How Private, Commercial, National and International Money is Created

    The following was abridged by Alistair McConnachie, from the works of Michael Rowbotham

    The financial system currently adopted by all nations is often
    described as “debt based”, since the process
    of going into debt is relied upon almost exclusively to create
    and supply money to their economies. By the action of
    lending to borrowers, commercial banks create
    credit and advance this to industry, consumers and governments.
    This “bank credit” circulates in the broader economy until such
    time as the loan is repaid. Such “bank credit” now forms 96% of
    the money stock in most industrial nations, with a mere 4% the
    notes and coins created by government, and free from a parallel

    Thus, almost the entire money stock
    is supported in circulation by vast debts in four
    main sectors….

    • Private debts eg. mortgages, loans, overdrafts, credit-purchases 
    • Industrial and commercial debts 
    • Government “national” debts 
    • International, including Third World debt

    The supply of money is a direct product of borrowing, and debt
    maintains this money in circulation. Modern debt is, in
    aggregate, quite unrepayable. Furthermore,
    difficulty is experienced in the repayment of individual debts
    in all four sectors.

    The Drive Behind Globalisation, 1998, pp 3-4.  

    Money is created in each of these four areas….


    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 amount of money deposited with it at
    that time. This is all done with the utmost ease. The bank has
    simply to agree that a person may take out a loan of, say,
    £5,000. The person taking out the loan can then spend £5,000 and
    hey presto! £5,000 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 £5,000 of new spending power has
    been created; £5,000 of new number-money enters the economy at
    the stroke of a bank managers pen, but £5,000 of debt has also
    been created.

    Thus, whoever takes out the loan will then make purchases and
    payments to other people, who will pay that new money into their
    bank accounts. Result: more bank deposits! As soon as the loan
    in the example above is spent, £5,000 will find its way into the
    bank account of a car dealer or DIY store; £5,000 of apparently
    new money. This is 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. Total
    deposits in the banking system have therefore increased by
    £5,000. 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 brand new money.”

    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 London joint stock bank has perhaps
    £50,000,000 of 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 nothing
    but an enormous superstructure of credit.”
    The Grip of Death, Jon Carpenter Publishing, 1998, pp. 11-13


    A country’s national debt is completely separate from, and
    additional to, the level of private and commercial debt directly
    associated with the money supply. The United Kingdom
    national debt in 1998 stands at approximately £380 billion. If
    the private and commercial debt of £780 billion and the national
    debt are added together, the total indebtedness associated with
    the UK financial system stands at some £1160 billion, which
    dwarfs the total money stock of £640 billion! How did this
    condition of overall negative equity come about?
    This excessive indebtedness which is a blatant
    misrepresentation of the real state of economic wealth enjoyed
    by the nation is a position shared by all the developed

    The national debt is actually composed of thousands of pieces of
    paper called stocks, bonds and treasury bills. These
    stocks and bills, known as gilt-edged securities,
    or gilts, are essentially elaborate forms of government IOU.
    These IOUs are issued because each year the government
    fails to collect enough in taxes to cover the costs of its
    public services and other spending and it borrows money
    to cover this shortfall. All government budgets overshoot by
    many billions of pounds, dollars or deutschmarks annually. This
    leads to what is called the borrowing requirement
    for that budget year. A country’s national debt is
    therefore the total still outstanding on all past years’
    borrowing requirements; thus the UK national debt
    consists of £380 billion of these gilt edged IOUs, in the form
    of outstanding treasury bills and stocks.

    The method of issuing these IOUs and administering the national
    debt is quite simple. In order to obtain money to cover its
    annual spending shortfall, an appropriate number of government
    stocks and bills are drawn up by the Treasury. These are then
    sold in fact they are auctioned off in the money markets to the
    highest bidder. This is done throughout the year to meet the
    shortage of revenue as it arises, and the announcements, in the
    form of government advertisements, can be seen regularly in the
    financial press. These stocks and bills are bought because they
    promise to repay a larger sum of money at some future date, and
    are sold at a price that promises a good return to whoever buys
    them. They are usually denominated in considerable sums of
    £1,000 or more per bond and are bought by insurance
    companies, pension funds, banks and trust funds… anywhere that
    money accumulates as savings. By selling these stocks,
    the government obtains the additional money it needs for the
    public sector, making up the annual shortfall in what it can
    gather by taxation.

