Professor Richard Werner (Oxford)

Director of International Development

University of Southhampton UK

Citation: https://YouTube.be/ECoG7pY4wRE

Interviewer: Allesandro Del Prete

Challenger Banks:: in UK 5 banks control 90%; in Germany 1,500 banks control 70%

Expert: (Names of banks) but they are still tiny.

Prof: And they will stay tiny…the moment they get a bit bigger, they will be bought up and they will disappear. This is exactly what happened over the last 100 years.

Interviewer: How do you begin to explain decentralized banking?

Prof: There is a role to be played by the banks in everything that is happening in the economy, but what exactly is their role. I would like to quickly reflect on that.

The banks are thought of as intermediaries, but are they? That’s not really what’s happening.

Interviewer: What are they?

Prof: They are creators of the money supply.

Interviewer. So you are firmly of the view that banks create money out of thin air?

Prof: I produced the first imperial studies to prove that in the 5000 year history of banking,

Banks are thought of as institutions that take deposit and lend money. The legal reality is banks do not take deposits and banks do not lend money.

So what is a deposit? It is not actually a deposit, its not a bailment, its not held in custody.

At law, the term deposit is meaningless. The law and law judgments have made it very clear,

If you give your money to a bank it is not called a deposit. This money is simply a loan to the bank.

Expert: That’s true.

Prof: So banks borrow from the public. So that much we have established.

What about lending? Surely they are lending money. No, they don’t. Banks do not lend money.

Banks again at law is very clear. They are in the business of purchasing securities. So you say, do not confuse me with all that legalese, I want a loan. Fine, here is the loan contract, here is the Offer Letter. At law, it is very clear you have issued a security, a Promissory Note and the Bank is going to purchase that. That is what has happened.

Interviewer: Put it in lawman’s terms. What does that mean?

Prof: It means what the bank is doing is very different from what it presents to the public what it is doing. You say, fine, the bank is purchasing my Promissory Note, I don’t care about the details, I just want my money.

The bank will say “You’ll find it in your account with us”, they will be technically correct. If they were to say “we will transfer the money to you,” that is wrong, as there is no transfer of money at all any where at all, from inside the bank or outside the bank.

Expert: It’s already in the bank.

Prof: What we call a deposit is simply the bank’s record of its debt to the public. Now it owes you money, and its record of what it owes you is what you think you are getting as money, and that’s all it is.

That is how the banks create the money supply. The money supply consists to 97% of bank deposits and these are created out of nothing by banks. When they ‘lend,’ they invent fictitious bank deposits. Why? They simply restate what is an accounts payable liability by having purchased your Promissory Note as a customer deposit, but no body has deposited any money.

I wonder how the FCA deals with this because in the financial sector, you are not supposed to mislead your customers.

So the banks create the money supply by inventing these claims on themselves. These fictitious deposits are deposited for the public as long as there is money creation is in line with the creation of goods and services, with new technologies and therefore adding value to the economy by the money creation.

If that is happens and we are talking about business investment productive loans productive bank credit you will have no inflation these loans can be repaid and you will have no inequality.

The banks lend for productive purposes in Germany in much of its 200 year history or in the last century in the East Asian economies where bank credit was largely for productive purposes.

But there are 2 more cases I need to quickly to point out because that’s the contrast.

Interviewer. Inequality is significantly lower and inflation is low.

Prof: Yes

Interviewer. And the real economy thrives.

Prof: Is booming. That’s when bank credit creation is focused on productive lending for productive purposes.

Interviewer. As opposed to speculation and asset price …..

Prof; As opposed to when banks create credit for consumption, what obviously is going to happen you are going to have more money created and more demand for goods and services, but it’s the same amount of goods and services and you are going to have price inflation. That is well understood and Central Banks are watching that.

What’s less well understood and what is biggest in the UK, and is probably 70% of all lending what is well way more than that….

Expert: is Mortgages

Prof: It is bank credit creation, so money creation, for asset transactions and purchasing ownership rights, and then you have a problem. Why? Because you are creating new money, but you are not creating new goods and services you are giving the people more purchasing power over existing assets, and therefore you must push up asset prices.

You can show a chart with asset prices and property prices in the UK and it will match very closely, as in Japan, and that creates the inequality. The banking sector has focused too heavily on productive lending.

Expert: what you are telling me is that this loan deposit needs to be categorized.

Prof: You are right, exactly

Expert: Is that right?

Prof: We need to look at where the money is going and that makes a whole world of difference.

If money as bank credit is used for production, you will have no inflation and financial stability.

Also you do not have this inequality issue.

Expert: And should there be a ratio of capital

Prof: This whole Basel capital approach does not work, because it is premised on the banks

as financial intermediaries, but they are not, they are money creators. We need regulations that recognize reality of how the banks actually operate.

Expert: So. You are saying this. Is a regulation problem?

Prof: That’s right. We need a different regulation and the only ones that has succeeded in history and we have good data in this century in particular in asset bubbles, are driven by bank credit for transactions that lead to an asset boom, and like a game of musical chairs, you have to play it, and assets are driven by more money for asset creation but the moment it stops, asset prices fall, and you get the first bankruptcies, and the banks get risk averse and the whole thing goes into reverse, and banks go bust.

You can avoid this, and the only regulation that succeeded in avoiding this is guidance of bank credit. Simple rules and the simplest form of bank credit guidance is simply bank credit for financial transactions. It doesn’t mean financial transactions are bad, but let the speculators speculate, let them even borrow money from banks.

Expert: from where do they borrow it?

Prof: They can issue bonds, or borrow in the market, but they shouldn’t get access to money creation, and that creates the boom-bust cycle.

In some countries they have succeeded in preventing this asset inflation, such as Germany, without guidance by having a banking system that’s dominated by banks that don’t want to do this speculation in the first place. These are the community banks. The smaller banks. They lend for productive purposes to small and medium size enterprises.

The solution is to create small banks.

Expert: I like it, but getting through the regulations, they are so reluctant. I have to say this has been brilliantly explained.