx and blind faith might be easier for you.

I just wish you'd stop spreading confusion. 

Cheers mate,

Tim Di Muzio, Editor, RECASP, Senior Lecturer, School of Social Inquiry and Humanities

University of Wollongong, Australia.


Reply: We are well aware of the theory put forward by Richard Werner and discussed it in, for instance, the October 2012 Socialist Standard. Incidentally he is not ‘from the London School of Economics’ except that he once studied there. We also know of Positive Money and have in fact debated against them (video recording here:

You appear to be unaware that there are two rival theories which claim that ‘banks can create money out of thin air’. One, favoured by Martin Wolf and Positive Money among others, that it is only the whole banking system including the central bank that can do this. The other, favoured by Richard Werner and wilder currency cranks generally, is that an individual bank can do this, and have done so since banks first came into existence. We don't agree with using the term 'out of thin air' as it is confusing and opens the door to all sorts of currency crank ideas.

The empirical study you direct us to (of a small savings bank in Germany) by Werner is entitled 'Can banks individually create money out of nothing – The theories and the empirical evidence', to which he replies:

'This study establishes for the empirically that banks individually create money out of nothing. The money supply is created as ‘fairy dust’ by the banks individually, "out of thin air".' (

In fact it doesn't show this, but merely that when a bank makes a loan those in charge of granting it do not check that the bank has the money in its reserves. This may well be the case for individual loans, but it doesn't go on to examine what then happens afterwards. The March 2014 issue of the Bank of England Quarterly Review provides an answer, as well as confirming our view that banks don’t make profits by simply creating money from nowhere and charging interest on it:

‘A bank’s business model relies on receiving a higher interest rate on the loans (or other assets) than the rate it pays out on its deposits (or other liabilities). (...) The commercial bank uses the difference, or spread, between the expected return on their assets and liabilities to cover its operating costs and to make profits (…) In order to make extra loans, an individual bank will typically have to lower its loan rates relative to its competitors to induce households and companies to borrow more. And once it has made the loan it may well ‘lose’ the deposits it has created to those competing banks. Both of these factors affect the profitability of making a loan for an individual bank and influence how much borrowing takes place. (...) therefore try to attract or retain additional liabilities to accompany their new loans. In practice other banks would also be making new loans and creating new deposits, so one way they can do this is to try and attract some of those newly created deposits. In a competitive banking sector, that may involve increasing the rate they offer to households on their savings accounts. (…) Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending.’

In his study Werner doesn't appear to have asked the managers of the small German savings bank he studied whether they felt they could go on indefinitely creating 'fairy dust' loans of €200,000.

Nor does he state what happened to the bank’s balance sheet when he repaid the loan they granted him as part of the experiment (as presumably he did).

It is repeating currency crank theories and advocating banking and monetary reform that is spreading confusion. The solution to the problems facing the wage and salary working class the world over is not Monetary Reform. It lies in making the means of wealth production commonly owned by all, which would make banks and money redundant. – Editors.