    As these government stocks mature and become due for payment,
    the government has to find the money promised on those stocks,
    and pay it to the financial institutions that bought them. But
    governments are unable to pay this money owing on their past
    stock issues. Indeed, each government is confronted by the
    current year’s annual shortfall in taxation
    receipts. The whole reason for the government issuing
    stock in the first place was because it could not cover its
    expenditure through taxation, and this annual shortfall
    is constant. There is no way a government can pay the money it
    owes. How then can the government pay up on its maturing stock?
    It has underwritten promises it cannot keep. What happens is
    that the government obtains the money to meet the payments due
    on maturing national debt stocks by selling more
    government stock to the financial institutions
    promising even more money in the future. The government draws up
    enough new stock to cover the repayments due on the old stock,
    sells this, and uses the money to pay off the old stock. Of
    course, when this new stock matures it too has to be paid off
    from the sale of yet more stock. The government manages to pay
    off the national debt, and not pay it, at one and the same time…

    There is a pretence that this is not the true arrangement, since
    repayment of national debt stocks is actually accounted as
    coming from taxation, not from the sale of more bonds. But this
    repayment from taxation creates such a massive shortage in
    government revenues that can only be made up by the sale of more
    bonds so the net effect is that repayment is constantly deferred
    by the sale of further government bonds. This is what is
    referred to as interest on the national debt although it is not
    really interest in the conventional banking sense, but a
    constant rescheduling of a completely un-repayable debt.
    This deferral is not, however, the end of the story….

    At the same time as deferring and re-mortgaging the
    existing level of national debt, the government
    has to sell yet more stock to cover the amount
    by which taxation falls below what is needed to support its
    public services. The national debt therefore escalates,
    increasing by the amount required to re-mortgage the past
    national debt, plus the shortfall in revenues to fund the public
    sector. In 1960, the UK national debt was £26 billion; by
    1980 it had risen to £90 billion. The national debt in 1998
    stands at nearly £380 billion, and is likely to reach a trillion
    pounds within the next 20-25 years. In America, the national
    debt in 1960 stood at $240 billion; by 1997 it had reached the
    level of $5,000 billion, or $5 trillion!

    It should also be remembered that the money held by pension
    funds and insurance companies, or whoever buys the government
    stocks, is money that had to be borrowed into existence
    in the first place.
    In other words, by this process,
    governments borrow money which has already been borrowed into
    existence, and they thus create a second massive institutional
    debt in respect of money which already has a debt behind it!
    Adding the national debt to the total of private debt places a
    country and its people in a position of overall negative equity,
    owing far more on paper than the amount of money that exists in
    the economy.

    The Grip of Death, pp. 96-98.  

    So, in summary: Governments draw up official treasury bonds, and
    these are auctioned on the money markets. The bonds are bought
    by both the banking and non-banking sectors. When the
    non-banking sector (pension and insurance funds etc) purchases
    the bonds, saved monies are recycled into the economy through
    government spending. When the banking sector buys government
    bonds, banks and lending institutions create credit: There is an
    increase in the money stock. This money is spent into the
    economy through government spending.

    Creative Accountancy, 1998, p. 29 


    The significant point about coins and notes money created by the
    government is that this money is created debt-free,
    and spent into the economy
    by the government. This
    is a vital consideration, and it is therefore important to
    appreciate precisely how this injection of debt-free
    money is managed. Coins and notes are minted and printed
    by the government at no cost, apart from that of materials. Of
    course, governments have no particular need of these coins and
    notes; banks are the institutions requiring a supply of cash.
    The government therefore sells the coins and notes that it
    creates to banks, who pay by cheque, and the government acquires
    the face value of those coins and notes in number-money. The sum
    of money which the government obtains, and which is debt-free so
    far as the government is concerned, is then added to whatever
    taxation revenue has been raised to fund the public sector.
    Thus, coins and notes are created by the government, and an
    amount equivalent to the face value of those coins and notes is
    spent into the economy as a direct, debt-free

    The Grip of Death, p. 14.  



    The financial position of even the wealthiest nations is one of
    acute financial pressure, with massive private and
    national debt, and budgetary difficulty dominating the
    economy. How can the wealthy nations, from a position of such
    perpetual monetary shortage and insolvency, lend money to the
    developing nations? The answer is that they do not. The
    money advanced to Third World nations is not money loaned from
    the wealthy nations. These sums consist almost entirely of
    monies that have been created, via the commercial banking
    mechanism, specifically for the purpose of the loan
    concerned. In other words, the same debt-based, banking
    process used to supply money to national economies is also
    employed for the creation and supply of funds to debtor nations.
    Thus, these monies are not owed by debtor countries to the
    developed nations, but to private, commercial banks.


