Showing posts with label Credit Creation. Show all posts
Showing posts with label Credit Creation. Show all posts

Saturday, September 26, 2026

Economic Stagnation or Growth: Two Financial Systems | Richard A. Werner

Throughout his career as a banking economist, Richard Werner has provided empirical evidence that economic stagnation is not an inevitable condition of mature economies. The central issue is how the financial system creates and allocates credit. Productive credit can finance investment, technology, productivity, employment, and sustained high growth. Credit directed instead toward consumption, property, and financial assets fuels inflation, speculation, asset-price bubbles, and recurring financial crises. At the center of this system are central banks, major commercial banks, international financial institutions, and globalist financial elites whose interests and activities extend across national borders. Through their policies and institutional structures, these actors influence who receives credit, on what terms, for what purposes, and, ultimately, who controls the productive economy.
 
Fra Luca Pacioli and Leonardo da Vinci: two geniuses at work.
 
The problem is not simply high interest rates or inadequate government spending. It is the concentration of financial power and the deliberate structure of credit allocation. Globalist central bankers and financial institutions that place their international financial interests above national production, employment, and the common good are traitors to their own countries and to the national interest. The World Bank and IMF belong to this globalist international financial architecture. Banking crises are not merely disasters within this system; they are "opportunities for restructuring ownership, consolidating institutions, and transferring control." This language of systemic crisis as "windows of opportunity" for structural and ownership "reforms" appears explicitly in World Bank material.
 
When a bank makes a loan, where does the money come from? The answer is that banks create money out of nothing: no deposits or reserves are transferred, and reserves need not even be checked. The bank simply creates and credits the new money. Why doesn't the bank take a deposit? Because, in law, there is no such thing as a bank deposit. What is commonly called a deposit is legally a loan made to the bank by its client. Banks therefore take loans from clients rather than deposits. Nor, legally, do banks lend money. They purchase securities. A borrower's signed loan contract constitutes a promissory note—an IOU or debt instrument—which the bank purchases and records as an asset on its balance sheet. The corresponding "deposit" is simply the bank's newly created liability to the borrower: a record of what the bank owes. It is therefore a fictitious deposit in the conventional sense; legally, it is an accounts-payable liability arising from the loan contract, booked as a customer deposit.
 Economics Must Be Tested Against Reality
Mainstream economics has repeatedly constructed theories first and then treated their internal logic as evidence of truth. Ricardo's deductive methodology established this pattern: begin with a preferred conclusion, construct assumptions that produce it, build a model around those assumptions, and then treat the resulting logical conclusion as economic reality (Ricardian Vice). But logic is not truth. A logically consistent model can still describe a world that does not exist. The same problem extends across classical, Keynesian, neoclassical, post-Keynesian, monetarist, Wicksellian, and other schools that rely heavily on equilibrium constructions rather than direct empirical testing.
 
Paul Samuelson's principle of revealed preference points toward a more useful approach: watch what people and institutions actually do rather than what they say they do. The natural-science approach is therefore essential. Economic propositions should be confronted with data and tested against observable behavior. David Hendry's general-to-specific methodology provides one example: begin with a sufficiently general empirical model, test it against the data, eliminate what the evidence does not support, and retain relationships that survive rigorous testing.

Banks Create Money Through Double-Entry Bookkeeping—and Control Its Allocation
The conventional description of fractional-reserve banking obscures the central mechanism. Commercial banks do not simply collect existing deposits and lend that money onward. When a bank makes a loan, it simultaneously creates a deposit through double-entry accounting: the bank records a loan asset and a matching deposit liability.

» Opportunities for restructuring ownership, consolidating institutions, and transferring control. «
The Fractional-Reserve Credit Expansion Cycle.
 
This mechanism has been understood within banking for centuries but has rarely been made central to mainstream economic analysis. The accounting entries can make money creation appear merely to be a transfer when, operationally, new purchasing power has been created. That distinction matters because whoever controls bank lending controls the direction of newly created purchasing power. The crucial question is therefore not simply how much money exists, but where newly created credit goes.
 
Commercial banks do not simply take existing deposits and pass them on to borrowers. When a bank makes a loan, it creates a corresponding deposit: the loan appears as an asset on the bank's balance sheet, while the newly created deposit appears as a liability. The bank's balance sheet expands on both sides through a double-entry accounting operation.

