Bank-money and the betrayal of democracy

In this speech given at the PSA conference in Cardiff, the author examines the history and theory of bank money - credit - from a democratic perspective. How did this strange fraud come to be established under law?

Ivo Mosley
8 April 2013

Our representatives betray us by allowing banks to create the money supply. Money is created in a way that benefits politicians, bankers and capitalists (entrepreneurs and investors) at the expense of the rest of us. Most of the laws which underpin the process have never even been argued about, let alone voted on, in any legislative assembly. Money-creation is managed behind closed doors by those who profit from the process: that is, by politicians, capitalists and bankers. Knowledge of the laws and procedures is obscure to all but a few. This most important of functions, therefore, is in opposition both to democracy and to open and accountable government.

The propositions in the paragraph above are perhaps outrageous, but easy to justify. Our present system of money-creation by banks was developed in England at a time when Parliament consisted of rich men voted in by other rich men. It has since become standard across most of the world, as English financial and legal institutions have been adopted by governments of other countries.

Public understanding of money tends to be that it is a uniform commodity, a medium or token of exchange, which favours no one person over another. Some people accumulate more than others because in some way, however inscrutable, they have provided more in exchange; or perhaps they have managed to get their hands on some ‘surplus value’ – in other words, they have managed to profit from financing and/or organising the work of others. When such people save, according to the myth, they have money to invest; and that is capitalism.

Nothing could be further than the truth than this picture of our money supply. It actually consists of two systems which are almost entirely separate, in that there is almost no flow from one to the other. I say ‘almost’ because, alone among all our methods of payment, actual physical cash­ – coins and notes – crosses the boundary between the two systems. There is a strong relationship between the two systems, however, and this relationship makes some into winners and some into losers.

The easiest way of understanding the relationship is to look at its origins in English history: then the picture becomes fairly simple. The system came into being when a certain dodgy practice of English bankers was given legal authority by English Parliamentary representatives between the years 1688 and 1704. Representatives had just become the supreme power in the land, and parliament, as I have already said, consisted of rich men voted in by other rich men. What was this dodgy practice?

The story is known to almost every elementary student of economics. English bankers of the 17th century stored gold, which was then in use as money. It was a period of civil war: hungry armies were on the move, and there was a big demand for strong-rooms. Bankers gave receipts to owners of the gold so they could return and claim it. Soon these receipts, these claims on gold, began to circulate as paper money. People began to pay for things by handing their claims to someone else.

So far so good, you might say. Paper money is light to carry and easy to hide: a brilliant and positive development! But bankers, realising that gold would stay put in their vaults for as long as the receipts kept circulating, thought – why not issue receipts for gold that doesn’t exist? They began to write receipts for fantasy gold, and to lend the receipts at interest. Today we simply call these “bank loans”. For reasons which are not hard to imagine, these bankers rapidly became extremely rich. Not only could they multiply their interest payments, they could expect repayment of fantasy loans in real money. They also made themselves vulnerable, however, because there were claims out in the world on more gold than they had in store. When too many people came in wanting real gold, they went bust.

Parliament, for its own reasons, authorised this dodgy practice. As rich individuals, members of parliament could now borrow, invest and (hopefully) make more money; as a government, they could borrow and finance war. The Bank of England took on the role of managing the system: from this was born the institution of the central bank. With government complicity, the dodgy practice became a complete system of money creation and management.

The system is in operation today across most of the world. We have said goodbye to the gold – the gold standard died finally in 1974 – and to most of the paper too; but the double-system is maintained in virtual, that is digital, reproduction. What was gold, is now cash digits. The money we actually use – always excepting those notes and coins – is digital claims on cash digits. The ‘reserve ratio’ of banks is a measure of how many claims exist against a single quantity of a bank’s ‘cash reserve’.

In other words, the system we are in thrall to now is the direct descendent of a system designed three hundred years ago for the profit of banks, governments and capitalists. It still performs that function today.

