A mysterious birth

Where do potatoes come from? — From the farmer's field. Where are little calves born?— In the cowshed. Where do plums come from? — From the plum tree.

Everybody knows that. But now ask the same question about money:

Where does money come from? Where is born the paper dollar that I have in my pocket? Who gave birth to it, for what reason, and in what circumstances?

Where were the millions and millions of dollars born with which the Government financed the war, the Government which had noticed for the previous ten years that there were not enough dollars in the country to just finance ordinary public works?

Then, where do dollars go to when one cannot see them any more? Where did the dollars go during the 1930-1940 Depression, those dollars which had financed the country so well from 1925 to 1929?

Where are dollars born, and where do they die?

Ask people these questions, and tell me how many are able to answer you.

Neither God nor the temperature creates dollars. And yet dollars are not created by themselves! Who creates them? Who knew how many to create to pay for the war? And why did they, who had created the dollars to carry on the war, not create any beforehand to settle the Depression?

Two kinds of money

In order to clearly understand where money begins and where it ends, one must distinguish between two kinds of money, equally good: coins and paper money, and bookkeeping money.

Coins and paper money is only pocket money, which ordinary people use every day.

The big industrialists, the big retailers, more regularly use bookkeeping money. To make use of bookkeeping money, one must simply have a bank account.

Let us suppose that I have a bank account with $2,000 to my credit. I buy an electric washing machine at Sears. It costs $600. I pay for it with a $600 cheque on my bank account. What will happen?

I will receive my washing machine. The Sears firm will deposit my cheque at its own bank. The banker will raise the Sears firm's credit by $600. Sears' bank will then send the cheque to my bank. The banker will decrease the credit of my account by $600. And that is all. Not one dollar will have left a pocket or a drawer. An account will have increased — the retailer's; another one will have decreased — mine. I have paid with bookkeeping money.

Bookkeeping money is the credits in bank accounts.

This kind of money accounts for 90 percent of all commercial transactions. It is the main kind of money in civilized countries, like ours.

Furthermore, it is when bookkeeping money increases, that pocket money increases, and it is when bookkeeping money decreases, that pocket money decreases. When ten dollars of bookkeeping money goes into circulation, one dollar of pocket money (coins or paper money) enters into circulation. When ten dollars of bookkeeping money disappears from circulation, one dollar of pocket money disappears from circulation. It is at least the current ratio.

Bookkeeping money is in control. It is its quantity that determines the quantity of the other kind of money (cash).

Money begins in the banks

To find out where money originates and ends, one must find out where bookkeeping money originates and ends. Bookkeeping money, which controls everything, is a credit in a bank account.

Increasing credits in some bank accounts, while decreasing them in other accounts, is merely a transfer of bookkeeping money. If the credits correspond to metal or paper money deposited in the bank, it is a change from pocket money to bookkeeping money. But if the credits in bank accounts are increased without any decrease elsewhere, new bookkeeping money, which increases the total volume of money available, is generated.

When I save and then deposit $100 in the bank, the bank writes down $100 to my credit. This gives me $100 in bookkeeping money. But it is not new money; it is merely money that has passed from my pocket to the bank, or from the account of someone who has issued me a cheque to my own account. It is not the birth of new money; it is simply savings.

But, if instead of bringing my savings to the bank, I come to the bank to borrow a great deal of money, let us say $100,000, to enlarge my factory, what actually happens?

The bank manager has me sign some forms and pledges. Then he hands me a discount cheque that I deposit with the teller. The teller simply writes $100,000 to my credit. He records the same amount in my bankbook.

I leave the bank without carrying any cash on me, but I have added $100,000 of bookkeeping money to my credit, which I did not have upon entering. This allows me to pay, by cheques, up to an amount of $100,000 for machines, materials, and workers.

Moreover, no other account in the bank was decreased to accomplish this. Not a penny was moved, whether from a drawer, a pocket, or an account. I have $100,000 more, yet no one has a penny less.

This $100,000 did not exist an hour ago, and yet here it is entered into my credit, into my bank account.

Where then does this money come from? This is new money which did not exist when I walked into the bank, which was neither in the pocket, nor in the account, of anyone, and yet it now exists in my account.

The banker actually created $100,000 of new money in the form of credit, in the form of bookkeeping money, which is just as good as coins and paper money.

The banker is not afraid to do this. My cheques to payees will give them the right to draw money from the bank. But the banker knows very well that nine-tenths of these cheques will simply have the effect of decreasing the money in my account, and of increasing it in other people's accounts. He knows very well that a ratio of bank reserves to deposits of 1/10 is enough for him to answer the requests of those who want pocket money. In other words, the banker knows very well that if he has $10,000 in cash reserves, he can lend $100,000 (ten times the sum) in bookkeeping money.

– Editor's note: The preceding paragraph was written in 1946, and this ratio (a 10% cash reserve requirement) has changed since then. In 1967, the Canadian Bank Act allowed the chartered banks to create sixteen times (in bookkeeping money) the sum of their cash reserves. Beginning in 1980, the minimum reserve required in cash (bank notes and coins) was 5 per cent, which meant that the banker needed only one dollar out of twenty to answer the needs of those who wanted pocket money. The banker knew very well that if he had $10,000 in cash, he could lend twenty times the sum, or $200,000, in bookkeeping money.

