Why Money must be created by State and not Private Banks

By Redge Nkosi – He’s the Executive Director and Research Head at Firstsource Money.


Paper and coin money as we know it, is but one leg of broad money. Most of us use the word money to denote the currency notes and coins in circulation, yet these constitute about or less that 5% of the total money, depending on the jurisdiction. This is government created money, through the reserve bank.

The other money is created from debt contracts (credit money or loans) between banks and borrowers. This money is then transformed into public money via the link banks have with the reserve bank. New money is thus created through loans given to borrowers as deposits in the hands of borrowers. Banks do not necessarily intermediate between savers and borrowers, as postulated by the Financial Intermediation Theory and the Fractional Reserve Theory (they don’t necessarily lend money that is saved). Money created through this process of loans is spent out there as public money. It is this money (the +95%) that is created by banks from “nothing” or from “thin air”, ex nihilo.

But what does all this mean in real life? As an example, the mortgage bond you have with your bank is money the bank lent you that was just created by way of a book entry. It is not that the bank sweated for it, yet you are charged interest and they repossess our property should you fail to honour the debt contract. This is true for any other debt contract you enter into with your bank. For both individuals and companies, private banks engage in this sort of money creation from thin air. Furthermore, banks can chose who to lend, thus having given themselves the power to allocate or not allocate this precious resource. And since banks are motivated by profit, credit allocation can only be to those they deem fit, naturally not in the public interest. As we have noted in the recent past, this power has been used by banks despotically and sometimes to the detriment of the entire economy. Recent cases of banks defrauding the general public with a view to maximising their profits are too many to count. Why should this right to create money be exclusively given to very few institutions? Why have this and other governments (actually parliaments) franchised out the production of money to very few institutions, yet the proceeds of such a franchise do not accrue to the people?

MONEY AND DEMOCRACY? Since the abandonment of the gold standard and the Brettonwoods system in early 1970s, there has been unprecedented expansion of finance as a result of the conversion of these billions upon billions worth of debt contracts into currency. And with it has been the expansion of power, corporate or personal by those that have acquired the right to create money. But also, modern capitalism is finance based, hence the term financial capitalism. Capitalism, especially this type of capitalism is a great source of power, perhaps differential power. Crucially, in modern democracies, whoever has the power to create and control money has the power to direct affairs of the nation. Yet, this power is outside democratic control. Where affairs of any nation are in the hands of powers outside democratic control, it is the interests of those powers that will be served. There can be, and are deleterious consequences that result from this private control of key lever of economic growth and equity. South Africa and Africa have for far too long been controlled from without. If from within there are yet non democratic powers that control the allocation of resources, there can never be any realistic chance to change the economic and social fortunes of the citizenry. It is for these and many other reasons that we say, lets remove the power to create money from private banks to the people, so that the nation as a whole can benefit from this act of creating money.

The article was first published on www.firstsourcemoney.org.

About First Source Money.

It is an economic policy research and advocacy team that campaigns for the replacement of the current moribund economic policies, especially the monetary and banking ones, with those that engineer equity, inclusive growth and sustainable development.

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  1. Yes the south african model of the reserve bank with its limited mandate is definately “State Capture”

    Stephen Goodson is 100% correct to have said this country has long time been captured by the banks. The Guptas alleged state capture in like a drop in the ocean.

    At the Anc Conference we agreed on the urgent need to for a commission of inquiry on state capture but combine all state capture including the banking sector & wmc entities & guptas.

    We further agreed that it must be back dated from 1994-

    Already we have facts and evidence that concludes that the banking sector has robbed this country with the amount totaling R1,632 trillion, broken down as follows:
    #R877 billion liability paid on bonds of apartheid looting 1996-2010.

    #R755 billion interest sarb benefited from state blocked account which were never declared to the finance minister on the take over 1994.

    This has resulted in interest earned to be declared as Sarb assets,the Rapport reported these financial 3 weeks ago.

    Here is the stench! (A)The Sarb is a none profit making institution hence should not have such assets.

    (B)The Sarb private shareholders questioned these assets and wanted to know “who’s money was this? As they were not being paid any dividends on it!

    Gill Marcus, Tito Mboweni & Pravin Gordhan instead of giving answer they gagged them by immediately changing the banking act.

    1. The current financial crisis (junk status & recession)in this country was a planned sabotage, which Trevor Manual, Tito Mboweni, Pravin Gordhan hid and protected from all of us! We continue to call them comrades, even thou its crystal clear that they have become agents of regime change,but we choose to use facncy english words & call it “factions” these are sellouts! Traitors finisn & klaar.

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