⇑ FULL TEXT ⇑
So you though you understood money !
An Institute of Economic Democracy Publication
‘ THE MONEY TRICK ‘
The Institute of Economic Democracy
273 Little Collins Street,
In Association with:
The Old Priory, Priory Walk, Sudbury, Suffolk,
Box 130, Flesherton, Ontario, Canada.
G.P.O. Box 3447, Auckland, New Zealand.
⇒ 1982 Edition ⇐
26 MEADOW LANE,
ENGLAND CO10 6TD.
Tel: Sudbury (0787) 76374
‘ THE MONEY TRICK ‘
It’s time the people of Australia knew the alarming
facts. Test your own knowledge of these
facts by the following questions: —
1) Do you know that no bank lends money deposited
2) Do you know that when a bank lends money it
CREATES it out of nothing?
3) Do you know that bank loans are merely pen and ink
entries in the credit columns of a bank’s ledger?
They have no other existence.
4) Do you know that practically all the money in the
community comes into circulation as a debt to the banks?
5) Do you know that money loaned by a Government
bank is just as much a debt to the people as if it were
loaned from a private bank? [ sold off ]
6) Do you know that * ‘fixed deposits” are a plausible
screen to hide the creation of credit?
7) Did it ever occur to you that the banks enjoy this
unique facility of creating credit and putting the nation
progressively into debt-bondage because they create
FINANCIAL credit against the REAL credit created by
8) Do you know that during the last 40 years, from 1942
to 1982, Australia’s National Debt (Commonwealth and
States) has increased from $3,378 million to $33,589
9) Do you realise that this debt is largely owned by the
banks — if not directly, then as security loans?
Are you aware that the money received from
Commonwealth Income Tax has risen from $282 million in
1942-43, $39.15 per head of population, to a total of
$28,577 in 1982-83, no less than $2,000 per head of pop-
The Commonwealth Taxation Office employed no less
than 12,497 people at 30.6.77 and we paid their salaries
totalling $130.7 million!
10) Do you know that the sales tax — introduced as a
“temporary measure” in 1930, has, since 1946-47 to
1982-83, some 35 years, increased from $72.5 million to
$3,629 million? It now takes over $250 per head of
11) Do you realise that every time a Government borrows
money for a public work the people are debited with the
liability (in perpetuity) but are never credited with the
value of the asset?
12) Do you know that every repayment of a bank loan
cancels the amount of the loan out of existence?
13) Do you know that Treasury Notes are Government
I.O.U.’s — national pawn tickets for pledging the assets of
Australia to the banks for the loan of OUR OWN financial
14) Do you know that banks purchase bank sites, build
premises and acquire assets at no real cost whatever to
themselves — by the simple process of honouring their
( We now have GST. [ GET STUNG TWICE ] )
You may dismiss these affirmations as “incredible”,
or “absurd”, but if you will read on, each one will be
proved beyond all shadow of doubt.
Most of us have grown up with only the vaguest
notions of money. We are fairly certain that it is the
Government’s right to print notes and mint coins. For the
rest, our knowledge is distinctly foggy.
Most people, for example, labour under the impres-
sion that the only money in the community is notes, silver
and copper. But this is a very, very small part of the com-
In fact, notes, silver, and copper — legal tender — is
used for less than five per cent of the total purchases made
in Australia. Over 95 per cent of all business is done by
cheques, [ and now credit cards].
This cheque currency is really bank-created money —
bank credit — but it functions exactly the same as legal
tender money. Banking authorities of world-wide repute
state that banks can and do create credit up to nine or ten
times their cash resources.
Banks go to great pains to perpetuate the fiction that
they are merely “the custodians of their customers’
deposits” — that they lend these deposits, and that their
profit consists of the difference in the rate of interest which
they pay to depositors and the interest they receive from
Such an idea is quite wrong, and it is the popular
acceptance of this major monetary fallacy which gives rise
to most of the false notions upbn the subject of money.
The facts about money are as follows:—
(1) Banks do not lend money deposited with them.
(2) Every bank loan or overdraft is a creation of entirely
new money (credit), and is a clear addition to the
amount of money in the community.
(3) No depositor’s money is used when a bank lends
(4) Practically all the money in the community begins its
life as an interest-bearing debt to the banks.
The Technique of a Bank Loan
All that a bank does in lending anybody, say, $1,000,
is to open an account in the borrower’s name — if he
hasn’t already got an account — and write Limit: $1,000,
across the top of the ledger.
The borrower is now free to operate and overdraw on
this account to the limit indicated.
When the account is drawn on by cheque, and in turn
the cheque is lodged in another account at the same or
another bank, a “deposit” is thus created and the supply
of money increased.
Thus bank loans create “deposits”, which plainly are
not the source of loan money but, rather, the other way
round, they are the outcome of loans.
Now for the Authorities
Now for the unassailable authorities on this matter of
the creation of credit by the banks.
Governor Eccles, one-time head of the Federal
Reserve Bank Board of the United States, said: —
“The banks can create and destroy money. Bank
credit is money. It’s the money we do most of our business
with, not with that currency which we usually think of as
money.” — (Given in evidence before a Congressional
The Encyclopaedia Britannica, 14th Edition, under
the heading of Banking and Credit (vol. 3, page 48): —
“Banks create credit. – It is a mistake to suppose that
bank credit is created to any important extent by the pay-
ment of money into the banks. The bank’s debt is a means
of payment, it is credit money. It is a clear addition to the
amount of the means of payment in the community.”
Mr. R.G. Hawtrey, previously Assistant Under-
Secretary to the British Treasury, in his Trade Depression
and the Way Out, says: “When a bank lends it creates
money out of nothing.”
In his book, The Art of Central Banking, Hawtrey
also wrote: —
“When a bank lends, it creates credit. Against the
advance which it enters amongst its assets, there is a
deposit entered in its liabilities. But other lenders have not
this mystical power of creating the means of payment out
of nothing. What they lend must be money that they have
acquired through their economic activities.”
Lord Keynes, the economist, and one-time Board
Member of the Bank of England, states: “There can be no
doubt that all deposits are created by the banks”.
Professor Soddy, the eminent physicist, of Oxford
University, wrote: —
“Is it possible in these days of disbelief in physical
miracles really to caricature institutions which pretend to
lend money, and do not lend it, but create it? And when it
is repaid them, de-create it? And who have achieved. the
physically impossible miracle thereby, not only of getting
something for nothing, but also of getting perennial
interest from it?”
Professor H. Kniffer, in American Banking Practice,
also testifies to this fact:*—
“The percentage of cash to credit necessary for a bank
to hold, demonstrated over a period of years, is 2Vi per
cent, with IVi per cent as a reserve with other banks.”
[This approximates to the practice in Australia where
the trading banks hold a small percentage of cash for legal
tender purpose, with a further deposit at the Reserve Bank
There Is only One Restraint on Lending
The July, 1938 issue of Branch Banking, an English
Bankers’ Journal, stated: —
“There is no more unprofitable subject under the sun
than to argue any banking or credit points, since there are
enough substantial quotations in existence to prove to the
initiated that hanks do create credit without restraint.”
There is just one restraint. “Sound banking practice”
limits the creation of credit to nine or ten times the amount
of cash or legal tender which a bank holds.
From Chamber’s Encyclopaedia (1950), vol. 2, page
99, under the heading of Banking arid Credit:—
“It is a fact that bank deposits are used as money,
which provides the basis for the statement that ‘Bank loans
create deposits’ . The creation takes place when the value of the loan is credited to the customer’s account, or, if a
different practice is followed, when one customer’s over-
draft becomes another customer’s deposit.”
Davenport’s Economics of Enterprise states: —
“Banks do not lend their deposits, but by expansion
of credits, create deposits.”
“Banking is Little More Than Bookkeeping”
The late Sir Edward Holden, an eminent British
banker, said: —
“Banking is little more than bookkeeping. It is a
transfer of credit from one person tq another. The transfer
is by cheque. Cheques are currency (not legal tender).
Currency is money.”
The Rt. Hon. Reginald McKenna, one-time Chan-
cellor of the Exchequer, and Chairman of the Midland
Bank, addressing a meeting of the shareholders of the
Bank on January 25, 1924, said this (and it is recorded in
his book Post- War Banking):—
“I am afraid the ordinary citizen will not like to be
told that the banks can, and do, create and destroy money.
The amount of money in existence varies only with the
action of the banks in increasing or decreasing deposits
and bank purchases. We know how this is effected. Every
loan, overdraft or bank purchase creates a deposit, and
every repayment of a loan, overdraft or bank sale destroys
H.D. McLeod, in his Elements of Banking, states: —
“When it is said that a great London Joint Stock
Bank has perhaps $50,000,000 of deposits, it is almost
universally believed that it had $50,000,000 of actual
money to ‘lend out’ as it is erroneously called … It is a
complete and entire delusion. These ‘deposits’ are not
deposits in cash at all … They are nothing but an
enormous superstructure of credit.”
Hartley Withers, in his book, International Finance,
“A credit in the Bank of England’s books is regarded
by the financial community as ‘cash’, and this pleasant
fiction has given the Bank the power of creating cash by a
stroke of the pen and to any extent that it pleases, subject
only to its own view as to what is prudent and sound
business.” (Page 31).
“It may sometimes happen that the borrowers may
require the use of actual currency, and in that case part of
the advances made will be taken out in the form of notes,
but as a general rule the Bank is able to perform its
function of providing emergency credit by merely making
entries in its books.” (Page 32).
Professor Heinz Wolfgang Arndt, Professor of
Economics at the National University, Canberra, writing
on Banking in The New International Illustrated Encyclo-
paedia, vol. I, page 321, said:—
. . . The other important function, which is
exclusive to the banking system, is to create the commun-
ity’s money supply, and to administer the monetary
system. The two functions are intimately connected since
modern money is created by banks in the process of grant-
[Note: To create means to produce out of nothing.]
A good legal definition of banking was provided by
the Judicial Committee of the Privy Council in the famous
Bank Nationalisation Case (Commonwealth Law Reports,
1947, vol. 79, pp 632-633).
. . .The business of banking, consisting of the
creation and transfer of credit, and making of loans, the
purchase and disposal of investments and other kindred
activities, is part of the trade, commerce and intercourse of
a modern society…”
TRADING BANKS: H.W. Arndt and CP. Harris, in
their textbook The Australian Trading Banks, clarify this
further in a special appendix, “The Creation of Money”:
. . .The process of creation of money by banks is
still commonly described as involving the “deposit of
money by customers with banks” which can then “lend
out more money than they have” because some of the
money they have lent out “comes back to them as
deposits” . . . Nowadays it is a mischievously misleading
description. It is misleading because it wrongly suggests —
(a) that notes and coin are, but deposits are not, money;
(b) that banks merely borrow and lend money created by
(c) that deposits come into existence primly through
bank customers paying in notes and co* n > an ^ on ly
secondarily through bank lending …”
DR. COOMBS: The former Governor of the Reserve
Bank, Dr. H.C. Coombs, in the E.S. & A. Research
Address at Queensland University on September 15, 1954
made the same clarification: —
“… Any given piece of expenditure caf 1 be financed
from one of four sources (or a combinat* on of these
(a) new savings;
(b) accumulated reserves;
(c) money borrowed, other than a bank;
(d) money borrowed from a bank.
The last source differs from the first t^ ree because
when money is lent by a bank it passes into the hands of
the person who borrows it without anybody having less.
