Is debt free money an option?

An intriguing proposal about how to rethink the global financial system is the notion of debt free money. This idea is typically raised in relation to the fact that the US Federal Reserve is not a central bank, it is a privately owned institution. The documentary “Secrets of Oz” details a long history of battles between American bankers and US presidents, with the bankers winning in 1913. The greenbacks issued by Abraham Lincoln were debt free money, for example. The documentary is worth watching, not necessarily for what it proposes as a solution, but for its history of wars between bankers and politicians, the latest of which we have just witnessed in the GFC.

The idea of debt free money is a questionable proposal for change. It is not going to happen any time soon and in America the contest was resolved in favour of bankers almost exactly a century ago. Moreover, this argument looks at the monetary system as a national phenomenon, when it has clearly become a global phenomenon with a life of its own. Still, it is worth considering for what it reveals about the situation in which we are now enmeshed and perhaps how the next crisis will be resolved when governments no longer have the financial fire power to produce another bailout. It also sheds light on the question of governance of the financial system. As previously suggested, governments have in this era of “financial de-regulation” handed over governance to the banks and traders, with predictable results.

First, I will list what I see as the flaws in the argument put forward by Bill Still in the “Secrets of Oz”:

  1. He blames the Depression and recessions on the use of bank issued money with debt. At best, this is a confusion of causation and correlation. The correlations are nowhere near as simple. There have been periods in which debt based money has been economically beneficial, there have been periods when it has been disastrous.
  2. He confuses ownership and control. Private banks may own the Fed, but that does not necessarily equate with private bank control. The Fed acts like a central bank for the most part, even though it is not government owned. Ownership did not confer influence for Lehmann Brothers in 2009. (Lehman was thought to have been one of the owners, although which banks own the Fed seems to be a point of considerable dispute). Equally, many central banks that are owned by their government do a perfectly good job of making a mess of their economies. That is not just a job for privately owned banks, it is a job for all bankers.

Let’s look at the current situation:

  1. We do have debt free money in most of the developed world. Central banks are running zero or near zero interest rates pretty much everywhere in developed economies, Australia being an exception. That is debt free money, although by the time it gets into the hands of actual business borrowers it has a very health interest rate on it. Someone is making a fortune on the spreads .. oh, banks of course.
  2. The idea that bankers can control the supply of money to get what they want partially applies. They are certainly more reluctant to lend to the “real” economy. But there is a whole level of meta money above that ($700 trillion of derivatives) which is money, so part of the money supply, sort of, which can be confected at will. The conceptualisation of money as a means of exchange, whose “supply” can be restricted has really become a thing of the past. It has become a disappearing point in which traders just make up their own rules.

Here, I think, is where the argument relates to what is happening.

  1. There is a ceaseless battle between bankers and governments, usually won by bankers in the first round. The second round is where we now are — governments having to fix up a mess and trying to take back the role of setting rules in order for the crisis not to happen again. Money defines the rules for a society and economy, and as the perennial wickedness of bankers becomes obvious, political leaders try to reassume control to restore the society. Obama, for the most part, ducked the issue, perhaps because, being overly generous, he had little choice. But the trend is slowly reasserting itself with an increased regulatory load being applied to the banks.
  2. Debt based money inevitably causes problems because the interest payments compound, bringing on crises as servicing the debt puts too much pressure on cash flows. That is especially a problem for governments. Whether or not governments can legitimately issue debt free money as proposed by Robert Zerliga is arguable. A number of Asian governments have done it for decades, especially Japan, without great results. But it is undoubtedly a bad idea for governments to rack up debt with an interest rate on it. Because the interest payments have to be serviced from increased taxation revenue it becomes a big problem in ageing economies. The only country that gets off the hook is America. Because it has the world’s reserve currency, there is always demand for whatever debt it issues. Europe, as we are seeing, does not escape. A considerable part of Australia’s strong position is due to Peter Costello in the Howard government refusing to run large deficits, unlike, for example, the Blair-Brown government. Government debt is vulnerable.

The argument about debt free money is a debate about whether to see money as a means of exchange, for utility only, or whether money should apply a cost-of-capital discipline to what happens in an economy. If money is debt free, there is no cost of capital, which, oddly, is pretty much exactly the situation in which we find ourselves. The crises in much of Asia, especially Japan’s implosion, show us what happens when there is no cost of capital. But one can point to many other crises, such as the Latin American debt crisis of the 1980s, when the compounding of interest eventually made a situation unsustainable. The answer to this dialectic is by no means clear cut.

