Bank-money and the betrayal of democracy

Published on openDemocracy/Economy, by Ivo Mosley, April 8, 2013.

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?

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 … //

… Law:

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.
(full long text and comments).

(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


stupid … I cannot let these questions;

forgotten how Govs have to be run?

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