Whenever a bank lends money there is, therefore, an
increase in the total amount of money agitable • •
BANK OF NSW: Finally, the matter pas been put
beyond all possible doubt by a most important Special
Article “Sources of Money” in the Bank of Wew South
Wales Review, October 1978, from whitfh we quote
. . Today in Australia, as in most other modern
economies, all money is a debt of the banking system . . .
Another important source of money creation * s by the
banks . . . When a banker grants a custormer credit by
overdraft, the bank “opens an account” in its books and
gives the client the right to draw funds without first having
to put money into the account. But bank deposits only
increase when the customer actually draws on the account
to pay his creditors. In the case of loans, funds are
deposited directly to the customer’s credit and result in an
immediate increase in the volume of money. In either case
the money supply increases as a result of the bank’s
lending activities. As long as the debt remains outstanding
the community’s quantity of money is increased …”
The Origin of Banks
4 4 And now, as I have said that the word Banco, as
applied to a Bank, does not mean a Bench, I will tell you
what it does really mean, and how it originated.
44 In the year 1171 the City of Venice was at war with
the Empires of the East and the West. Its finances were in
great disorder, and the Council levied a forced loan of 1
per cent on the property of all their citizens, and promised
them interest at 5 per cent. Such a loan has several names
in Italian, but the most common is Monte, a joint stock
fund . . .
44 At this time the Germans were masters of a great
part of Italy, and the German word Banck, a mound or
heap, came to be used as synonymous with Monte, and
was Italianised into Banco, and the loans or public debts
were called Monti or Banchi.
r 4 4 That the word Banco in Italian means a Public Debt
might be proved by numberless quotations. I will give only
one or two.
44 Thus in an Italian Dictionary it says: 4 Monte, a
standing Bank, or Mound of Money, 2$ they have in diver-
sities of Italy’ .
44 Thus you see the words Monte and Banco are synon-
ymous, and mean a Heap, a Mound, a joint stock fund
formed by the contributions of a number of persons.
44 This was the meaning of the word when it was first
introduced into English . . .
4 4 Equally great misconception prevails as to the
meaning of the word Banker, and the nature of Banking
4 4 It is said in a popular work on Banking: A banker is
a dealer in capital, or more properly a dealer in money.
He is an intermediate party between the borrower and the
lender. He borrows off one party and lends to another;
and the difference between the terms at which he borrows,
and those at which he lends, forms the source of his
44 I will now show you at once what a complete mis-
conception of the nature of Banking business it is to say
that a Banker is an intermediate party between the bor-
rower and the lender’.”
The Reader Can Prove the Facts Himself
Now, we think it will be agreed that we have produced
adequate and incontrovertible evidence of the highest
authority in support of the first three statements made on
page 1 of this booklet:—
• That no bank lends money deposited with it.
• That when a bank lends money it creates the means of
payment out of nothing.
• That bank loans are merely pen and ink entries in the
credit columns of a bank’s ledger.
However, if the reader is not prepared to accept the
abundant evidence given by the authorities quoted, he can
prove the matter for himself very simply.
(1) The total sum of legal tender (notes and coin) in use in
Australia in 1981 was $4,977 million, though the total
volume of money in existence was $55,387 million
(Pocket Year Book No. 67 1982), more than eleven
times the sum of legal tender in the form of notes and
(2) In contradiction of the banks’ popular fiction that they
only lend money deposited with them, we challenge the
donbtful reader to find one bank depositor whose
deposit has ever been reduced by so much as one cent
in order that a bank may lend money to someone.
The Chicanery of Bank Profits
The entire confidence trick of the banks is based on
the perpetuation of the claim that bank profits are gov-
erned by the difference between the interest paid on fixed
deposits and the interest charged to borrowers. It enables
them to pull the proverbial wool over the eyes of the
credulous public, and give verisimilitude to their balance
sheet hocus-pocus that they make no more profit than any
other commercial undertaking.
But profit loses all meaning when a group of financial
institutions enjoys the unique privilege of being able to
create the nation’s monetary requirements.
What we have to look closely at, in assessing how well
the banks have done at the nation’s expense, is to examine
how their total assets have increased.
Total assets of Trading Banks in Australia have
increased as follows:—
1962 $ 4.053.4 million
1970 $ 8,452 million
1975 $18,480 million
1980 $35,330 million
A Bank’s Premises Cost it Nothing!
We have stated that most money comes into circu-
lation as a debt to the banks.
We say “most” of it does. The only money that does
not originate as a debt to the banks is the money banks use
in their own purchases.
All money that a bank spends on its own behalf,
whether it is the payment of its employee’s salaries, the
purchase of a building site, a building, stocks and shares,
printing, advertising, stationery, etc., all such purchases
put money into circulation debt free.
But with these exceptions, it is correct to say that the
bulk of the community’s money begins its life as a debt to
We have given abundant authority on this vital point.
How Banks Purchase Properties
But let us first deal with the statement that banks
purchase properties or securities or advertising, etc., by the
simple process of honouring their own cheques.
This is somewhat technical, but we’ll try to make it as
simple as possible.
Take the case of a property or bank premises. First,
the bank draws a cheque upon itself. This cheque is paid
into someone else’s account — probably at another bank.
Thus bank deposits are increased.
To offset this purchase in the bank’s balance sheet,
there would be an increase in the bank’s assets, i.e.,
The accounting technique is to debit Premises
Account with the amount of the purchase and credit the
same account with the value of the asset.
In a similar manner, a bank can purchase shares or
Government securities. These would be paid for by a
cheque drawn on the bank and in due course the amount of
the cheque and purchase are placed to the debit and credit
of Securities Account.
It may be argued, of course, that a bank pays for its
properties and securities out of profits, or reserves.
But this idea is as illusory as the fiction that a bank lends its
Neither profits nor reserves are affected by any
purchase by a bank, because it hasn’t actually parted with
The position is very different when an individual buys
a premises. The cost of the purchase is debited in his bank
account. The individual, though he has acquired an asset,
is down in his balance at his bank to thp extent of the
But in the case of the bank’s purchase of a premises or
securities, or indeed anything else, the cost is no more than
a book entry in its own books.
As Hawtrey, one-time Under-Secretary to the British
Treasury, observed in his Art of Central Banking: “Other
lenders have not this mystic power of creating the means of
payment out of nothing”.
You may object that if bank “A” bought a premises
and its cheque in payment was deposited with bank “B”,
the latter might not co-operate. That is a possibility, of
But this is met by an exchange of balances with other
All banks follow the same system and provided they
keep reasonably in step with each other, their own debits
and credits cancel each other out. At the worst, all a bank
would need to pay for would be the difference in favour of
the other banks.
J.M. Keynes, a very frank and refreshing economist,
who later became Baron Keynes, Board Member of the
Bank of England, once pointed out that all the banks’ own
cheques are passed through the exchanges, where the
debits and credits of each bank are worked out.
If the banks work in harmony with each other (as they
do), they can meet their own requirements, and acquire
assets, at no real cost to themselves.
That is to say, if all banks built or bought premises,
etc., in proportion to the flow of deposits returning to each
one, the cheques issued by the banks would cancel each
other out and they would acquire the premises, etc., for
nothing more than an increased deposit liability, which
presents no great difficulty.
The foregoing may explain to the reader why the
banks have been enabled to acquire the most valuable
building sites in cities and towns and erect such remarkably
Most of the main city banks are beautified with
marble from floor to ceiling, and the humble depositor
feels like doffing his hat, and standing in silent awe and
admiration in such an atmosphere of hallowed opulence
Now we know the secret of it.
Bank Credit is the Community’s Life Blood
The business world cannot function without bank
credit, and every person in the community is equally
dependent upon it.
Stop, or even restrict, bank overdrafts for one week
and there would be a nation-wide crisis. Continue the
restriction for three months and this nation would be
plunged into a depression, with unemployment and bank-
ruptcy for thousands.
Such a crisis happened in the early thirties, as millions
of the older generation remember with sorrow and bitter-
You may remember that during the depression there
was no shortage of goods. The shops and stores were full.
But credit had been restricted by the banks.
The life blood did not flow freely, and industry died and unemployment was staggering.
Bank credit is the life blood of the community and if
the flow of blood is restricted the patient’s life is
How Money Begins
Now let us look at this credit business a little more
closely. How does it come about?
There is an old economic tag that money originates in
production and is cancelled in consumption.
Practically all the community’s money has its roots in
production. Most money sees the light of day as a
In other words, it begins its life as a debt to a bank,
and from the moment it is released as a book entry in a
bank’s ledger, the credit created by the bank and loaned to
a company or individual travels through the production
system, much of it being used for consumption, and is
finally cancelled when the debt is repaid to the bank by the
That industry — both primary and secondary — can-
not function on its own resources is proved by the univer-
sal need it has of bank overdraft accommodation (i.e.,
A Nation in Pawn
In other words, this huge total of assets is in pawn to
the banks, and in the event of any individual or company
defaulting in its loan obligations, the individual or the firm
would probably be put into liquidation in satisfaction of
the banks’ claims.
That’s fair enough, you might say. But wait.
The banks lend iinsiiey against the assets of the com-
munity. These assets were created by the total efforts of
They were created by the resources of enterprising in-
dividuals, skilled executives, and adventurous manage-
ment, in producing articles or services to satisfy a public
The banks made no contribution whatever to the
development of a farm, a business, or a manufacturing
company in its early, formative years. The bank comes
into the picture when most of the hard pioneering work is
done, and by granting a loan — a costless and effortless
procedure — it merely monetises the REAL CREDIT
created by a functioning industry and a consuming public.
In other words, the banks merely create — by the
stoke of a pen, mark you, or figures in a bank ledger — the
financial credit which is backed by the real credit created
by the joint operations of producers and consumers. The
people do all the work and run all the risks. The bank does
nothing — nothing to create the assets — and runs no risk
whatever with the credit it lends.
When a Bank Hangs Out its Sign
But let us look more closely into this question of the
ownership of the real credit of Australia — the farms,
factories, houses, offices, stores, railways, and all enter-
prises, public and private.
Take a farming district. Men take up a piece of virgin
country divided into farms. They clear the land, grub out
the stumps, plough what they can and get it under culti-
They build homes, barns, cowsheds, plant trees, erect
fences, construct dams, sow edible grasses and put stock
on to graze.
This developmental programme may take years. It
will certainly require toil and sweat in heroic measure.
Only the toughest survive — and those blessed with good
seasons. The rest will fail. The struggle will prove too
much for them.
Meantime, a small township has made a beginning in
the locality, and it is not long before a branch of one of the
trading banks sets up its sign, and many of the locals open
an account with it.
It is not long before every farmer in the district is at
the end of his resources. He wants more capital for stock-
ing, for clearing, fencing, housing etc.
A Mortgage over Every Farm
So he goes in and puts his problem to the new branch
manager of the local bank. The manager will probably
make a personal inspection of the farmer’s property, and if
he is impressed by the amount of work done and the pros-
pects of a profitable farm, he will approve his application
for a loan.
But in return for the loan, the farm is mortgaged to
the bank. The hank is now the virtual owner.
Now, note these points: The farmer, by his long and
ceaseless energies over a period of years, has brought a
piece of bush land into production. He has risked his all —
and often jeopardised the health of himself and his wife —
in battling with adversity.