What is clear is that bankers should be viewed with absolute and perpetual suspicion. Their behaviour goes in predictable patterns, and the patterns are routinely destructive. The GFC is just the latest iteration. Banking may be a necessary evil, but an evil it all too often is. It should be heavily monitored. Here is a description of how the bankers undid the greenback, Lincoln’s debt free money:

“Even after (Lincoln’s) death, the idea that America might print its own debt free money set off warning bells throughout the entire European banking community. On April 12th in 1866, the American congress passed the Contraction Act, allowing the treasury to call in and retire some of Lincoln’s greenbacks, With only the banks standing to gain from this, it’s not hard to work out the source of this action. To give the American public the false impression that they would be better off under the gold standard, the money changers used the control they had to cause economic instability and panic the people. This was fairly easy to do by calling in existing loans and refusing to issue new ones, a tried and proven method of causing depression. They would then spread the word through the media they largely controlled that the lack of a single gold standard was the cause of the hardship which ensued, while all this time using the Contraction Act to lower the amount of money in circulation.”

Little has changed about the behaviour of bankers. Only the complexity of the financial markets, and the bankers’ tricks, have changed.


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  1. Very good post. Thank you SON.

    “What is clear is that bankers should be viewed with absolute and perpetual suspicion. Their behaviour goes in predictable patterns, and the patterns are routinely destructive.”

    I cannot agree more.

    “The money changers used the control they had to cause economic instability and panic the people. This was fairly easy to do by calling in existing loans and refusing to issue new ones, a tried and proven method of causing depression.”

    I guess this is where all the Jewish conspiracy theory comes from ….

  2. Thanks for another superb article SoN. Now we begin getting down to the core issue.

    We do have debt free money in most of the developed world. Central banks are running zero or near zero interest rates pretty much everywhere … That is debt free money, although by the time it gets into the hands of actual business borrowers it has a very health interest rate on it.

    Meaning, for all intents and purposes, it is not “debt-free” at all. As you correctly go on to point out –

    Someone is making a fortune on the spreads .. oh, banks of course.

    ZIRP is all about making the banksters whole again. Nothing more.

    The trillions in ZIRP “money” is not reaching the real economy in sufficient quantity to drive further economic “growth” (ie, transactions), simply because in a debt-laden global economy, where billions have received an epic debt shock in 2007-08, there are simply insufficient borrowers, and/or insufficient willingness on the part of insolvent banksters to offer loans, in order to keep the global debt-money Ponzi going. Instead, what we are seeing and will continue to see from ZIRP is more asset bubbles – most likely in commodities / “hard assets” – and volatile HFT-driven casinos (“markets”), as banks use the ZIRP trillions to “invest” in attempts to restore their balance sheets.

    Debt based money inevitably causes problems because the interest payments compound, bringing on crises as servicing the debt puts too much pressure on cash flows.


    Hence, why it is usury that is the key economic problem for humanity. As has been pointed out by eminent philosophers and wise, community-spirited persons of sound morals and ethics for millennia.

    What most fail to recognise is that “money” (currency) creation does not occur at the central bank, who then loan to banks at ZIRP rates. As Steve Keen has well argued (endogenous money), and as published by the Federal Reserve Bank of Chicago, “money” creation occurs at the level of commercial banks, via the offering (temptation) of “loans” of electronic bookkeeping entries … with a rate of usury loaded on top; usury being the key debt-repayment component which is NOT created at the time of creating the principal. Principal + usury can only be repaid via the banks/financial system issuing ever more loans-at-usury into the economy. If the aggregate of all principal + interest owing were called in at once, there is insufficient “money” to settle all debts. On close inspection, it is self-evident that usury-based “money” is a brilliant “trickle UP” Ponzi scheme, designed to redistribute real wealth (esp. land title) from the masses of working people, UP into the ownership of the bankster class.

    I agree with your view that a change to this system appears far distant. However, there are numerous evidences of grass-roots alternatives arising all over the world. Especially post-2008. The internet changes everything. I remain hopeful and positive that significant change for the better vis-a-vis usury-free “currency” may be nearer than any of us might imagine.