From the general point of view, what is wrong with creating claims on cash that isn’t there? By lending claims on something they don’t have, banks take money – interest payments – under false pretences. By augmenting the money supply, they dilute the value of currency held by others — a schoolboy’s dream, taking a little from everyone else so they won’t notice. In short, banks manufacture money for the benefit of a certain section of society – government, capitalists and banks – at the expense of all the rest, including workers, genuine savers and independent producers. They are creating more inequality, in a world already more than unequal enough.

This way of telling the story points out the specific nature of the abuse: the creation of claims on money that isn’t there. Such claims are called fictitious credit: if you try to claim what you think is yours, you find out it’s not there. Objecting to this, of course, is quite different from objecting to, say, the taking of interest, to credit, to negotiable claims, or even to capitalism.

Fictitious credit favours not just banks (who make big profits) but also capitalists and governments, who are able to borrow at cheap rates: fantasy cash comes cheaper than real cash. (Just think of cash moneylenders’ rates today, as against those of banks: anything from 30% up to 1,000%, as against 5% or less.) Especially important for governments is the fact that no permission besides the bank’s is needed to borrow; and banks, licensed by governments, are inclined to cooperate. Together, banks and governments burden that convenient legal fiction ‘the people’ with almost unlimited debt – and governments get to spend the money. The combination of government and capitalist borrowing is a deadly ‘left’ and ‘right’: a left-hand blow of government borrowing, followed by a right-hand blow of investors who purchase assets and services with created money. To see ‘left’ and ‘right’ as opposing forces in the modern world is to yield to confusion: they operate together in every Western state.

This system of creating money is foolish as well as fraudulent. Banks create claims in the act of lending, and those claims disappear when loans are paid back, so the money we actually use grows or shrinks according to the banks’ appetites for lending. This ‘perverse elasticity’ exacerbates the business cycle, turning ups-and-downs into full-blown booms-and-busts.

There is no need for money to be created this way. When money was gold, of course, someone had to find it, dig it up, or trade for it. Once it was paper, money could be (and occasionally was) distributed in an equitable way among citizens and households. Whether gold, paper, or digits, money is valued for its reliability as a means of exchange. The creation of fictitious claims is a criminal offence for most of us, it is a privilege allowed only to banks and ‘other depositary institutions.’

There are three differences between money created as fictitious credit, and money pure and simple.

First, in its creation: fictitious credit is created out of nothing on condition that the borrower will pay a certain amount of interest and eventually be able to repay the loan. A glaring example: when countries emerged from communism, Western banks bought up their assets with money from nowhere and put the inhabitants to work for the profit of investors.  

Secondly, during its existence, money as fictitious credit is forever being transformed (via the portal of interest) from circulating money to money seeking investment. Another way of putting this is to say that bank-money is created with an embedded widget which transfers it bit by bit to the ownership of capitalists.

Thirdly, fictitious credit is destroyed when debts are repaid. This means that during a downturn, the money supply is apt to shrink. In a modern economy, that means there is less and less money in circulation, to pay for services or manufactured goods.

Overall, and very grievously for humanity and freedom, the great pools of capital managed by governments and capitalists grow and grow, while the amount of money among the rest of us shrinks.

From the way the system operates, we would expect a steady growth in the amount of capital in the world, and a steady decrease in the amount of money in circulation. We would expect the steady impoverishment of people not attached to government or employed by capitalists. We would expect a steady increase in the amount of debt loaded onto their peoples by governments. We would expect there to be massive pools of capital available for projects with a guaranteed return (such as arms production: for arms are purchased by government order with public debt, and governments like to compete). We would expect cooperative enterprises which profit capitalists, governments and banks at the expense of that convenient legal fiction ‘the people’.

We would expect humans to become less and less competitive against machines, because machines are bought with created capital, while workers come burdened with government-created debt that has to be funded by taxes on employers and workers.

