Different definition, same system

1 and 2 February 2018, my own translation of my August 2013 Dutch original, translated with the assistence of DeepL, followed by bilingual postediting.

Introduction and scope

On Ad Broere’s website there is a short article “Eind aan geldschepping door banken” (The end of money creation by banks). Like all of his articles that I have seen, it has no publication date. (Mine have, for many years now.) But I can derive the date from Twitter: July 26, 2013.

I will briefly comment on this brief article. (Well, briefly; knowing myself, it can easily grow into another 2000 words again.) I have watched the video that the link refers to, Bancorruptcy, and I could write a lot about that too. But I won’t, for now, because then I should have done that in English, not in the Dutch of which this is the translation, because the video is in English, the language of MEP Godfrey Bloom.

Do banks have money?

I quote Ad Broere, translating what he wrote:

Banks create money from nothing the moment they lend it out. The basis for this money creation is your signature under a (mortgage) loan contract. Before you signed the signature, the money DID NOT EXIST. Then who owns that money? No one, and certainly not the bank. Nonetheless, banks want money for providing this money created out of nothing!

In parts. I start at the end and focus on:

Then who owns that money? No one, and certainly not the bank.

That is a trivial and therefore pointless statement. Of course the money is not the bank’s, not now and not before, because by definition, banks cannot have money!

That’s simply impossible, because after all, what is money? Money is:

Banks are not members of the public, so banks cannot have money, not according to this definition. Nor can a government. The public consists of households, and of businesses outside the banking sector.

Why does money creation happen?

Money creation is real. It always occurs when a bank grants a loan to a member of the public. When Ad Broere writes …

Banks create money from nothing the moment they lend it out.

… there’s not a word there that’s untrue.

This money creation follows from the same definition that explains why banks cannot have money. So that is consistent.

Way out of the discontent

Ad Broere’s words clearly imply that he doesn’t like either point, and wants to see them changed: he wants no money creation by banks, and he thinks banks should have the money they lend out.

And as I see it, that is easy to achieve. Not by changing and reforming and perhaps disrupting the whole system, with chaos, civil war, poverty and hunger as a possible consequence. Nor by changing the definition of money. But simply by using a different definition of money, equally valid but suitable for different purposes.

The definition from which money creation results, and which entails that banks and the government can never have money, is the definition of money as a medium of exchange.

It is the definition by which central banks measure the size of the money supply: too little money isn’t right, because that might cause stagnation in the economy. Too much such money isn’t desirable either, because then the economy may get overheated, and eventually money will devalue too rapidly, because people can buy things too easily, so that demand increases while supply is lagging behind.

The other definition is that for money as a unit of account. I did not realise that until less than two months ago. With money as a unit of account, you can express everything that has an economic value as an amount of money.

And then all of a sudden, banks do have money: coins and banknotes that they have in the safe have value and are therefore money, in that sense. Shares, bonds or other securities issued by governments or companies, including other banks: they have a value, so they can be expressed as an amount of currency, so in a sense they are money.

The bank’s claim on the borrower to whom that bank has provided a loan, is then also money. Conversely, the claim of the borrower, who has the borrowed money in a checking account or savings account, is also money.

Now this is what really matters: according to THAT definition, money creation does not exist. In the case of money as a unit of account, as a way to estimate valuable material or financial items, you have to take into account both debit and credit, assets and liabilities, accounts receivable and accounts payable.

If a bank provides someone with a loan, the bank gains money (in the sense of ‘money as a unit of account’) at the debit side of the balance sheet; the bank also gives money to the borrower (credit side of the balance sheet), so that the borrower then has money (a bank balance, debit on the borrower’s balance sheet, if available).

As a result of the transaction, the bank wins as much money as it loses, so in total nothing changes. The bank does not become richer.

Problem solved. The system is not wrong, only we have used a money definition that could lead to misunderstandings. So I say: use the appropriate definition, and the bank does have money that it lends out, and money creation does not exist at all.


To end the article with, I look at another quote from the article by Ad Broere:

As long as this sick system isn’t ended, the distribution of wealth will remain very unjust. There will be some who owns almost everything, and others who have almost nothing.

It is up to the author, Ad Broere, to prove the causal link between an unjust distribution of wealth on the one hand, and money creation based on the definition of money as a means of exchange, on the other hand. I really don’t see it. Not with the best of my intentions.

Perhaps interest causes the difference, but that too seems implausible to me. A political intermezzo: I too am against large income differences and against poverty, but I see progressive taxation, education, mitigation of trade barriers, and investments in the energy resources of the future as the appropriate means against these. Not the abolition of interest.

And certainly not the abolition of money creation - if at all possible, but I don’t think so.

I can never remember those Latin expressions, partly because my 1968-1969 grammar school adventure failed miserably after only one year, so I continued not learning Latin. But I can look them up:

Both are untrue, when applied to money creation and to wealth differences. There is no causal link. They are fallacies.

Copyright © 2017 R. Harmsen. All rights reserved.

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