States and the private creation of money

f money is no longer gold (which was the justification for creating the system of commercial banks and central banks as the institutions responsible for safeguarding gold and turning it into the money supply), how is it that it is still the case that only the banks can create money? And why do they only do it as debt which has to be repaid to them with interest? To put it another way: why do national governments have to pay interest to their central banks in order to finance public spending, when this is money that the national governments could directly create themselves when they implement this spending? Perhaps the only logical answer that comes to mind is that the banks in fact control governments and not the other way round.

Mayer Rothschild, member of the most powerful European dynasty of bankers, is remembered amongst other things for saying the following: “Give me control of a nation's money and I care not who makes the laws.”.

Interest and the need for exponential growth

When a bank gives out a loan, it is creating money with the principal of the loan but not with the interest which the bank will charge to the debtor during the lifetime of the loan. Given that the entire money supply is created as debt with interest, we might conclude that the money to be used to pay the interest on the debt simply does not exist. So how is it that the financial system has survived for so long? Basically for two reasons.

1. Because it is financed by growing indebtedness, that is to say the money supply has to constantly grow in order to pay the interest on debts and avoid the collapse of the system. This means that the system is constantly urging everyone to take out more and more debt, starting with mortgage holders before moving on to consumers who are offered quick and easy personal loans and credit cards, and finally ending up with companies and States. We are thus talking about exponential growth in both the economy and the despoiling of the Earth’s natural resources.

2. Because there are some who do not pay off the principal of the loan and only make the interest payments. This is the case with the public debt of the most powerful countries and the debts of influential companies and institutions which enjoy privileged conditions; and probably it is also true of all policy and credit card instruments in which the principal is not paid off and the contract is normally automatically renewed each year ad infinitum.

At any event, this shows us the extent to which the financial system actually needs growing indebtedness, and how the increase in mortgages and in consumer loans is linked to the maintenance of the current financial system.

Hence in general terms everyone is in debt, and the only difference is between those who have to pay back their debts and those who do not.

The banks and the real estate bubble

While it would have been unthinkable 15 years ago to give a mortgage to be paid back at more than 15 or 20 years, this upper limit has been deliberately doubled by the banks and savings banks up to the current position of 35 or 40 year mortgages. With this simple and at the same time wicked decision, the banks have both made possible and brought about the rise in the price of housing since by increasing people’s ability to go into debt, they have thereby increased the prices which we are able to pay.

This has benefited the banks because with mortgages they have been able to create money and collect enormous quantities of interest with very low levels of delinquency thanks to housing being a basic need. The rise in prices has also caused an exorbitant increase in the profits of the main building firms and real estate agencies in Spain, and thus also in the profits of the banks and especially the savings banks as they are the main shareholders in most of these companies.