    Holding only a nominal reserve contributed by the wealthy
    members, the World Bank raises large quantities of money by
    drawing up bonds and selling these to commercial banks on the
    money markets of the world. Thus, the World Bank does not
    itself create the money it advances to Third World nations, but
    sells bonds to commercial banks which, in purchasing these
    bonds, create money for the purpose. The World Bank
    therefore functions along the lines of a country’s national debt.
    Just as with the government bonds of a country’s national debt,
    when a commercial bank makes a purchase of World Bank
    money-bonds, the commercial bank creates additional bank credit.
    In essence, the World Bank acts as broker for commercial
    banks, who are the actual money-creation agents and who hold
    World Bank bonds in lieu of monies they create in
    parallel with debts registered against Third World nations.
    Although these loans may be denominated in pounds, dollars or
    Francs, such loans advanced under the World Bank have no
    connection with respective national economies, and in no sense
    represent monies loaned by these nations, nor debts owed to them
    by developing nations. The debts are owed to private,
    commercial banks (via the World Bank) in respect of money they
    have created through the purchase of debt bonds.


    The IMF presents itself as a financial pool an international
    reserve of money, built up with contributions, known as quotas,
    from subscribing nations that is, most nations of the world.
    However, credit creation accompanies almost every aspect of IMF

    Twenty-five percent of each nation’s IMF quota is paid in the
    form of gold, the remainder in the nations own currency. The 25%
    gold quota is the only component of IMF lending capacity that
    does not, in some way, constitute additional money created in
    parallel with debt.

    The 75% of a nation’s quota payable in national currency is
    invariably funded by the government concerned through the sale
    of bonds, thus adding to that nation’s national debt. Therefore
    the IMF, whilst not itself creating credit, places
    monetary demands on member countries for quotas that can only be
    funded via each country’s national deficit. This involves
    the sale of government bonds to commercial banks, leading to
    money creation by those banks. This source of revenue forms the
    main fund of IMF monies available to developing nations.

    Since the monetary demands on the IMF are constantly increasing,
    due to rising demand for Third World loans, the quota demands by
    the IMF have reached the point where (so-called) creditor
    nations such as America and Britain are reluctant to undertake
    yet more bond issues and further national debt to supply these

    So, in recent years the IMF has begun to
    circumvent the restrictions of its overall quota. By
    co-operating directly with commercial banks to organise more
    substantial loans than it can fund from its own quota
    resources, the IMF administers loan packages made up in part
    from its own quotas and in part from commercial sources.
    For example, of the $56 billion loan advanced under the IMF to
    South Korea in the wake of the Asian crisis, only $20 billion
    was contributed by the Fund; the remaining $36 billion was
    arranged by direct co-operation with international commercial
    banks, which created money for the purpose.

    The total funds of the IMF were substantially increased and its
    function and status as a money-creation agency clarified when,
    in 1979, the IMF instituted Special Drawing Rights (SDRs). These
    SDRs were created, and intended to serve, as an additional
    international currency. Although these SDRs are credited to each
    nations account with the IMF, if a nation borrows these SDRs
    (defined in dollars) it must repay this amount, or pay interest
    on the loan. Whilst SDRs are described as amounts credited to a
    nation, no money or credit of any kind is put into nations
    accounts. SDRs are actually a credit-facility just like a bank
    overdraft if they are borrowed, they must be repaid. Thus,
    the IMF is now creating and issuing money in the form of a
    new international currency, created in parallel with debt, under
    a system essentially the same as that of a bank… the IMF
    reserve being the original pool of quota funds.

    In summary, of the $2,200 billion currently outstanding as Third
    World or developing country debt, the vast majority represents
    money created by commercial banks in parallel with debt. In no
    sense do the loans advanced by the World Bank and IMF constitute
    monies owed to the creditor nations of the World Bank and
    IMF. The World Bank co-operates directly with commercial
    banks in the creation and supply of money in parallel with debt.
    The IMF also negotiates directly with commercial banks to
    arrange combined IMF/commercial loan packages.

    As for those sums loaned by the IMF from the total quotas
    supplied by member nations, these sums also do not constitute
    monies owed to ‘creditor’ nations. The monies subscribed as
    quotas were initially created by commercial banks through the
    agency of national debts. Therefore both the contributing nation
    and the borrowing Third World nation carry a
    burden of debt associated with these sums. Both quotas and loans
    are owed, ultimately, to commercial banks.

    The Invalidity of Third World Debt, 1998, pp.14-17.  



    Purchase back issues of Alistair McConnachie’s Prosperity money reform journal here

    And here is a link to Alistair McConnachie’s Google Profile.