Double-entry bookkeeping is crucial because it can obscure what is actually happening. Every entry has an offsetting entry, so the books remain perfectly balanced. The accounting identity can therefore make money creation look like a transfer between accounts rather than the creation of new purchasing power. The conventional story says that banks first obtain money through deposits and then lend those deposits. The opposing interpretation is that, in the act of lending, the bank simultaneously creates the loan and the deposit. The deposit did not previously exist; it is created as the counterpart to the bank's new loan asset.

This distinction matters because it determines how the banking system should be understood. If banks create deposits through lending, then credit creation is not merely the redistribution of pre-existing savings. It is the creation of new purchasing power, and therefore the allocation of bank credit becomes one of the central mechanisms determining what the economy produces. Double-entry bookkeeping does not make the money creation disappear; it records the creation in a way that keeps the balance sheet mathematically consistent. The loan and deposit are created together, with the debit and credit balancing exactly. The accounting system describes the transaction, but the balanced accounts can conceal the economic significance of the transaction itself.

That is why the question is not simply whether banks "have the money" to lend. The more fundamental question is what happens when a bank decides to create a loan, because that decision simultaneously creates a deposit and directs newly created purchasing power toward a particular use. The implications are enormous. If credit finances productive investment, it can fund technology, capital formation, productivity, employment, and economic growth. If it finances consumption, property, or financial speculation, it can instead generate consumer-price inflation, asset inflation, leverage, and financial crises.
 
 Productive Credit vs. Financial Inflation
The decisive issue is therefore not merely the quantity of money but who controls the creation of credit, how that credit is created, and where the newly created purchasing power is directed. Credit directed toward productive business investment creates a powerful economic chain: 
bank credit → business investment → technology → productivity → higher output → economic growth
A company borrowing to purchase machinery, develop technology, expand production, or improve processes can generate additional output that services the debt and increases national income. Credit becomes a mechanism for expanding productive capacity. 
  
Money and credit are not neutral tools that merely grease the wheels of commerce;
they are active instruments of statecraft and industrial design. High growth as 
a policy objective requires the right institutional and financial mechanisms.
 
The opposite occurs when credit primarily finances consumption or speculation. Consumption lending can push up consumer prices without increasing productive capacity. Lending against property and financial assets can inflate asset prices, encourage leverage, and eventually generate the conditions for financial crises. The distinction is therefore not simply between "more" and "less" credit. It is between productive credit and credit that inflates existing claims on wealth.

Japan's Income Doubling Plan and the Deliberate Creation of Growth and Wealth in the 1960s
Japan demonstrated what becomes possible when financial policy is directed toward structural transformation and productive expansion. Initiated by Prime Minister Hayato Ikeda in 1960, the Income Doubling Plan was not a rigid, Soviet-style command directive, but a highly sophisticated public-private roadmap. While the official target was a 7.2% annual growth rate to double the Gross National Product (GNP) in 10 years, Japan actualized an astonishing average growth rate of over 10%, achieving its goal in roughly 4.5 years.

The Japanese model subsequently influenced South Korea, Taiwan, Singapore, and China. When Deng Xiaoping visited Japan in 1978 with approximately 300 senior Chinese officials, the purpose was to study how Japan had achieved extraordinarily rapid economic development and how China could generate similarly high rates of growth. High growth was therefore not treated as an impossibility imposed by the laws of economics. It was treated as a policy objective requiring the right institutional and financial mechanisms.

Britain's Concentrated Banking System
Britain developed in the opposite direction. Five major banks came to control more than 80 percent of deposits, with balance sheets exceeding £2 trillion (HSBC, HSBC UK / HSBC Holdings; Barclays; Lloyds Banking Group, including Lloyds Bank, Halifax, and Bank of Scotland; NatWest Group, formerly Royal Bank of Scotland Group, including NatWest, and RBS; Santander UK). Large centralized banks naturally concentrate on large corporate customers and standardized lending structures. Small and medium-sized businesses operate differently. They require relationship banking, local knowledge, rapid decisions, and financing for technology, machinery, expansion, and working capital. Around 65 percent of British employment is associated with small and medium-sized firms, yet the banking structure is poorly adapted to their financing requirements.

Germany historically maintained approximately 1,200 small local, cooperative, and savings banks. Japan, South Korea, and China likewise developed extensive local banking networks. Local firms can approach institutions that understand their businesses and make rapid decisions about financing investment and technological adoption. Britain's productivity problem therefore cannot be separated from its banking structure. A financial system dominated by a handful of enormous institutions can be highly efficient at servicing large corporations while remaining structurally incapable of supplying the dispersed productive credit required by thousands of smaller firms.

