Overview

There are three main types of money: currency, bank deposits, and central bank reserves. ...Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves. Bank of England, Money in the Modern Economy (2014) The most outstanding fact of the last depression is the destruction of 8 billion dollars - over a third - of our check-book money - demand deposits. Irving Fisher, 100% Money and the Public Debt (1936) The process by which banks create money is so simple that the mind is repelled. John K Galbraith, Money: Whence it Came, Where it Went (1975) Commercial banks create the money supply in the form of the deposit account money supply: by making repayable loans of newly-created bank deposits to private sector loan account debtors and to government bond debtors. Making a bank loan or bond purchase creates a linked pair of credits/debts: a new spendable, cashable, credit balance (a new bank deposit: e.g. ]$1000) in the debtor's bank deposit account; and an equal new interest-bearing repayable debt balance (-$1000) in the debtor's bank loan or bond account. Debtors spend their new bank loans and bond sale proceeds. Debtors pay the new credit balances to payees - by check, direct deposit, online banking, debit card, etc - within the bank-operated payments system of debiting payer accounts and crediting payee accounts. The new credit balances are debited out of the debtors' bank deposit accounts and credited into the first payees' bank deposit accounts. That's where the deposit account money supply - the spendable, investible, savable (and cashable) credit balances in our bank deposit accounts - comes from, in the first place. Then payees create the spendable cash money supply by making cash withdrawals, and paying with debits to our deposit account credit balances. But most bank deposits are never cashed out. Most money never exists in any other form than credit balances in payees' bank deposit accounts. Debtors owe all the credit balances back to their creditor-banks, as payment of the debtors' loan account and bond debt balances. Repaying a bank loan; or redeeming a bank-held bond; un-creates - extinguishes; cancels out to $0/$0 - the deposit account credit balance (+$1000) and the loan account or bond debt balance (-$1000) that were created by making the bank loan or bond purchase. The deposit account money supply - which is over 95% of all money that exists - only exists so long as debtors' debts remain unpaid. But debtors can't pay their loan account and bond debts because payees have all the deposit account money. The Road to Debt Bondage describes how the commercial banks' debt-based repayable bank loan and bond purchase money supply creation monopoly creates ever-increasing totals of payees' bank deposit account balances that are owed back to banks as payment of debtors' unpayable loan account and bond debts, until debtors finally default en masse and the banking system descends into a financial crisis of creditors' uncollectable money that is owed as debtors' unpayable debts. Financial crisis is historically resolved by writing off our bank deposit account balances to relieve the commercial banking system of its unpayable deposit liability debts. Which is what bankruptcy Trustees did in the 1930s, and the Dodd-Frank depositor bail-ins program plans to do this time. Which plunges the spending-driven producer-consumer economy into Debt-Deflation Depression by writing off ruinous amounts of commercial banks' unpayable deposit liability debts - which used to be our spendable deposit account money supply. Monetary system reform - government issuance of debt-free (non-repayable) money that breaks the banks' longstanding monopoly of debt-based money supply issuance - can solve the unpayable debts problem, prevent banking system failure, and eliminate the need to write off our 'money in the bank'.

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