  3. Some of you, we all know, are poor, find it hard to live, are sometimes, as it were, gasping for breath. I have no doubt that some of you who read this book are unable to pay for all the dinners which you have actually eaten, or for the coats and shoes which are fast wearing or are already worn out, and have come to this page to spend borrowed or stolen time, robbing your creditors of an hour. It is very evident what mean and sneaking lives many of you live, for my sight has been whetted by experience; always on the limits, trying to get into business and trying to get out of debt, a very ancient slough, called by the Latins aes alienum, another’s brass, for some of their coins were made of brass; still living, and dying, and buried by this other’s brass; always promising to pay, tomorrow, and dying today, insolvent; seeking to curry favor, to get custom, by how many modes, only not state-prison offences; lying, flattering, voting, contracting yourselves into a nutshell of civility or dilating into an atmosphere of thin and vaporous generosity, that you may persuade your neighbor to let you make his shoes, or his hat, or his coat, or his carriage, or import his groceries for him; making yourselves sick, that you may lay up something against a sick day, something to be tucked away in an old chest, or in a stocking behind the plastering, or, more safely, in the brick banks; no matter where, no matter how much or how little.

    I sometimes wonder that we can be so frivolous, I may almost say, as to attend to the gross but somewhat foreign form of servitude called Negro Slavery, there are so many keen and subtle masters that enslave both North and South. It is hard to have a Southern overseer; it is worse to have a Northern one; but worst of all when you are the slave-driver of yourself.

    – Henry David Thoreau, Walden; or, a Life in the Woods, 1854

  4. “this argument looks at the monetary system as a national phenomenon, when it has clearly become a global phenomenon with a life of its own.”

    Absolutely agree with you observation. But I hope we won’t come to a conclusion that to tackle the problem we will need a global parliament. o_O

    • No need for others to draw that conclusion. The bankster class, and assorted puppets thereof, have long ago determined that as the(ir) desired goal (“solution”). Present moves in Europe for a “currency commissioner” with powers to overrule national budgets (ie, loss of national sovereignty), and a “banking union”, all representing means to the same end.

      It’s all about control.

  5. Debt free money as a concept is not that much different to the money printing that is occurring all over the world right now.

    In the US at the moment, the Federal Reserve ‘buys’ government bonds and the interest on the bonds is paid back to the government as a dividend. If you cut out the middle man from the equation, the government is effectively issuing new currency. There’s not really much point to the Fed being in the picture except for vague notions of fiscal discipline and accountability being enforced.

    The net result is the same as the debt free money in this scenario(where the CB buys all bonds). The extra currency enters the system and contributes to inflationary outcomes. Inflation results in a form of wealth tax.

    The most important issue then is perhaps a values question: Where would you like your inflation to start?

    If the government is able to issue debt free money, then you could argue that the inflation will start from socially desirable services and works. I.e. the government prints the money to pay the bridge builders and doctors.

    If the government is not able to do so, then they must borrow from the central bank or market, pay the interest, and (at least on the central bank’s portion) receive the dividends back a year or more later(post inflation), with a bit skimmed off the top.

    They’re not all that dissimilar once you consider the reality of what’s happening right now. The only difference is that the Central bank and inflation gets to skim a bit.

    For what it’s worth, at least in the USA, it is legal for the congress to mint coinage. There was a discussion a while back about the possibility of minting a 14 trillion dollar coin and depositing it at the Fed. Hilarious, but legal.

  6. Well, not meaning to preach or anything here (I know that would be political and ideological suicide at this too early stage) but once you have a social welfare system that is NOT based upon faith, hope and charity (which is the ‘perfect law of liberty’ because it keeps everyone and their property free/outright control and ownership of themselves and their property), you then have benefactors (our current politicians and ministers) who call themselves “benefactors” but they rule over you and over each other, that is, they are no longer public servants in the true and traditional sense of the word.

    This is because in order to hand out benefits, they have to take it from your friends, families and neighbours (even at the force of a gun if need be) and often, they are not overly particular or ethical as to how they go about getting more out of your neighbours’ pockets.

    This brings about first a subtle but then increasingly obvious despotism as such a system ages, and such a system has always collapsed in the end anyway.

    It used to be that one minister would look after every ten families and they would call such a community something like the “Hundred of Sydney” or the “Hundred of Newcastle” etc.

    People would voluntarily tithe to each minister who were true public servants and they would get their benefits from that minister – people voluntarily tithed because it was a system of faith hope and charity which kept every man and women free and in full legal control (and ownership) of their lands.

    This is the form of government that the bible teaches and of which no minister in any of today’s churches are preaching (you can work out why I am sure).