In practice, the banks could lend out even more than that, since they could increase their cash reserves at will by simply purchasing bank notes from the central bank (the Bank of Canada) with the bookkeeping money they create out of thin air, with a pen. For example, it was established in 1982, before a parliamentary committee on banks' profits, that in 1981, the Canadian chartered banks, as a whole, made loans 32 times in excess of their combined capital. A few banks even lent sums equal to 40 times their capital. Moreover, in 1990 in the U.S.A., the total deposits of commercial banks amounted to about $3,000 billion, and their reserves amounted to approximately $60 billion. This resulted in a ratio of deposits to bank reserves of about 50/1. U.S. banks held enough cash to pay off depositors at the rate of only about two cents on the dollar.

Subsection 457(1) of the most recent version of the Canadian Bank Act, enacted on December 13, 1991, states that, as of January, 1994, the primary reserve, in the form of cash, that a chartered bank has to maintain is nil, zero. So the banks are no longer limited by law in creating credit, or bookkeeping money. (And if all cash is eventually replaced by electronic money, with debit or microchip cards, as it is already planned by the banks, they won't even be limited in practice to create money, which will then not be a piece of paper or an entry in a ledger, but simply bytes, units of information in a computer.)

The increase in the money supply

When it is the Government that borrows from the banks, the procedure is the same. The amounts are much greater, because the entire wealth of the country is involved. All the power to tax is then used as a pledge to the banker, in the form of debentures.

When the war broke out in 1939, the Government, which for the last ten years had been short of money, went to the banks to carry out a first loan of $200 million. The banks did not have any more money than they had had the day before. For the last ten years, the population had been lacking money. When one is lacking money, one hardly has any surplus to bring to the banks.

Nevertheless, the banks loaned $200 million to the Government. They wrote to the Government's credit $200 million in bookkeeping money. And the young people, who had been wandering about aimlessly for years because there was no money, were called immediately by the Government, dressed from head to toe, lodged, fed, equipped, and transported to Europe to take part in the slaughter.

And this was seen in all the countries of the world. The world had suffered from unemployment for ten years, due to the scarcity of money. This same world was able to fight a very costly war, because the banks had created all the bookkeeping money that was needed to finance the war.

Canada's banks thus created, during the war, at least 3 billion dollars of new money to finance the Canadian share of the universal butchery.

Money is easy to create, since all that is needed is the banker's pen. And yet, before the war, due to the lack of money, the world did penance for ten years, and no government made an order to make use of the banker's pen.

The death of money

But this bookkeeping money, created by the banks, is created under certain conditions. It must be brought back within a determined period of time, along with other money, in the form of interest.

Thus, one million dollars loaned at 5 percent for a period of twenty years, obliges the Government, which borrows this sum, to pay back 2 million dollars within twenty years — $1 million in principal and $1 million in interest.

As the Government does not create money, and as it cannot pump out from the public more money than was put into circulation, it is never able to bring back to the banker more money than the banker created. The more the Government tries to meet its obligations, the more it creates a scarcity of money in the country. It must even borrow other amounts to be able to pay indefinitely the interest on the principal thus created by the banks.

This is the reason why the public debt always increases, why interest on this debt is ever greater, and why taxes to pay the interest charges are more and more burdensome.

As for private individuals who thus borrow from the banks, they must either pay back with interest, or go bankrupt. If some succeed, it is by extracting from consumers, through the sale of products at raised prices, more money than they have put in. The success of some, in a system where money begins in the form of a debt, laden with interest, necessarily causes the bankruptcy of others.

Nine-tenths of the money that returns to the bank to repay loans enters the bank in the form of credit, and is simply cancelled; this money ceases to exist. The bank is both the cradle and the grave of money. It is both a factory that creates money and a slaughterhouse that cancels money.

When repayments are demanded faster than new loans are made, the slaughterhouse functions more rapidly than the factory. The result is a depression. This was how the 1930-1940 Depression originated.

When loans are more generous and more frequent than repayments, the factory runs more rapidly than the slaughterhouse, and money becomes plentiful. This is what happened during the war: money was more plentiful than the products.

It is quite obvious that the amount of money in circulation depends on the banks' actions. And the banks' actions do not depend at all on production or needs.

A pernicious dictatorship

In a world where one cannot live without money, one understands that a system which thus gives to private interests — the banks — the power to regulate the amount of money as they please, puts the world at the mercy of the makers and the destroyers of money.

Those who control money and credit have become the masters of our lives. No one dare breathe without their permission. This is what Pope Pius XI said.

A striking point must be emphasized:

It is production that gives value to money. A pile of money without corresponding products does not keep anyone alive, and is absolutely worthless. Thus, it is the farmers, the industrialists, the workers, the professionals, the organized citizenry, who make products, goods and services. But it is the bankers who create the money, based on these products. And the bankers appropriate this money, which draws its value from the products, and lend it to those who make the products.