12 Sep 2012

Michael Rowbotham : The Grip of Death

I'm in the middle of reading Michael Rowbotham's incredible 1998 book "The Grip of Death : A study of modern money, debt slavery and destructive economics". It was one of the very first books in recent times that really exposed the truth behind the way money is created as debt by banks. Indeed, it was this book that Ben Dyson picked up by chance in the university library, and which led him to set up Positive Money a few years later.

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....


  1. It's very easy indeed. When a bank let you do an overdraft of 100, she put 100 as liabilities in the book, after creating 100 in account. When you pay back with a 100 banknotes, the two accounts go to zero. The liabilities one and the client one. And the cashier pocket the 100 banknote. This is why they don't like when robbers get in and take the banknotes which are their black gain... Here you can find an academic explication: http://www.scribd.com/doc/56056328/The-most-important-feature-of-banks-credit-creation

  2. And if you ask yourself where do the banks hide their illegal gains, you have to read REVELATION$ from Denis Robert, Les Arenes editions, 2000. It's about how clearing institutions help banks stash illegal gains in offshore islands by using unpublished accounts... Madaleine Albright and Hillary Clinton knows better....

  3. I
    don’t think much of Michael Rowbotham. His book is great if you want an
    adrenalin rush. But not if you want to understand money, banking, etc. I made a
    start on his book, and then gave up.

    particular, I don’t agree with the passage you cite from his book: “And that
    money is held and accounted as an asset of the bank."

    may very well be that some banks instruct their branches to regard or count
    loan repayments as money that can then be re-lent. That makes some sort of
    sense because banks want to lend as much as possible without over-expanding. So
    telling bank branches they can have £X in total lent out at any one time, and
    no more (until allowed to by the bank’s head office) makes sense.

    any idea that “unlent” money of the above sort “is accounted as an asset of the
    bank” is a joke. That “not yet lent” money just won’t appear on a bank’s
    balance sheet. Or if it did, any competent auditor would scrub it out.

    the idea in your next paragraph that the above amounts to “counterfeiting”, I
    think that claim is very debatable. Money creation by commercial banks is a
    perfectly legitimate activity. The industrial revolution was funded by this
    type of money. But at the same time it is perfectly legitimate to ask whether the
    country’s best interests are served by letting commercial banks do this, or
    whether money creation should be the preserve of the central bank. Like you, I
    favour scrubbing commercial bank created money and having just central banks
    create it.

    two latest posts on my own blog (at the time of writing) are on the fractional
    versus full reserve argument: http://ralphanomics.blogspot.co.uk/.

  4. Hi Simon, I read your post with interest and was equally surprised at Rowbotham's statements. I've done some research and have been able to clarify the situation, I thought you'd want to know! I think the confusion here is regarding the different types of "money", namely central bank money and current account (credit) money. When a loan is repaid, credit money does indeed disappear in a puff of smoke. But the central bank money which is transferred when the debtor receives money to pay off the loan is not destroyed. Central bank money is constant within the banking system, unless the central bank decides to create more (QE). It is not destroyed. I think the final paragraph you quote implies that if one bank was making all of the loans, then it would end up sucking in all of the central bank money as the loans were repaid (as central bank transfers from other banks). However, if other banks make loans, or customers of other banks receive their loan to a current account, then central bank money is transferred out of the first bank. So we need to view the banks as one connected system, all using central bank money. This video will make it clear - http://www.youtube.com/watch?feature=player_embedded&v=JCuMAoHpM_4.

    Regarding your point on central banks lending money to governments (QE), consider that the central bank creates new central bank money which is transferred to the banks with which the goverment has current accounts (showing as a current account asset of the government, balanced by liability to repay the gilts). The government can then use this new money for government spending or servicing debts. But this money is absolutely brand new central bank money and therefore potentially inflationary. However, in a credit crunch (debt collapse) where credit money is destroyed by loan repayments, this new central bank money helps to balance out destruction of credit money. Essentially, the government is filling the hole in the money supply created by repayment of private debt. Public debt expands as private debt shrinks. There comes a point when private debt is so low that people begin to borrow again and private debt expands once more. This will cause inflation, unless the central bank sells the gilts it bought from the government (shrinking central bank money in the system), or raises interest rates to limit private debt expansion.

  5. The book is great as an eye-opener, but that particular statement is incorrect. The money gets destroyed when it's repaid. Positive Money has released a new video explaining this: http://www.positivemoney.org/2013/03/how-money-gets-destroyed-new-video/

  6. Hi Mira, I looked into this and found that his statement isn't incorrect, it's just not clearly worded. He is referring to central bank money, rather than credit money, when he says "money" is not destroyed. In order to repay a loan, a transfer of central bank money occurs between banks when the borrower earns money to make loan payments. So a bank receives central bank money when a loan is repaid - This central bank money is not destroyed and is held as an asset of the bank...

  7. My thanks to Peter for looking into this. It may indeed be the case that the difference between central bank money and credit money is critical.

    However, I note that the recent news about Barclays lending billions to the Qatar Investment Authority who then used the money to buy shares in Barclays sounds pretty much like a way for banks to keep the money they create. See my piece about how to solve the UK's national debt problem in five easy stages to see how the insanity of commercial bank money creation could potentially be abused.