By his energies, and his wife’s loyal help, he finally
creates a great asset — a farm that produces food —
referred to in the popular Press as “the backbone of the
country” . He has added to the wealth, or real credit, of the
At this stage the farmer is generally obliged to go, cap
in hand, to the banker, to ask for money — credit — to
carry on, or to bring the property into greater production,
or to tide him over a droughty season.
The banker has contributed nothing to the develop-
ment of the farm — nothing whatever. And yet — we
repeat — by the stroke of pen, the bank can make a loan to
the farmer and acquire the virtual possession of the farm
under mortgage, until every cent of the loan and the
accrued interest are paid in full.
Now, don’t tell us, please, that the bank in making the
loan, lends the bank’s reserves or money lodged with it on
fixed deposit, to help the farmer at a critical period.
Because we have seen, in all the authorities quoted, that
the bank has done nothing of the sort. All it has done is to
create financial credit — an effortless and costless process
— against the real credit created by the farmer and by the
activities of the people at large.
And it won’t be long before every farmer in the
district is under mortgage to the local bank — when the
deeds of every farming property will be lodged in the
bank’s safe until their debts are paid … or else!
Real Credit and Financial Credit
We have dwelt on this point at some length with a view
to clarifying what is meant by the real credit of the country
as distinct from the financial credit.
In the example given of the farming district, real
credit is created by the farming community. The real credit
is the Substance. The financial credit is the Shadow.
And yet the figures in the bank’s ledger are of vastly greater
import than the productive potential of skilled men, rich
land and milch cows!
At least, that is the cock-eyed situation that has
developed out of the private monopoly of the public credit.
The Story of a City
Take a city, as an example — any city. Villages grow
into small towns; small towns into big towns and big towns
into cities — and land values grow with them. Thus we find
property in the heart of a city bringing $2,000, $4,000, or
$10,000 a foot.
What is it that gives property that fantastic value?
Primarily, it is the huge aggregation of human beings who
live in or around a city.
Take away the people and property values would
The people represent all the facets of a civilised com-
munity — production, consumption, manufacturing,
exporting, importing, retailing. Transport, the food
supply, education, cultural activities, health services,
social services, entertainment, and a thousand other vital
factors go to make a community.
All these factors make up the REAL CREDIT of the
Real credit may be defined as the faith or belief
(credo, I believe) that a free community has the know-
ledge, energy and capacity to co-operate in satisfying its
needs. This is its power in association, and the end product
is the sum total of the community’s real credit.
We see, therefore, that the real credit of a nation is
created by the people through their abundant and many-
sided energies — what economic textbooks refer to as “the
increment of association”.
Now the financial credit of a nation should be a
reasonably correct reflection of its real credit. Since money
is merely a convenient token system to enable the people to
purchase goods and services, it should be issued at the
same rate that goods and services are produced, neither
more nor less.
Cuckoos in the Nest
But even more important is this point:
Since the com
munity creates all real credit, the ownership
of the financial credit which should reflect the real credit — the goods and services — also belongs to the people.
But it doesn’t. It belongs to the banks. Or, rather, it
has been appropriated by the banks. The banks are really
financial cuckoos in the community’s nest. The banks issue
and cancel money without any regard to the total pro-
duction of goods and services. They cancel financial credit
arbitrarily, unscientifically, sometimes causing inflation,
and sometimes causing deflation and depression.
As we go on we shall see that the ownership of the real
credit of the community is the great issue that must be
solved if Australia — and all nations which work under the
same monetary system — is to survive as a free democracy
or a slave state.
Today the banks enjoy a monopoly of the public
credit. They create and cancel (destroy) money as though
the real credit was created by them. Whereas they haven’t
lifted a little finger in its creation.
But by usurping the nation’s sovereign prerogative to
issue all its monetary requirements — not merely the small
change (the legal tender) — the banks have established a
powerful monopoly of credit by which they wield the
greatest power without any responsibility whatsoever.
This monopoly of credit by the banks is not new. It
has been going on for over 100 years, and during that time
the banks have consolidated their position to one of almost
The Creeping Paralysis of Debt
Where does this private monopoly of credit lead to?
To debt and tax bondage.
Individuals, businesses, industries, municipal councils
and governments themselves are in debt bondage to the
Banks being the only source of money, the community
has to borrow from the banks the money to pay the interest
on the money it has already borrowed.
It is inevitable, therefore, under this system, that we
get deeper and deeper into debt.
The public debt of both the Commonwealth and the
States has risen from $3,378 million in 1942 to $33,589
million in 1982 — over 1,000 per cent in 40 years!
How the Debt System Works
The debts owing on public undertakings are debts in
perpetuity. They are never repaid. You have no doubt
noticed that every Commonwealth Loan is mostly used to
renew or convert — not to redeem — previous loans as
they fall due. Debt is compounded on debt and interest on
Here is just one example of what we say, typical of all
public works: —
A loan of $32,000,000 was raised by NSW in 1888 for
railway purposes. This loan fell due in 1924, and the State
had then paid $51,815,452 in interest charges without
repaying any of the principal.
The original interest was 3Vi per cent, but the conver-
sion rate was 5 per cent. The loan was redeemed in 1955,
by which time NSW had paid $99,651,052 in interest,
without any reduction of the principal.
Including principal and interest the total payment up
to 1955 amounted to $131,651,052. Nearly $100,000,000 in
interest was paid on a loan of only $32,000,000.
Do you wonder why the State railways don’t pay —
There is only one possible escape from such a
financial deadlock — the national credit power of the
Commonwealth must be used, debt free, to liquidate an
intolerable debt burden that is threatening all States with
Semi-public undertakings, such as water and sewerage
boards, or electricity authorities, are all hopelessly debt-
logged, a fact which makes the cost of their service to the
public twice and three times as high as it should be.
A study of the debt position of Local Government
throughout Australia reveals that in many cases over 50
per cent of rate revenue is required to service debt. The
policy of all Federal Governments since the end of the
Second World War has been to force the States and
Municipal Governments to increase their debt burdens
while financing many of their own activities out of
taxation. This policy has intensified the breakdown of the
Federal system of decentralised Government in Australia.
The Sad Story of Sydney’s
There is a much-photographed and much-publicised
bridge over Sydney Harbour. And it certainly is a proud
monument to engineering science.
It was built 50 years ago at a cost of approximately
$16,000,000. To pay for the bridge it was made a toll
bridge, and every vehicle and every person who has crossed it in the last 50 years has paid a toll (pedestrians excepted).
So profitable is the toil that, after paying all mainten-
ance expenses, the Sydney Harbour Bridge earns a nett
profit of nearly $800,000 annually.
But the original capital debt marches on. Up to the
end of 1955, $13 million was still owing on the bridge and
interest payments had totalled $14,534,000.
Instead of costing $16 million, this bridge has already
cost $27 Vi million and there is still $13 million owing — – all
this despite some $800,000 per annum in profit from tolls.
The authorities say that the bridge will be definitely
paid for by 2005 — twenty years hence.
It is comforting to have that reassurance, but in
another thirty years this noble structure will have been paid
for several times over — and hundreds of millions of
motorists will have been irked by the annoyance of
stopping their cars to search their pockets for small change
every time they cross it.
This is a typical example of how debt finance works.
Public undertakings are paid for over and over again. The
people are taxed and re-taxed for them over the years from
generation to generation — and as we shall see as we pro-
ceed, it is all so unnecessary.
The Cancellation of Credit
You might ask, “Well, if the banks create money in
the way you say, and lend it by way of overdrafts, and
loans, why don’t they own the assets of Australia, lock,
stock and barrel?”
A fair question. The answer is this: Because when a
company repays a bank’s overdraft, or the individual
repays the bank’s loan, the bank is actually no better off as
a result of the transaction.
That may sound incredible, but bear with us, and we
will explain the technique.
Take one specific instance, typical of all bank
Jones & Co. arranged with their bank for an overdraft
of $5,000. They lodge what is called “collateral security”
to satisfy the bank (deeds or share scrip to the value of
Jones & Co. are now at liberty to write cheques to the
value of $5,000, plus whatever they had previously to their
credit with the bank. To be more precise, they can now
“overdraw” their account to the extent of the overdraft
limit of $5,000.
But when Jones & Co. repay the $5,000, the debt is
cancelled, and $5,000 previously in circulation has been
cancelled out of existence.
[Don’t be confused here. The $5,000 has been paid
out to other people by Jones & Co., but when the
Company repays the loan to the bank, $5,000 is auto-
matically cancelled out of existence.]
The position of borrower and lender at this point is as
follows: Jones & Co. are (for the moment) out of debt to
the bank, but the bank is not one cent the richer for the
repayment of the $5,000.
All that has actually happened is that a ledger entry
has been made in Jones & Co.’s account. They are no
longer “in the red”, as the banks describe it.
The only difference the repayment of the loan has
made to the bank has been to make its position slightly
more liquid and add to its interest earnings. By making its
position more liquid, we mean that its ratio of overdrafts
to cash deposits has improved slightly.
Remember what the Rt. Hon. Reginald McKenna,
one-time Chairman of the Midland Bank, said: “Every
loan, overdraft, or bank purchase creates a deposit, and
every repayment of a loan, overdraft or bank sale, destroys
a deposit”. That is what is meant by the cancellation of
If all money repaid to a bank were not cancelled in
this way, then, of course, the banks would have owned the
entire assets of Australia long ago.
It is as well to note the difference between a bank loan
and a loan from an individual or company.
The bank creates the money (or credit) it loans by a ledger
credit entry. As the Encyclopaedia Britannica says, “it creates the means of payment out of nothing”.
The Power of Life and Death
It charges interest upon this credit creation, and when
the loan is repaid, both the debt and the money used in
payment of the debt are automatically cancelled.
(Their cancellation, of course, does not apply to any
cash or legal tender used in the repayment of the bank’s
loan, but legal tender usually represents no more than a
very small percentage of bank transactions.)
When a loan is made by an individual or a company
(other than a trading bank) the procedure (outlined above)
is quite different. The money loaned is debited to the
account of the lender and when repaid it is credited to the
account of the borrower. No money is cancelled in the
Such loans are for a definite period, whereas the
money loaned on overdraft by a bank is for an indefinite
period. The banks have the power to call up the overdraft
partly or wholly at any time they decide.
The fate of companies and individuals — and govern-
ments — is entirely at their mercy. Their power is stupen-
dous, both in the creating and granting of loans, and in
their arbitrary recall, with or without notice!
The banks give and the banks taketh away. They hold
the power of life or death over the whole economy.
Man Creates a Frankenstein
The lengthened shadow of debt is taxation.
As debt waxes fat with every loan, so taxation casts a
larger shadow and a deeper gloom over the lives and
liberties of the people.
Debt is what governments sow. Taxation is the bitter
harvest the people reap.
Taxation reduces the living standard of every man,
woman and child, and is therefore a frontal attack, backed
by all the sanctions of the State, on the personal freedom
of the individual.
As practically all money issued has its origin in
interest-bearing debt, it follows that all forms of taxation
must increase, inevitably, mathematically, and remorse-
As taxation increases, so individual security decreases.
It is not so very long ago since taxation was a puling
infant. But what an alarming change twenty or thirty years
has wrought! The child has grown to a man, and the man
has become a conscienceless thug who forces his way into
every home, grabs what he can with impunity, and waylays
rich and poor alike.
The taxation thug is the terror of the neighbourhood,
holding the whole community to ransom.
