The basics.

The truth about how money, banks and governments work.

Currency Users and Currency Issuers

You are a currency user. The government is the currency issuer.

These are two VERY different things.

Imagine the players and the umpire.

The players cannot create points.

The umpire creates and issues the points. Where do the umpire’s points come from? He creates them “ex novo”, from nothing.

They are unencumbered and irredeemable, which basically means that you can only exchange a point for another point.

When the umpire issues points, he does not accrue a points “debt”.

He simultaneously has no points of his own but he has the unlimited ability to issue points.

This is what a Fiat currency government is. The issuer of points, which we call “currency”.

You, as a currency user, can have a positive points balance or you can owe points to someone else.

The government can only have a tally of points issued. It has, at all times, zero points but the ability to issue unlimited points.

Umpires don’t keep a cumulative, running total of all points issued but governments do.

This is because our currency denominates the country’s fixed assets and productive capacity.

Too much currency would be bad (inflation), too little currency would be bad (deflation).

TAX

If governments can issue their own points (currency), why do they need yours?

In point of fact, they don’t. A Fiat currency government can pay for anything it likes by creating its own currency.

But, and its a big but, the currency denominates the country’s productive capacity.

So lets say there’s X billion pounds worth of goods and services.

If government tries to buy too much, there will come a point where there is no more productive capacity to produce more goods and services and at that point, all its doing is bidding up the price of goods and services.

We call that inflation.

So government, in order to provision itself, taxes money from you, to give itself economic “headroom”.

It taxes money from you, it reduces your demand in the economy and backfills that demand with its own requirements.

That is the purpose of taxation.

Not finance…. it creates its own money. It just needs you to NOT have the money to prevent inflation.

When government says “we can’t afford” they really mean is “we don’t want to”.

Anything we have the real resources (people and things) to do, we can do.

BANKS

99% of people believe that banks are the intermediaries of funds.

Like the “Bailey Building and Loan” in the film “Its a Wonderful Life”.

They take your money as savings and lend it out to borrowers.

This is indeed how Building Societies work. It is not how Commercial banks work.

Commercial banks have a licence (a banking licence) from government to create money. When they make a loan, they create the money they lend.

Lets take a simple example.

In a town there’s only one bank. With no money.

Bobby decides to buy Sue’s house for £100k.

Bobby goes to the bank and borrows £100k.

The bank create a deposit account of +£100k and a loan account of -£100k.

See what they did there? They took zero and split it into +100k and -£100k.

No money needed.

Bobby makes a bank transfer to Sue for £100k.

The money never leaves the bank and it never had to have £100k on hand to make the loan. All the “accounts” in the bank are “ledger” money.

Money on paper only.

That’s the magic of modern commercial banking.

And its been known about for a LONG time.

Wicksell, “Economic Journal”, 1907.
“The banks in their lending business are not only not limited by their own capital; they are not, at least not immediately, limited by any capital whatever; by concentrating in their hands almost all payments, they themselves create the money required…”

And now Bobby is going to pay 5% of £100k to the bank every year for 25 years lending him money they never had.