Banking 4/7

Money! What is money? Money is a ticket that enables one to buy goods with, just as a railway ticket enables one to ride on the train goes the argument. The more tickets one has in one’s pockets, the more someone can buy. These tickets are, therefore, merely media of circulation, purchasing power. They may be made of anything. The material is of no consequence. What is of consequence, though, is the quantity of money in circulation. The mortal sin of the banks is that they refuse to issue enough money, or credit, to enable the “common man” to procure the necessities of life. Therefore, the power to issue money and credit based on social wealth must be taken over by a state-owned, claim the advocates of reforms and panaceas. Money, they explain, causes commodities to circulate, but herein they are certainly deceived by appearances. In reality, the movement of money is simply the reflex of the circulation of commodities. Money only realises the prices of commodities. Given the velocity of money, among other things, the quantity of money required in a community is just the amount sufficient to realise the prices of the goods to be exchanged. More than this the system cannot and will not absorb. For money, in the sphere of circulation is an effect not a cause. Hence, there is nothing seriously wrong with money, as such. Consequently, to increase the quantity of money will not put more goods into the hands of the people. Such an increase, in place of causing a greater quantity of commodities to circulate, can only have the effect of cluttering up the machinery of exchange. To advance as an argument for such an increase that many people are suffering because they have not the money with which to buy the necessities of life is not an argument for the relief of distress. Many are deeply moved because many are scarcity amidst plenty. It is a condition the reason for which baffles them. They can see easily enough that the products of labour are not properly distributed. That does not require much brain work . But they do not have sufficient insight into the capitalist system to be able to understand that this condition arises from the fundamental contradiction of the system. This fundamental contradiction is that goods are socially produced, but individually appropriated by the private owners of the means of wealth production. The profit system, albeit appropriately modified, must be maintained at all costs. Hence, they want to retain the capitalist system, but at the time escape the inequalities and distress which it produces. So when they speak of changing the system, what they have in mind is an indefinite idea of correcting some of its faults. Yet those faults will only end when the means of production are brought into common ownership and democratic control so that they can be oriented towards directly satisfying people’s needs – when banks, money and all the rest of the buying and selling system will have become redundant.



 It’s not a revolution if you’re only taking out the bankers. The bankers are not wicked finance capitalists against whom the anger of workers should particularly be directed, just capitalists with their capital invested in a particular line of business, no more no less reprehensible than the rest of the blood sucking parasitical capitalist class. Recessions are inherent in the boom bust cycle of capital. “Greedy bankers” are a scapegoat distracting from the fact that this will happen again and again and again. Blaming them alone implies you could have a nicer capitalism with good bankers. Pinning the blame on “greedy bankers” lets the rest of the culprits off the hook. This is not just a financial crisis, but a crisis of the whole capitalist economy in which the whole business and political class are fully implicated.

If a few get rich while millions lose out, then this is capitalism working as it only can work. If there is slump followed by boom followed by slump, then capitalism is working as it should. It works the only way it can work – in an anarchic and chaotic manner, oblivious to the misery and suffering it creates. As usual it is the working class that suffers the cutbacks, the reduced standard of living, and the vicious and austerity programmes that every such crisis engenders.

That capitalism is chaotic is evident. Its frequent bubbles and recessions — its unavoidable features— become global. The disasters get bigger, and nastier.

There can be no such thing as a permanent boom. Marx, the first person to provide a convincing analysis of how the capitalist economic system worked, explains how capital accumulation proceeds by fits and starts, periods of relatively rapid growth being followed by periods of contraction and stagnation. The graph of long-term growth under capitalism is not a straight line moving up from left to right but a jagged line with peaks and troughs, with each peak normally higher than the previous one. Marx argued that this cyclical pattern of growth was not just accidental but was inevitable under capitalism - it was the way capitalism functioned and developed, its “law of motion” as he put it - with each period of rapid growth ending in a slump and each slump preparing the conditions for the next round of growth. Capitalism is driven, not by consumer demand, but by the drive to make and accumulate profits as further capital and that this is by no means a smooth process.

