How money is created in Australia :

Simply explaining how the Australian monetary system could better serve Australia's people.

If we knew we were being robbed of our savings, wouldn't we try to do something about it?  If we knew that most of the money we pay in taxes was wasted, wouldn't we demand an explanation?

We have all heard it said that "money is the root of all evil" and probably thought that was a bit of an exaggeration.  But when we understand how money is created in the modern world we can then understand the main cause of many major problems: ever increasing taxation; pensions disappearing; inequitable distribution of wealth; inflation; national debt; currency crises and devaluations; recessions; depressions; and even the failure of government in a democracy to govern in the interest of its electors.
Money was invented to be a tool for facilitating trade, but has now become a tool used by the rich to govern the world.  If you have any doubt about that, please read on.

National Debt:

We've all heard of the Third World's debt crisis, of hopelessly poor nations unable to pay their debts, and of the human suffering and environmental consequences of their desperate predicament.  But did you know that powerhouse of the world economy, the United States of America, is also in debt... to the extent of nearly US$20,000 for every man, woman and child in the entire USA?  Or that after Mexico and Brazil Australia is, per head, the largest debtor nation on Earth?

According to figures obtained in mid 2001 from the CIA Factbook, these are the external debts of a few countries, a lot of them from the "First World":

Australia US$222 billion, Austria US$32 billion, Canada US$253 billion, China US$159 billion, France US$117 billion, Hong Kong US$48 billion, Israel US$18 billion, Italy US$45 billion, New Zealand US$53 billion, Russia US$199 billion, South Africa US$25 billion, Sweden US$66 billion, United Arab Emirates US$15 billion, United States of America US$862 billion.

The Factbook's figures vary from being a couple to several years old, but if so many countries, from the richest to the poorest, are all in debt the question needs to be asked... to whom is the money owed?  The answer, apparently, is to private banks.

Banks are happy to make loans available because of the interest they earn from them, but how do they come to have so much money to lend?  More even than the world's richest countries?  The way the banks amass all that money to lend is the story of this page, because they do it not only in Australia, but in countries all around the world, and they are accused by many of using that money to bribe and blackmail politicians, political parties, bureaucrats, media, experts, and others so that indirectly they are able to govern the world.
To find out how, read on...

Definition of Money:

Money according to the Macquarie dictionary is "coins or certificates (such as banknotes etc.) generally accepted in payment of debts and transactions, or any article or substance similarly used".  In the early days of Sydney, Australia, rum was frequently used as a form of money.  In the modern world credit cards and cheques are generally accepted in payment of debts and transactions, so credit is a form of money.

Coins and Banknotes

In Australia, coins are made by the Commonwealth Government at its Royal Mint in Canberra and banknotes are printed in Melbourne by Note Printing Australia, a wholly owned subsidiary of the Reserve Bank of Australia which in turn is wholly owned by the Commonwealth Government.  So it is fair to say that coins and banknotes are manufactured by the government.  Provided the quantities made result in a total money supply in balance with the goods and services being generated throughout the country the manufacture of coins and banknotes will not cause inflation nor a shortage of money.

But statistics like those prepared by the Reserve Bank show that only about 5% of all money in Australia exists as coins and banknotes.  So where does the other 95% of money come from?

Banks Create Money by Creating Credit:

Credit that can be accessed by credit card, overdraft cheque or bank loan represents nothing more than someone's promise to pay.  Credit money exists only as numbers in bank computers.

When someone borrows from a bank, perhaps taking out a housing loan, the bank records in the borrower's account the debt that must be repaid with interest, and in return provides a bank cheque to the borrower or direct to whoever he is purchasing the house from.  The bank cheque is bank created credit, not backed up by the bank's own money nor anyone else's.  The banks are permitted by governments to create credit like this up to as much as 15 times the total amount of money they hold in "deposits".  Furthermore, "deposits" are considered to be not only banknotes and coins, but cheques and account balances representing credit created previously, so banks are able to build a mountain of credit based on earlier credit until it amounts to 95% of all money!

It is worth stressing that when a bank makes a loan, it never loans any of the bank depositors' money.  No depositor ever sees a statement telling him that part of his deposit is unavailable because it has been loaned to a borrower.  Bank loans are of bank created credit only.

Eventually the house seller will present the bank cheque for payment, probably at another bank where it will be credited to the seller's account.  But even at this stage the created credit still exists only as numbers that the banks' computers can swap amongst themselves, and on average that is where 95% of it will stay for the life of the loan, because, remember, only about 5% of all money is cash.

