From State Debt to State Money by Rudo de Ruijter

By Rudo de Ruijter
Guest Writer
Dandelion Salad
Independent researcher
Nov. 28, 2011

Brussels wants the keys to the national treasuries of the 17 Euro-countries. Only this way can they save the Euro, they say. The ESM-treaty has already been signed. If the national parliamentarians ratify it, it will be the end of our sovereign democracies. Do we want that? Is there an alternative?

For those who know how the money system works, the logical solution to today’s problems are fairly simple. A bank reform. On TV, at least in the Netherlands, the subject is still taboo [1], but if you want to know how it works, you can find an explanation here. (And if you already know all this, you can scroll immediately to 2. bank reform.)

1. Today’s money system

World wide bankers now have a money system, which is based on making money out of thin air. Nearly all money in bank accounts consists of thin air. There is only a tiny little fraction of real money in circulation. How is that?

Banking is bookkeeping

Each time a banker supplies a loan he does not hand out money, but just a balance. The loan consists of nothing else but numbers in the banker’s books. Let’s say you want a loan from your bank, the “Hard Up Bank”. On one side of the ledger the banker writes that you owe him 250,000 Euros and on the other side that he owes you 250,000 Euros. You see the amount appear in your account. You can spend it. Buy a little home? Okay, buy a little home.

Say you write a cheque to the seller of the house. He will bring that cheque to his bank, the “Red Shield Bank”. That bank now wants to exchange the cheque at your bank, that is to say, against real money. Red Shield knows how his colleague has juggled the numbers from his hat and won’t put up with thin air.

So now “Hard Up Bank” will have to come up with real money. However, in practice, this is not necessary most of the time, because Red Shield also supplies loans continually. Part of these loans will be spent with customers of Hard Up Bank. So, what happens is that Red Shield exchanges his claim of 250,000 Euros on Hard Up Bank against a claim of 250,000 Euros of Hard Up Bank on Red Shield.

Interest on thin air

This way banks can bring into circulation more loans all the time. One can of thin air is exchanged against another one and the customers don’t notice how they are fooled. For, on this thin air, interest has to be paid.

Just for amusement an example where banks create millions without the need of a single cent of real money. In reality it is a bit more complex, but still.

We assume there are 3 banks which respectively serve 20%, 30% and 50% of the population. We suppose all three have the same type of customers, who have the same needs for loans and expenses. It is demonstrated that all payments the banks must execute at the moment the borrowers spend their loan are counterbalanced by the reception of these payments.

The borrowers at the first bank spend 20% of their loans with customers of their own bank, 30% with customers of Bank 30% and 50% with customers of Bank 50%. And so on. When we add all the amounts from the loans together, each bank has received as much as he created. Voilà, 100 million Euros created as balances in bank accounts without the need of one cent of real money.

When you ask bankers if they create money out of thin air, they generally reply that they only supply loans as far as they have balances in front of them. However, those balances increase automatically by the loans they supply all together.

Interbank payments

All payments proceed in the same way. When you make a payment to someone at another bank, then your banker must pay it to the other bank. But still the same day there will also be payments made by customers of other banks to customers at your bank. All these interbank payments are simply crossed out against each other.

What the banks finally pay to each other are the little differences between incoming and outgoing packets of payments. To facilitate these payments all banks have an account at the central bank. The amounts in these accounts are considered to be real money. (If they wished the banks could claim the entire amount in bank notes, as the central bank is authorized to print them.)

At the central bank the rule goes that banks must have a positive balance at the end of the day. When a banker is short of money, because he received a bit less than he paid out, he will borrow for the night from his colleague, who then has received a little more than he paid out. And when the colleagues don’t trust each other, like during the credit crisis in 2008 and now again since a few months ago, the banker can borrow from the central bank for a quarter of a percent more.

