I've not finished it, but I have to tell you that there was one bit of chapter 2 that has already made my jaw hit the floor.
I had already got used to the idea that banks can create money when they make loans. And that they can charge interest on those loans.
But I had naively assumed that when those loans get paid off, the "money" effectively disappears in a puff of smoke. Obviously, the bank will have sucked out of the economy all the interest payments that were made during the loan period, but I honestly believed that the money that was lent would get destroyed when the repayment was made. That's the story that we are all told as soon as we cotton on to the fact that commercial banks are allowed to create the money supply as debt.
This is one reason why I have been arguing for some months that if Central Banks (like the ECB and the Bank of England) were to lend money to governments (via a "'publicly-owned credit institution" to get round the restrictions in the Lisbon Treaty), and the governments were to use that money to repay their loans to the banking system, then this could not cause inflation. I thought that the "money" would simply disappear in a proverbial puff of smoke. No chance for inflation. As a consquence, I really could not understand why the Germans (in particular) could object to repayment of government debt on the grounds that it could be inflationary.
But then, on pages 28-30 of Michael Rowbotham's book, I read the following:
"The banking system is able, at a pinch, to claim that it does indeed create money, and does so in large quantities, but 'only as a service to the borrrower'[....]
"This claim, that money is created as a service to the borrower, like the suggestion that they are 'only lending their depositors' money', is utterly false, and an argument that completely ignores all the facts of standard banking practice. Banks make money and although the act of lending might be regarded as a service, the truth is that banks account all the money they create as their own. In total effect, banks create money for themselves." [....]
"It used to be argued that money repaid to banks in respect of a loan was effectively destroyed. This was portrayed as the simple reverse of the spiral money creation process. In the same way that a bank loan created a new deposit of number-money or credit, the repayment of a loan or mortage was held to cancel out an equivalent amount of credit. It was argued that when someone paid money into their overdrawn account, the debt and that amount of money were set against each other and cancelled each other out." [....]
"But this is not what actually happens at all! As any bank manager will confirm, when money is repaid into an overdrawn account, the bank cancels the debt, but the money is not cancelled or destroyed. The money is regarded as every bit as real as a deposit; it is regarded by the bank as the repayment of money that they have lent. And that money is held and accounted as an asset of the bank."
"The fact that upon repayment, money that they have created is not destroyed, but is accounted as an asset of the bank, proves beyond dispute that when banks create money and issue it as debt, they ultimately account for that money as their own. The only factor which disguises their indisputable ownership of the money they create is that this returning money is usually rapidly reloaned. Borrowing in the modern economy almost always outpaces repayments, which is why the money supply escalates. This means that the money returning as repayments does not accumulate embarrassingly in the bank's own account, but is quickly reloaned, along with more debt."I am completely gob-smacked. What difference is there between this and counterfeiting money? Nothing, except that what banks do is legal.
I am so amazed by this that I am tempted to think that Michael Rowbotham must have been mistaken. If so, can someone in the banking system please explain to me and everyone else what really does happen when someone pays back a loan? Does the money disappear (as it should)? Or does the bank just keep it?
Answers on a postcard please....