So banks can and do increase the money supply by creating money out of nothing, as credit.  By so doing their influence over the total amount of money circulating in the community is many times greater than that of the government manufacturing banknotes and coins.  And so it is that the privately owned banks can cause and control inflation.  Remember that next time you hear some scaremonger predicting ruinous inflation caused by the government printing money.

In time, the credit created by the loan is extinguished as the loan is repaid, so at the end of the loan the temporarily created credit will have disappeared, except for leaving the bank richer by the amount of interest paid.  Would now be a good time to remember that the interest amount is often greater than the original amount of the loan?

To expand its business, the banking industry normally seeks to continually increase the overall level of debt, and just loves big spending business and government customers.  But it is worth noticing that banks can at any time decrease the supply of money circulating in the community by refusing to issue new loans as existing ones are repaid... thereby causing recessions and depressions.

In Other Words:

The previous section is the most misunderstood part of this story, so it is worth repeating several times in different words.  Click here to find similar things being said in different ways by a variety of commentators.  And if you are wondering why you don't hear these things on TV, on radio, at school, or in newspapers, here is an explanation of why from Canada, which is plagued by the same problems.

Bankers Depression of the 1930s:

Older Australians all know about the Great Depression and the extremely hard times it brought about; but what of its causes?

In 1930, Australia did not lack industrial capacity, fertile farmland, or skilled, industrious and willing workers, residing in both the city and country. Already, extensive systems of reasonably efficient transport and communications were in place. War had not ravaged the cities or countryside, nor had famine devastated the land and its population. There remained plenty of development work to be done.  The one thing that industry and commerce lacked was a sufficient supply of money.

In the early 1930s, Bankers, who were the only source of new money or credit, deliberately refused loans to industry, commerce and agriculture.  However, payment on outstanding loans was still demanded, which led to a rapid decrease in the circulation of real money.  By a curious co-incidence, the same thing was happening in America and elsewhere.

This caused a complete standstill; jobs could not be done, goods and services could not be purchased. This placed Australia in the Great Depression of the 1930s, and moreover, placed extensive numbers of mortgaged businesses, private dwellings and farms into the hands of Banks. The same happens on a smaller scale every time we have a recession.

Australia suffered more in the 1930s than any other country with the exception of Canada and Germany.  We had an unemployment rate that reached 30% and was 20% for a long period of time.  National income fell by almost half.  Capital dried up completely.  Commodity prices fell by two thirds.

Bankers Quickly Created the Money for War:

Almost overnight, the same Bankers who had no money for housing, food and clothing, suddenly had millions to lend for Army barracks, uniforms, rations and weaponry.  This was a remarkable reversal in policy by the Bankers. They simply began pumping millions upon millions of dollars back into the economy when war was imminent.  The Great Depression ended because of the war!

Wars create huge debts to the Bankers who are able to expand the money supply and lend more money out.  Big banks that have traditionally been owned exclusively by a few collaborating families, can change the course of history and have done so for much of this century.

Competing Banks Co-operate:

Various mechanisms exist to enable individual banks to co-operate with each other to make the banking industry work by exchanging debts, payments, information, etc.  One such is the Australian Payments Clearing Association, a public company owned by the banks, building societies and credit unions. It has been in existence since February 1992 and has specific accountability for key parts of the Australian payments system, particularly payments clearing operations.

If you have wondered how the independent banks manage to raise and lower their interest rates all at about the same time, the answer lies with the Reserve Bank of Australia which is not a government department but is wholly owned by the Commonwealth.  The Reserve Bank Board makes decisions about interest rates independently of the political process – that is, it does not accept instruction from the Government of the day on interest rates.  In the USA the Federal Reserve Bank posed as a government agency until a US appeal court ruled that the Federal Reserve is privately owned.

Numerous banking associations and institutes exist throughout the world to cater for the mutual interests of bankers.  One is the Australian Bankers' Association, the national organisation of licensed banks in Australia whose mission is "to further the interests of Members . . .".

And internationally, Australia is a member of the International Monetary Fund which was created to promote international monetary cooperation.  Its activities include Surveillance, Lending, and Debt Relief for heavily indebted poor countries in exchange for the ability to prescribe macroeconomic adjustment and structural and social policy reforms in those poor countries.

