Private Banks or a Bank of the Government. A Comparison. by Rudo de Ruijter


by Rudo de Ruijter
Writer, Dandelion Salad
Independent researcher
October 12, 2015

Today we have a private banking system, with specific characteristics like the creation of “money” out of thin air and permanent “money” growth. First, you can find here below a short description of what a money system of the government could look like, eventually after a few intermediate steps. [1]

All money comes from the government

The government creates money and spends it or lends it out. In both cases the receivers will spend it in their turn. This way the money circulates and each time new transactions take place with the same money.

The lent out money disappears out of circulation again, when the borrower pays back his loan. That money comes back to the government, which “destroys” it in its books.

The government raises taxes. Not to finance spending, for it creates money for that purpose itself, but to prevent the mass of money from growing continually (= monetary inflation). The collected taxes too are “destroyed” in the books.


From the principle here above the public money system can be developed further. In particular the role of the parliament, the role of the banks and the role of the taxes need to be defined more in detail. They finally determine the role and functioning of the bank of the government.

The parliament decides about the policy and can obtain the effects it wants in society by making specific investments cheap or free. In a public system, banks are not allowed to create “money” out of thin air. They can only be middlemen between the bank of the government and the public. For this they receive commissions, not interest. The taxes play a role in the destruction of money and specific tax-measures can help prevent jams in the money circulation.

Bank of the government

Finally the bank of the government functions as the traffic control, which has real-time overview on money creation (government spending and loans), inflow from abroad, domestic money flows and parked savings, outflow to abroad and money destruction (taxes and pay backs of loans).

With financial instruments, monetary operations and other measures the bank of the government can stear the wished circulation. (For instance purchase or sale of securities, purchase or sale of currencies, speed up or slow down financings that have been designated for this purpose.)

With a public money system the government (and society) can adapt to political preferences and changing situations. The government can:

  1. let the money mass grow further and keep striving for economic growth;
  2. keep the money mass more or less stable and opt for sustainability and quality of life. (A sustainable society supposes less use of materials and less need for products by an increase of quality.)
  3. make the mass of money shrink to keep the economy going when the population shrinks.

Note that options 2 and 3 lead to the failure of banks in today’s private banking system.

Access to loans

In a public money system borrowers don’t need pawn. Non-payments can be treated like tax debts. The government does not need capital to absorb losses. Indeed, with or without the forming of capital, losses are always at the charge of the population. (That is also the case today. They are taken from the benefits or from the capital of the bank that have been taken from the population.) The parliament decides the policy for the supply of loans. As far as it chooses to charge loans with interest, the interest can stay lower. And when low interest rates are unwanted in the international context, the interest can be compensated fiscally.

Society comes first

With a public money system the focus is on available labor and means, not on the scarcity and cost of money.

Comparison with today’s private money system

Today it is the private banks that determine society more and more. They decide which investments are or are not financed. For this, banks consider their own interests, their possibilities for benefits and if borrowers can pay back their loans.


The so-called “money”-creation out of thin air

The private banking system is based on the creation of “money” out of thin air. [2] In fact, it isn’t about money, but about bank balances. The creation consists of a bookkeeping entry at the supply of loans. The bank writes the debt of the borrower on the activa side and an the same amount as a balance for the borrower on the passiva side. The borrower now disposes of a balance at his bank.


Bank balances without money

In theory, a balance means, that the holder can claim the corresponding money from his bank. But because banks create these balances without having the corresponding money, this money doesn’t exist. For all created balances banks only have very little money, often between 2 and 5 percent of what they owe to their customers.


So, a bank balance isn’t money. It is only a recognition by the bank, he owes you money, even if that money doesn’t exist. So you cannot pay with your bank balance. With a payment order, a bank card or via internet banking, you can only order your bank to execute payments for you.

The real money

Banks obtain the real money by selling bonds, like government bonds, to the central bank.


The latter will write up the value into the account the bank has with the central bank. This is the way the real (official) money comes into existence.

In the transaction the bank must promise to buy back the bonds at an agreed date at an agreed higher price. The difference in price resembles interest. That is why it is often said, banks borrow the money from the central bank. So, the banks must continually sell and buy back bonds to dispose of the real money.

So the real money starts as numbers in accounts at the central bank. The banks can also withdraw the real money in the form of bank notes. The central bank is the only one who has the right to print them.

The real money is used for the interbank payments and to supply bank notes to customers, when they ask for them. Subject to stock being available.


Interbank payments

When the borrower spends his balance with bank A and buys a car with an account holder of bank B, bank A must pay the sum to bank B and must do so with real money, for banks do not accept each others balances as means of payment. That is why the payment is executed via a transfer at the central bank, where the banks have their accounts with real money.

In practices, most payments among banks are not executed. Incoming and outgoing payments are simply crossed out against each other.


At the end of the day only the little remaining differences are truly transferred. This way, with very little money, banks can execute huge amounts of payments.

Note that the beneficiary of our payment orders never receive any payment. Instead, they receive a balance with their own bank, in other words a claim on thin air.


Financing of loans

Bankers like to pretend, they have costs of financing for each loan, since they must pay the money to another bank.

The reality is, all banks supply loans continuously and the subsequent outgoing and incoming payments also annul each other for the greater part.

Here an example with three banks:

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.