And the irony of the situation is that it is no use
calling the police, for the police, and all the sanctions of
the State, are his aiders and abettors.
With the growth of taxation to the point of confis-
cation of income, we see the State, which should be the
refuge and the protector of the people, following a policy
which is alien to the interest of the people who compose it.
The State has become the enemy of the individual.
Political parties are cynical, venal machines. The factions
of right or left are concerned only with a struggle for
power, perks and preferment, and once one or the other
party is in office, platform promises crumble like piecrust,
spoils go to the victors, salaries are constantly increased
and the public welfare is regarded with open contempt.
The ‘Temporary Tax” that Came to Stay
But income tax is but one tax. Others have been added
with almost every Budget until now human ingenuity itself
is taxed to devise more ways of taking the income from
those who earn it.
Customs and excise duties, land tax, property tax,
sales tax, company taxes, probate duties, stamp duties,
petrol tax, payroll tax, social services taxes, entertainment
taxes — these have all conspired to forge heavy chains
upon the personal freedom of the whole population.
Take the sales tax as an example. Here you have the
same story of modest beginning, with rapid growth to the
point of confiscation of purchasing power, just as thieving
often begins as petty pilfering and ends as grand larceny.
The sales tax was first introduced into Australia in the
year 1930, as a “temporary measure”, to help balance the
first budget of the Great Depression. It began as a demure
2Vi per cent and yielded $6,943,674.
In 1982-83 it yielded $3,629 million!
Australia loses the services of tens of thousands of
men and women who could be far more profitably and
productively and happily employed producing goods than
in adding savagely to the cost of thousands of articles
purchased by the public and to the cares of their fellows.
Taxes That Come Like “a Thief in the Night”
But that is not the end of the tax story. The most
unfelt of all taxes are the customs and excise duties.
taxes are subtle, unseen, like the silent thief that comes in the night.
The innocent consumer suspects nothing. He drinks
his glass of beer light-heartedly, quite unaware that on
every small glass he pays a tax — excise duty.
The excise taxes on cigarettes are even more savage.
We repeat, taxation is the great price inf later.
Customs and excise duties cover a vast multitude of
goods — most of the goods we import and many of those
we make in Australia.
$3,700 in Taxes on Every Man, Woman and Child
When the whole burden of taxation is added together
— income taxes, sales taxes, customs and excise duties,
social services, property taxes and rates, payroll taxes etc.
— it will be found that for the year 1982-83 it totalled
approximately $3,700 for every man, woman and child in
Australia. Commonwealth taxes, direct and indirect, took
over $3,000 per head. State taxes and Local Government
rates took the remainder. So the average family — mother,
father and two kids — are slugged just under $15,000 in
total taxation. In 1920 total taxation in Australia averaged
about $10 per head. 62 years later it averaged $3,700 per
head — an increase of about 37,000 per cent!
Why Taxation Must Always Increase
Even a cursory study of the figures relating to the
growth of income tax, sales tax, customs and excise duties,
and the dozen other subsidiary taxes, shows that the
increases are pitiless.
During the space of half a life-time all these taxes have
increased remorselessly and fantastically.
Why is this? The main clue to the answer of this
question lies in the dispiriting fact that the nation has
surrendered its sovereign prerogative over the issue of
There is no more incongruous and depressing spec-
tacle in Australia than the Commonwealth Government
every few weeks offering its Treasury Notes (the nation’s
I.O.U.’s) to the banks in return for money to carry on the
Thus the national estate has been systematically
pawned to the banks and the people have been progres-
sively sold into debt and tax bondage.
So the interest burden on the National Debt has
increased with similar mathematical progression.
Every government, every municipality, every public utility is
debt-logged, and to meet their increasing interest obli-
gations they must, in desperation, do one, or all, of three
(1) They must constantly increase the cost of all public
(2) They must invent new sources of taxation or increase
the old taxes.
(3) They must borrow more debt money.
As we know to our cost, they do all three, and the
spiral of price, debt and taxation is ever upward.
What if Water Were Issued as a Debt?
Does it not occur to you as preposterous that private
institutions — as private as a butcher’s shop or a chain
store — should have the sole right to create and issue
money as a debt, thus making tax bondage inevitable?
Just imagine if the Water Board issued all water for
human requirement as an interest-bearing debt, and that,
in order to meet our interest obligations on the water we
used, we had to go back to the Water Board to borrow
more water to pay the Board for the water we had already
What a fantastic situation! And yet that is precisely
what the banks do with money. They monopolise its
creation, issue it only as a debt, and oblige us to go back to
the same polluted source — the only source — to borrow
the money to pay interest on the debt already incurred!
The Vast Social Evils of the System
It is the most tragic irony of our civilisation today that
although man has solved the age-old problem of dire
poverty and scarcity, although his inventive genius has
given the world an Age of Plenty, we have become indi-
vidually more and more enmeshed in the heavy chains of
debt. Progress has been purchased by tax bondage — and
Instead of being more free, man is more enfettered.
Instead of enjoying better health with shorter hours,
labour-saving devices, and social services, many diseases,
and especially diseases of the nervous system, are more
widespread than ever before.
Those who have managed to put away some savings
find their value progressively reduced by inflation — a
hidden tax. Many who thought they were retiring on ade-
quate retirement funds find that the inflation robber forces
them to seek some type of work. Debt and taxation are the
basic cause of inflation.
This alarming increase in mental disorders — it is
equally true of America, Britain, Canada and New
Zealand — has been a development of the last thirty or
No doubt war and depressions have played their part
in reducing millions of people to nervous wrecks and
borderline sanity cases, but the abiding fear which haunts
men and women from their earliest, formative, impres-
sionable years, right through life, is the fear of insecurity.
No matter how hard the average man and woman
works, no matter how much they deny themselves the
simple pleasures of life, the great majority can never hope
to own their own homes, or to travel outside their own
country, or make provision out of their own resources for
their old age.
As the shadows of life begin to lengthen, the prospect
before, the average man and woman is the depressing
picture of eking out the last years of their lives on the old
age pension, aided and abetted by the free medicine of the
That is the pitiable level of security that most people
can expect — the drab offerings of the Welfare State.
This haunting sense of insecurity from the cradle to
the grave leaves a great many social evils in its train. The
problem of delinquency is one. The alarming increase in
mental cases is another. The increase in deficiency diseases is a third.
But worse than all this is the pitiful attempts which are
made by the mass of the people to escape from life, with its
hazards and obligations. The popular forms of escapism
are alcohol, horse racing, picture shows, radio serials,
television and cheap fiction — all of them harmless enough
in moderation, but when such poor hobby horses are
ridden to death, life is lived on a pathetic level.
Doubtful Blessings of the Welfare State
Of course, the politicians, and our masters, the
bureaucrats, will tell you that our debt and tax bondage is
made as tolerable as possible.
Does not the Welfare State give us old age pensions to
eke out the balance of our lives in poverty street after we
are too old for the employment treadmill?
And doesn’t the Welfare State hand out widows’
pensions, war pensions, child endowment, unemployment
benefits arid free medicine?
And is not the Welfare State based on the socialistic
principle that no man shall go bare-footed? Everyone will
have one boot.
And if all this were not enough to endear us to our en-
slavement by the powers which have usurped the com-
munity’s credit, there is the rose-strewn pathway to the
We can buy almost anything on time payment —
expensive labour-saving gadgets, furniture, clothes, even
holidays. Yes, and we can provide for our funeral expenses
by the same 4 4 easy” payments (at an added interest
charge of 17 to 25 per cent).
But we cannot buy security in freedom, we cannot buy
happiness, we cannot get peace on any terms. We are
enslaved to the private monopoly of the public credit.
Tax Bondage is a Cause of
Perhaps it never occurred to you that tax bondage is
the prime cause of that relatively new social evil — youth
But consider the facts. In the lower and middle
income brackets it is now the rule rather than the exception
for the mother of the family to get a job, once her children
are old enough to go to school.
Good money is offering, and often no great skill or
previous experience is called for. The prospect is tempting
to any woman. In fact, it is the only way families in the
lower and middle income groups can pay direct and
indirect taxation, which averages $6,284 per annum on a
family of four, and still be able to afford a car, or such
domestic facilities as a washing machine, refrigerator, etc.
But what happens to the children? The children arrive
home from school before 4 p.m. There is no mother to
greet them. So they order their own lives. Play in the street,
with doubtful companions, possibly, and under no
The mother gets home between 5.30 and 6.00 p.m.,
and is hard put to it to prepare the evening meal and do the
domestic chores left undone in the morning. She is in no
mood, nor has she the time, to attend to the problems of
How easy for the children to gather the impression of
unwantedness and make their own small lives as much
away from home as possible.
And so the seeds of possible delinquency are sown.
We are not suggesting that parents are blameless, but
there is an over-riding cause and a pressing economic urge
which obliges all too many mothers of the race to go to
work to supplement the family income.
So we see how confiscatory taxation strikes at the very
foundation of civilised society — the home.
Automation Will Cripple the
Taxpayers Who Survive
We have dwelt at some length on confiscatory taxation
and the social evils it spawns. But worse is to come.
There is on the horizon a dark cloud slowly but surely
assuming menacing proportions. We refer to automation.
Don’t misunderstand us. Automation is inevitable.
will quicken the tempo of change in lifting the burden of
monotonous types of work from the backs of men to the
backs of electronic, manless machines.
Automation will put the coping stone on this Age of
Plenty by increasing the Plenty, and do it with less and less
But let us be under no illusions. Where labour-saving
inventions in the past have meant a steady reduction of
working hours, automation will mean a steady reduction
of working men — and women.
By that time — the next five or ten years — the
taxation load will have grown very much heavier, and the
number of taxpayers to carry the onerous burden will have
If now taxpayers are at staggering point, automation
will bring the declining number of taxpayers to the point of
If the people displaced by automation are to live and
live as this Age of Plenty entitles them to live, whether
employed or not, then it becomes even more imperative for
the Australian Government to assert and exercise its
sovereign prerogative to create its monetary requirements
instead of borrowing them.
It must become master in its own house if all the
stupendous problems that are now taking grotesque and
frightening shape are to be resolved in sanity and common-
The money-creation and debt story in Australia is the
same overseas. Nations are now wallowing in crisis,
through a sea of debt and usury.
Canada’s public debt position is frightening.
following figures tell their own story: —
Federal Public Debt (March 31st, 1982)
$3,695.7 million Interest
$ 395.8 million
$ 551.6 million
1977 $35,668.5 million
1978 $40,505.8 million Interest $ 3,000 million
Local Government Debt
1977 $20,095.6 million Interest $ 1,500 million
(Note: The Provincial and Local Government Debt
figures are those published in the Canadian Year Book for
1980-81 and are the most up to date obtainable).
Canada’s latest budget has lifted Federal taxes alone
to a point where direct and indirect taxation per head of
population is over $3,000 — over $12,000 for the average
family of four, a mother, father and two children.
Provincial and Municipal taxes add another $2,000 per
head to this total. This brings total taxation, starting at
Municipal level and including Provincial and Federal taxes
to approximately $20,000 for the average Canadian family
Of this huge total, approximately a quarter is paid as
interest on government debt!
This is a higher percentage than elsewhere in the Western world, with the exception of Northern Ireland, where 66 per cent of taxation revenue goes as interest on debt.