So quite apart from family connections, religious loyalties and secret societies, there exist many recognised bodies fostering contact, co-operation, and perhaps collusion between supposedly competing banks.  Whether this ever results in a conspiracy is left for the reader to decide.

Banks (try to) Buy Respectability:

A minor scandal erupted in Australia during the year 1999 when it was revealed that influential radio talkback presenter, John Laws, had accepted payment of half a million dollars from the Australian Bankers' Association for more favourable on-air comments about the banks.  The parties involved appeared to regard the deal as a normal commercial arrangement.

Impossibility of paying off all debt:

Some simple arithmetic will quickly convince you that if 95% of a nation's money exists as bank created credit owing a bit over 5% interest, the remaining 5% of "real" money will be insufficient to pay even the interest!  Consequently, interest is continually compounded as a debt.  This is a mathematical certainty.  The whole economy then slaves away at the impossible task of trying to repay the ever increasing debt to the banking system.  Lucky individual borrowers will sometimes pay off their debts to the banks, using in the process so much of the available money as to ensure that others never can.

Under Australia's present monetary system, at any point in time the capitalised value of debt and interest will always exceed the money supply.  At the end of May 1998 in Australia, the total value of debt and interest as a result of lending by banks was $518,498m, while the money supply was $404,109m.  There's a fuller discussion of this matter in Manufacturing Money by Mark Mansfield B.Ec.

The Result: 

Profits for the banks, Debts and taxes for the people:

Whilst the banks profit by creating credit, what happens to the borrowers?

In the case of the Australian government its debt has reached such a size that it can not pay off the loans as they fall due, and has to borrow more just to pay its interest bill !   By 1993/4 Australian governments were responsible for 46% of Australia's total external debt which itself is now US$222 billion according to the CIA Factbook.

This is why the government, desperate for money to pay the banks, increasingly taxes the people who can not escape it;  why it sells commonwealth assets and enterprises previously owned by the people; why it bleats that it can no longer pay old age pensions to people it has been taxing for that very purpose since the 1940s; and why it continues to attract foreign investment long after our need for it has passed.  A formula for leading Australia inexorably into the clutches of the International Monetary Fund !

Australia has already started taking the IMF's Four Steps to Damnation.

If you have retained your sense of humour this far and would like to join a group of Australians who are sick of banks, why not visit the Sick of Banks website and register your support?

Better Alternatives:

The good news is that the problems caused by Australia's present money creation system can all be overcome: better alternatives existAnother matter entirely is how to get Australian governments to implement the required changes, or even to comprehensively discuss them.

Some approaches that have merit are listed below:

Government Issued, Debt Free Credit:  Most problems would be overcome if the government simply issued credit, like it does with banknotes and coins, debt free.  Especially when the government itself is the borrower.  It already has the constitutional power to do so.  Why it should have transferred this lucrative right to privately owned banks is difficult to understand unless things like bribery and blackmail are considered.  Conspiracy theorists point out that two American Presidents, Abraham Lincoln and John Kennedy were both assassinated whilst they were attempting monetary reform.

Nationalising the Banks - bringing them under government ownership and control - appeals because amongst other things it could result in banking profits being shared by all the people.  In 1947 Prime Minister Ben Chifley and his Australian Labor Party Government attempted to nationalise Australia's banking system, but the proposal was vetoed by the Privy Council.  Chifley's idea was to harness credit-creation to national economic development.  Opponents point out that government has made such a mess of so many things it has undertaken that it simply can not be trusted with something as important as running banks. For example, in Australia's banking crisis of 1989-1992, the IMF estimates the cost of rescuing state-owned banks to be nearly 2% of GDP.

Islamic Banking is designed around the religious beliefs of Muslims, but can be used by anyone.  Paying and charging of interest is prohibited !  Use of paper money is also illegal according to Islamic law, so another Islamic initiative is a return to the use of coins made of precious metal.  The gold Islamic Dinar is now minted in four countries and is on its way to becoming the currency of millions of Muslim peoples.  And it could once again become the currency of all people who are tired of being cheated.

Impex Banking is just one of a collection of reform measures proposed by Economic Reform Australia, a non-profit and non-party organisation concerned primarily with sustainable development and with economic and financial reform.

For lots more detail about alternatives and an agenda for implementing them, see David Keane's page Solutions for Australia's Banking and Financial Management.

Some Success Stories:

The Saracen Empire forbade interest on money 1,000 years ago and at that time its wealth outshone even Saxon Europe.

