The Creation of Money as Debt

According to Social Credit theory, hanks both create and destroy money. "On this point both Social Crediters and orthodox economists agree. Both agree that the repayment of a bank loan is a destruction of money ... Substantially, all money that comes into existence is a debt to the banks, and this is why Social Crediters refer to our present money system as a Debt System.

Social Crediters maintain that our money system will never be effective or just until some money, at least, comes into existence under proper circumstances, as a national credit without any corresponding national debt" (F. C. Jordan, Social Credit for New Zealand)

'... The banking system owns our money and the people, including industry, only have it on loan and pay interest on it continuously.' (W.B. Owen, Wealth or Debt)

These views contain a mixture of truth and painful misunderstanding. It is true that most (but not all) money comes into existence as debt. It is not true, however, that banks create or destroy money at will.

A Social Credit notion of money creation was in Sir Tom Skinner's mind when he declared at the 1976 Wellington stop-work rally that 'if you were the BNZ it wouldn't cost you a cracker to build that building in Willis Street. You'd only have to write a cheque.' This is nonsense. In fact banks can only create credit in a regulated proportion with their reserves They can't conjure money out of thin air in unlimited quantities. If the BNZ builds itself a building, it has to forego the interest that a similar amount of finance could bring in if they lent it out instead.

It is no more true that the repayment of a loan involves the destruction of money When a borrower repays his hank, this money remains on the books of the bank and is available for lending to a new borrower.

It is easiest to understand the error of SC theories of money by looking at the actual processes by which the supply of money is expanded or contracted.