We would expect a vicious circle of humans being made redundant and dependent on the State, putting yet more financial burden on those who productively work.

It would be easy to go on, outlining how our monetary system needs or favours war, environmental devastation, cultural degradation, ‘recreational drug use’, relentless and unsustainable growth, and the huge cities of the dispossessed which appear wherever representative government takes root; and how the tidal waves of created capital produce barbarous billionaires and new kleptocracies.

None of these connections is ever, so far as I know, debated in representative assemblies or in our media. It would make no sense for a political party, a corporate-owned media company, or for that matter a political tyrant (increasingly significant these days, when dictatorships are rearing their ugly heads all over the place) to question a system which offers to supply them with money at others’ expense. For money, as the saying goes, is ‘power in its most liquid form’. 


I mentioned earlier that the laws supporting the bank-creation of money were not created in a democratic fashion – that is, they were not voted on in a legislative assembly. They came into being by commercial practice being accepted into law.

It is a feature of English law, within which this system was first created, that law is made not only in parliament but by the decisions of judges (‘case law’). A strength of this system is that it may react swiftly and inventively to changing circumstance; a weakness is that those who are disadvantaged by law may not notice and continue to be disadvantaged.

A bank needs three privileges before it can legally create fictitious credit it. It must own the cash deposited with it. It must be authorised to create multiple claims on the cash it holds in store. Lastly, its claims must be enforceable in law: they must be allowed to disguise themselves as legal tender – as euros, dollars, pounds etcetera.

The first of these privileges was established – or rather re-established, since it was already commercial practice – in a famous case (Foley v. Hill of 1848) when judges agreed with each other: the money customers deposit is ‘to all intents and purposes the money of the banker, to do with as he pleases’ [Lord Cottenham]; and moreover, that a banker ‘receives it to the knowledge of his customer for the express purpose of using it as his own.’ [Lord Brougham]. In other words, we all know that when we put money in a bank it becomes the property of the bank, and that it’s no longer ours. End of story.

The second legal privilege of banks was explained in another well-known case [UDT v. Kirkwood, 1966]. One of the three judges, Lord Denning, said that the law enforced such credits on the principle ‘communis error facit jus’ which a legal dictionary explains thus: ‘What was at first illegal, being repeated many times, is presumed to have acquired the force of usage, and then it would be wrong to depart from it.’ Denning’s actual words: ‘thus it (the law) will enforce commercial credits rather than hold them bad for want of consideration.’

The third privilege – for the fictitious credits of banks to be regarded in law as legal tender – was actually debated and passed by the English parliament. Parliament, as I keep repeating, consisted then of rich men voted in by other rich men. They passed the Promissory Notes Act of 1704 specifically to crush judicial opposition to fictitious credit: in particular, to suppress Lord Chief Justice Holt’s attempts to stop bankers from dictating the law. It is interesting that LCJ Holt is famous today for his efforts to restrain another establishment vice, the persecution of witches; and for his reminder that slavery is not permitted on English soil.

To add confusion to the mix, the laws supporting the practice are dishonestly framed. A bank is defined as an institution which accepts deposits; and, in circular fashion, as an institution licensed to act as a bank. The essential privileges of a bank are thus masked, hidden, unacknowledged. Lord Denning complained of this lack of definition fourteen times in the judgement referred to earlier.


Halting the creation of money as fictitious credit would not be difficult. What is difficult is piercing the veil of public ignorance, so that people know enough to demand reform.

Reform would consist of two processes: withdrawing the privileges of banks, and managing the transition to a ‘level playing field’. For this, some democratic decision-making is needed: on how to restrain fictitious credit, how money should be made or destroyed in future, and how artificially-created debts should be adjusted in the meantime, so that an equitable transition might be made to an equitable future.


There is discussion of how this might be done in my book In The Name of the People, as well as in many forums on the internet: see, for instance, or

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