THE UNITED STATES
The biggest economy in the world — the United States
of America is also being stretched on the debt-rack. The
1982 budget deficit alone has topped $100 billion. On top
of this figure, the Administration is trying to find $115
billion interest on a National Debt that has topped $1
TRILLION; TIME magazine, in an inadequate attempt to
convey the size of a trillion-dollar debt, explained that a
line of one trillion dollars, all touching, would reach 1.2
million miles into space on the other side of the sun!
The effect on industry is staggering. Two-and-a-half
million farmers in the US have an average debt of $85,000
per farm; a combined total farm debt now exceeding $200
But farmers aren’t the only ones affected. The New
York finance magazine Forbes (March 29, 1982) said:—
. . .Gross interest payments are flowing through the
economy at a rate approaching $900 billion a year — about
$4,000 per year for each American man, woman and child.
That’s interest, mind you, not debt. It’s an increase of
200% since 1976 … The tremendous burden of debt
service is taking a growing toll in bankruptcies, savings-
and-loans failures, dividend omissions and continued
declines in housing prices … In 1950 the average corpor-
ation had $43 of operating income after depreciation to
meet each dollar of interest payment; today’s figure is less
than $4 . . .”
In 1982 it was revealed in the House of Commons that
interest on the National Debt now cost more than defence,
education or national health. National Debt interest rose
from £705 million ($1,410 million) in 1955 to £8,661
million ($17,322 million) in 1980. Thus, National Debt
interest costs every man, woman and child in Britain over
$340 per head each year — over $1,300 annually for the
average family of four. The British situation is chaotic,
with the demise of many industries. British Steel,
nationalised in the postwar period, is propped by huge
injections of taxpayers’ money. British Leyland — almost
all that remains of the car industry — has been bankrupt
twice. The textile industry in Bradford is closing up. Both
the shipping and aircraft industries are shadows of what
they used to be.
Britain’s basic problem is public and private debt.
Part of Britain’s $250 billion national debt is still owed on
World War I. Britain has paid that debt twice, knd com-
pound interest has left a sum still outstanding bigger than
the original loan. Final payment is scheduled for the 2004!
Apart from an unemployment queue of over 3
million, there has been a shift in Britain’s workforce of
over 28 per cent from private industry to government in
Both Northern and Southern Ireland have massive
financial burdens. Of Eire’s budget, 66 per cent goes in
interest payments on debt.
US Tax Commissioner Leads the Revolt
The crass stupidity of the present monetary system, so
far as taxation is concerned, was recently exemplified by
the following cable which appeared in the Sydney Sun
Herald from New York: —
As the deadline for Americans to pay their
income tax loomed this week, thousands of people
visited pawnbrokers, banks and finance companies
to raise the necessary money.
The US is having its greatest business boom for
years but, paradoxically, Americans say they have
never felt so broke.
“They’ve run me dry, ” said Ralph Novin, a
Dallas (Texas), pawnbroker. “Men have deluged me
with women’s wedding rings, watches, television sets,
clothes, irons and mantel clocks to raise tax money. “
J.R. Chaplin, loan chief of a Chicago finance
corporation, reported a steep increase in loans, for
income tax payments.
A Detroit bank official estimated tax loans to be
3 per cent higher than last year.
Apart from individual loans, business-tax loans
from major New York City banks have skyrocketed
in the past two weeks by $763 million, or 8 per cent
above last year’s jump.
Many who have had trouble paying their tax
find a simple expedient. They just don’t pay.
Despite stepped-up collections by the Internal
Revenue Service, tax delinquencies last year rose by
nearly $32 million. Many Americans are criticising
inconsistencies in the US tax laws.
Life magazine said the Treasury “dips with a
sieve, and the pattern of the sieve gets crazier every
year as the rulings, court decisions and amendments
pile up. “
Besides the millions of ordinary citizens, there
are some 300 organisations in America agitating for a
repeal of the tax law.
This week, T Coleman Andrews, former US
Commissioner of Internal Revenue (i.e. US Commis-
sioner of Taxation) unexpectedly came to their
support by saying: “Federal income taxes should be
abolished. America today is in the death grip of tax-
ation. Taxes are too high from top to bottom. “
Andrews condemns the present income tax
structure as “brutal, confiscatory banditry com-
pounded by extreme complexity” and “an intoler-
able threat to the unfettered freedom of enterprise
which made America great “
Early in June, 1978, the press headlines referred to the
launching of a massive tax-revolt movement in the United
States as property owners in California used their con-
stitutional rights to force a vote on a proposal to slash
taxes. Shock waves were sent right across the USA as tax-
payers voted for big tax reductions in a massive two-to-one
Here is a lead for tax-weary Australians.
The Great Treasury Bill Racket
What does the average citizen know of Treasury Bills?
Treasury Notes are the I.O.U.’s given by the Com-
monwealth Treasury to the Reserve Bank.
In other words, Treasury Notes are pawn tickets by
which the national assets of Australia are systematically
pledged to the banks.
This is how the system works:
The banks have a nice working arrangement whereby
they acquire Treasury Notes from the Reserve Bank. These
Treasury Notes are in denominations of $2,000, $10,000,
$100,000 and $1,000,000 each.
The private banks obtain them from the Reserve Bank
by a process of what is known in high banking circles as re-
The trading banks acquire the Treasury Notes by
drawing on their accounts with the Reserve Bank, where it
is the practice for the banks to keep large balances or
Say a bank decides to acquire $1,000,000 worth of
Treasury Notes. It draws a cheque on its account with the
The purchasing bank’s account with the Reserve Bank
will therefore be debited with $1,000,000 and credited with
an interest-bearing security, worth $1,000,000, plus the
The bank therefore not only acquires an interest-
bearing investment, but it acquires a security which CAN
BE CONVERTED INTO CASH AT ANY TIME with the
And, as we have seen, $2,000 of cash is the usual
backing for $20,000 of loans and overdrafts.
But let us follow the process through, and see where
the Treasury Note racket affects the people of Australia.
Every three or four months a Commonwealth Loan is
floated. Commonwealth Loans average about $600 million
There is usually a great, Commonwealth-wide pub-
licity ballyhoo behind these loans, in which the public is
exhorted to subscribe because the loans are for public
works — for roads, schools, irrigation works, state rail-
ways, housing, etc.
This advertising is grossly misleading, because the
main purpose of the loans is not to finance public works at
all. The main purpose of the Commonwealth Loans is to
redeem a volume of outstanding Treasury Notes.
That is to say, the chief purpose of Federal loans is to
buy these Bills back from the banks which hold them, and
thus reduce the volume of the short term national debt.
Don’t make the mistake of concluding that this
process of buying back outstanding Treasury Notes in any
way reduces the National Debt. It doesn’t. All that it does
is to convert portion of the short term debt into long term
debt, i.e., into permanent National Debt. This is what is
called funding the National Debt.
In simple terms, when a Commonwealth Loan is
floated, the money subscribed by the public — individuals
and companies — is chiefly used to redeem, say,
$100,000,000 worth of Treasury Notes.
In the process of redemption the public and com-
panies get the bonds, but the banks achieve the equivalent
in increased liquidity of assets, enabling them to lend
But from the public’s point of view, an even more
disturbing aspect is that the National Debt has been added
to. It grows, remorselessly, every few months to what is
now an astronomical figure — and, of course, taxation
grows with it.
There is no plan apparently known to the custodians
of our national financial policy which offers even the
flimsiest hope of escape from this iniquitious system.
It never seems to occur to anyone that the National
Debt should ever be redeemed — though one Auditor-
General is on record as saying that in one particular year,
two or three millions were actually set aside for debt
He added, with classical naivete, that the money used
for the purpose was loan money!
You may well ask, if money subscribed to Federal
loans is mainly used to redeem the short-term debt, how
are public works financed?
They are chiefly financed by credits made available by
the Reserve Bank in return for Treasury Notes.
A fully subscribed Federal loan, of say, $150 million
may be used to redeem $100 millions worth of outstanding
Treasury Bills. The balance may be used for public works.
This is not to suggest that the public works pro-
gramme will not be carried out. It will. But the finance
used will be mainly through Treasury Notes. From a
bank’s point of view these are gilt-edged securities of the
highest order, backed by the taxing power of the Federal
Government to redeem from time to time so that the highly
profitable practice of short term lending to the nation can
be repeated over and over again.
Why the Reserve Bank allows the private banks to
acquire them (and by a virtually costless process!) is one of
those incredible things that defies explanation or common-
sense, judged by the normal standards of this most un-
But an even more inexplicable thing is why the
Reserve Bank, a mere department of the nation, should
regard the credit it costlessly creates for the Treasury as an
interest-bearing debt, on which the people, through tax-
ation, pay interest in perpetuity. This is a classical example
of the tail wagging the dog, or the weather cock, not
merely indicating the wind, but creating it.
ALL THAT THE RESERVE BANK DOES IN EX-
CHANGE FOR THE TREASURY’S NOTES IS TO
MONETISE THE CREDIT OF THE NATION. The bank
didn’t create the national assets which back the loans.
These were created — or will be — by the people of Aust-
The bank’s function was effortless, costless, and
could have been, and no doubt was, performed by a junior
Why in the name of sanity this simple transaction is
allowed to become the basis of our National Debt, and the
pitiless taxation which has to pay the interest on it,
transcends all the laws of logic.
Amazing Examples of
In Australia’s Government Bank, Dr. L.C. Jauncey
records the humble start of the Commonwealth Bank of
“On July 15, 1912, with no subscribed capital and
with assets of only £10,000 in the form of a loan from
the Commonwealth Government, the Bank opened its
doors for business.
“On July 7, 1921, a deputation of unemployed waited
on Sir Denison Miller, then Governor of the Bank.
“Mr. Scott (member of the deputation): ‘In your
address in London, Sir Denison, you stated that to meet
the necessities of war certain things had to be done by you,
which, before the war, would not have been dreamed of.
You financed Australia for £350,000,000 for war purposes,
and, had the war continued, you could have financed
another £350,000,000. Are you now prepared to finance
Australia £350,000,000 for productive purposes?’
“Sir Denison Miller: ‘Yes, I shall do my best’.”
In the Australian Press of July 7, 1921, Sir Denison
Miller is reported to have said this:
“The whole of the resources of Australia are at the
back of this bank, and so strong as this continent is, so
strong is this Commonwealth Bank . . .
Australian people can intelligently conceive in their minds and will loyally support, that can be done.”
In other words, that which is physically possible can
be made financially possible.
Backed by the credit, i.e. the faith, of Australia, the
Commonwealth Bank, which started with a capital of
$20,000 was able to create credit over the next eight years
to the extent of $700,000,000!
The Commonwealth Bank, incidentally, affords a
most amazing example of how privileged a bank is in
As we said, the Commonwealth Bank opened its
doors for business in 1912 with assets (or, rather, liabil-
ities) in the form of a loan of $20,000.
By 1956 it was able to boast assets to the total of
$4,000,000,000 — a figure exceeding all the assets of the
larger companies in Australia!
Every year sees a further increase in total assets.
Add this stupendous figure to the assets of the private
trading banks and you get an idea of the extent to which
the banks have expropriated the real credit — i.e., the real
wealth — created by the people of Australia. The banks
have acquired the credit — nearly $8,000,000,000 of it! —
and have saddled the people with the debt.
In monetising the real wealth of Australia (i.e. creat-
ing its monetary equivalent) the banks have issued the
money as a debt and so acquired assets equal to about one-
third of the entire wealth of Australia.