In order to maintain or increase their share of the market and realise the surplus value embodied in their products, capitalist firms are compelled by competition to reduce their costs by improving their productivity, in particular by the introduction of more productive machines. This leads to an increase in overall productive capacity. During the period of recovery that follows a slump this poses no problem as the market is beginning to recover and expand again. However, as the competitive pressures to increase productive capacity continue, the point is eventually reached when productive capacity in a key industry or group of industries comes to outstrip the market demand for its products. At this point a crisis of overproduction breaks out. As profits fall, production is cut back, workers are laid off and, through the knock-on effect on other industries, the market shrinks, so inaugurating the period of slump. During the slump, the least productive machines are taken out of production and capital is depreciated or simply written off. This purge of under-productive machinery and over-valued capital eventually creates the conditions which allow capitalist growth to recommence, so beginning the boom-slump cycle again. This is how capitalism has developed and continues to develop.

A key factor in this is that capitalism’s financial apparatus is largely built on confidence that transactions will be smooth and payments will be met. When this confidence in the efficiency of trade and commerce starts to ebb then things can take spectacular and serious turns for the worse. The erosion of financial confidence is one of the ways in which a downturn in one sector or country can spread to others.

The financial crisis is a reflection of the fact that stock exchange and foreign currency gamblers have realised that countries have expanded their productive capacities beyond market demand. One consequence of the past period of slow growth was that significant amounts of profits were not being reinvested in production but, instead, being held in liquid form and invested in financial assets with the aim of making as large a short-term profit in as short a time as possible. All the multinational corporations had treasury departments engaged in financial speculation of one form or another whether on the stock exchange, the bond market, currency transactions, commodity markets or dodgy hedges such as derivatives.

This extra demand for financial assets, deriving from non-reinvested profits, has driven up their price, so creating the anomalous situation of a stock exchange boom in what is essentially a depressed economy. Most of the financial transactions that took place were not investments of productive capital- not used to set up factories or to buy machinery, equipment or raw materials-but are to buy and sell shares or bonds or foreign currencies or commodity futures or property or failing companies to asset strip them. Such purely financial transactions are utterly unproductive, even from a capitalist point of view. Not only do they not result in the production of a single extra item of wealth but they don’t even increase the amount of surplus value available for sharing amongst the various sections of the capitalist class. It’s a zero-sum game. As socialists have always maintained, stock exchanges are places where capitalists gamble and try to cheat each other with a view to acquiring as large a mass as possible of the surplus value that has already been produced by and robbed from the workforce.

What some argue is that if the interest that the money capitalists earns seems to spring out of thin air, the industrial (productive) capitalists, in contrast, seem to earn their profits from the sweat of their brow. Their “profit of enterprise” – which is what remains after they pay money capitalists interest – appears to be the fruit of functioning capital, rather than the fruit of owning capital. Just as there is an abstraction from the actual production ( exploitation) process in the case of interest-bearing capital, in the case of profit of enterprise the production process is separated from capital itself, so that it appears merely to be labour process. Profit seems to accrue to industrial capitalists as payment for a useful function performed in that labour process. The fact that industrial capitalists play an active role in the production process provides a basis for the claim that they are preferable to the money capitalists who do nothing more than provide the investment. Marx’s theory of surplus-value brings to light the ultimate source of capitalist wealth.

Some apologists for capitalists say productive businesses produce value. Speculation is the use of money-capital, not to invest in the production of new wealth and new surplus value, but unproductively to try and swindle other capitalists’ out of their past profits. It’s a zero-sum game in which the total amount of profits remains the same but merely gets redistributed differently amongst capitalists depending on their speculative skills.

Real value is only created by the worker. It is labour power, which is a source of more value than it has itself. The capitalist, having bought the labour power, engages the worker to work for longer than is required to produce the value of that labour power, and so surplus value is produced. It is working for the capitalist clas that we produce a greater value in the form of the commodities we create than the value of the wages we receive. Out of this “surplus value”, the capitalists obtain an income to support his consumption but also the new capital to reinvest in their business enterprises.

So ultimately the source of capitalist profits is the difference between the price of product of labour, and the cost of hiring the specific types of labour involved in realising it. That is, between the value of the work we do, and the cost of maintaining and reproducing our capacity to do that work. Once that profit has been realised, there is no hard and fast rules determining how that profit is divided among the various members of the capitalist class. It becomes a matter for legal and contractual relations between capitalists, as they use a variety of rights to secure their share of the profit, with landowners securing rent, financiers securing interest. Each takes a profit from the total of surplus value extracted.