Bankers among each other

Bankers have agreed upon rules among themselves about the required capital in relation to the calculated risks, like those of the outstanding loans. That capital is only a fraction of these risks, but in this way the creation of money out of thin air is tempered somewhat and banks get more in line with each other with the supply of loans. This increases the mutual confidence in lending money to each other, so that all of them can optimize their possibilities for benefits.

So, first of all, bankers are bankers among each other. When the customers of big Dutch banks were angry about the grab-culture at their bank and massively took their money to Triodos Bank (a kind of green bank), the big banks were short of that money. Fortunately for them, Triodos was not the meanest bank and ended up lending the money back to those same Dutch banks. (Sorry folks, ethical banks simply don’t exist, sympathetic looking banks do. But with such a money system, you can’t expect otherwise, can you?)

But as soon as dark clouds show up at the horizon and severe losses threaten the banks, the mutual confidence is immediately gone. Then each banker tries to keep up his own trousers. Each of them tries to increase his cash reserves and lower his risks. As a result, over the period of months, the industry hardly gets any loans anymore and the waves of dismissals and failures start to ravage the country again. And if the bad weather stays, it can even last for years. Wonderful, isn’t it, such a banking system?

Amounts move from account to account

Back to the sold house. The seller now disposes of 250,000 Euros of thin air, he will spend on his turn. This way, this so-called money goes from one account to the next. So even if you have never contracted a loan, in your account there is only thin air you received for your work or for goods you sold. If, for example, you are at the ING-bank, this bank only has 3 cents of real money for each Euro you have as a balance in your account.

All the time less money in your pockets

In fact, with thin air they multiplied the 3 cents by 33. This means that when you deposit a banknote of 100 Euros in your account at ING, they lend out 3300 euros. To put it an other way, for each Euro we don’t keep in our pocket, the banks collect a multiple of interest.

Maybe you do understand now too, why the bankers seduce us to make our payments electronically as much as possible. Credit cards, bank cards, fuel cards, prepaid, chip and public transportation cards, it all serves just one goal: to make sure we need the least possible amount of cash money in our pockets.

However, this has also a reverse side. The cash reserves (the bank notes and the exchangeable balance at the central bank) do not only serve to give cash to the customers and to pay the little differences between incoming and outgoing payments, they are also the first reserves to absorb losses. But since the income at lower cash reserve percentages increases disproportionally, the temptation to take more risks is big. This way, with our modern plastic money we contribute to the reckless loan behavior of our bankers.

Let us see what happens when we bring a bank note of 100 Euros to our bank and deposit it in our account. At 3% of cash reserves the bank only has 3 cents for each Euro in your account.

In the right column you see that the revenues rise disproportionally when the cash reserve percentage lowers. And – the other way round – if you want to go back from 3% to 4% with the same amount of cash reserves, you need to get rid of 1/4 of the outstanding loans…

All amounts are temporary

At agreed moments you will have to pay back the balance you received from Hard Up Baank. From the pool of all “money” in circulation you have to earn enough to pay the installments. Then Hard Up Bank writes in his book that the amount you owe him is decreased and he decreases the amount he owes you. You see the amount disappear from your account. In this way the created balances disappear out of circulation again. That is a decrease of the “money” in the country.


The interest you pay does not disappear from circulation. With it the banker pays all his costs (like interest, insurances, staff, maintenance, invoices of the companies that supply E-banking etc.) and the capital is extended to allow him to lend out still more next time.

“Money mass” must grow

The classic risk for the bankers is that borrowers don’t pay back their loans or only pay back partially. And when the pawn appears to be insufficient, he will stay with problems in his book keeping, meaning with amounts that sooner or later he will have to book as losses.

To minimize the risk of defaults of payment the banks take care that more and more loans are brought into circulation. For the more “money” is added to what is in circulation, the less each unit becomes worth. That is what is well known as inflation. The amount the borrower must pay back is set. And because this amount over the course of the loan becomes worth less, he can earn it more easily. If he must pay 6% of interest and the inflation is 2%, the load of the interest is 1/3 less. [graphic]. In this way the number of defaults of payments is considerably reduced.

By the way, the advantage for the borrowers exactly equals the loss of value that the users of the money experience. In fact, as users, they pay a part of the interest too.

Working harder all the time

It is this same inflation that makes it so that we must work harder all the time. Each time more “money” comes into circulation we must try to earn more, if we don’t want to get poorer.

Of course a central banker will never tell us that the growth of money is a need for the bankers. The official pretext is that inflation leads to more economic activity.

And that, in turn, is the origin of the wide spread belief that an economy must grow to be sound. A very dangerous fairytale. Eternal economic growth is impossible on a finite Earth. And the longer we continue on this path, the more we destroy. What we can say is that a money system that needs a growing mass of money to function, is not suited for a sustainable society.

State debt

Our government disposes of “money” by levying taxes. With it different things can be financed that are important for all of us together, like for instance dikes, roads, bridges, schools, hospitals, police, army and so on. It regularly happens that the government spends money before the corresponding taxes have been levied. In today’s system the government must then borrow money and pay interest on it. That is the well known state debt or public debt. We may be accustomed to it, but in fact it is something weird. Within the community people execute tasks for the community, everyone is paid for his contribution and subsequently there is a debt left over. And on that debt, all of us pay interest via extra taxes.

Money creation by privately led banks

This is exclusively caused by the fact that parliamentarians in the past have ceded the creation of money to private bankers. This happened at a time that people valued the fairytale that said only bankers could keep the monetary household in good shape. If the government would bring the money into circulation, that would surely lead to a disaster!

Democracy without money

The result is that we still pretend to live in democracy, while one of the major attributes of society, the creation of money, is in the hands of private bankers. De Nederlandse Bank N.V. (the Dutch central bank) is ruled by private persons and is independent from the government. Before, they also independently set the interest rate “in the interest of the economy”, as they called it. Now, this is done by the European Central Bank (ECB), where the 17 independent central banks of the eurozone are the owners and managers.

One interest rate for all

The ECB has engaged the impossible challenge to set one interest rate for the 17 different countries, with totally different economies, which have very different potential for productivity. Of course, it is completely impossible to determine an interest rate that has the optimal effect for all countries. A change of interest rate can only be beneficial for one or some countries. The other countries bear the consequences.

The euro, the most expensive money experiment ever

The euro will probably be remembered as the most expensive money experiment ever. Since the start of the project in 1970, it was already known that the experiment was doomed to fail, but bankers and hard headed politicians pushed for the common currency anyway. The point is that a common currency can only work in an economically homogeneous area. [2] [3] [4] Here is why.

When consumers, in countries with fewer possibilities for productivity, prefer cheaper and better products from abroad, the exterior debt will increase. At the same time the country’s own productivity will decrease. A country disposing of its own money can then devaluate it. That makes the imported products more expensive for its own population and the export products cheaper for foreign purchasers. The debt will decrease and the productivity increase again. Devaluations were very common before the Euro started. The Euro works like a fixed exchange rate. Less productive countries are trapped like rats. They will never be able to get out of debts again. That is why the chosen method of loading still more debts on these countries is a strange and ill one.

Euro coupled with EU-membership

The bankers have succesfully lobbied for the rule that we can’t leave the euro without leaving the EU. Well, that kills two flies with one blow.

The EU

More and more people become aware that the EU is much less democratic and social than the citizens in Europe want. Although it was that way right from the beginning, many are finding out only now that the European Parliament is a mockery and not a real parliament with democratic power. Also, more and more people are finding out the European Commission (EC) and the ECB draw all power towards them. By the way, for the EC and the ECB the ESM-treaty [5] will be the breakthrough that puts all national parliaments off the side. For them the ratification of this treaty seems to be a piece of cake, as most parliamentarians are still sleeping or cannot believe it. (Or are they accomplices?)

The European Union has the free market economy as laid down principle. Meanwhile, almost everyone has understood that the deregulating of banks, the privatization of infrastructures and the abolishment of governmental tasks lead to a harsh society harassed by crises. Those principles are outdated. The partisans of these principles will only succeed by imposing them by violence. Greece won’t be the last victim.

The IMF-scenario

The EC and the ECB now cooperate with the IMF to crush countries with too high debts under still higher debts. The scenario to seize power has been applied by the IMF many times over the past fifty years. That scenario goes like this: maneuver a country into difficulties, and as soon as is gets into debt, crush it under gigantic loans in a such way it cannot even pay the interest. Subsequently keep the country under guardianship and make sure the government gets completely weakened by imposing ever more spending cuts. Let the population bleed, then it will be content more quickly when they get some air. And as soon as things are severely disorganized, let foreign investors buy the country’s wealth and introduce an absolute free market economy.

We too

Anyone who thinks it over for a minute sees that with the scenario of the emergency funds all Euro countries end up in debt. This too has already been anticipated in this criminal scenario. The massive loans first serve as a pretext to impose a guardianship. As soon as this is accomplished, they can declare the country will never be able to pay back its loans. And with these broken loans they can maneuver their next victims into debt; these are the governments that warranted these loans. They will have to cut spending to pay for the losses. And for all countries the same refrain will be repeated over and over again, that governments must cut spending, cut spending, cut spending. Until hardly anything is left of the role and function of the national governments and Brussels can take control. Of course this will be accompanied by enormous social unrest. You can read the rest in Naomie Klein’s book, The Shock Doctrine.

2. The bank reform

State money

The solution is simple. In stead of pouring dozens of billions more into a Euro that is doomed to disappear sooner or later and in stead of letting us prescribe cuts in public spending by the undemocratic European Commission and the ECB, we can introduce state money, also called public money. (This is NOT the same thing as the money we used to have before the Euro! That would not solve our problems!)

Technically this can be done rather simply. In stead of today’s central bank, a new central bank will be established, that is to say, a central bank of the state. It will fall under the responsibility of the Ministry of Finance and be controlled by the Parliament. A commission of well formed people will watch over the long term interests of the money system.

This state bank will be the only bank authorized to create money. All loans will be supplied in state money, be it in electronic form or in cash. It will be prohibited for commercial banks and financial institutions to create balances out of thin air. All new balances must be fully backed by state money. Today’s banks stay responsible for the loans in Euros they have outstanding at the moment of the reform. As far as they wish, they can become middlemen between the state bank and the public for the supply of loans and they can manage the customers’ accounts in name of the state bank. In this case nothing changes for the public in their existing accounts. The balances in Euros will be transformed 1:1 to state money. As middlemen the banks don’t receive interest but a fee for their services.

Emission of state money

The emission of state money delivers a comparable amount of Euros. These can be kept by the state bank for the payment of debts and also as enormous strategic reserve. I think it is not unthinkable that at some point of time the new state money will be attacked on the exchange markets. We would be about the only country in the world with its own state money and the mighty private bankers will not gratefully accept that.

No spending cuts

The motive for today’s spending cuts are the gigantic loans that the IMF, the EC and the ECB have mischievously loaded on Greece, while the country was already struggling with severe debts. It was foreseeable that after the seizure of power of the IMF, the EC and the ECB the loans would be declared unrecoverable and that the losses would be loaded on the eurocitizens in other countries.

Not so long ago the rescue funds EFSF had a lending capacity of 440 billion Euros. That was an average of 1320 Euros per eurocitizen. On 27 October 2011 250 billions were left, when the heads of state of the euro-countries made one trillion (1,000 billions) out of it, thanks to a bookkeeping trick. (Yes indeed, the thin air formula.) Of course we are now guarantors for these 1,000 billion Euros, or to put it otherwise, an average of 3,300 Euros for each and every eurocitizen. When the following emergency funds, the ESM, will get ratified by the national parliaments, an additional obligation comes on top of it of 700 billion Euros (2,100 Euros per euro-citizen). Subsequently, this ESM funds can be raised indefinitely without the approval of the national parliaments.

So the motive for the spending cuts doesn’t lay in the national situations of the euro-countries. Of course, each country has its particular problems that ask for appropriate measures, but that does not necessarily mean we would have to give up our government and our social, cultural and other achievements.

Let us end the Euro, end the EU and end the spending cuts.

Pension funds

You can save money during your entire life for your pension, but what you can do with it greatly depends on the situation at that moment. Already before 1980 it was obvious that around 2015 a huge grey wave would arrive of people of 65 years and older, that would be faced by an ever decreasing portion of working people. Pension funds have made the premium payers believe, they would receive a value guaranteed pension, something they should never have promised with this predictable situation.

The last generation of pension receivers, by the favorable relation between a big working population and relatively few pensioned people, could be paid directly out of the collected premiums from the working people. That time is over.

Pension funds often have a portion of the paid in premiums invested in state obligations. So in fact, part of the pensions is already paid by the government with our tax money. Another part of the pensions comes from the income from foreign investments. To say it otherwise, from the profits of companies elsewhere in the world. To say it still otherwise, from the fact that workers elsewhere in the world execute part of their work to pay our pensions. So, a kind of financial colonialism.

Personally I would rather prefer we take care of ourselves and our elderly. In my opinion we have enough room for that, when, progressively we direct our economy towards sustainability and cooperation, in stead of competition and financial profitability.

Cheaper money system

The state money system can function much less expensively than the private money system we now have. In the first place all interest goes to the Treasury for the benefit of the population. Also, the interest can stay lower, because the state bank does not need to make benefits. (No fat salaries for financial boys, no bonuses, no expensive building up of capital.)

The state bank does not need a separate capital, because all money belongs to the community. In fact we, together, guarantee the value of our money. Defaults of payment can be treated the same way as tax debts.

Permanent money

At the moment all money in circulation consists of loans that must be replaced by new ones all the time. However, the state bank can decide to leave a part of all money in circulation permanently, to lower the need for loans. (This should be accompanied by appropriate fiscal measures.) In the new system the government can very easily create a portion of permanent money by spending an amount of money (=bring money into circulation) without levying the corresponding taxes.


The state money system, by itself, has no need for inflation. It can even continue to work perfectly in times of deflation. Borrowers will no longer know the relative advantage of the decrease of value of the installments. By contrast, the cost of interest can always be lower and for democratically wished investments that can even stay nil. (And if a low interest rate causes trouble in the international context, the cost of interest can be partly or completely compensated fiscally.)

State debt

Today’s state debt comes from state expenses for which no taxes have/had been levied in advance. This state debt can be ended in the shortest possible way with newly created state money. That stops the interest payments. After that, the concept of state debt can go into the waste bin, because the state, when needed can simply use its own bank. For budget excesses the allowed cases and limits can be described, as well as conditions for exceptions, for which we can think of a requirement of 2/3 chamber majority. The rules can be anchored within the constitution.

Democratic influence

The decreased influence of bankers on the shaping of the society will open more room for democratic influence. That offers the possibility to engage in a transition towards a sustainable society. Information, involvement and dictate by citizens will be of high importance to succeed. I think this may need improved democratic structures.


The European Union, daily, offers a lot of ease in the international trade. But isn’t the price getting too high? Do we want to exchange our sovereign democracies against the dictatorial rule of the European Commission that wants to cut to the bone all achievements and transform the whole society into a financial playground? Personally, I think these eases are paid way too dear then.

The cooperation with European partners will not stop when we step out of the EU. Real cooperation is based on trade, industry and tourism and on everything that serves mutual interest.

Notes and references:

[1] On 25 October 2011, in the Dutch talk show of Pauw en Witteman, Sunny Bergman was resolutely silenced by Ewald Engelen, who presents himself as financial-geologist and came to highlight the cisis-story from the mainstream point of view. After EE has presented the desaster tersely, Sunny Bergman notes: “But it is also correct to question the economic growth model by itself.” EE, as if he were bitten by a dog: “Yes, that is a very pleasant, luxurious position. We really should do that. At the moment you drive in a very pleasant nice car” – SB: “I don’t have a nice car” – EE: “No, okay, and you can buy tasteful food at Market, but for very many other people this is just an exercise that doesn’t occur in their image of the world.” (And thus, in particular, not in the image of the world of this Ewald himself.)

[2] In the studies about optimum currency areas we can distinguish those focusing on the needed conditions and those from after 1970 (when politicians had decided they wanted a single currency in Europe) focusing on cost and benefits.


“It is possible to distinguish two major streams of the optimum currency area literature. The first stream tries to find the crucial economic characteristics to determine where the (illusionary) borders for exchange rates should be drawn (1960s-1970s). The second stream (1970s-till now) assumes that any single country fulfills completely the requirements to make it an optimal member of a monetary union. As a result, the second approach does not continue in the search for characteristics, identified as important for choosing the participants in an optimum currency area. This literature focuses on studying the costs and the benefits to a country intending to participate in a currency area.” , page 7.

Friedman put forward the advantages of flexible exchange rates between countries as follows: As it is commonly observed, the country’s prices and wages are relatively rigid and factors are immobile among the countries. As a result, under the negative demand or supply shock the only instrument to avoid higher inflation or unemployment is the change in the flexible exchange rate (that means appreciation or depreciation of the currency). This brings the economy back to the initial external and internal equilibrium. (…) Under the fixed exchange rate regime there would always be the unpleasant impact on unemployment or inflation. , page 8.

[3] Yrd. Doç. Dr. Hüseyin Mualla YÜCEOL, Mersin Üniversitesi Iktisadi ve Idari Bilimler Fakültesi, Maliye Bölümü, in “WHY THE EUROPEAN UNION IS NOT AN OPTIMAL CURRENCY AREA: THE LIMITS OF INTEGRATION”

Europe is not an optimal currency area. Although, On January 1, 1999, 11 EU countries initiated an EMU by adopting common currency, the euro, the EU does not appear to satisfy all of the criteria for an optimum currency area. Then, joining the EU is not identical with joining the euro for both old members and new members. , page 66

[4] Paul de Grauwe, excerpts of speech

“With up to twenty-seven members instead of the present twelve, the challenge for ensuring a smooth functioning of the enlarged Eurozone will be daunting. The reason is that in such a large group the probability of what economists call ‘asymmetric shocks’ will increase significantly. This means that some countries may experience a boom and inflationary pressures while others experience deflationary forces. If too many asymmetric shocks occur, the ECB will be paralyzed, not knowing whether to increase or to reduce the interest rates. As a result, member countries will often feel frustrated with the ECB policies that do not (and cannot) take into account the different economic conditions of the individual member countries. This leads us to the question whether the enlarged EMU will, in fact, be an optimal currency area.” (…)

“If a country is hit by negative shocks brought about by agglomeration effects, the wage cuts necessary to deal with these shocks will inevitably be very large. To give an example: If Ford Motor were to close down a plant in Belgium and to invest in Poland instead, the wage cut of Belgian workers that would convince Ford Motor not to make this move would have to be 50% or more given that the wage not feasible, then flexibility dictates that the Belgian workers be willing to move.”

[5] ESM, the new European dictator! (article)

ESM, the new European dictator! (video, 3:50)

ESM, a coup d’état in 17 countries!


The Public Option in Banking: Another Look at the German Model by Ellen Brown + Keiser Report: Dog & Pony Show

ESM, the new European dictator! By Rudo de Ruijter

Out of the euro by Rudo de Ruijter

Interview with Naomi Klein: The Shock Doctrine (video)

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