The Productivity Problem Was Identified a Century Ago
This is not a newly discovered problem. The 1918 Colwyn Committee Report examined Britain's banking system and identified the concentration of financial power in the Big Five (National Provincial Bank, London County Westminster & Parr's Bank, London Joint City & Midland Bank, Lloyds Bank) together with inadequate long-term finance for smaller enterprises. The problem has therefore persisted for more than a century: productive businesses require credit, but the banking system concentrates financial decision-making in institutions whose incentives favor scale, established borrowers, and financial assets. The solution is not simply another government subsidy layered onto the existing structure. It is decentralization of financial power.

Britain could support thousands of local banks, cooperatives, savings institutions, and other locally rooted lenders. A hypothetical network of 5,000 banks, each operating 30 branches with 35 loan officers per branch, would create more than five million local lending positions. Credit decisions could once again be made close to the businesses and communities receiving the money. Britain itself previously had thousands of banks, cooperatives, savings banks, credit unions, and provincial financial institutions. Those decentralized structures existed during periods when Britain achieved exceptionally high rates of economic growth, including periods of double-digit expansion.

The Local-Banking Growth Flywheel
The mechanism is straightforward. A community bank with £20 million in capital can support a substantially larger loan book as it develops deposits, retained earnings, and lending relationships. Over three or four years, £20 million could support £400–500 million of lending and potentially approach £1 billion as the institution grows. 
 
» The solution is decentralization of financial power. «
 
Productive lending creates its own economic feedback loop. Businesses borrow, invest, expand output, increase productivity, generate income, repay loans, and create new deposits. Those deposits support further lending, which finances further investment. This is the banking flywheel:
capital → productive loans → investment → productivity → income → deposits → additional lending → further investment
However, in 2014, Werner himself founded Hampshire Community Bank (HCB) in the UK, envisioning it as a proof of concept for a German-style local savings-bank system. Instead, HCB spent more than a decade trapped in a regulatory stalemate before entering operation in November 2024. HCB's experience demonstrated the difficulty of establishing small, localized banks within the UK’s existing regulatory framework. Compliance costs, capital-adequacy requirements, and technology standards designed to supervise multitrillion-pound high-street banks are applied with little differentiation to small community-bank startups. Without a specialized tier of "light-touch" regulation for local, non-systemic institutions—comparable to the American community-banking sector or Germany's Sparkassen—the legal and structural barriers to expanding local banking in the UK remain firmly in place.

Growth Is Not a Fixed Physical Limit
The conventional language of "limits to growth" confuses physical resources with economic output. GDP and national income are statistical measures, not physical quantities existing independently of human production. Economic growth is fundamentally driven by human ingenuity, technology, organization, and productivity. A society can produce more with the same physical resources when it discovers better methods of production.

There is therefore no fixed physical law imposing permanently low economic growth on advanced economies. The constraint is institutional: whether the financial system provides productive businesses with the credit necessary to develop and implement new technologies. The scarcity narrative becomes fraudulent when it is used to present stagnation, austerity, declining living standards, or permanently constrained production as unavoidable while enormous financial resources continue to flow into asset markets and speculative activities.

Interest Rates Are Not the Whole Mechanism
Interest rates are often treated as the principal mechanism governing economic activity. But the quantity and allocation of credit matter at least as much. The critical question is not merely whether money is cheap or expensive. It is whether banks are actually creating credit for productive investment. An economy can have low interest rates and weak growth if credit is directed toward property speculation, financial engineering, or existing assets rather than productive enterprises.

The claim that interest rates cause growth also reverses the causal relationship. Strong economic growth creates demand for productive investment and credit, which can influence interest rates. The rate itself is not necessarily the originating force. Dame Kate Barker's criticism of the Monetary Policy Committee—describing its long tenure as having "really been a bit of a waste of time"—illustrates the broader question: if monetary policy focuses overwhelmingly on the price of money while ignoring the quantity and destination of credit, it can miss the mechanism actually driving productive growth.

Central Banking, Creation of Income Tax, and the Concentration of Power
Central banking is not merely a technical exercise in setting interest rates. It is a system of monetary power. The creation of the Federal Reserve coincided with the creation of the federal income tax and the expansion of federal financial power. Over time, increasingly concentrated financial institutions have accumulated enormous influence over governments, national debt, taxation, and monetary policy.