For all its worth, the distinction between productive and non productive capitalists remain a question of who gets what share of the unpaid labour of the working class.

Workers are exploited by virtue of the fact that we produce surplus value for the capitalists which is appropriated and used for their own ends. Nothing to do with low wages or being harshly treated. Exploitation is something which is built into the very nature of the employment relation itself which implies the division of society into employers/owners and employees/non-owners .

In fact, capitalism is not interested in producing things as such. It is only interested in profit expressed in money terms. Investing in the production of goods and services is an inconvenience which it has to go through in order to achieve its aim of ending up with a greater financial worth than it started with. Thus the purest form of capital is finance capital and, from the capitalist point of view, the most convenient way to make more money is to do so by financial dealings of one sort or another. It’s an illusion of course. It’s production, not finance, that makes the world go round. The financial world cannot go on feeding off rising paper asset values for ever. Reality must intrude at some point. But capitalism without finance capital is inconceivable; so too, therefore, is capitalism without financial crashes.

Capitalism is not a place (‘financial centres’) or a thing (‘multinational corporations’ ), it is a social relationship dependent upon wage labour and commodity exchange where profit is derived from capital’s theft of unpaid labour. Concentrating on “nasty” financiers and multinationals and defining “capitalism” in those terms can only end up as a massive diversion from the goal of abolishing the capitalist system.

This idea that bankers are any worse than other types of capitalists is not convincing. To repeat ad nauseum. The capitalist class as a whole, and all of the individual capitalists, enrich themselves thanks to workers adding more new value to the commodities they produce than the value of the wages received as payment for their labour-power. Any party to this exploitation of labour – whether the capitalist who lends the investment funds, the capitalist who supervises the commodity production process, or the capitalist who is tasked with selling the commodities – is entitled to a piece of the action and therefore share equally in the blame. It is nonsense to argue that one type of capitalist is more or less culpable than the others. The relations between capitalists is very much like those between a gang of thieves, who cooperate to pull off a heist and then divide the loot among themselves. Conflicts easily arise from such an arrangement: as a bigger share for one means a smaller share for the others. “Wall Street vs. Main Street”. It is more a re-distribution of booty among the robbers. Such squabbles are of little concern to the person who has been robbed. In the end it is just the old “divide and conquer” approach with a subtle new twist – instead of dividing the working class, the internal divisions of the capitalist class are emphasised to deflect attention from the actual real class divide that exists.

The task for socialists is not to drive out speculators from capitalism to perfect the system but to move beyond production as merely a means of capital accumulation.

It is no co-incidence that the cries for banking reform invariably comes during economic depressions. The lubrication that keeps the capitalist machine running – the money markets – are dysfunctional.

Who are the people who find a difficulty in paying for the money they use? Not the working class in any sense of the word. Not the large capitalists, for they control the powers of government and have a currency suitable to their interests. There is left the small capitalist and shopkeeping section, who, fond of calling themselves the “middle” class, find themselves unable to hold their own positions against the giant production and “chain store” system of distribution that is crushing them out in all directions. Hence this howl for an extension of “credits” and the introduction of “cheap” money for the purpose of paying their debts. There is no chronic shortage of purchasing power. Sufficient to buy the product is generated as wages and profits in the course of production. Slumps are not caused by an absolute shortage of purchasing power but arise when, because of falling profit prospects, capitalist firms choose not to spend all their profits on fully renewing or on expanding production.

As Marx identified “So long as things go well, competition effects an operating fraternity of the capitalist class…so that each shares in the common loot in proportion to the size of his respective investment. But as soon as it is no longer a question of sharing profits, but of sharing losses, everyone tries to reduce his own share to a minimum and to shove it off upon another. The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, ie, to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist’s interests and those of the capitalist class as a whole, then comes to the surface…”

 Marx also pointed out that “the moneyed interest enriches itself at the cost of the industrial interest in the course of a crisis” Bankers are enriching themselves at the expense of industry and workers, in other words. So whats new?

The economist David Harvey has explained that the losses of the crisis are finally distributed between factions of the capitalist class, and between the working and capitalist classes, and whatever the power struggle that ensues, the necessary result will be the destruction of value (closure of workplaces, the laying off of workers, destruction of surpluses, defaulting on debt, cutting of state services, and so on) so that a new round of capitalist accumulation can begin. The sad but inevitable reality of capitalism.