Of course, with a creation of 100 million through new loans, it would be pure coincidence, if the need for financing of each individual bank would be annulled up to the last cent. But there is more:

Facing the supply of new loans we find most often the pay offs of old loans. The borrower has to take care, the amount of the pay off arrives into his account in time. At that moment the bank receives money for the pay off, for which the bank doesn’t have any payment obligation anymore. The money goes into the cash tray of the bank and the bank will lower the debt and the balance of the borrower. The created balance disappears again.


As long as the individual bank just replaces the ending loans by new ones, it can always pay the amount of each loan to another bank, when, by chance, it is not annulled by an incoming payment.

Only when banks grow, they will have to raise their cash reserves. Then we are talking about something like 2 cents per “lent out euro”, depending on the required cash reserve at that moment.

Bank regulations

Banks have decided rules about the required capital each bank must have a minimum capital in proportion to the outstanding debts. (In practice around 5%). The central bank can also impose a minimum cash reserve. In a general way, these rules contribute to keeping the growth of banks in concert, and minimize the risk an individual bank cannot fulfill its payment obligations because of a too rapid supply of new loans. For the rest, these rules form merely any guarantee for the customers.

Banks have a natural tendency to grow. For the individual bank director it is a matter of producing better results each year. To grow, not only the ending loans have to be replaced by new ones, but extra loans must be supplied too.

The borrowers have to take care they earn and pay off the borrowed amounts. The problem is, that not all borrowed amounts stay in circulation. A considerable part lands into savings accounts.


Here it is parked and cannot be earned by the borrowers. More and more borrowers will have to earn their pay offs out of the balances that still circulate, which also have to be earned by the original borrowers. The solution of the banks is to compensate the outflow into the savings accounts by the supply of still more new loans. (Whereby ignorant economists think the savings are lent out.)

Over 35% interest

The interest too will finally have to be paid out of the “money” that still circulates, at the sale of goods and services. Helmut Creutz has calculated on the basis of German numbers, that over 35 percent of everything we pay is interest. [3]



The individual banker doesn’t occupy himself with the question whether his growth of “money” also leads to more economic activity or not. Until the start of the euro it was the role of the central bank to influence the interest rate and speed up or slow down the supply of loans, in such a way the inflation was maintained without ending up in hyperinflation.

Among others, the inflation results in a decrease of worth of each money unit, and thereby also of the principal the borrower has to pay back. When the interest is 6% and the inflation is 2%, this can be compared with a decrease of the interest burden of 1/3. This way banks avoid the non-payments that would occur at interest rates between 4 and 6 percent, that is to say, the major part of them.

So, for the banks, a decreasing inflation means an immediate danger of exponential increase of non-payments.

A century of “money”-growth

Private banks must keep growing and cause inflation in order not to fail.


Example of inflation in the Netherlands since 1800.

1 guilder in 1800 = 1000 guilders in 1995.

International agreements can hinder the “money”-growth, like the Bretton Woods accords of 1944, in which countries had agreed to keep their exchange rate pegged to the dollar. Finally, in 1971 it was the US itself that could not fulfill its obligations in gold reserves because of the high expenses of the Vietnam war and let the dollar float.

Subsequently, the seventies were marked by an enormous “money”- expansion with high interest rates. The problem for the banks was no longer Bretton Woods, but to find credit worthy borrowers, for little by little all credit worthy borrowers were already overloaded with debts.

In 1970, Pierre Werner (a banker and Prime Minister of Luxembourg and attendee at the Bretton Woods conference) presented the first blue print for the common European currency, that could, at once, largely extend the working area for the banks.

That new currency needed time and the banks didn’t have that. Therefore a plan was concocted to convince the governments of the G10-countries to borrow no longer ‘free of interest’ from their central bank, but at interest from private institutions.





Starting from 1974 the public debts rose explosively by the effect of interest on interest. [4] Merely in the Netherlands, the banks received a free manna of hundreds of billions of euros this way, and this still continues.


The society got totally disrupted. Public infrastructures and services had to be privatized (what offered the banks new reliable borrowers) and a sustained wave of budget cuts led to a gradual destruction of public services and achievements and the commercializing of care.

Private banks must keep growing, even when we get drowned in debts, cannot pay the interest anymore and the economy doesn’t need any extra money anymore. The regulating of banks, the free manna of hundreds of billions of euros and the creation of a eurozone with ESM-bank doesn’t change anything about that.


The growth syndrome of private banks works like a devastating cancer tumor. For each crisis you can find motives, but the structural cause sits within the system itself.

Nearly everything that is essential for the coherence of society has now ended up cut into bits.


[1] See also: Out of the euro, and then?

[2] Money creation in the modern economy
By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.
Website: Bank of England;
search: Prereleasemoneycreation.pdf
copy: Prereleasemoneycreation.pdf

[3] Helmut Creutz & money/


from the archives:

Out of the euro by Rudo de Ruijter

Oh Canada! Imposing Austerity on the World’s Most Resource-rich Country by Ellen Brown + Global Economic Crisis and Canadian Austerity

The Banking System In Short by Rudo de Ruijter

Overt Money Financing: Raining Money on Main Street by Ellen Brown

7 thoughts on “Private Banks or a Bank of the Government. A Comparison. by Rudo de Ruijter

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  6. What I find really disgusting is that the vast majority of westerners have no idea that more than 95% of their money is created by private banks (out of thin air) as loans. Nor do they understand that paying off all the debt will make the economy worse rather than better. If all the public and private debt were paid off, there would be no money in circulation to keep the economy ticking over.

    Even front line bank employees have no idea they’re creating money every time they make a loan. Try asking them about it and you’ll see.

    It’s high time we ban private banks from creating money and restore this function to the public.

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