Mandarin China issued its own money, interest and debt free, and historians and collectors of art today consider those centuries to be China's time of greatest wealth, culture, and peace.

Germany financed its entire government and war operation from 1935 to 1945 without gold and without debt, and it took the whole Capitalist and Communist world to destroy the German power over Europe and bring Europe back under the heel of the bankers.

A little place that has escaped the clutches of the banks by issuing its own interest-free money is the little island of Guernsey.  By controlling its own money supply from 1816 onwards, Guernsey was able to avoid the century old trap of borrowing when it didn't have to.  The island has had a stable and prosperous economy for over one hundred and fifty years. Guernsey's income tax is only a "flat" 20%.  It has no public debt, no GST, no VAT, no inheritance tax, no capital gains tax, and almost no inflation.

American colonies issued debt-free and interest-free money as colonial script in the 1700's and their wealth soon rivaled that of England, provoking restrictions from Parliament which in turn led to the Revolutionary War.  The basic cause of the revolt of the American colonies against the British Government was the fact that the colonists were creating their own money and enjoying comparative prosperity compared with conditions in Britain.

American President Abraham Lincoln printed 400 million dollars worth of interest and debt free Greenbacks in 1863 to successfully finance the Civil War, only after being asked to pay 24% to 36% interest by the banks.  He was later assassinated, allegedly by an agent of the Rothschild Bank.

Australia's own government established Commonwealth Bank achieved some impressive successes while it was "the peoples' bank", before being crippled by later government decisions and eventually sold.  At a time when private banks were demanding 6% interest for loans, the Commonwealth Bank financed Australia's first world war effort from 1914 to 1919 with a loan of $700,000,000 at an interest rate of a fraction of 1%, thus saving Australians some $12 million in bank charges.  In 1916 it made funds available in London to purchase 15 cargo steamers to support Australia's growing export trade.  Until 1924 the benefits conferred upon the people of Australia by their Bank flowed steadily on. It financed jam and fruit pools to the extent of $3 million, it found $8 million for Australian homes, while to local government bodies, for construction of roads, tramways, harbours, gasworks, electric power plants, etc., it lent $18.72 million.  It paid $6.194 million to the Commonwealth Government between December, 1920 and June, 1923 - the profits of its Note Issue Department while by 1924 it had made on its other business a profit of $9 million, available for redemption of debt.  The bank's independently-minded Governor, Sir Denison Miller, used the bank’s credit power after the First World War to save Australians from the depression conditions being imposed in other countries. The Commonwealth became the first Australian Bank to to open an agency in New York, established mainly for public loans via the New York market.  By 1931 amalgamations with other banks made the Commonwealth Bank the largest savings institution in Australia, capturing 60% of the nations savings.

The Commonwealth Bank was unable to save Australia from the depression of the 1930s because it had been effectively strangled in June, 1924, when the Bruce-Page Government brought in a Bill to amend the Commonwealth Bank Act by taking the control of the Commonwealth Bank out of the hands of its Governor, and placing it in the hands of a directorate consisting of the Governor of the Bank, the Secretary of the Treasury, and six persons actively engaged in agriculture, commerce, finance, and industry, to be appointed by the Governor-General (which in practice meant the Bruce-Page Government).  The effect of the Bill was to place the Bank absolutely under the control of a body of men who might be bitterly opposed to any competition with private banking.

Such history of money does not even appear in the textbooks of public schools today.


"At the turn of the century there was nothing that Australians could not afford.  Per head, we were the richest people on Earth.  Our life expectancy was the longest in the world."

So runs the introduction to a 1987 film series produced by Film Australia and entitled "Last Chance for the Lucky Country" (ISBN 0642 13106 6).  It seems that Australia had the highest or close to the highest standard of living right up until about 1960.  But the introduction continues:

"Today, our rank has dropped.  16 countries lead us in wealth.  After Mexico and Brazil we are, per head, the largest debtor nation on Earth."

That was in 1987.  By the end of 1997 our standard of living had dropped below 23rd, we were further in debt, and the value of our dollar had dropped to a near-record low.  By 2001 our dollar had set a series of new record lows, and will keep going that way unless someone has the courage to reform Australia's monetary system so that money is created without it becoming an interest-bearing debt to banks.


Share your thoughts on this matter now, at Nugget Forum.

See also: Various Views on Money Creation

See also: Manufacturing Money

See also: Australia Needs An Industry Policy

Published 2001 by David Kidd   (, Maryborough, Queensland 4650, Australia