The present banking crisis is not all that complicated. When borrowing became less available and more expensive banks came unstuck. They found that, when their loans came up for renewal they had to pay more interest on them than they were getting from those they were lending money too. Since banks make a profit by paying depositors and creditors a lower rate of interest than they charge those they lent money to, this meant they were making a loss. That’s what can go wrong when banks can’t get hold of other people’s money on the right terms. What can also go wrong is that they make unsound loans - the sub-prime situation. If they buy a house and the lend someone the money to buy it, if that person defaults they are left with the house. In normal times they can resell it but because there has been overproduction in the housing market they are finding that they can’t get the same price for it as they paid for it. In other words, they lost money.

In fact this effective overproduction in the housing sector could be said to be what has provoked the present financial crisis.

Some in America seek a solution in the likes of the State Bank of North Dakota. That a bank owned by state authorities weathered the recession was perhaps more a reflection that the state’s economy is primarily based on agriculture and oil , both involved in current boom times. Nor was the state particularly exposed to the sub-prime disaster “North Dakota really didn’t participate in subprime to a significant degree. I mean, that was–you know, it was sort of a flyover state. All of the aggressive subprime lenders apparently didn’t think there were enough folks in farms that they could get to lever up to take on these dodgy loans.”
http://therealnews.com/t2/index.php?There are three main divisions within capitalist society which share the surplus-value which is socially extracted from the working class; the industrialist, the landlord and the banker. These divisions historically reflect the application of the division of labour to the specialised investment of capital in any field of production and distribution, any process of circulation, of which banking is part. Banks produce nothing. They are really middlemen or custodians of idle capital which must be available as a hoard, as potential money capital waiting to be put to use. Their profit is made during the process of circulation. The difference between finance capital and industrial capital is that the owner of money capital who wishes to earn interest on that money throws it into circulation not as capital for himself, but so that others can use it; and consequently gains a profit by this service.

Contrary to popular belief, banks do not dominate the capitalist system (The two largest corporatrions in the world are WalMart, bigger than the Pakistan and Exxon bigger than the New Zealand economies). In the list of companies by revenue size the first financial business enterprise to appear is Fannie Mae at number number 16. This mistaken view is due to the fact that wealth is represented by enormous quantities of money. All wealth under capitalism expresses its value in the symbolic money form, but that form tends to conceal the fact that capital exists in the physical implements of the labour, factories, minerals, buildings, ships, etc. If for some reason, whether it be that the market is already overloaded and cannot absorb further commodities, or that over-production has already taken place, then production will be scaled down, curtailed, or in some cases halted entirely, and workers will be laid off. In these circumstances there will be little prospect of profit, and as experience has shown a number of capitalists, the smaller ones, go bankrupt All the machinations of the banks, either by advancing or retarding credit, whether charging low interest rates or not, cannot alter this. At the moment there is no shortage of cash available for investment. However, in a failing market there is little incentive to the industrial capitalist to commit himself to paying interest when the prospects of earning surplus-value on the borrowed money are extremely remote.

Speculation basically involves buying cheap and selling dear. When it comes to banking, what banks are doing is borrowing money cheap and lending dear, pocketing the difference as profit. Basically the same as any merchant who buys below value but above the cost-price of the producer of the commodity, and then sell above their own cost-price. There is nothing very specialk about banks; they are not wicked finance capitalists against whom the anger of workers should particularly be directed, just capitalists with their capital invested in a particular line of business, no more nor less reprehensible than the rest of the capitalist class.

Banks lend money and charge interest on it, but they don't create this money themselves but many have come to accept a myth that banks can create money "out of thin air." No, they can't. They can only lend out either what has been deposited with them or what they themselves have borrowed on the money market.

True, they don't have to hold all of this as cash, but only a very small proportion, as little as 3%. There's nothing dubious about this. It's what banks do - lend money that people and firms don't want to spend for the moment to those who do want to, and making their profit out of the difference between the rate of interest they pay depositors and what they charge borrowers. It is quite true that banks do not have to retain all the money deposited with them in the form of cash. If they did, they would never be able to make any profit, since it is only by re-lending, at a higher rate of interest, the money they have in effect borrowed from their depositors that they make profits. It does not mean that they can lend out many times any amount borrowed by or deposited with them as cash, raking in the interest. It means that they can only lend 97 per cent of this amount.