The Incredible Story of the
Another illuminating example of Credit Power is
afforded by the meteoric growth of the Rural Bank of New
Up to the year 1948, the Rural Bank was a savings
bank. Its branches in 1947 numbered fifty-eight, valued at
$1,327,430, and its assets totalled $74 million.
Then, in 1948, a dramatic change took place. The
Federal, Labor Government, under Prime Minister
Chifley, introduced a Bill to nationalise the trading banks
This threat alarmed the Government of New South
Wales — a Labor Government — so while Mr. Chifley’s
legislation was before parliament, the New South Wales
Labor Government rushed a very short Bill through all
stages within one day’s sittings of Parliament.
This Bill’s purpose was to change the constitution of
the Rural Bank from a virtual savings bank to a bank of
issue — that is to say, a bank which has the power to
In the few years since the Rural Bank became a bank
of issue, it has increased its assets amazingly.
Valuable corner sites have been acquired for premises
in the city or Sydney and all the leading country towns.
In 1956 it had over 110 branches, its assets had
jumped to SI 38 million, and It disclosed reserves to over
There is nothing comparable in business or industry
with banking when it comes to acquiring assets.
The assets of the Colonial Sugar Refining Company in
1956 did not exceed $120 million and the CSR is an
Australia-wide organisation — the largest sugar producing
company in the Southern Hemisphere, in addition to its
vast subsidiaries producing building materials, chemicals
And there is the great Broken Hill Proprietary — the
foundation of Australia’s iron and steel industry. Its rami-
fications are Australia- wide, and yet its assets are only
$110 million. General Motors-Holden’s assets at Decem-
ber, 1955, were $94 million.
Does it not strike you as utterly fantastic that a bank,
which employs a few hundred clerks, with no machinery
more pretentious than typewriters and adding machines,
with no plant more impressive than office buildings, and
unknown to the general public outside its own State, can
vastly increase its assets far beyond our greatest industries
and do it in relatively few years?
Does it not strike you as preposterous that an institu-
tion which produces nothing more than figures in books,
can acquire the ownership of assets more vast than our
greatest industries which employ thousands of people in all
States, and upon whose physical production the entire
economy of Australia depends?
It is a most illuminating example of CREDIT
POWER — the greatest power in the world*
Once a nation understands it, and resolves to use it,
without the chains of debt and taxes, once it has the states-
manship to use this vast power potential boldly and wisely
as a constructive and liberating force, that nation will
bound ahead, the great problems which confront and
confound it will be solved with expedition and satisfaction,
the grievous burdens of debt and taxation will be gradually
lifted from the backs of the people, enabling them, at long
last, to raise their heads to heaven in thanksgiving .
THE POWER AND THE GLORY!
Royal Commissions on Finance
Has there been no public outcry against a financial
system that leaves such a trail of human suffering in its
Of course there has. The outcry usually results in the
appointment of a Royal Commission to inquire into it.
Such Royal Commissions have been held in Britain,
Canada, Australia, and New Zealand.
The personnel of these Royal Commissions were
mostly men in the fifty to sixty age bracket. They were men
who had built up successful careers in industry, law,
accountancy, and commerce.
Their minds had long been made up in regard to the
financial customs of their age. They had all personally
done well under the financial system they were asked to
In short, all these Royal Commissions consisted of
men whose mental attitudes and understanding of the
financial and monetary system had been conditioned by a
life-time of familiarity with the traditional practices. They
could conceive of nothing else. They were pledged to the
preservation of the status quo. Custom, tradition, the
mesmeric spell of orthodoxy, the day-to-day practices of a
life-time — it is very difficult, if not impossible, for a
group of men to think outside such a powerful, inhibiting,
It is no reflection upon the honesty of the men who
made up these Royal Commissions when we record that
their reports for the most part white-washed the prevailing
financial and monetary system.
They made some criticisms, to be sure, some minor
recommendations, but for the most part they gave their
blessings to the old system and short shrift to any new,
unorthodox system or innovation that some witnesses pre-
sented to them.
Nobody was surprised, therefore, and only a small
minority of public opinion was disappointed, when the
reports of these Royal Commissions followed much the
But some very interesting and significant things did
emerge from these Royal Commissions. Here, for
example, is what the British Royal Commission (presided
over by Lord MacMillan) found in regard to the creation
of credit in 1920.
We quote from chapter 4, page 34:—
“It is not unnatural to think of the deposits of a bank
as being created by the public, through the deposit of cash
representing either savings or amounts which are not for
(he time being required to meet expenditure. But the bulk
Of the deposits arise out of the action of the banks them-
selves, for by granting loans, allowing money to be drawn
on an overdraft or purchasing securities a bank creates a
credit in its books, which is the equivalent of a deposit . . .
“The bank can carry on the process of lending, or
purchasing investments, until such time as the credits
created, or investments purchased, represent nine times the
amount of the original deposits in cash.”
Australian Royal Commission on Money
The Australian Royal Commission into the Monetary
and Banking system of Australia made its report in 1937.
After nearly two years of exhaustive inquiry the Com-
mission, in its report, was obliged to admit that the Com-
monwealth Bank (now the Reserve Bank) possessed all the
power necessary to finance all Governmental needs.
Section 504, of the Commission’s Report, headed
4 4 Creation of Credit”, reads:—
Because of this power, the Commonwealth
Bank is able to increase the cash of the trading banks in the
ways we have pointed out above.
“Because of this power, too, the Commonwealth
Bank can increase the cash reserves of the trading banks;
for example, it can buy securities and other property, it can
lend to the Governments Or to others in a variety of ways,
and it can even make money available to the Governments
and to others free of any charge …”
As this last clause has led to a good deal of contro-
versy as to its exact meaning, Mr. Justice Napier, Chair-
man of the Commission, was asked to interpret it, and his
reply, received through the Secretary of the Commission
(Mr. Harris) was as follows: —
“This statement means that the Commonwealth Bank
can make money available to Governments or to others on
such terms as it chooses, even by way of a loan without
interest, OR EVEN WITHOUT REQUIRING EITHER
INTEREST OR REPAYMENT OF PRINCIPAL.”
Thus the Commonwealth Government was given the
happy alternative of obtaining all its loan requirements
without recourse to borrowing from the banks on Treasury
Bill security, and so involving the nation in additional
national debt, and the people in more onerous tax burdens.
BUT IT DIDN’T TAKE IT.
A Bank Governor’s Frank
Some of the most frank evidence on banking practices
was given by Mr. Graham Towers, Governor of the
Central Bank of Canada, before the Canadian Govern-
ment’s Committee on Banking and Commerce.
During the 1939 session this Committee confined its
proceedings to an examination respecting the Bank of
Canada. The witness for the Bank, subject to cross-
examination, was Mr. Graham F. Towers, its Governor.
The Committee held thirty sittings and its proceedings
cover 850 pages, so that to bring out the important points
necessitates drastic condensation. We have endeavoured
to do this fairly, and in each case we give the page number
of the proceedings so that reference can be made to the
Bear in mind that the following statements made or
agreed to by Mr. Towers are those of the Governor of the
Government-owned Central Bank of Canada.
(The following extracts are from the Minutes of Pro-
ceedings and Evidence Respecting the Bank of Canada,
Committee on Banking and Commerce, 1939. Government
Printing Bureau, Ottawa): —
Question: “But there is no question about it that x
banks create the medium of exchange?”
Towers: “That is right. That is what they are f or . . .
That is the Banking business, just in the same way that a
steel plant makes steel.” (p. 287)
“The manufacturing process consists of making a
pen-and-ink or typewritten entry on a card or in a book.
That is all. 55 (pp. 76 and 238)
“Each and every time a bank makes a loan (or pur-
chases securities), new bank credit is created — new
deposits — – brand new money.” (pp. 113 and 238)
“Broadly speaking, all new money comes out of a
Baink in th torn of torn (] MS (?)
“As loans are debts, then under the present system all
money is debt..’ (p. 459)
Mr. Towers continued: “A government can find
money in three ways: by taxation, or they might find it by
borrowing the savings of the people, or they might find it
by action which is allied with an expansive monetary
policy, that is borrowing which creates additional money
in the process.” (p. 29)
Q: A banker can purchase a federal government bond
by accepting from the government, we will say a bond for
$1,000 and giving to the government a deposit in the bank
Mr. Towers: Yes.
Q: . . . what the government receives is a credit entry
in the banker’s book, showing the banker as a creditor to
the government to the extent of $1,000?
Mr. Towers: Yes.
Q: And in law all that the bank has to hold in the way
of cash to issue that deposit liability is 5 per cent?
Mr. Towers: Yes. (p. 76)
Q: Ninety- five per cent of all our volume of business is
being done with what we call exchange of bank deposits —
that is simply bookkeeping entries in banks against which
people write cheques?
Mr. Towers: I think that is a fair statement, (p. 223)
Q: . . . the need of a currency gold reserve was today
largely psychological so far as domestic currency was con-
Mr. Towers: As far as domestic currency was con-
Q: But if the issue of currency and money is a high
prerogative of government, then that HIGH PRERO-
GATIVE HAS BEEN TRANSFERRED TO THE
EXTENT OF 88 PER CENT FROM THE
GOVERNMENT TO THE MERCHANT BANKING
Mr. Towers: YES. (p. 286)
Creating New Money
Q: When a $1,000,000 worth of bonds is presented (by
the government) to the bank, a million dollars of new
money or the equivalent is created?
Mr. Towers: Yes.
Q: It IS a fact that a million dollars of new money is
Mr. Towers: That is right, (p. 238)
Q: Now, as a matter of fact, today our gold is pur-
chased by the Bank of Canada with notes which it issues —
not redeemable in gold — in effect using printing press
money … to purchase gold?
Mr. Towers: That is the practice all over the world . . .
Q: When you allow the merchant banking system to
issue bank deposits — with the practice of using cheques
you virtually allow the banks to issue an effective sub-
stitute for money, do you not?
Mr. Towers: The bank deposits are actually money in
Q: … as a matter of fact they are not actual money
but credit, bookkeeping accounts, which are used as a sub-
stitute for money?
Mr. Towers: Yes.
Q: Then we authorise the banks to issue a substitute
Mr. Towers: Yes, I think that is a very fair statement
of banking, (p. 285)
Q: Will you tell me why a government with power to
create money should give that power away to a private
monopoly and then borrow that which parliament can
create itself, back at interest, to the point of national
Mr. Towers: … we realise, of course, that the
amount which is paid provides part of the operating costs
of the banks and some interest on deposits. Now, if
parliament wants to change the form of operating the
banking system, then certainly that is within the power of
parliament, (p. 394)
Mr. Towers: The banks cannot, of course, loan the
money of their depositors, (p. 455)
Q: You have agreed that banks do create money.
Mr. Towers: They, by their activities in making loans
and investments, create liabilities for themselves. They
create liabilities in the form of deposits.
Q: You will agree with the statement that has been
made that banks lend by creating the means of payment.
Mr. Towers: Yes.
Q: So that with the increase of 500 million of bank
deposit money (from 1934 to 1938) we have not had any
Mr. Towers: We have not. The circumstances of the
time have not encouraged it. (p. 643)
Q: … so far as war is concerned, to defend the integ-
rity of the nation there will be no difficulty in raising the
means of financing whatever those requirements may be?
Mr. Towers: The limit of the possibilities depends on
men and materials.