The same concentration appears internationally through the World Bank, IMF, central banks, multinational financial institutions, and the globalist financial elite. Their influence extends beyond individual loans or interest-rate decisions into the architecture of national economies. The result is a system in which financial power becomes increasingly detached from local productive economies. National governments can retain formal political authority while the practical allocation of capital increasingly occurs through institutions operating within an international financial system.

The Austrian School and the Missing Empirical Method
The Austrian School deserves credit for recognizing the importance of bank-created credit and warning against centralized economic planning. Its analysis of monetary expansion and financial distortions contains important insights. But rejecting statistical analysis entirely goes too far. Economics cannot escape empirical testing simply because human behavior is complex.

The appropriate approach combines institutional understanding with rigorous empirical analysis. The papers "Can Banks Individually Create Money Out of Nothing?" and "The Lost Century in Economics" are part of the effort to recover the actual mechanics of banking and test economic propositions against observable evidence. The essential question remains simple: what actually happens when banks lend, and where does the resulting purchasing power go?

Globalism, Europe, and the Loss of Monetary Sovereignty
The European monetary system extends the same problem from national banking to supranational financial governance. The euro removes important elements of national monetary sovereignty by placing member states inside a common monetary framework. Germany's industrial model—particularly its automobile industry and vast network of suppliers—has been subjected to increasingly severe pressures while monetary and regulatory authority has moved upward into European institutions.

»  The concern is ultimately simple: they want our savings. «
 
The European Union compounds the problem by separating major decisions from direct national democratic control. The European Parliament lacks the normal legislative initiative possessed by national parliaments, while the European Commission exercises major executive and regulatory authority without being directly elected by the European population. The structure resembles, in important respects, the centralized political-economic model that European nations supposedly abandoned after the Soviet experience: power moves away from local institutions and toward increasingly distant administrative authorities.

Europe, Savings, and Financial Centralization
Financial centralization extends beyond monetary policy. Restrictions on banks from outside the European Union offering deposits without an EU license can become part of a broader architecture of capital control. The concern is ultimately simple: they want our savings. Once financial institutions, governments, and supranational authorities acquire greater control over where citizens can hold money, how capital moves across borders, and which institutions may provide financial services, control over savings becomes another instrument of political and economic power. The issue is therefore not merely banking regulation. It is who controls the accumulated wealth of households and businesses and who determines where that wealth can be deployed.

Germany, Sovereignty, and Institutional Control
Germany provides the most extreme historical example of the relationship between political sovereignty and external institutional power. Germany remains constrained by postwar occupation arrangements. American intelligence structures have maintained extensive influence since 1945, while German political institutions were shaped by postwar re-education. Germany never recovered sovereign independence, and these postwar arrangements continue to shape contemporary German political developments. Policies that were regarded as mainstream or centrist two decades ago are increasingly described as "right wing," while the political center has moved substantially toward the left.
 
The Common Good vs. Concentrated Financial Power
The central economic problem is ultimately political: who controls the creation and allocation of money? A decentralized banking system distributes financial decision-making among thousands of institutions embedded in local economies. A concentrated banking system places that power in a handful of enormous institutions. 
 
An internationalized financial system transfers still more power toward central banks, multinational financial institutions, the IMF, World Bank, and global financial networks. The consequence is a widening separation between financial power and the common good. Productive businesses need credit to invest, innovate, employ people, and increase productivity, while financial capital can instead be directed toward assets, speculation, debt structures, and institutions whose interests are increasingly detached from national economies.

The alternative is not austerity or permanent scarcity. It is productive credit, decentralized banking, technological investment, rising productivity, and the restoration of financial power to the communities and nations in which economic activity actually takes place. The fundamental choice is therefore between a financial system organized around productive national development and the common good and one increasingly organized around centralized monetary authority, global financial interests, and the concentration of economic power.

Richard Andreas Werner (b. 1967) is a German economist and professor, currently at the University of Winchester, best known for coining "Quantitative Easing" in 1995 while proposing recovery strategies for Japan. He authored the Quantity Theory of Credit, empirically demonstrating that commercial banks create money out of thin air when granting loans and distinguishing between GDP-effective credit and speculative financial credit. A prominent critic of Western central bank policies and CBDCs, his research—including his bestseller Princes of the Yen—advocates for localized community banking to prevent financial crises.