The money lent, obviously, is spent on something, the proceeds of which ultimately end up back in the banking system and are then available for lending all over again. This is not creating new money out of nothing. It is re-lending already existing money. If the money lent does not return to some bank when spent - and so become part of its assets - then no more loans can be made. So, banks cannot lend out more than they have.

Derivatives, collateral debt obligations and the rest are not relevant here as they are not bank loans or money. They are what Marx called "fictitious capital" - ie the conversion of a stream of interest into a notional capital sum which can be bought and sold. Packaging and selling these was an alternative to lending at interest that the banks found to turn a profit. According to Marx the securities themselves really have no value and represent nothing more than a legal claim to a portion of future surplus-value. So any sale of these assets (at any price) represents a transfer of value from buyer to seller, although assuming that there is no default on the asset it will serve to eventually increase the amount of value in the hands of the buyer. The owner of a financial asset records the asset in his books as if it had a value just like any other commodity. This turned out to be disastrous when it was discovered that the stream of interest was also in many cases fictitious.

If there is one lesson of the current financial crisis it is that banks can only lend out what they have borrowed either from depositors or from their own borrowing on the money markets. It was an over-reliance on the latter that largely led to the collapse of Northern Rock and the near collapse of so many other banks. If banks could really create vast quantities of credit at "a stroke of a pen" then none would ever go bust. Neither would they need to tap the money markets for funds.

The second and most important function of the banker is to provide money for industry, which is capital. This has a separate function from money as the medium of circulation. The function of capital is not merely the circulation of commodities but their production in the first instance. Therefore, money used as capital is withdrawn from circulation because the wealth which it represents has been locked up in the process of production. The credit system of advancing capital allows individuals to use capital which is not theirs, and has opened the door to all sorts of swindles and reckless speculation. Who would not gamble with other people's money?

Credit creationism is a myth first given respectability by the 1931 MacMillan Report on Finance & Industry, though a significant minority of economists, bankers and trade unionists on the MacMillan Committee rejected it, while others later got cold feet when the implications of what they had signed up to became evident. It didn't stop a version of it (later highly amended by Samuelson and others) entering into standard economics textbooks.

What is of significance for those who describe thmselves as socialists yet espouse the idea of credit creationism is that runs counter to one of the basic precepts of Marxian economics, namely that value arises in the sphere of production not circulation. If banks could create credit with the stroke of a pen, that would mean in effect they could create wealth, and consequently the Marxist Theory of Value would be shown to be wrong. However, as time passes the validity of the Labour Theory of Value, i.e. that wealth can only come into existence when men apply their energies to nature, is all too apparent. If credit creationism were true, the solution to society's problems would indeed be monetary reform, not socialism - exactly the sort of argument put forward by Major Douglas in the 1930s (see below) to the American libertarian anti-fed reserve conspiracy theorists of today.

The confusion about the role of banks in creating money arises partly because of a lack of clarity as to the nature of money. Money is anything that people are prepared to accept as money and which circulates freely. As youngsters we get to play with toy money. This works perfectly well within the confines of play because players accept it as money and it circulates freely between them. The Bank of England's official measure of the money supply employs a number of different definitions leading to a number of different totals. M0 comprised sterling notes and coin in circulation outside the Bank of England (including those held in banks’ and building societies’ tills), and banks’ operational deposits with the Bank of England. On the narrowest definition the new bank deposits that arise as a result of banks lending money to customers do not count as money. On broader definitions they do. Keynesians and the Monetarists include "bank deposits" as money and that this confuses the issue. Especially as even the term "bank deposits" includes two entirely different types. Most people will interpret the term "bank deposit" to mean money that someone has and that they deposit in the bank, ie in effect lend to it even if they are not paid any interest (but are granted free banking in lieu of this). But the Keynesians and the Monetarists also include as bank "deposits" loans made by banks which take the form in effect of a credit line on which the borrowers pay interest to the banks. So, they mean by "bank deposits" both money that is lent to the banks and money that is lent by them. This involves double counting as some of the money that the banks lend will come from the money that has been really deposited with them.