Q: . . . and where you have an abundance of men and
materials you have no difficulty, under our present
banking system, in putting forth the medium of exchange
that is necessary to put the men and materials to work in
defence of the realm?
Mr. Towers: That is right.
Q: Well, then, why is it, where we have a problem of
internal deterioration, that we cannot use the same tech-
nique … in any event you will agree with me on this, that
so long as the investment of public funds is confined to
something that improves the economic life of the nation,
that will not of itself produce inflationary conditions?
Mr. Towers: Yes, I agree with that, but I shall make
one further qualification, that the investments thus made
shall be at least as productive as some alternative uses to
which the money would otherwise have been put. (p. 649)
Q: Would you admit that anything physically possible
and desirable can be made financially possible?
Mr. Towers: Certainly, (p. 771)
Do Bankers Understand the
Creation of Credit?
Do all bankers understand the mechanism of credit
creation by the banks?
No. We have discussed this matter with scores of
bankers, and only an odd one understands how banks
create and cancel credit and how they purchase securities.
When we place the facts of the matter before them —
and the facts are beyond dispute — the average banker is
almost inarticulate with incredulity, and often with indig-
This is understandable. A man who has spent the
better part of his life under the impression that banks only
lend money deposited with them, and that the banker’s
profit consists of the difference between the interest he
pays on fixed deposits and the interest he charges on loans,
finds it most difficult, if not impossible, to dislodge this
firmly fixed idea from his mind.
You may say that it is incredible that bankers would
not know their own system. Not at all. Men are con-
ditioned by custom. They grow up in a tradition. They
accept, without question, the routine practices of their pro-
Apparently these practices work admirably. They do!
From the point of view of administration, the banking
system is probably the most efficient we can point to. Why
should anyone question it? — especially those in its
employ. That is the power of tradition.
Revealing Statement by NZ
In the higher realms of banking, however, there is no
doubt that most of the VIP’s know the facts. This was
admitted by Mr. H.W. Whyte, Chairman of the Associated
Banks of New Zealand, in his evidence before the New
Zealand Royal Commission in 1955. He admitted, quite
frankly, that banks create credit when making loans and
advances, and he added: —
“They have been doing it for a long time, but they
didn’t quite realise it, and they did not admit it. Very few
did. You will find it in all sorts of documents, financial
textbooks, etc. But in the intervening years, and we must
all be perfectly frank about these things, there has been a
development of thought. Until today I doubt very much
whether you would get many prominent bankers to
attempt to deny that banks create credit. I have told you
that they do; Mr. Ashwin (Secretary to the Treasury) has
told you that they do; Mr. Fussell (Governor of the
Reserve Bank) has told you that they do.
“But twenty, forty, fifty years ago you would not
have found many people who would have said that. They
didn’t quite appreciate they did that.
“The system has not changed very much; it is the
system that stands today, not very much different from
what it was forty, fifty years ago, but there has been a
development of thought.”
Further, in reply to Dr. Mazengarb, Q.C., who sub-
mitted to the commission a series of monetary reform
proposals on behalf of H.J. Kelliher, one-time director of
the Bank of New Zealand, Mr. Whyte, reiterated the
point: “There is no secret about banking; there is no secret
about banks creating money; there has been a development
of thought in the matter.”
This “Development of Thought”
We must confess we were most intrigued by the some-
what naive admission that “there has been a development
of thought in the matter”.
What the Chairman of the Associated Banks of New
Zealand really meant, we suggest, was that there has been a development of knowledge of the facts of money.
During the Depression years, hundreds of thousands
of hungry, unemployed people had nothing else to do but
study a new and strange phenomenon — the paradox of
poverty amidst plenty.
The seasons were bountiful. The warehouses were
bursting. The shops were full. But few could buy the
goods, and untold numbers of people were destitute. The
food was there. The clothes were there. All that was
missing was money — this relatively costless ticket system
had broken down as a distributing mechanism.
In those days £1 notes or £100 notes could be printed
for 2d. each, and bank ledger credit could be issued at no
cost at all.
But money was a private monopoly. Its issue and
control were sacrosanct — more sacred than human lives.
How absurd it all was, when we look back on those
But hungry men began to think, to inquire, to find out
how the monetary system worked, and what they found
out was as revelationary as the facts given in this booklet.
A great literature grew up exposing the truth in regard
to the creation of credit, and this truth was thrust embar-
rassingly under the noses of bankers in high places.
This was the reason — and the only reason — for Mr.
Whyte’s admission that “there has been a development of
thought in the matter”.
Do the Economists Understand
the Creation of Credit?
No. This subject forms no part of the economics
course. The pathetic result is that in their writings and
speeches, where it is necessary to touch on the subject of
bank credit, the economists repeat the old fiction that bank
loans are limited by their deposits.
Very few Australian economists, to our knowledge,
understood the creation of credit. One was Professor A.G.
Mackay, who, in his textbook on “Economics”, stated:—
“In this way, by means of a loan, an advance, an
overdraft, or by the cashing of bills, the banks are able to
increase the volume of deposits in the community, and
because of this process it is not correct to say that a bank
loans out deposits which people make with it.
“It is clear that IT CREATES THE DEPOSIT BY
THE ISSUE OF THE LOAN; the loan travels back to the
bank or to another bank and assumes the form of a
Professor R.F. Irvine, Professor of Economics at
Sydney University, about the time of the First World War,
introduced the study of bank credit and financial mech-
anism generally into the economics course.
It was a very popular course, and students and pro-
fessor often discussed the dangerous implications of a
financial system that placed so vast a power for good or
evil in private hands for private profit.
Apparently, Professor Irvine’s handling of the eco-
nomics course gave considerable concern to the banks,
with the result that some charge was trumped up against
the professor and he was obliged to resign.
During the days of the Depression, Professor Irvine
lectured extensively in Sydney on the broad lines followed
by his book.
Has There Been No Outcry In
Has no statesman warned the people of the evils
inherent in a private monopoly of the public credit?
Yes, a few have, but remember, finance is all-power-
ful. It controls the Press (by overdrafts) and is in a position
to make and break anyone who dares to challenge and
expose its power. Most politicians quickly learn that if they
are going to “get on”, the simplest policy is to play safe,
conform to orthodox practices and procedures, and don’t
“stick one’s neck out”.
It is an appalling reflection upon the public men of all
countries that they conform to the orthodox tradition in
this supine, spiritless and sycophantic manner, but they
justify their attitude by the cynical reflection that there are
no political plums for those who kick against the traces or
try conclusions with powerful vested interests.
But there is one notable, indeed, classical example of
courageous statesmanship which did challenge and succes-
sfully buck the bankers of his day.
That man was Abraham Lincoln.
To finance the American Civil War, he was obliged to
go to the banks for money. The banks attempted to exploit
the desperate situation of the northern armies, and agreed
to lend money at interest rates varying from 24 to 36 per
This was usury of an outrageous nature, and Lincoln
refused financial help at such a monstrous price.
Instead, he printed the famous “greenbacks”, and the
United States’ note issue has followed the greenback
design ever since.
The “greenbacks” enabled the North to conduct its
war against the South with very little debt, but before the
“greenbacks” were issued the North was desperate for
finance, and the result of his negotiations with the pred-
atory banks compelled Lincoln to observe:—
“I have two great enemies; the Southern army in front
of me and the financial institutions in the rear. Of the two,
the one in the rear is my greatest foe.”
This statement by Lincoln, and his other statements
upon the government’s part in financing the nation are
confirmed by the Appleton Cyclopaedia (US) of 1861,
“The money kings wanted 24 per cent to 36 per cent
interest for loans to our Government to conduct the Civil
“The monetary needs of increasing numbers of people
advancing toward higher standards of living can and
should be met by the Government. Such needs can be
served by issuing national currency and credit through the
operation of a national banking system. The circulation of
a medium of exchange issued and backed by the govern-
ment can be properly regulated. Government alone has the
power to regulate the currency and the credit of a nation.
‘The government should create, issue, and circulate
all the currency and credit needed to satisfy the spending
power of the government and the buying power of con-
sumers. The privilege of creating and issuing money is not
only the supreme prerogative of government, but it is the
government’s greatest creative opportunity.
“The financing of all government enterprises, the
maintanance of stable government and ordered progress,
and the conduct of the Treasury will become matters of
“More will cease to he the master and become the
servant of humanity. Democracy will rise superior to the
But Lincoln was assassinated before he fully trans-
lated this debt-free monetary policy into effect, and there
is quite an amount of evidence to sustain the theory that he
was assassinated at the instigation of the banks, which saw
in his new policy a challenge to their lordship over money.
The Banks “Gift from Pandora”
Garet Garret, regarded as “the clearest expositor of
economics in the United States”, makes these interesting
remarks about that tragic abstraction, bank credit, in his
book, The Bubble that Broke the World:—
“Of all the discoveries and inventions by which we
live and die, this totally improbable helix of credit is the
most cunning, the most liable, the least comprehended,
and next to high explosives, the most dangerous. All that
the bankers themselves really know about it is how it works
from day to day. Beyond that, it is a gift from Pandora.”
Phillip A. Benson, president of the American
Bankers’ Association, in a speech at Milwaukee, on June
8, 1939, quoted in the New York Times of June 11, 1939,
“There is no more direct way to capture control of a
nation than through its credit system.”
W.E. Gladstone once stated: —
“From the time I took office as Chancellor (Decem-
ber, 1852) I began to learn that the State held, in the face
of the Bank and the City, an essentially false position as to
finance. The hinge of the whole situation was this: The
Government itself was not to be a substantive power in
matters of finance, but was to leave the Money Power
supreme and unquestioned. In the conditions of that situ-
ation I was reluctant to acquiesce, and I began to fight
against it by financial self-assertion from the first. I was
tenaciously opposed by the Governor and Deputy-
Governor of the Bank (of England), who had seats in
Parliament; I had the City for an antagonist on almost
(The term “the city” in London refers to the banking
and financial institutions, and the quotation is from
Morley’s Life of Gladstone.)
With one or two notable exceptions, the Church has
maintained a sepulchral silence on the subject of financial
policy, averting its eyes heavenward in the presence of a
stupendous temporal problem.
The two exceptions were Archbishop Le Fanu,
can Primate of Australia during the Depression. He
spoke out frequently and courageously against a financial
policy so heavily freighted with the social evils of anti-Christ.
Anglican Primate of Australia (Archbishop Le Fanu)
in October, 1935, said:—
Every man in the community is heir to all the inven-
tions and scientific knowledge which have made this easier
life possible, and yet the enhanced values and oppor-
tunities of life are not shared as they should be.
‘ ‘Our present financial system is not doing its job. The
fundamental Christian objection to the existing capitalistic
system and to the bankers’ control of money, from which
it seems inseparable, is that it holds persons in serfdom to
the exigencies of financial policy.”
Pope Pius XI in the Encyclical Quadragesimo Anno
” It is patent that in our days not alone is wealth
accumulated, but immense power and despotic economic
domination is concentrated in the hands of a few . . .
‘This power becomes particularly irresistible when
exercised by those who, because they hold and control
money, are able also to govern credit and determine its
allotment, for that reason supplying so to speak the life-
blood to the entire economic body, and grasping, as it
were, in their hands the very soul of production, so that no
one dare breathe against their will.”
