The process whereby money comes into existence in our society is appalling, firstly because it enables banks and borrowers to determine the purposes to which society's resources are put (investments that benefit richer people) and secondly because it delivers enormous wealth to the banks and the rich.
The amount of money circulating in the Australian economy is about double the amount that existed in 2000. What is the process whereby new money is added to the economy?
New money is simply created by the banks every time they make a loan. Here’s the Bank of England saying so. (McLeahy, Radia and Thomas, 2014.)
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
“Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”
When you go to the bank officer for a loan he does not go down into the vaults and get the money. He does not get some of the money the bank is holding and give it to you. He simply grants you the loan by keystrokes that put money into your account. It didn’t exist before he did that.
The bank gets and owns that money and lends it to someone who has to pay it back someday with interest. He might invest it in a firm that produces things you buy, at a price that is high enough to enable the firm’s owner to pay the interest, meaning that you are paying the interest.
So the vast sums paid back as interest are wealth transferred from people to the banks, who created the loans from nothing and at no cost to themselves.
Very few people understand this process. It is literally by far the most powerful mechanism transferring wealth to the rich. It would be easily eliminated, simply by enabling governments to create and issue new money by spending it into circulation, on socially needed things, as distinct from allowing private banks to created and lend it into circulation and reap interest payments.
All this is astoundingly irrational and objectionable, but there is very little awareness of what is going on and very little criticism. In 1975 J. K.Galbraith said, “The process by which banks create money is so simple that the mind is repelled.”
Over the past hundreds of years many critics and monetary reform agencies have objected to a system putting billions of dollars every year into the hands of banks and their shareholders. (Maloney, 2024.) Another analyst says, “…allowing banks the privilege of creating money represents a massive subsidy to the tiny minority that own banks, or have shares in banks.” (Pettifor, p. 178.)
The most ludicrous aspect of the system is that our when our governments borrow money, which they do in great volume all the time, they go to those private banks and borrow money from them (and from other sources), and have to pay it back with interest. As a result, many billions of dollars of public wealth is continually drained into the coffers of the private banks and then into the pockets of their shareholders … when the entire process is absurdly wrong, unnecessary and could and should be totally eliminated. Governments should create and issue or spend all new money.
Many Urgent social needs go unmet because government tell us they haven't got the money to attend to them, and are already in too much debt. Yet they could create the money while saving huge interest costs.
Ellen Brown says, “The cruel hoax is that governments are in debt for money created on a computer screen, money they could have created themselves.” (Brown, 2026.) The sums are staggering. In 2011 UK public debt (i.e., not including private debt) was around 1 trillion pounds and annual interest was 43 billion pounds, equal to 630 pounds per person. (Robertson, 2012, p. 54.) In America now more than $1 trillion is paid in interest on the Federal debt alone every year.
The Positive Money group puts it clearly. (Pettifor, Undated.) Money...
“ ... should be spent via the government into infrastructure, green technology, or as a cash transfer to help households pay off their debts and improve their finances.”
The situation is even worse regarding the cost of goods we buy. Note how interest compounds. The price of bolts put into a motor includes an amount that the bolt producer had to pay for the capital he borrowed to buy inputs for their manufacture. When the motor manufacturer sells them to the fridge maker his cost of production includes the interest paid by the bolt manufacturer, and it also includes the cost of his interest payments on the money his firm has borrowed. So interest is being paid on sums increased by previous interest payments, adding all the way up to the price you pay for the fridge.
Kennedy (1995) estimated that the percentage of what we pay for various things that is made up by the accumulated interest payments along their production chain. For some it totalled around half the final cost. Venz and Leggatt, (2024) state the proportion for Australian house construction, that is, the amount paid in interest is more or less equal to the loan that was taken out.
Why on earth does it make sense to allow private banks to create money and own it, and get interest every time they lend it out?
Why is there almost no criticism of this process?
Again, there would be no problem with this if the banks were publicly owned.
There is only one publicly owned state bank in the US, the Bank of North Dakota, and it out-performs all the rest on all performance indicators. That's because it does not have to deliver any of it profits to shareholders, and it can lend at low or no interest to good ventures.
Note that in a sustainable and just society the problem would not exist, because there would be no economic growth and therefore no need to continually add to the money supply. Money would be placed in banks for safety and to enable transactions but would earn no interest.
Conclusion
The money creation system is absurd, a gigantic racket, by far the greatest scam in all of history, and easily replaced. The failure to object to it, let alone scrap it is a tribute to the dominance of capitalist ideology; it is taken for granted that private banks can and should create and issue new money. This outline has been sent to The Reserve Bank of Australia, various economists, and left agencies. None have expressed any criticism of the analysis, or interest in taking up the issue.
For references and a much longer discussion.
References
Brown, E., (2026). The Sovereign Reset: Escaping the Interest Trap with Greenbacks, Scheerpost. September 2nd.
Kennedy M., (1995). Interest and inflation free money: Creating an exchange medium that works for everybody and protects the earth. Seva International.
McLeay, M., A. Radia and R. Thomas, et al., (2014). Money creation in the modern economy, Bank of England Quarterly Bulletin, Monetary Analysis Directorate.
Maloney, M., (2024). Bank Crisis & Inflation: The Biggest Scam In The History Of Mankind. See also: The IOU Machine: How Currency Is Created | Hidden Secrets of Money.
Pettifor, A., (2017). The Truth Behind the Magic Money Tree, Positive Money, June 2nd.
Venz, S. and J. Leggatt, (2024). What is the average mortgage in Australia, Forbes Adviser. July 15th.
ABOUT THE AUTHOR
Ted Trainer is a Conjoint Lecturer in the School of Social Sciences, University of New South Wales. He has taught and written about sustainability and justice issues for many years. He is also developing Pigface Point, an alternative lifestyle educational site near Sydney. Many of his writings are available free at his website, The Simpler Way.
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