2000s >> 2005 >> no-1206-february-2005

Cooking the Books 2: Banks again

An item on our website (www.worldsocialism.org/wsm-pages/currencies.html) on the myth that banks can “create credit” by a mere stroke of the pen has elicited a response from Belgium, from three members of a party there called Vivant. Joseph Meyer, a member of the parliament of the German-speaking region of Belgium, emailed us: “In the article ‘Major Douglas Rides Again’ the author made an incredible stupid statement, when he wrote ‘. . . banks cannot create credit-money on their own . . .’ Because the banks do this all the time, you really should publish a correcting article, in order to maintain your party’s credibility”.

A key plank in Vivant’s programme is a “citizens’ basic income” for all (also favoured by the Green Party here) and it seems that they have been tempted by “funny money” theories to explain how this would be financed.  Actually, the passage our correspondent gives does not appear in the article. What we argue in it is that banks cannot lend out more money than has been deposited with them, which is indeed a denial that they can “create new credit-money on their own”. What banks do every day is lend out money deposited with them, making a profit out of the difference between the rate of interest they charge and the rate they pay to depositors.

The second correspondent refers us to a site of University College Dublin (www.ucd.ie/economic/teaching/macro12.ppt) on the “creation of money” which he claims backs up Vivant’s view. Despite the misleading title (banks don’t create money, just lend it), the site in fact backs up our claim since it shows clearly that, if there is a requirement that a bank must retain 10 percent of its assets in cash, and if 1000 euros are deposited with it, it can only lend out 900 euros and not 9000 (as is frequently misunderstood). True, if the 900 euros is eventually deposited in a bank, then a further 810 euros can be loaned, and if this is also eventually deposited, a further 729 euros, and so on until a total of 9000 euros is lent out, but only because in total 10,000 euros will have been deposited over the same period. In this (rather unrealistic, but not theoretically impossible) scenario which is used in all economics textbooks these days, if anybody could be said to have “created credit” it would be the depositors not the banks. It is their money that the banks re-)lend not money supposedly created by a mere stroke of the pen.

The third correspondent ends his email: “you are wrong, and if socialism is your concern, you should admit [it]”. Socialism is very much our concern, but why should an accurate description of how capitalism works, in this case in relation to banks, be regarded as somehow anti-socialist? In fact, by showing how monetary reforms, whether based on accurate or inaccurate theory, cannot solve the problems facing wage and salary workers under capitalism, this confirms that the only way out is to establish the common ownership and democratic control of the means of life, with production to satisfy people’s needs and not for profit, and distribution in accordance with the principle “from each according to their ability, to each according to their needs”. As such, socialism will be a society without money and its problems. Banks will become redundant and the buildings and computer equipment they currently take up will be freed for other purposes.

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