Nationalisation of Banking is not the Answer
The unthinking mind, after perusing the alarming
array of facts in this book, may be forgiven if he said at
once that the answer to the problem was to nationalise the
Whilst this may appear, on the surface, to be the
obvious answer, in our opinion it is not the correct answer.
Indeed, in our opinion, after many years of study and
research, there is only one thing more disastrous than the
present monetary system, which is mostly in private hands,
and that is a nationalised monetary system.
Experience in several fields has shown that a public
monopoly is far worse than a private monopoly.
There is a certain amount of competition among the
private banks, but a public monopoly is complete and
Such a monopoly may work with tolerable satis-
faction in regard to postal services or railways, but God
help Australia if the flow of credit — the life-blood of the
nation — was within the arbitrary powers of a group of
bureaucrats from whom there was no appeal — except to
another group of bureaucrats.
It should be noted that the Reserve Bank follows pre-
cisely the same financial policy as the private banks, except
in a few minor details. It finances the Federal
Government’s needs in return for Treasury Notes, and
insists that the Treasury Notes be redeemed by the frequent
raising of public loans, thus adding progressively to the
National Debt and to taxation.
Although a Government institution, it acts towards
the nation as though it were a private concern. It is quite
alien in spirit and policy to the national interest.
Please don’t hasten to tell us that the “profit” it
makes goes into the national coffers. We know that. But
the profit benefit from the nation’s bank is almost too
trivial to mention when we consider what the Reserve Bank
could do for Australia if it functioned under a different
The Bank of England is another instance of the empty
futility of nationalising a great bank. What has it bene-
fitted Britain since its costly nationalisation took place
under the Attlee Government? A few paltry millions. It
follows the same alien policy to the nation that it did
before. It is still a power above the nation, instead of being
in the service of the nation.
No. The answer to the problem does not lie in bank
nationalisation, which merely changes the name over the
door, but makes no change in monetary policy.
You don’t make a monopoly any better by making it
Our Attitude to the Banks
We make no apology for drawing public attention to
the social evils that arise out of the present monetary
It is time the public, and especially those who sit in
high places, knew the facts. “Know the truth and the truth
shall make you free”.
But the sum total of what we say in this book must not
be construed as an attack upon the banks or upon the hier-
archy of bank personnel.
That is neither the point nor purpose of this book.
Merely to fill readers with an unhealthy revenge complex
against the banks would defeat its purpose. ■
There is nothing new about the present method of
creating credit and charging it as a debt to the community.
It began a long time ago.
Our present banking system began with the gold-
smiths. As the goldsmiths were craftsmen in gold and
silver, they were the only people equipped with strong-
rooms for the safekeeping of such valuables.
How the Cheque System Began
In those days the only money was gold, silver and
copper. It was minted into coinage in the name of the king,
and put into circulation in the payment of the army, navy
and public service. Those were the halycon days of no
It was at this stage, however, that a new development
took place in the monetary system.
Burglaries and highway robbery were very common in
England before a properly organised police force was
established by Sir Robert Peel in 1835. For safe-keeping,
therefore, gold plate and sovereigns — the chief monetary
token — were lodged with the goldsmiths.
Every time one lodged, say, 20 sovereigns with a gold-
smith, he gave a receipt for the amount. These receipts
gradually became currency — that is to say, people accep-
ted the goldsmith’s receipts in payment of a debt.
And, of course, it was only a matter of time when the
goldsmiths themselves woke up to the fact that this
practice of the payment of debts and purchase of goods by
the giving of a goldsmith’s receipt put the goldsmith in a
Long experience had shown them that very few people
withdrew their gold coinage once it was lodged with them.
By keeping only 10 per cent of the money deposited with
them, the goldsmiths could meet all day-to-day with-
drawals. The other 90 per cent of the money they were now
free to lend at interest.
They learned, to their intense satisfaction and im-
measurable profit, that every £100 of gold sovereigns de-
posited with them was sufficient backing for the lending of
£900 in what were called 4 ‘gold receipts”.
These gold receipts began to circulate as money
because each one was a promise to pay gold on demand.
Thus the gold receipts were the forerunners of the bank
Garet Garrett, in his book, Anatomy of Credit, tells
the story of the origin of banking and credit in these
How can a bank lend credit to the amount of nine
times its cash deposits? Perhaps the easiest way to explain
it will be to tell the story of the old goldsmiths, who
received gold for safe-keeping, and who issued receipts for
“These receipts, representing the gold, began to pass
from hand to hand as money. Seeing this, and that people
seldom touched the gold itself or wanted it back, so long as
they thought it was safe, the goldsmiths began to issue
paper money redeemable in gold, without having the gold
in hand to redeem it with.
“A very audacious idea, and yet it worked, because if
a goldsmith was honest, he was solvent, as, in exchange for
that paper which he promised to redeem in gold on
demand, he took things of value, called collateral, in
pledge so that against the outstanding paper he had good
assets in hand, and if people did come with his paper,
wanting the gold on it, he had only to sell the collateral,
buy gold, and then redeem the paper, according to his
promise — always providing that the collateral was liquid
and easily sold, and that too many people never came at
once, all demanding gold on the instant.
4 * Fewer and fewer people ever did want the actual
gold. So long as they believed in the goldsmith, they pre-
ferred to use his paper for all purposes of exchange —
paper which no longer represented the actual gold, and yet
was as good as gold because whenever anyone did want
the gold, it was forthcoming. From this evolved modern
In the time of Cromwell, the goldsmiths were referred
to as “bankers”, and in 1694 a private company was
formed in London which, in consideration of lending the
State £1,200,000, was granted a charter to form the Bank
The establishment of joint stock banks followed in
due course, and the system spread to all parts of the world.
It is idle, therefore, to point an accusing finger at the
banks or those responsible for the present monetary
system. They have merely inherited the system, and for the
most part, have no sense of guilt for the multitude of social
evils it has given birth to.
The power to change the system is within the province
of any democratic State, and this can be done without dis-
possessing the banks or nationalising them.
But reforms will involve considerable pruning of their
powers and also a very salutary increase in the exercise of
the sovereign power than belongs to the nation.
Winston Churchill’s Proposals
Winston Churchill, in his Romanes Lecture at Oxford
University in 1930, laid a logical foundation for approach-
ing these problems, with a view to their ultimate solution.
We quote the following extracts from that notable
“Direct taxation has risen to heights never dreamed of
by the old economists and statesmen, and at these heights
has set up many far-reaching reactions of an infrugal and
even vicious character. We are in the presence of new
forces not existing when the textbooks were written . . .
“Beyond our immediate difficulty lies the root
problem of modern world economics; namely, the strange
discordance between the consuming and producing
power . . .
‘If the doctines of the old economists no longer serve
for the purposes of our society, they must be replaced by a
new body of doctrine equally well-related in itself, and
equally well-fitting into a general plan . . .
“Have all our triumphs of research and organisation
bequeathed us only a new punishment — the Curse of
Plenty? Are we really to believe that no better adjustment
can be made between supply and demand? Yet the fact
remains that every attempt has so far failed.
“Many various attempts have been made, from the
extremes of Communism in Russia to the extremes of
Capitalism in the United States. But all have failed, and we
have advanced little further in this quest than in barbaric
“Surely it is this mysterious crack and fissure at the
basis of all our arrangements and apparatus upon which
the keenest minds throughout the world should be con-
“It would seem, therefore,” Churchill went on, “that
if new light is to be thrown upon this grave and clamant
problem, it must in the first instance receive examination
from a non-politiqal body, free altogether from party
exigencies, and composed of persons possessing special
qualifications in economic matters.
“Parliament would, therefore, be well advised to
create such a body subordinate to itself, and assist its
deliberations to the utmost. The spectacle of an Economic
sub-Parliament debating day after day with fearless
detachment from public opinion all the most disputed
questions of Finance and Trade, and reaching conclusions
by voting, would be an innovation easily to be embraced
by our flexible constitutional system.
“I see no reason why the political Parliament should
not choose in proportion to its party groupings a sub-
ordinate Economic Parliament of say one-fifth of its
numbers, and composed of persons of high technical and
Nine Vital Proposals
After twenty-five years of serious research into the
monetary and financial problems of this era, the Monetary
Research Institute makes the following proposals, which
might well serve as a basis of study for a non-party com-
mittee along the lines suggested by Winston Churchill.
(1) That a National Monetary Authority, responsible to
Parliament, be appointed to: —
A: Control the policy of the Reserve Bank and Trading
B: Relate the total of monetary issues each year to the
total productive capacity of capital and consumable goods
(2) That the National Monetary Authority, using the
Reserve Bank as its instrument, provide the Federal and
State Governments and Municipalities with their monetary
needs for capital development, without the incidence of
debt or interest.
(3) That the National Monetary Authority introduces the
principle of a National Balance Sheet, debiting it with the
cost of all National Capital development, but crediting it
with the asset value of all such development.
(At present, all Federal and State public works are
charged up to the people in the form of further national
debt. BUT THE PEOPLE ARE NEVER CREDITED
WITH THE ASSETS. No business could long function in
solvency under such a lop-sided policy of accountancy.)
(4) That public loans be REDEEMED — not RENEWED
— as they fall due, the redemption being underwritten by
the Commonwealth Reserve Bank.
(5) That income tax be reduced at a flat rate of five per
cent per annum. The results to be assessed at the end of
each five-year period, and the progressive reduction to be
continued IF THE NATIONAL ECONOMY RESPONDS
SATISFACTORILY, until taxation has been reduced by 50
(6) That vexatious taxation — to give it no harsher name!
— such as sales tax and payroll tax — be progressively
reduced over a period of five years and then abolished alto-
(7) That no trading bank be permitted to discount
Treasury Bills — in fact, Treasury Bill finance should be
terminated as an instrument or symbol of further national
(8) That overdraft rates be reduced to the cost of debt
service, giving the banks a normal profit-margin, but sub-
stantially pruning their power over governments in particu-
lar and the nation in general.
(9) That the war-time policy of price subsidies be re-
enacted, but with this vital difference: that the subsidies be
paid from the national credit account and not from in-
The soundness of the price subsidy principle was
abundantly proved in the last war. It was a most effective
mechanism for maintaining a stable price level in a highly
The monetary changes proposed are to be implemen-
ted gradually, not precipitately. Governments and the
people at large could witness the gradual change from an
insolvent, debt-logged, tax-ridden economy, staggering
from crisis to crisis, to a solvent economy, which had at
last found a happy and practicable way of escape from the
chains which enfettered it.
Summary of Merits
The foregoing proposals are by no means exhaustive
or comprehensive, but they might well serve as the foun-
-dation stones of any monetary reform policy.
In sum, their implementation would: —
A: Assert the sovereign right of the nation — the
Federal Government — over monetary policy in general
and money for the capital development requirements of
Commonwealth and States in particular.
It would be master in its own house and no longer
obliged to pawn the national estate to the banks.
B: It would make a beginning in the long, uphill task
of redeeming the National Debt.
C: It would gradually put an end to a taxation policy
that is today nothing short of confiscation of income, and
which tomorrow would turn taxpayers, out of sheer
struggle for human survival, into a nation of Poujades, or
tax evaders on a nation-wide scale.
D: It would progressively reduce the inflated price
structure to something like normal. Taxation is the arch
E: The trading banks would be free to finance private
industry, but at a rate of interest more in keeping with the
service they render in mobilising and monetising the com-
To those fearful people who insist that these proposals
would lead to inflation, may we ask for a little cool