    Of course, honest weights and measures (e.g. gold and silver coin and not fiat money) was compulsory in such a system because it kept everyone honest. This system has been the most predominant system throughout history and what we have today is actually a diversion/abnormality by historical comparisons.

    This kept everyone’s unalienable rights intact and they owned their properties outright with no state-government finger in the pie. The only real tax there was was the tithe to the minister in that you either serve God (this better system) or the unrighteous Mammon (the system we have today in most parts of the world).

    Anyway I probably don’t need to say that our modern system of democracy has to fall and will fall according to nature’s rule of law and nature’s God let alone anything else.

    Some people may even remember seeing land plans with terms such as the “Hundred of ……”?


    • It sounds old fashioned but I agree Claudem777. I think we are living in welfare LaLa land with the government playing nanny. The key here is that the government thinks that the money (all money) is theirs.

      Another aspect I think is that the immigration settings are too high making a welfare state very expensive to maintain and leaves me less inclined to volunteer and donate. If my community and my citizenship is not valued and I am told I must compete on a global level playing field then they can get their hand the hell out of my pocket.

    • Ignoring the religious parts (I am agnostic and just not interested in it) I really do to agree. The welfare system we have now truly is an abomination. It was started as a means of helping those who cannot help themselves and catching people who fall down, then helping them get up. It has become nothing but a way for government to buy votes, with our own money, that they forcibly took from us. Oh and before they give it back to us they take a cut of course.

      “Democracy lasts until half the population realise that they can vote themselves the state treasury”

      I don’t know who said it but it’s perfectly apt.

      There simply has to be a better way of providing a social safety net.

    • Yep ..straight too the MB HFTalk moderation machine..n didn’t even mention All the best,n I was gonna say Howard n Costello but ,it so Laurel n Hardy..n anyway I yield back.. till my time is up

  7. My mission is to educate my child on all things Debt related, along with the power of the compounding function.The Bankster system is well entrenched and as far as I can observe able to operate just as it wants. The GFC is nothing if not a testament to how Banking has completely corrupted the Political class and therefore the fabric of our lives.

    The only option available to us now is Defence. Forget change, it’s too late for that. And I use the war like terms deliberately because have no doubt households are “under attack”.

    I know some will disagree , but consider that at least by focussing efforts on one’s Defence you have some modicum of control over the outcome.Wasting time and effort railing at the existing system gets nowhere and vaulable time and energy is lost.

    The fact is general populations in the developed countries at least have lost complete control of how Money is created. The best we can do as individuals now is truly understand how it works and put that knowledge to use to better our familes lives.

  8. I was a banker. A very proud and honest banker. My uncle was a banker from the generation before me, and all I wanted to be was a bank manager,just like him. And I was, but more. I became an investment banker, and a very good one. Then one day, the test came; that slight opening of the door that showed just how wealthy I could be, if only… But I’d been brought up in a different world. One where it was how you behaved when no one was watching that mattered. And the door was quietly closed. My daughter is 14 next month, and I now have to figure out how to advise her on how to approach life. Do I instruct her in my upbringing beliefs of trust and honesty, or do I recognize that I should have stepped inside that pragmatic room of indeterminate riches that was show to me? The answer is as obvious from where I sit today, as it wasn’t when the door was pushed ajar.

    • Janet,

      Unfortunately Banking doesn’t have enough of the people like you where it matters.

      Your story demonstrates that the “numbers” are against us. Personally, I think there is whole industry waiting to be born from “Money and Banking Education”. It is quite astounding that , while populations have close intimate contact with money every single day, they are so ignorant of the mechanism that is Money and the Banks that control it.

      Why are we not more pro-active in educating on how the “system” really functions?

    • Janet, why do not you try to raise your daughter as Warren Buffett did? You can be honest AND “beat the market” fair & square. There is so much market inefficiency to exploit after all.

  9. Political correctness, pr teams, but more so privacy has killed society accountability to some degree. Years ago, if someone was dodgy they were made to stand out like dogs balls. Today, sht look around at those who have been shown to shake like a tree, yet still hold credible rolls in tv etc.
    There needs to be legislation bought in to somehow hold people more accountable, and in a monetary sense. The options regarding bankruptcy, your wifes assets etc are reduculous, Allan bond etc. it makes society look second class. Privacy etc needs to be somehow watered down so those dodgy, can be corrected via social accountability as often the allusion of credibility is everything to these dheads. Too many are getting through the net.