The continuous concentration of money capital into banks and the expansion of the credit system allows a great number of transactions to take place without the mediation of any money. This is due to what Marx calls the mutual settlement of accounts. If there is a series of exchanges based on credit such that Capitalist A owes £500 to Capitalist B, and Capitalist B owes £600 to Capitalist A, the only amount of money necessary to realize the £1100 of commodities is a £100 -- the £500 owed to each (£1000 in total) are simply canceled on the books and no money is necessary to intervene in the realization of this portion of the value of the commodity capital. The amount of actual money intervening in giant purchases is surely very small. The bulk of purchases take place against credit, where the mutual settlement of accounts is always possible. The move towards a "cashless society", debit and credit cards, can be seen as increasing the velocity of circulation of the currency.

Ultimately money will only be acceptable and circulate freely if people using it have confidence in it. That is why, for so much of modern history, money has either contained precious metals or has been a token representing a call on precious metals. Today a country's currency depends not on how much precious metal backs it up, but on how productively powerful its economy is.

The one institution which appears to create credit is the State, operating through the Bank of England. This is an act of deliberate political policy. The Government, in a variety of ways, instructs the Bank of England to print an excess of paper currency, which the Government uses to finance its own schemes, and without having to introduce tax legislation to deal with particular cases. This inflation of the currency does not, nor cannot, add to existing wealth. What is really happening is that, far from creating credit, the Government is confiscating other people's. This has the same effect as a general increase in taxation. The constant dilution of the purchasing power of money by inflation raises prices and dislocates production and distribution. This is public fraud posing as public credit.

Postscript

Credit/Money Creation

Federal Reserve Bank of Dallas explains on its website: “Banks actually create money when they lend it.” the author informs us. This website creates a lot of misunderstanding because of that statement. The New York Federal Reserve gives a rather more sophisticated explanation.
http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html. But it is all made very clear on Page 57 of Fed Today
http://www.federalreserveeducation.org/fed101/fedtoday/FedTodayAll.pdf

The theory that banks can create “money out of nothing” comes in two forms.

In the crude version, it is argued that if the banks have to keep 10 percent of their assets as cash (as used to be the rule; it’s now as low as 1 percent) this means that if someone deposits $1000 in a bank that bank can then lend out $9000. Actually, what it means is that it can lend out $900.

The more sophisticated version takes over from here and assumes that the $900 is then spent and that the people who receive it then deposit it in one or other bank. These banks can then lend out 90 percent of what has been deposited with them, or between them a further $810. So that means that the original $$1000 has already become $1710. In other words, the banking system this has “created” an extra $710 “out of nothing”. But the process doesn’t stop here. The $810 also ends up with the banks, who then lend out a further $729. The process continues until, in the end, the banking system has lend out a total of $9000.

Banks can’t and don’t “create credit”. They can only lend out what has been lent to them, ie other people’s purchasing power. So, bank credit only re-arranges, not increases purchasing power.Banks are financial intermediaries that borrow money from some people and then lend it others. Banks fund loans to customers by a mixture of two methods, one of these is using money deposited with it from customers , the other is through the wholesale banking market, i.e. effectively money deposited with it from other institutions .Generally, small banks are deposit-rich and large banks are deposit-poor. Large banks loan out more money than has been deposited with them by borrowing from small banks. Small banks themselves borrow from depositors and other banks as well. An entire national economy can loan out more money than has been deposited in its banks by borrowing from foreign banks. The origin of their profits is the difference between the rate of interest they charge those they lend to compared to that they have to pay those the borrow from. An alternative to saying banks ‘create’ money is just to say that they help circulate it. The only body which can create additional purchasing power is the government via its Central Bank. It can in effect print more money.

Banks are not the only actors involved in the process – a bank makes a loan but that is not immediately redeposited, it gets spent on consumer goods or turned into productive capital so all these things have to happen first before it ‘comes back’ into the banking system, so the bank is not necessarily the active subject in all of this, so it’s not just like the banks sitting in isolation of everything deciding to create money out of nothing, if all the other activity didn’t happen then the banks wouldn’t be able to do what they do. It’s ‘created’ as a result of activities going on outside and outwith of the banks themselves, it’s not about them ‘creating’ credit and at some point it then having to react with the real economy, it’s about the activities of the real economy dictating it’s need and the banks responding to it.The fact that the bank doesn’t create money becomes obvious during a commercial crisis, during which too many depositors try to redeem their IOUs (their deposits) than can be redeemed- a run on the bank.