Sunday, September 7, 2025

State Central Banking vs Private Central Banking | Wen Tiejun

Let's delve into the core reasons underlying the strategic confrontation between the People's Republic of China and the United States of America, as this unveils a significant systemic discrepancy: [...] The issuance of the renminbi (RMB) is fundamentally based on the authority of the Chinese government, specifically through the People's Bank of China (PBC). The basis for the issuance of the renminbi is definitely not gold. The reason this money is valuable is because it is a sovereign currency issued by the state and backed by state authority. Empowering a sovereign currency establishes credit. The currency creates credit, and the sole resource available is political authority. Thus, political authority, governmental power, and the administration in control align with the currency system.
Wen Tiejun (温铁军) is a Chinese agricultural economist and a professor at the Renmin
University of China, best known for his studies on the Three Rural Issues in Mainland China.
 
On the other hand, the source of the US dollar's credit is an institution established by private bankers, not a country. Pay attention, this difference matters: The US dollar is actually issued by an institution called the Federal Reserve. The Federal Reserve is neither an official entity nor a government institution; instead, it is an organization operated by private bankers. This particular organization possesses the authority to issue the national currency and determines the financial policy of the United States, which the government then implements.
 
 
» The root cause of global chaos is financial capital globalization, which is
supported by military hegemony. « Wen Tiejun's complete discourse video.  
 
This occurrence is quite rare across the globe, both in terms of nations and systems. In the majority of countries, it is the political power of the state that grants authority to its national currency, forming a sovereign currency. In a select number of nations, such as the United States, institutions are established by private banking entities, and the government subsequently enacts the policies of these private banker collectives.

[...] Therefore, throughout the extensive history of the United States, numerous influential presidents have attempted to reclaim monetary authority. All of them ultimately failed. Almost every president who was resolute in their determination to reclaim monetary authority ended up deceased, including the widely recognized Kennedy assassination. These events all share similar demands to restore monetary rights back to the government, yet none of these plans have been fully realized.

[...] China continues to maintain its national control over financial capital. For what specific purpose? In recent years, when China faced global crises and a decline in exports, the Chinese government mainly relied on national finance, investing in infrastructure that may not yield immediate profits. A straightforward example is the allocation of funds for the construction of roads and railways in rural, mountainous, and even desert regions. All these investments cannot be recovered in the short term, and it's also difficult to recover them in the long term. So, should we invest? We should, because if we don't, businesses will have no market and workers will become unemployed. On the other hand, the government would have to use its finances to pay for unemployment benefits. Rather than doing that, it's better to invest. 

» The United States exploits the world's wealth with the help of "seigniorage." It costs only about 17 cents to produce a 100 dollar bill, but other countries had to pony up 100 dollar of actual goods in order to obtain one. It was pointed out more than half a century ago, that the United States enjoyed exorbitant privilege and deficit without tears created by its dollar, and used
the worthless paper note to plunder the resources and factories of other nations. The hegemony of the US dollar 
is the main source of instability and uncertainty in the world economy. «
Ministry of Foreign Affairs of the People's Republic of China, 2023. 

[...] I perceive this as one of Trump's most proactive and forward-thinking policies—to focus on the advancement of infrastructure development. His most significant challenge is that the US lacks the so-called state-owned enterprises (SOEs) similar to those in China. Additionally, it doesn't have a state-owned banking system. China's system uses state banks to receive currency from the government, which is directly paid to state-owned enterprises. These enterprises then directly engage in infrastructure construction, maintaining China's economic growth and sustaining employment. The US uses private banks to issue more currency to buy government bonds, which then leads to a virtual capital expansion, with two hands shifting the crisis to the whole world.

[...] Analyzing this with American theory suggests China's state-owned banks and state-owned enterprises are inefficient. They don't provide tax revenue and occupy a large amount of capital. But just because financial resources are utilized doesn't mean nothing is produced. A significant amount of wealth is indeed generated, but this wealth manifests in the form of airports, seaports, train stations, highways, and high-speed railway systems. None of these investments can generate returns in the immediate short term. Consequently, a substantial amount of capital in China's state-owned banks is currently tied up. According to general free-market economic theory, those that can't be recovered soon should all go bankrupt. As long as you genuinely and sincerely execute what is purportedly stated in the media today, China's economy should have gone bankrupt long ago because its large investments can't be recovered quickly.

»
I think he [US Fed chairman Jerome Powell] is a very stupid person, actually. «

Not-calling-the-shots POTUS, July 13, 2025.
 
[...] How Trump might approach the situation? He doesn't have China's methods. So, how will he do it? By relying on private bankers to reform America's railways? How long will it take to recoup the investment? Why would private individuals invest in rebuilding American roads and airports? Private investment is dropping. This is similar to what's happening in China: whenever there's an economic crisis, China's private investment decline is inevitable. So, how do you counter it? You have to rely on state investment to push it up. One goes down, the other goes up. That's how it is. 
 