  10. My very simple proposal; IF monetary “stimulus” has any validity at all, instead of feeding it into the economy via banks and via the purchase of government debt, feed it into the economy via a % refund of tax paid last year.

    The difference is, it would actually have the effect of stimulating the economy, it would enter the economy at the point where it was going to have the most effect, and no-one would stand to reap “unearned income” or economic “rent” out of it. And the government would benefit slightly too, without the sheer profligacy inherent in the purchase of government debt via “QE”.

  11. SoN, I wonder if you have seen this documentary?

    Lengthy, but highly recommended; indeed, it is by some margin the best I’ve seen on “money”, the credit / debt currency creation mechanism, and best of all IMO, even begins to touch on some of the alternate “money” solutions (LETS, P2P, etc) that are (again) springing up in response to the present crisis.

    • Tks Op8, I really enjoyed it. Vet much the lines along which I was thinking. Most fascinating was the snippet from Paul Volcker towards the end. As I thought, it was very much line ball as to whether the world, or at least America, would finish up with a system of money/banking system at all after the debauch that led up to the GFC. And that was really decided on the morning of Sep 17th, so he says. Otherwise, we were destined for a period of barter or conch shells, or perhaps the stocks of the medieval period.

  12. QUESTION: Debt free money will reduce tax rates across the board and provide a more stable environment to do business….. So why don’t high net worth individuals embrace the option?

  13. Well, blow me down, cost-free capital leads to people squandering capital on anything and everything. Who would have thunk it?

  14. SoN,

    Your notion that money-is-politics is quite a dissident notion and flies in the face of our reigning mythology. In Behind the Veil of Economics Robert L. Heilbroner explains how the masses have been lured into believing that, just because power is exercised covertly in our social and economic system, that it has gone away. Jonathan Schell describes this ruling dogma as follows:

    The early champions of the free market, most of them British, had in fact looked to industry mainly to create the wealth of nations, as the title of Adam Smith’s classic book had it, not the power of nations, which had been the preoccupation of their mercantilist predecessors. The advocates of laissez-faire declared the independence of economics from state power. The eventual coining of the word “economics,” identifying a distinct realm of human activity subject to its own laws, was one sign of their faith in that independence.

    JONATHAN SCHELL, The Unconquerable World

    Nietzsche argued that man needs these religious and/or religious dogmas and mythologies. Most religious folks consider Nietzsche to be enemy No. 1—-the great atheist. But Nietzsche was no friend to atheists, as he judged secular mythologies just as harshly as he did religious ones. As George A. Morgan commented in What Nietzsche Means:

    But man has survived with his fictitious world: does that not prove it true? Not at all, in Nietzsche’s opinion. Man, indeed, has been an incorrigible pragmatist, like other animals, ever maintaining the truth of those beliefs which seemed to help him live. Because of the age-long selective process, surviving modes of interpretation probably do stand in some favorable relation to real conditions—-just favorable enough for survival. “We are ‘knowing’ [erkennend] to the extent that we can satisfy our needs.” That truth is always best for life, however, is a moral prejudice. Falsification has been shown to be essential; truth is often ruinous, and sheer illusion helpful, as experience testifies. And of course there is no certainty about even the pragmatic value of our beliefs; there is merely the fact that we have survived so far. Beliefs not immediately harmful may yet be fatal in the long run.

    Perhaps the greatest scene from The Wizard of Oz is when Toto pulls back the curtain, exposing the reality of “the Great and Powerful Oz.” He is an illusion, created by a little old man manipulating the right levers. Here’s the scene:

    • Oops! That should read

      Nietzsche argued that man needs these religious and/or secular dogmas and mythologies.

  15. A friend of a friend said the other day that superstition is in our genes. He told me not to fight it.

    Without superstition, believing in afterlife etc, we won’t be able to cope with inescapable tragedies.

    I told him that’s BS.

  16. Another excellent article by SON to distract us for our ambrosia filled weekends.

    Isn’t usury and debt diverting attention from the central problem with our banking system.

    Maturity Transformation.

    People talk about MT as though it is a natural as mother’s milk and the world will cease spinning on its axis if we prohibit it.

    Prohibit it? What madness doth he speak.

    At its core Maturity Transformation sails very close to fraud. Lending money for term that which is the property of others and can be demanded at call.

    A bank uses, as a basis for loans for varying periods, deposits that it agrees can be paid back at call knowing full well that if everyone who has made ‘at call deposits’ turns up and makes that call they cannot be paid.

    They are gambling that people will not ‘run’ and make that call. We know from history what happens when that happens.

    We also know from history the ‘solution’ the bankers managed to have adopted. A central bank will just print the money if a a ‘run’ happens so in theory a ‘run’ never happens.

    How about we just re-wind the tape and question the need for maturity transformation?

    Depositors are perfectly capable of lending for an extended term – term deposits. And the contracts for those terms deposits can be traded if liquidity is required by the depositor – bonds.

    If depositor doesn’t like keeping money under the mattress they can certainly pay someone with a solid vault and a convenient system of ATM’s to store their money. Come to think of it, since when did we actually receive any interest from the banks on our ‘at call’ deposits, anyway.

    The solution is quite simple – ban maturity transformation.

    If a depositor wants deposit money and for it to be available at call (rather than enter a contract to deposit for a term), the bank must hold that money (all of it) on hand so that all of the deposits at call are available in the event of all the depositors making a call.

    This would erase the float that funds the activities of bankers.

    No need to ban the charging of interest on loans ‘usury’ once the fraud of maturity transformation is prohibited.

    • A bank uses, as a basis for loans for varying periods, deposits…

      This is the core misunderstanding that almost everyone has.

      Deposits are NOT used as the basis for loans. Loans create the deposits.

      If you make the time to watch the docos I’ve linked, along with the Fed Reserve of Chicago link towards the top (or just ask Steve Keen), you will see that this fact has been widely acknowledged by heads of Federal Reserve member banks, the Bank of England, and heads of commercial banks.

      Your observations regarding MT are valid. But they miss the mark, due this essential misunderstanding of how the “money” creation process actually works.

      Here’s a 3 minute explanation … and you only need the first 2 minutes –

      • Opinion8Red,

        You and Steve Keen are up against the same phenomenon that Copernicus, Bruno and Galileo were. Since time immemorial, people had been able to observe the sun rise in the east and set in the west. Now, all of a sudden, Copernicus, Bruno and Galileo were telling them this wasn’t what was happening at all.

        Likewise, people know from everyday experience that they go to work each day and expend the sweat of their brow to earn a few dollars. Some save a few of these dollars, which become their savings, their capital. But the reality is that this money has no more value than the money that the bankers create with the stroke of a keyboard. And in fact this money that they struggled and sacrificed so much for was originally created by the stroke of a banker’s keyboard. For people who have spent their whole lives laboring and sacrificing to save a few dollars, you’re telling them they wasted their life being maniuplated, chasing after an illusion. That’s not an easy nut to swallow, and something many will react violently to.

        The trick is to get people to see the bigger picture, to position themselves in outer space at that fabled Archimedean point so they can look down on the solar system or the monetary system to see how it really works. It’s an uphill battle. From the time geocentricism was first challenged in 1543, it took several hundred years for it to be slowly superceded by heliocentricism.

        • glen5875,

          Here’s the flipside of the problem you are pointing to from a finance industry insider. The comments quoted below were part of an exchange between a finance industry worker with the handle ‘Truth Is There Is No Truth’ who has been a stalwart of the comments at Steve Keen’s Debtwatch blog for many years.

          The exchange took place in the comments on this post by Steve Keen:

          Look at TITINT’s struggle to grasp the implications of aggregating the individual firm’s operation into a system-wide perspective.

          September 22, 2012 at 1:45 pm | #

          I was really enjoying that until it got to the bit about banks creating credit and putting in reserves a month later.

          It’s a preconceived misinterpretation of the ECB statement. There is a big difference between reporting reserves in a buerocratic sense, and managing liquidity in a real sense. In fact allowing a month delay in reporting presumes the funding is done in advance rather than implying that the funding is done to meet reserve requirements.

          The statement shows a poor understanding of how banks operate. Where is this kind of information coming from, other than the very selective and misinterpreted snippets? It’s not even really necessary for the whole argument anyway, endogoneus money creation does is not hinged on this causality.

          Happy to invest some time in explain this to you if you wish.


          Steve Keen’s replies follow. And here is the final comment from TITINT and the first line of Steve Keen’s final comment:

          September 25, 2012 at 9:42 am | #

          That I have to agree with. The problem I’ve always had with this is that the parsimonous model incorrectly implies individual bank behaviour, which earlier on had the pitch fork crew up in arms chanting slogans that bankers wake up in the morning and switch on the money machine.

          The question is how do you reconcile a systemic outcom from the outcome of individuals who act in the opposite way. This is not impossible actually and I think it is an advancement in thinking to understand that individual banks funding first can collectively create a system of endogenous money creation. This type of model is worthy of the complexity of the financial system, as opposed to the simple notion that individual banks behaviour is directly translated to systemic outcomes.


          Steve Keen
          September 27, 2012 at 12:23 pm | #

          Thanks TININT. I’m pleased-very pleased–that we’re in agreement…..


          TITINT comes across as an intelligent, reasonable person and it has taken years for him to come to grips with the model Steve Keen is advancing. We have a long road ahead IMHO.

          • Keen makes it very clear in his final comment that TruthIsThereIsNoTruth is a victim of the minutia of his own little micro-world, and fails to stand back and look at the larger picutre revealed by a macro-economic analysis.

            TITINT provides the perfect example of the sort of parochial and egocentric type of thinking that makes theories like geocentricism plausible. He lacks the ability to place himself in a hypothetical vantage point from which he can objectively perceive the subject of inquiry, with a view of totality. The ideal of “removing oneself” from the object of study so that one can see it in relation to all other things, but remain independent of them, is described by a view from an Archimedean point.

            Here’s how Keen put it in his final response to TITINT:

            One interesting avenue would be to explore what the “microstructure” is behind endogenous money….

            For the meantime though, I’ll leave that issue and work on building a monetary macro model where the ultimate outcome is shown in a parsimonious way.

            Occam’s razor, anyone?

        • glen5875,

          The trick is to get people to see the bigger picture, to position themselves in outer space at that fabled Archimedean point so they can look down on the solar system or the monetary system to see how it really works.

          Thank you. Excellent advice, that I will endeavour to implement.

      • In the case of non-APRA regulated banks, which don’t settle through the Reserve Bank, this is not the case. In the absence of finding new deposits or drawing down on facilities with other banks (or on its equity), such a bank cannot make loans in the first instance.

        • Indeed pithoneme. And is it not both interesting, and enlightening, to note that the “banks” who do not have this power remain mere minnows compared to the Big 4.

      • ” Your observations regarding MT are valid. But they miss the mark…”

        What mark am I missing?

        That banks don’t need reserves to create a loan.

        No kidding. I have been reading your links for months to that effect and have no issue with that. However, it is clear from Prof Keen’s points below that he is alert that it is not the end of the story.

        The point that I am not missing, that you unfortunately are, is that your solution – banning usury – is no solution to the problem you identify – endongenous money creation by banks in an environment of Reserve Accounts at Central Banks – even if it was possible and it clearly is not.

        How precisely how do you plan to convince anyone that the charging of interest or receiving interest is not appropriate.

        However, prohibiting Maturation Transformation is easily argued and would address many of the problems that current affect banking.

        It is simple to explain

        “Banks must have funds on hands to meet the claims they have contractually agreed to meet – ie deposits at call”.

        “Maturity Transformation is the smelly near fraudulent practice pioneered by Goldsmiths that should be stamped out”

        Without the bottomless pit of a central bank reserve account to draw down this would impose a very simple and highly effect limit on Banking behaviour – even if you wish to pursue your long term goal of convincing people that banks should not be allowed to pay or charge interest.

        • your solution – banning usury – is no solution to the problem you identify – endongenous money creation by banks in an environment of Reserve Accounts at Central Banks

          That is not the problem I identify.

          Usury is the problem I (and many before me) identify. Endogenous “money” creation is merely a mechanism that (vastly) compounds the root problem.

          My best-to-date monetary “solution” is not merely banning usury. It is the maximal decentralisation of the endogenous money creation mechanism, so that every individual is empowered to endogenously create “currency” for him/herself – usury free – subject to uniform, pre-programmed rules.

          • ” It is the maximal decentralisation of the endogenous money creation mechanism, so that every individual is empowered to endogenously create “currency” for him/herself – usury free – subject to uniform, pre-programmed rules.”

            That is a very ambitious objective – and I will confess that I am entirely sure what you mean.

            Are there any actions short of that objective that would be an improvement or render such gains that failure to attain your objective would be tolerable?

            What part of Rome should we commence with?

            Banning MT?

          • Pfh007,

            In my view there are many interim/bandaid solutions that could be, indeed are, more easily envisioned than what I advocate. And yes, banning MT might be one of these. However, it is my view that until the power to create money currency at least begins to be decentralised, then we have not even taken the first step in the right direction. For mine, even a decentralisation of “legal tender” laws, allowing anyone / any group to pool resources and begin a bank, issuing their own currency (ie, “money” governed by their rules, which the public has a free choice to accept or shun), without yet banning usury, would be one step away from the wrong direction. Still not in the right direction, but an improvement.

      • One in on briefly , can see it read minute

        Being..if you’re baited or convinced able enough to buy my inherited house mist a house buying up-trend or boom created to consumption allowed,via a loan commitment,you’ve become the banks asset stream..when I deposit the said funds,I’m a liability in good luck..while you’re at the top of your world lookin too paying down your creation is…
        Almost a shame I’m to old to breed,never mind n something no doubt a finally sheltered working couple love to do..

  17. A quote from “Fight Club”

    Narrator: A new car built by my company leaves somewhere traveling at 60 mph. The rear differential locks up. The car crashes and burns with everyone trapped inside. Now, should we initiate a recall? Take the number of vehicles in the field, A, multiply by the probable rate of failure, B, multiply by the average out-of-court settlement, C. A times B times C equals X. If X is less than the cost of a recall, we don’t do one.

    Woman on plane: Are there a lot of these kinds of accidents?

    Narrator: You wouldn’t believe.

    Woman on plane: Which car company do you work for?

    Narrator: A major one.

    Put it in the context of money makers
    A=Loan with interest
    B=Default on loan
    C=Loss of money
    Recall=Debt free money
    To the money makers, it is not about making everyones lives a bit easier. It is about making money, full stop.

  18. Of course, the Treasury could issue lots of money (without debt = printing money). But bankers will take that money and issue/create (a lot of) (new) debt. But when the debtors can’t repay their debts then the entire system of debt collapses again. So, as long as bankers/people create debt/credit the money system will collapse again and Deflation will occur again.

    Still talks about the contraction of money after the crash of 1973. But that happens because A LOT OF used their money to pay down their debts. And a lot of companies went out of business, detroying a lot of debt/money/credit. Hence the contraction of the amount of money in the economy.

  19. Interesting article and discussion. I’m in New York at the moment and have just been given a copy of Occupy Wall Street’s “The Debt Resistors’ Operations Manual”. Good stuff, IMO.

    Back home, I reckon Denise Brailey is doing a great job trying to look after people who never had a chance of paying off their bubble-inflated mortgage.

    She’s establishing a political party to call the banks to account for credit management procedures amounting to fraud whilst abnksters try to keep their mortgage brokers between them and jail.

    But, not to worry, our banks will be “too big to fail”, so we’ll be bailing them out shortly, too.

  20. Dumpling said that it’s too bad that money doesn’t come with a guide book. I would like to tell her it does come with a guide. In the USA, where I live, it is several volumns long. I am taking about the income tax code. It is no quintessent that the code was enacted right after the Federal Reserve System was created. They work together to expand the private sector debt. Which Prof Steve Keen points out that the excessive creation of debt in the private sector create the financial crisis. The code continually encourages the private sector to create debt (money). When too much mooney (debt) is created inflation and economic bubbles are created. When inflation is created the Fed will apply tight monetary policy which increases interest rates. If they don’t cause interest rates to go high enough, relative to the inflation rate the market adjusts prices to the higher cost, as it did in the seventies, and then we are off to the races again creating more debt. It took Paul Vocker raising interest rates to 21%, the raising of the capital gains tax, and a lot misery experience by the middle class and the working class to finally bring the inflation rate in America down. When it comes to bubbles, the only solution the Fed has come up with what Alan Greenspan has said about the housing and other bubbles, “Let it pop and then we clean up the mess when it happens.” Relying on the Fed to manage inflation and bubbles is a flaw in our economic policies. We can do better than this. It will take a change in our tax policy to make our economy more productive and effluent. We need to change our economic policies to help decrease the occurance of deep recessions and high inflation. Read more at

    • Economysflaw, I also live in the USA!

      Look, money and currency need to be distinguished. You can make “money” without ever using any currency like dollar.

      Let us look at apple and orange.

      In region A, one apple is worth one orange. In resion B, one apple is worth two orangees. If you do certain trades, you can make a killing, without ever using the concept of currency.

  21. Debt free money is by definition VERY inflationary. Currently it won’t because deflation is the defining trend. But in the right setting it also can create Hyper-Inflation.