»
The US uses private banks to issue more currency to buy government bonds, which then 
leads to a virtual capital expansion, with two hands shifting the crisis to the whole world. «
 
A significant number of individuals are critical of China's system. I don't intend to imply anything else; I'm merely suggesting that you observe the actual impact. I also don't wish to defend this so-called closed system of China because I equally dislike this bureaucratic system, but it actually maintains the nation's foundational employment and crucial economic development.
  

Sunday, August 10, 2025

Money Creation—Banking’s Best-Kept Secret | Richard A. Werner

In an era when gold was money, people believed it was essential for transactions. But carrying gold was perilous—dangerous even today in cities like London, let alone in the 15th-17th centuries amid bandits on lawless roads. So, people sought safe storage. Professions handling gold, like goldsmiths crafting jewelry for kings, aristocrats, and the wealthy, had secure vaults and private guards. Naturally, individuals deposited their gold with these goldsmiths for safekeeping.
 
» We don't need to lend actual gold. «
"The Moneychanger and His Wife", painted by Quinten Matsijs, 1514.
 
To prove ownership, depositors received receipts—crucial evidence in case the goldsmith died and his son denied the claim. Goldsmiths charged a fee for this service, which seemed fair. Now, imagine we’re neighbors in Hampshire. I’m buying a plot of land from you, and we agree on a price in gold. My gold’s stored with a goldsmith in London. “I’ll go fetch it,” I say. You reply, “What’ll you do with it? You’ll risk your life fetching it, and then I’ll have to risk mine carrying it back.” We pause, then realize, “We might as well leave it there, and I’ll give you my deposit receipt.” Thus, these receipts for deposited gold evolved into Europe's first paper money—gold certificates, transferable and convenient.
 
Goldsmiths soon noticed that depositors rarely withdrew their gold; it stayed put, which was handy. This led to secrecy-shrouded practices. People knew goldsmiths held gold reserves, so they approached them for loans when in need. But until about 350 years ago, lending at interest was illegal in most European countries, forbidden by Christian doctrine and Biblical prohibitions against usury. A goldsmith might whisper, "Maybe I can lend, but keep it secret because I'll charge interest." The borrower agrees: "I'll pay, and we'll keep it secret." Goldsmiths began lending out portions of the deposited gold—especially standardized bullion—while swearing everyone to secrecy to evade arrest for illegal interest.
Shylock in The Merchant of Venice, Act IV, Scene I, by William Shakespeare, 1596.
 
As guilds do, goldsmiths convened to discuss trade secrets: “How do we handle lending too much gold? We need to work together—if one runs short, the others help, or else the whole scheme unravels, and we all get arrested for interest altogether.” One innovative goldsmith proposed, "I've got an idea—we don't need to lend actual gold. The next guy who comes begging every Monday—I've turned him down before. But now I'll lend to him to show you."
 
»
 All banks have always created money out of nothing. 
That's the secret of banking. «
 
The borrower arrives, pleading. The goldsmith says, “Today I’ll lend. Standard contract: small print, interest, your daughters sold into slavery if not repaid.” “Fine,” the borrower consents. “One more thing: 300 grams of gold. Sign here, I sign, and I lend it—but you must deposit it with me immediately.” The borrower protests, “I need the gold.” “You get the deposit receipt,” replies the goldsmith. “Yes, that’s all I need.” With the loan contract signed, the goldsmith records it as an asset on his balance sheet. He hands over the 300 grams of gold momentarily—now you see it, now you don’t—and it’s redeposited. The borrower leaves with a receipt for a new deposit.
 
» 
Banking has not been very well understood: legally, a "deposit"
is a loan to the bank, now owned by the bank, not the depositor. «
 
Double-entry accounting, invented for banking to obscure such maneuvers, made it appear legitimate: “All correct; the borrower deposited.” But it is fraudulent—the borrower enters with no gold and leaves with a document claiming a deposit, without increasing the goldsmith’s actual reserves. This is the essence of modern banking: fractional reserve lending and money creation out of thin air, born from these historical practices.
 
Reference:
 
» Today, due to the institutionalisation of interest and the advent of digital money,
roughly 97 percent of modern money comes into existence as interest-bearing debt
—i.e., it "comes into being only when someone promises to pay back even more of it." «
Yusuf Jha, 2013.
 
See also: