Logic of Islam

Making Sense of the Teachings of Islam

Interest and the Modern Banking System

Most of the material in this article has been taken from the lecture on Riba (Interest) delivered by Mufti Taqi Usmani in England.

After the world has experienced the two conflicting economic ideologies (i.e. Capitalism and Socialism) without any success (as they have failed to provide a just and equitable economic system for the whole humankind), it is time to come back to the economic system provided by Allah Almighty in his last and final revelation, the Holy Quran.

The Prophet Muhammad (peace be upon him) has told us that earning halal is obligatory upon us after five time prayers. So, a lot of importance has been attached to the economic activity by the Holy Prophet (peace be upon him). But at the same time, Allah has told us in the Holy Quran that economic pursuit should not be the ultimate goal of a Muslim. Economic activities are the means and not the end in itself. The main aim of a person is to be successful in the life hereafter. Nevertheless economic activities are a means to achieve this objective. Therefore, Islam has laid down some rules regarding our economics and Muslims are required to abide by them.

One of those principles is related to Interest (or Riba) and Allah Says “But Allah has permitted trade and has forbidden interest” [Al Quran, 2:275]. Trading and interest are different and not the same as some try their level best to prove.

This prohibition has become so evident in this day and age that it has never been the case in the recorded history. The horrors brought by interest based economy were unimaginable some centuries ago.

The banks make most of their money through interest. All the people deposit their money into the banks, and thus the banks have the wealth of the entire nation (plus they create money by fractional reserve banking). Now who benefits from this wealth in the banks? If you analyse, you will find that if a poor person goes to a bank to borrow money (for a business venture even if his idea is feasible) he will be kicked out of the bank. The reason being, unless he has collateral he cannot be given any money. The loan is only offered to the rich people (basically meaning that banks give business loans to those who can show that they do not need it). These rich people who obtain loans from the banks are of very small percentage of the total population. According to the statistics of 1997 from the State Bank of Pakistan, it was only 0.06% of all the depositors who borrowed this money from the banks. This means that the wealth of the whole nation is being utilised by a handful of people.

These entrepreneurs invest this wealth into profitable projects. Sometimes they earn huge profits out of their investments, and this occasionally reaches 100%. Taking an extreme example, if an industrialist has earned 100% profit, he will pass only a small amount of interest to the bank, and the bank after deducting its own share will pass the rest to the depositors. The layman is very happy that he deposited e.g. Rs.1000 and got back Rs.1050 in one year. But the poor person does not know that his wealth was utilised by the capitalist and he has earned enormous profits out of it (i.e. Rs.1000 in the above example). The Rs.50 which the depositor has earned is again taken back by the industrialist community, because whenever a borrower takes a loan from the bank, whatever interest he pays is included in the cost of his product. Thus, the prices of commodities that are sold in the market include the rate of interest that has to be paid to the banks. So when this poor person (who has earned Rs.50 on his Rs.1000) goes to the market and buys stuff, he pays this Rs.50 back to the industrialist community who used his money to earn Rs.1000 of profit. In reality, the depositors earn nothing. The whole profit has gone into the pocket of the entrepreneur.

On the other hand, if there is a loss, and if you take an extreme example, banks sometimes go bankrupt. So, then the money invested by the businessman was only 10% or 20%. It will be the depositors who will lose their entire wealth. In other words, if there is a profit, the whole earnings go to the capitalist, but if there is a loss, the depositors will have to bear the brunt of it.

There are other destructive aspects of Interest, and if anyone is interested, he or she can read the book “The Problem with Interest” by Tarek El Diwany (this book can be purchased from http://www.theproblemwithinterest.com/).

In addition, please read "The Web of Debt" By Ellen Hodgson Brown" (http://www.webofdebt.com/)

The interest based economic system was not so damaging in the past, but now its effects have engulfed the entire world. Some of the effects of the modern interest based economy are shown by the following statistics:

225 people own more wealth than the poorest 2.5 billion people (UNDP Human Development Report 1998).

24000 people die every single day because they are unable to obtain life sustaining food (UN World Food Programme, 2003).

Relieved of their annual debt repayments, the severely indebted countries could use the funds for investments that in Africa alone would save the lives of about 21 million children by 2000 and provide 90 million girls and women with access to basic education (UNDP Human Development Report 1997, p. 93).

According to the United Kingdom's Department for International Development in 2000, 1.2 billion people live in "abject poverty", meaning that they have no basic medical care, nutrition or housing. In the sub-Sahara, 48% of people go without health services, 48% of people are without safe water and 42% are illiterate, whilst in south-Asia the corresponding figures are 22%, 18% and 49.5%. Measured in 1987 US Dollars, GDP per capita in sub Sahara was $520 and in South Asia $521, whilst in the Industrialised Countries it was $12,764 (1995 figures compiled in (UNDP Human Development Report, 1998 ).

The income ratio of the one-fifth of the world's population in the wealthiest countries to the one-fifth in the poorest went from 30 to 1 in 1960 to 74 to 1 in 1995 (UN Human Development Report, 1999).

Now the meaning of the verse in the Quran has become crystal clear: Allah says “O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal – [thus] you do no wrong, nor are you wronged” [Al Quran, 2: 278-279].


Modern Economy: Progress or Destruction

Most of the material in this article has been taken from a lecture delivered by a Scholar in Australia a few years ago. Before reading this article please read the article “Interest and the Modern Banking System” on this website to get the full value out of this article.

Allah says in the glorious Quran “O you who have believed, fear Allah and give up what remains [due to you] of Riba (interest), if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal – [thus] you do no wrong, nor are you wronged” [Al Quran, 2: 278-279].

Narrated by Abu Hurayrah The Prophet (peace be upon him) said: “A time is certainly coming to mankind when only the receiver of Riba will remain, and if he does not receive it, some of its vapour will reach him”. Ibn Isa said: “Some of its dust will reach him.” (Sunan of Abu-Dawood Hadith 3325)

Riba is generally translated as Interest. But the fact is that Riba is a broad term (and there is no single word in the English language to describe it correctly hence it is translated as Interest) and the consensus prevailing among Muslims throughout history has been, and continues to be, that Riba among other things, includes interest. In this article, I will only concentrate on two aspects of Riba: Interest due to time and Riba due to deception.

If Allah and his Messenger are at war and we are sleeping then something is wrong. It is obligatory for an Islamic state to eradicate Riba (interest) from the society, otherwise they will be at war with Allah and his Messenger; and that is exactly what is happening today.

Why Allah has given such a stern warning. The answer is in the fact that Allah has told us that herein lies the greatest danger of all: if you allow this door to be opened (i.e. the door of interest) the poison of Riba (whoever will be injected with it) will paralyse you. The enemy will be able to take control of you. Do not let this door to be opened.

To understand one of the aspect of Riba let’s take an example: I pass on $200 to you and you are obliged to return $400 to me in five years; time is what is responsible for the increase. Today this is known as lending money on interest. In other words, the money lender argues that time equals money.

What the modern day banker does is that he reaps what others plant. He is like a pimp who lives of the sweat of others. This is oppression that some people sit down very comfortably in their beachfront homes and drive Mercedes Benz while the rest of humanity work like jackasses in order to allow them to live the affluent life.

When interest enters into a society, the bloodsucking predatory (a predator lives of the flesh of other animals) elite will now take control of the market and they will suck the blood of the masses. So when an economy is based on Riba, the rich will keep on getting richer while the masses will keep on growing poorer and poorer.

The banker might argue that he is running a business but as Allah Says in the glorious Quran “But Allah has permitted trade and has forbidden interest” [Al Quran, 2:275]. What is the difference between business and Riba? The brief answer to this question is that it is in the essence of a business transaction that you must accept the possibility of either a profit or a loss, but if this possibility is not there then it is not business; and so risk free investments are not business transactions. It is in the essence of the Riba (Interest) transaction that the possibility of loss is eliminated. The money lender is immunised from loss. He can only make a profit, he cannot suffer a loss. That is why Riba does not qualify as business.

An economy in which the rich will permanently remain rich (barring exceptions) and the wealth does not justly circulate means that poor will remain poor. If the rich is permanently rich and the poor is permanently poor, that is slavery; it is economic oppression. That is why Islamic economics is designed in such a way that wealth circulates in the economy in which this type of economic oppression (in the world we are living today) is eliminated.

What happens when money is lent on interest? It’s not only the case where the elite live of the sweat of the masses, it is more than that. When the money lender is immunised from loss, the implication would be that wealth will no longer circulate justly through the economy. Around the world today for those who have eyes to see, and who do not spend their days and nights eating Halwa, watching movies and partying, the modern economy is precisely this economy. And they call it the best model of economy ever experienced by humanity. This is the best model? Have you no shame? Do you think we have the brains of a Jackass? An economy in which wealth no longer circulates, an economy in which rich are permanently rich and the poor are permanently imprisoned in poverty, and you call that progress! This is not progress; it is new economic slavery which has descended upon mankind.

Another aspect of Riba is which is based on deception as narrated by Anas ibn Malik: The Prophet, peace be on him, said: "Deceiving a mustarsal [an unknowing entrant into the market] is Riba (Suyuti, al-Jami al-Saghir, under the word ghabn; Kanz al Ummal, Kitab al-Buyu, al-Bab al-thani, al-fasl al-thani, on the authority of Sunan al-Bayhaqi)

The biggest ripoff is what is taking place in our times.

The currency used at the Prophet’s (peace be upon him) time was mainly gold and silver. The well known hadith states "Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt - like for like, equal for equal, payment being made on the spot. If the species differ, sell as you wish provided that payment is made on the spot". (Muslim)

So if it is not like for like it is Riba (as explained in the hadith of Bilal [may Allah be pleased with him] bringing dates to the Prophet peace be upon him). What is common to all the six things mentioned in this hadith? They were all used for some time or the other for money. The second thing which is common among all of them is that the value of the money is in the money i.e. they all have intrinsic value.

One day Europe was attacked from the inside and the Europe which was Christian lost its Christianity. The Christian Europe fought a ferocious battle against interest. When French Revolution occurred, the back of the Christian Church was broken in Western Europe, while the Back of Christian Church in Eastern Europe was broken after Bolshevik Revolution. When Church lost its stronghold the Jews were delighted. Because the Christians were waging war for centuries against the Jews: they were not allowing the Jews to lend money on Interest. The Jews always wanted to lend money on Interest; because they had changed the Torah (in which Riba was prohibited) and the Torah now says (in context): “do not charge your brother interest, whether on money or food or anything else that may earn interest. You may charge a foreigner interest, but not a brother Israelite, so that the LORD your God may bless you in everything you put your hand to in the land you are entering to possess.[Deuteronomy 23:18-21].

Now with the French Revolution, economy based on Riba emerges in Europe for the first time. And of course after Bolshevik Revolution this possibility was also open in Eastern Europe. The banks not only started to lend money on interest, they started to issue paper as money. When the governments saw banks were getting richer by issuing paper as money, the governments took over the paper. Then gradually Europe started to conquer rest of the world at the point of the sword. So a white world order emerged at the point of a sword in which Europe now ruled the world. When they took over most of the world, one of the most important things they wanted to do was to dismantle the system of real money (e.g. gold and silver) and replace it with paper money. They achieved this eventually. Europe would not decolonise and handover, for example, Pakistan to Muhammad Ali Jinnah or Indonesia to Sukarno unless Europe was insured that the new financial system was in place in which real money was replaced with paper money.

At the beginning when paper money was introduced it was redeemable for Gold. In USA until 1920’s you could take $20.67 in notes to the bank and ask for one ounce of gold in return and you would get it. When the banks and the governments issued paper money, they gave their word that this is the value of the paper and they even printed on Dollar bills “In God We Trust” (in other words when we give our word to you that $20.67 is equivalent to one ounce of gold, our word is as good and as solid as the word of God). But in 1933 something strange happened: Uncle Sam (i.e. US Government) was broke. So guess what Uncle Sam did? In April 1933 Uncle Sam enacted legislation prohibiting all Americans from keeping gold. Americans had to return any gold they had (not jewellary but coins and bullion) to Uncle Sam and he will give you paper in return, and you have to trust in Uncle Sam that his word is as good as the word of God. So Americans gave their gold to Uncle Sam. If they caught you with gold after a certain date then you could be fined $10,000 and could spend a maximum of 10 years as a guest of Uncle Sam in one of his prisons. So Americans took their gold and got back paper in return. After Uncle Sam had collected the gold, he changed his word (these are values of those who economically rule the world today). Uncle Sam changed the price of gold from $20.67 to $35 an ounce of gold (the catch was that only foreigners could sell their gold at the new higher price). American people woke up that morning realising that their own government had ripped them off of nearly half their wealth.

This is a transaction based on deception which Prophet (peace be upon him) described as Riba. Why did all this happen? It is because the value of the real money is in the money. The definition of the paper money is that value of the money in the paper money is not in the money, therefore, the value can be CHANGED. Every time the value of the money is changed the value of the money goes down. What happens when the value of money goes down? The first thing is that there is a massive transfer of wealth from the masses to the predatory elite (which in the above mentioned case was the US Government). What is the second thing that happens? The answer is this: I worked for the whole month I got my salary in gold I could buy a camel; after ten years I could still buy a camel with that salary, after fifty years I could still buy a camel, but when I get my salary in paper I could buy a camel, few years later with my salary I can’t buy a camel with that money anymore (it will only buy a jackass now), so now I am beginning to feel like a jackass because someone has ripped me off. Where did my money go? If you can answer this question (i.e. who took my money and where did it go and how did they take it?) you would understand the game that they are playing. A few years later I cannot even buy a jackass anymore, I can only buy a goat; a few years later I cannot even buy a goat, I can only buy a chicken with that money.

How is this taking place? They started with paper being redeemable for gold and then came 1933 where they ripped people off of almost half their wealth. In 1944 after the end of World War II they consolidated the system with the creation of international monetary system. The new international monetary system now emerges from upstate New York in the form of Bretton Woods agreement. At Bretton Woods they decided that no longer paper will be redeemable for gold; only one paper will be chosen to be redeemable for gold. The one paper which was chosen was the US Dollar. So this was a major blow to the integrity of money. The second thing they did was that the only people who can come to Uncle Sam to redeem money for gold would be governments (through Central Banks). So now the entire system lost 99% of its integrity (because the masses cannot redeem paper for gold). Nobody from 1944 to 1971 redeemed their paper for gold. The Vietnam War took place in the late sixties and Uncle Sam printed a lot of paper to finance the war, and Uncle Sam did not have gold to back the paper. At Bretton Woods they had fixed the price of gold at $35 an ounce. So in September 1971 the British Government came with 3 Billion US Dollars and asked for gold. Uncle Sam knew that the game was up. Because in the coming months other governments would start coming in and demanding gold for the US Dollars they had in their Central Banks. So Richard Nixon addressed the American nation and said (in context), we gave our word but we do not have to keep our word, and we will no longer honour our obligation under Bretton Woods to redeem paper for gold from Central Banks. Therefore, since September 1971 there is no legal link between paper and gold.

Now all they have to do (those who want to rule the world) is to take control of money. Anyone who can take control of the money can control the world. The elites can attack paper so it goes down and down and down. When paper goes down and down, there is a massive transfer of wealth to that bloodsucking predatory elite, the second thing that happens is that wages lose their value because prices go up and up. As wages lose their value, the masses are now imprisoned in something called slave wages. When masses are imprisoned in slave wages you can now control them, you can now rule them.

The rip off has taken place. The thieves have looted our money. The rich have now grown filthy rich and the masses are now in miserable poverty from which there is no way out.

Do you know what happened to Indonesian Rupiah? IMF had issued Indonesia a clean bill of health (an economy which is strong). Indonesia is a major oil producing country. It has land which is very fertile. It has a big and energetic population. It has abundance of mineral resources. There is no reason why Indonesia should be poor. The IMF concurred that Indonesia has a healthy economy. Suddenly the Indonesian Rupiah was attacked by the bloodsucking predatory elite and the banking centres around the world. As a result, the Rupiah falls. Before the crisis, the exchange rate between the rupiah and the dollar was roughly 2000 Rupiah to 1 USD. The rate had plunged to over 18000 Rupiah to 1 USD at times during the crisis. Indonesia lost 13.5% of its GDP that year. In the process of bringing down the Indonesian money, they robbed the Indonesian people of probably more than half of their wealth. Half of Indonesia is instantaneously reduced to below the poverty line. Guess what is the poverty line: $29 a month. All this is happening because we accepted paper as money.

This economic system is driving some of our sisters to sell their bodies for a few dollars. They have no choice in order to get bread to feed their children. It is driving many to live a life of crime. Others are dying every day of hunger (please check out the statistics in the article “Interest and the Modern Banking System"). What will Allah do on the day of Judgement to those who are still eating Halwa and living a carefree life, while the predatory elite have gone filthy rich?

Now that Riba has engulfed the entire world what is going to happen? There is no certain answer to this question, but economists are coming up with certain predictions:

[1] The paper money (fiat currency) system will eventually collapse. First of all the US Dollar will collapse and this disease will slowly spread throughout the world. This would mean that Governments will not be able to print paper anymore.
[2] The likely scenario is that future money will be electronic money. And who creates electronic money? The banks; this would mean that whoever controls the banking system will control the world.
[3] Because governments will lose power, and commodity prices will soar after the collapse of the US dollar, there is a chance that centrally planned systems (in which bureaucrats decide everything) will come into existence. This could in turn result in wars breaking out to take control over the resources.

To get further insight into how this debt based economic system works, I would recommend the following books (they can be purchased from the internet):

The Problem with Interest by Tarek El Diwany
Confessions of an Economic Hit Man by John Perkins
Empire of Debt by Bill Bonner and Addison Wiggin
The Coming Collapse of the Dollar and How to Profit from it by James Turk and John Rubino
The Final Crash by Hugo Bouleau http://www.finalcrash.com/
The Web of Debt by Ellen Hodgson Brown (http://www.webofdebt.com/)

I would also recommend that you read the article “The Other Kind of Terrorism” http://www.islamic-finance.com/item115_f.htm

Please also watch the documentaries by John Pilger "War by Other Means" http://video.google.com.au/videoplay?docid=-5399796928596929639 "The New Rulers of the World" http://video.google.com.au/videoplay?docid=-7932485454526581006 and "Apartheid Did Not Die" http://video.google.com.au/videoplay?docid=-6343784518626528037

In addition, watch these interesting analyses by Ron Paul: "The End of Dollar Hegemony" http://video.google.com.au/videoplay?docid=-8327695139643041382 ; "Federal Reserve, Banking and Economy" http://www.youtube.com/watch?v=ji_G0MqAqq8

All this has happened because the humanity, with its limited intelligence, opened the door of Riba. The revelation had told us long before not to open this door, but now after hundreds of years later we are realising what a big mistake this was!


The Reality of Money and the Banking System

Before reading this, please read the article “Modern Economy: Progress or Destruction” on this website (I have added some video links and if you have time please watch them too, as they further illustrate the points made in the article).

I got this interesting article from the internet. It is a must read to understand the economic system we are living under today.

Please also watch the video “Money as Debt” (the link for the video is at the end of the article). I highly recommend it.



1) What is money... how is it created and who creates it?

2) Why is almost everyone up to their eyeballs in debt... individuals, businesses and whole nations?

3) Why can’t we provide for our daily needs - homes, furnishings cars etc. without borrowing?

4) How much could prices fall and wages increase if businesses did not have to pay huge sums in interest payments which have to be added to the cost of goods and services they supply...?

5) How much could taxes be reduced and spending on public services such as health and education be increased if governments created money themselves instead of borrowing it at interest from private banks…?

"If you want to be the slaves of banks and pay the cost of your own slavery, then let the banks create money…" Josiah Stamp, Governor of the Bank of England 1920.

It is simply the medium we use to exchange goods and services.

Without it, buying and selling would be impossible except by direct exchange.
Notes and coins are virtually worthless in their own right. They take on value as money because we all accept them when we buy and sell.
To keep trade and economic activity going, there has to be enough of this medium of exchange called money in existence to allow it all to take place.
When there is plenty, the economy booms. When there is a shortage, there is a slump.
In the Great Depression, people wanted to work, they wanted goods and services, all the raw materials for industry were available etc. yet national economies collapsed because there was far too little money in existence.
The only difference between boom and bust, growth and recession is money supply.
Someone has to be responsible for making sure that there is enough money in existence to cover all the buying and selling that people want to engage in.
Each nation has a Central Bank to do this - in Britain, it is the Bank of England, in the United States, the Federal Reserve.
Central Banks act as banker for commercial banks and the government - just as individuals and businesses in Britain keep accounts at commercial banks, so commercial banks and government keep accounts at the Bank of England.

"Let me issue and control a nation’s money, and I care not who writes its laws." Mayer Amschel Rothschild (Banker) 1790

Central banks are controlled not by elected governments but largely by PRIVATE INTERESTS from the world of commercial banking.
In Britain today, notes and coins now account for only 3% of our total money supply, down from 50% in 1948.
The remaining 97% is supplied and regulated as credit - personal and business loans, mortgages, overdrafts etc. provided by commercial banks and financial institutions - on which INTEREST is payable. This pattern is repeated across the globe.
Banks are businesses out to make profits from the interest on the loans they make. Since they alone decide to whom they will lend, they effectively decide what is produced, where it is produced and who produces it, all on the basis of profitability to the bank, rather than what is beneficial to the community.
With bank created credit now at 97% of money supply, entire economies are run for the profit of financial institutions. This is the real power, rarely recognised or acknowledged, to which all of us including governments the world over are subject.
Our money, instead of being supplied interest free as a means of exchange, now comes as a debt owed to bankers providing them with vast profits, power and control, as the rest of us struggle with an increasing burden of debt....
By supplying credit to those of whom they approve and denying it to those of whom they disapprove international bankers can create boom or bust and support or undermine governments.
There is much less risk to making loans than investing in a business. Interest is payable regardless of the success of the venture. If it fails or cannot meet the interest payments, the bank seizes the borrower’s property.
Borrowing is extremely costly to borrowers who may end up paying back 2 or 3 times the sum lent.
The money loaned by banks is created by them out of nothing – the concept that all a bank does is to lend out money deposited by other people is very misleading.

We don’t distinguish between the £25 billion in circulation as notes and coins (issued by the government) and £680 billion in the form of loan accounts, overdrafts etc. (created by banks etc,).
£100 cash in your wallet is treated no differently from £100 in your current account, or an overdraft facility allowing you to spend £100. You can still buy goods with it.
In 1948 we had £1.1 billion of notes and coins and £1.2 billion of loans etc. created by banks – by 1963 it was £3 billion in cash and £14 billion bank created loans etc.
The government has simply issued more notes and coins over the years to cover inflation, but today’s £680 billion of bank created loans etc. represents an enormous increase, even allowing for inflation.
This new "money" in the form of loans etc, which ranks equally with notes and coins – how has it come into existence?
"The process by which banks create money is so simple that the mind is repelled." Professor. J. K. Galbraith

This is how it’s done…. a simplified example...
Let’s take a small hypothetical bank. It has ten depositors/savers who have just deposited £500 each.
The bank owes them £5000 and it has £5000 to pay out what it owes. (It will keep that £5000 in an account at the Bank of England – what it has in this account are called its liquid assets).
Sid, an entrepreneur, now approaches the bank for a £5000 loan to help him to set up a business.
This is granted on the basis of repayment in 12 months - plus 10% interest – more on that later. A new account is opened in Sid’s name. It has nothing in it, nevertheless the bank allows Sid to withdraw and spend £5000.
The depositors are not consulted about the loan. They are not told that their money is no longer available to them– The amounts shown in their accounts are not reduced and transferred to Sid’s account.
In granting this loan, the bank has increased its obligations to £10,000. Sid is entitled to £5000, but the depositors can still claim their £5000.
If the bank now has obligations of £10,000, then isn’t it insolvent, because it only had £5000 of deposits in the first place? Not exactly…
The bank treats the loan to Sid as an ASSET, not a liability, on the basis that Sid now owes the bank £5000.
The bank’s balance sheet will show that it owes its depositors £5000, and it is now owed £5000 by Sid. It has created for itself a new asset of £5000 in the form of a debt owed by Sid where nothing existed before - this on top of any of the original deposits still in its account at the Bank of England. - it is solvent - at least for accounting purposes!
(At this stage the bank is gambling that as Sid is spending his loan, the depositors won’t all want to withdraw their deposits!)
The bank had a completely free hand in the creation of this £5000 loan which, as we shall see, represents new "money", where nothing existed before. It was done at the stroke of a pen or the pressing of a computer key.
The idea that banks create something out of nothing and then charge interest on it for private profit might seem pretty repellent. Anyone else doing it would be guilty of fraud or counterfeiting!

New "money" into the economy...
Sid’s loan effectively becomes new "money" as it is spent by him to pay for equipment, rent and wages etc. in connection with his new business.
This new "money" is thus distributed to other people, who will in turn use it to pay for goods and services - soon it will be circulating throughout the economy.
As it circulates, it inevitably ends up in other people’s bank accounts.
When it is paid into someone’s account which is not overdrawn, it is a further deposit - Sid pays his secretary £100 and she opens an account at our hypothetical bank – it now has £5100 of deposits.
If we assume for a moment that the remaining £4900 ends up in the accounts of the original depositors of our hypothetical bank, it now has another £4900 in deposits - £10000 in total if the depositors have not touched their original deposits. In practice much of it would end up in depositors accounts at other banks, but either way there is now £5000 of new "money" in circulation.
Thus in reality, all deposits with banks and elsewhere actually come from "money" originally created as loans – (except where the deposits are made in cash – more on cash very shortly).
If you have £500 in your bank account, the fact is someone else like Sid went into debt to provide it.

The key to the whole thing is the fact that :-
[1] Cash withdrawals account for only a tiny percentage of a bank’s business.
[2] Bank customers today make almost all payments between themselves by cheque, switch, direct debit or electronic transfer etc. Their individual accounts are adjusted accordingly by changing a few figures in computer databases – just book keeping entries. No actual money/cash changes hands. The whole thing is basically an accounting process that takes place within the banking system.

The state is responsible for the production of cash in the form of notes and coins.
These are then issued by the Bank of England to the high street banks - the banks buy them at face value from the government to meet their customers’ demands for cash.
The banks must pay for this cash and they do so out of what they have in the accounts which they hold at the Bank of England – their liquid assets. Their accounts are debited accordingly.
The state (through the Treasury) also keeps an account at the Bank of England which is credited with the face value of the notes and coins as they are paid for by the banks. (This is now money in the public purse available for spending on public services etc.)
This is how all banks acquire their stocks of notes and coins, but the cash a bank can buy is limited to the amount it holds in its account at the Bank of England – its liquid assets.
As this cash is withdrawn by banks’ customers, it enters circulation in the economy.
Unlike bank created loans etc, cash is interest free and can circulate indefinitely.

NON CASH PAYMENTS - Book keeping entries
With so little cash being withdrawn, and from experience knowing that large amounts of deposits remain untouched by depositors for reasonable periods of time, banks just hope that their liquid assets will be sufficient to enable them to buy up the cash necessary to meet the relatively very small amounts of cash that are normally withdrawn.
A bank has serious problems if demands for cash withdrawals by depositors, and indeed borrowers who want to draw some of their loans in cash, exceed what the bank holds in its account at the Bank of England.
In practice it would probably try to get a loan itself from the Bank of England or another bank, to tide itself over. Failing that it would have to call in some loans and seize the property of borrowers unable to pay.

Once you have made a deposit at the bank (in cash or by cheque), all you then have is a claim against the bank for the amount in your account. You are simply an unsecured creditor. Your bank statement is a record of how much the bank owes you. (If you are overdrawn, it is a record of what you owe the bank). It will pay you what it owes you by allowing you to withdraw cash, provided it has sufficient cash to do so.
If customers are trying to withdraw too much cash, this is a run on the bank, which will soon refuse further withdrawals. So it’s first come first served!
Should you want to make a payment by cheque, this is less likely to be a problem – you are simply transferring part of your claim against the bank to someone else – the person to whom your cheque is payable - just a book keeping entry.
If the person to whom your cheque is payable has an account at the same bank as you do, the deposit stays with that bank – overall the bank is in exactly the same position as it was before.
I give you a cheque for £50 – we both have accounts in credit at Barclays – what Barclays owes me is reduced by £50, what Barclays owes you increases by £50 – but nothing has left Barclays – the total deposits or claims against Barclays remain the same…..

….BUT if you keep your account at Lloyds, deposits at Barclays are reduced by £50, whilst deposits at Lloyds increase by £50.
Millions of transactions like this take place every day between customers of the various banks, using switch cards, direct debits, electronic transfers as well as cheques – deposits are therefore constantly moving between the banks.
All these cheques and electronic transfers pass through a central clearing house (which is why we refer to a cheque being "cleared").
The transactions are set off against one another, but at the end of each day, a relatively small balance will always be owed by one bank to another.
A bank must always be ready to settle such debts.
To do this, it makes a payment from its account at the Bank of England to the creditor bank’s account at the Bank of England.
Thus a bank faces claims from two sources (which it meets out of its liquid assets) – its customers wanting cash, and other banks when it has a clearing house debt to settle.

Unless all the banks are faced with big demands for cash at the same time, the banking system as a whole is safe, although an individual bank is vulnerable, should a large number of depositors for some reason withdraw their deposits in cash or transfer their deposits to other banks.

We now see how today the whole system is basically a book keeping exercise where millions of claims pass between the banks and their borrowers and depositors every day with relatively very little real money or cash changing hands – backed by tiny reserves of liquid assets.
The system is known as FRACTIONAL RESERVE BANKNG and banks are sometimes accurately referred to as dealers in debts.
Barclays Bank’s 1999 accounts illustrate the whole thing very well - it had loans owing to it of £217 billion, it owed £191 billion to its depositors – backed by just £2.2 billion in liquid assets!
A bank’s level of lending is geared to the amount of cash it has or can buy up – its liquid assets - rather than the amount of its customers’ deposits.
But if a bank can attract customer deposits from other banks, it will add to its liquid assets, as other banks settle the resulting clearing house debts in its favour – hence there is tremendous competition between banks to attract deposits.

INTEREST…. Big Profits for the bank...
Let’s now return to Sid – he has to pay our bank 10% interest on his loan - £500. These interest payments are money coming into the bank, they are profits and they end up in its account at the Bank of England - additional liquid assets for the bank.
It now has an extra £500 to meet its depositors’ withdrawals. If Sid manages to repay the original loan as well, it will have an extra £5500.
Our bank created for itself out of nothing an asset of £5000 in the form of a loan to Sid. It is no longer owed anything by Sid, but in repaying his loan with interest, Sid turned a mere debt into £5500 of liquid assets for the bank – a tidy profit for the bank…. and the basis on which more loans can be made.
Banks today risk creating loans 100 times or more in excess of their liquid assets as Barclays Bank’s 1999 accounts show – (see above).
Thus our bank will soon be making many more loans. Thus, the deposits it receives back will increase and so will interest payments and therefore profits.
With more loans and more deposits, there will be a greater demand to withdraw cash – but increasing profits means more cash can bought by the bank. (This is how the amount of cash in circulation has been increasing to reach £25 billion by 1997.)
It is a myth to think that when you borrow money from a bank, you are borrowing money that other people have deposited – you are not – you are borrowing the bank’s money which it created and made available to you in the form of a loan.

Sid’s interest payments and any repayment of the loan itself to the bank means, however, that this "money" is no longer circulating in the economy.
Any payment into an overdrawn account reduces that overdraft. It operates as a repayment to the bank and the "money" is lost to the economy.
More money must be lent out to keep the economy going. If people don’t borrow or banks don’t lend, there will be a fall in the amount of money circulating, resulting in a reduction in buying and selling - a recession, slump or total collapse will follow depending on how severe the shortage is.
The increase in bank created loans over the years is additional conclusive proof that banks do create "money" out of nothing - £1.2 billion in 1948 up to £14 billion by 1963 up to £680 billion by 1997.
Today’s supply of notes and coins after taking inflation into account, has similar buying power to the supply in 1948 (£1.1 billion) but since then, there has been a tenfold plus increase in real terms in money supply made up of credit created by banks.
This has enabled the economy to expand enormously, and as a result living standards for many people have improved substantially.... but it has been done on borrowed money! What is credit to the bank is debt to the rest of us.
The banks are acquiring an ever increasing stake in our land, housing and other assets through the indebtedness of individuals, industry, agriculture, services and government - to the extent that Britain and the world are today effectively owned by them.


1) Goods and services are much more expensive...
The cost of borrowing by producers, manufacturers, transporters, retailers etc. all has to be added to the price of the final product.
2) Consumers’ have much less money to spend...
They are burdened by the cost of mortgages, overdrafts, credit cards, personal loans etc. As a result of 1) and 2) there is...
3) A surplus of goods and services...
...because the population overall can’t afford to buy up all the goods and services being produced. This in turn creates.....
4) Cut throat competition...
Businesses try to cut prices and costs to grab a share of this limited purchasing power in the economy, as illustrated by:
(i) Wages being held down as much as possible.
(ii) Shedding of jobs.
(These both reduce people’s spending power even more.)
(iii) Retailers importing cheap products from abroad where wages are much lower.
(iv) Production of cheaper goods that don’t last as long.
(v) Protection of the environment a low priority.
(vi) Mergers and takeovers - corporations get bigger and bigger, driven to search out new markets.
(vii) Big companies shifting production to poorer countries which have cheap non-unionised labour and the least stringent safety and environmental laws or....
(viii) Demanding large government subsidies and tax free incentives as the price for setting up new production or not relocating abroad.
5) Ever increasing indebtedness...
When a bank creates money by making a loan, it does not create the money needed to pay the interest on that loan.
The bank lent Sid £5000, but it demands £5500 back. Sid has to go out into the business world and compete and sell to get that extra £500 from his customers. It can only come from money already circulating in the economy - made up of loans other people have taken out – so soon someone will be left short of money and have to borrow more.
Thus the only way for interest payments to be kept up is for more loans to be taken out. Although a few individuals and businesses may pay off their debts or get by without additional borrowing, OVERALL people and industry must keep borrowing MORE AND MORE to provide the money in the economy needed to keep up interest payments on the overall volume of debt.
The present level of debt at £680 billion means we are borrowing about £60 billion of new "money" into existence each year to pay the interest on it.
But people and industry can’t go on borrowing indefinitely - they will no longer be able to afford to, and will gradually stop borrowing more money into existence. When this happens, the economy will go into decline. The system thus contains the seeds of its own destruction.
When loan repayments and interest payments are made to banks, this is money taken out of circulation. If it went on indefinitely, in an economy where the money supply is largely made up of loans etc. created by banks, there would eventually be almost no "money" left in circulation and with it no economy.
Under the present system, if the economy is to be kept going, money must be constantly lent out again. It would be possible simply re-circulate the existing money supply without creating new money were it not for the fact that extra money is needed to cover interest payments and also to enable the economy to grow.
6) Inflation....
is guaranteed because producers constantly have to borrow more, and must add the cost of that increased borrowing to the price of the goods produced.
Why is it that when the moneylenders hike their prices (i.e. put up interest rates) this is supposed to reduce inflation?
It doesn’t....
It’s just that there is a delay in industry putting up prices.
Initially industry is forced to hold or even reduce its prices with profits down, or even sustaining losses in a desperate bid to sell its products in an economy where money available for spending is reduced because of higher interest payments being made to the banks.
Inflation may be held in check or even reduced temporarily, but eventually industry must put its prices up in order to recover these higher costs.
This most readily happens when interest rates come down, more people borrow, and money supply and consumer spending increases. Inflation then races ahead.
The fact that levels of borrowing/money creation have to keep on rising as already explained, adding to the overall burden of interest payments, guarantees that inflation will be present as long as we have an economy based on an increasing burden of debt.


Surplus goods in the national economy have to be disposed of somehow. The obvious way to do this is to try to export them!
The absurdity is that every nation is trying to do this, because of the same fundamental problem at home.
This creates frenzied competition in world markets and masses of near identical goods madly criss-crossing the globe in search of an outlet.
Instead of international trade being based on reciprocal mutually beneficial arrangements where nations supply each others’ genuine needs and wants, the whole thing becomes a cut-throat competition to grab market share in order to stay solvent in a debt based economy.
Big corporations demand unrestricted access to every nation’s market – so called "free" trade.
The European Union "single market", the North American Free Trade Agreement and the World Trade Organisation are the best examples of the drive to open up all national markets.

Exporting is good for a nation’s economy...
Because when exported goods are paid for, this brings money into the exporting nation’s economy free of debt.
The money to pay for them was borrowed from banks in the importing nation.
That money is lost to the importing nation’s economy, but the debt that created that money still has to be repaid by the importer out of the remaining money in the importing nation’s economy.
If a nation can become a big net exporter, for a time it’s economy will boom with all the interest free money coming in - a trade surplus will exist.

Importing is not so good for a nation’s economy...
If some nations are building up trade surpluses in this way, others must be net importers and building up trade deficits.
Ultimately, those with big deficits can no longer afford to import, since so much money is sucked out of their economies leaving a proportionally increasing burden of debt behind.

The IMF was set up to provide an international reserve of money supposedly to help nations with big deficits.
In practice it makes matters worse.
A nation with a big deficit has to seek a bail out from the IMF.
BUT this comes in the form of a loan, repayable with interest.
Like loans from a commercial bank, IMF loans are money created out of nothing, based on a cash reserve pool, which is provided by western nations who go into debt to provide it (see National Debt).
The nation with the deficit goes even more heavily into debt.
It will however be able to carry on trading and importing goods from the wealthier nations.
As a result, much of this borrowed IMF loan money flows into the economies of wealthier western nations.
However, the repayment obligation including the interest payments remains with the debtor nation.
This is the true horror of third world debt - the poorest nations borrow money to bolster the money supply of the richer nations.
In order to secure income to pay the interest, and redress the trade balance, these poorest nations must export whatever they can produce. Thus they exploit every possible resource - stripping forests for timber, mining, giving over their best agricultural land to providing luxury foodstuffs for the west, rather than providing for local needs.
Today, for nations in Africa, Central and South America and elsewhere, the revenue from their exports does not even meet the interest payments on these IMF loans (and other loans from western banks).
The sums paid in interest over the years far exceed the amounts of the original loans themselves.
The result is a desperate shortage of money in their economies - resulting in cutbacks in basic health and education programmes etc.
Grinding poverty exists in nations with great wealth in terms of natural resources.
Structural Adjustment Programmes - these are now attached to IMF loans and include conditions that recipient countries will reduce or remove tariff barriers and "open up their markets to foreign competition" - in other words take surplus goods off another country that can’t be sold at home.

British national debt now stands at £400 billion - the annual interest on that debt is around £25 -30 billion. The government can only pay it by taxing the population as a whole, so we pay! National debt is up from £26 billion in 1960 and £90 billion in 1980.
Successive governments have borrowed this money into existence over the years.
Instead of creating it themselves and spending it into the economy on public services and projects boosting the economy and providing jobs, they get banks to create it for them and then borrow it at interest.
It all started in 1694 when King William needed money to fight a war against France.
He borrowed £1.2 million from a group of London bankers and goldsmiths.
In return for the loan, they were incorporated by royal charter as the Bank of England which became the government’s banker.
Interest at 8% was payable on the loan and immediately taxes were imposed on a whole range of goods to pay the interest.
This marked the birth of national debt.
Ever since then the world over, governments have borrowed money from private banking interests and taxed the population as a whole to pay the interest.

How the Government Borrows Money
When governments borrow money, in return they issue to the lender, exchequer or treasury bonds - otherwise known as government stocks or securities.
These are basically IOU’s - promises by government to repay the loan by a particular date, and to pay interest in the meantime.
They are taken up chiefly by banks, but also by individuals with money to spare including very wealthy ones in the banking fraternity and, in more recent years, pension and other investment funds.
When government securities are taken up by banks, this is money creation at the stroke of a pen by the banks out of nothing.
Banks are creating money as loans out of nothing by lending it into existence to the government in very much the same way as they do to individuals and companies.
The government now has new money in the form of loans to spend on public services etc.
If this money was not borrowed into existence in this way, there would be that much less economic activity as a result.
The government constantly tells us that there isn’t enough money for this that and the other, because it knows that the cost of borrowing any money it needs has to be passed on to the taxpayer.
Instead, it sells off state assets and now gets the private sector to fund public services instead.

enormous increases in national debt...
enormous profits for the banks...
Massive government borrowing and money creation by banks is required to fund a war effort.
The same international bankers have covertly funded both sides in both world wars and many other conflicts before and since.
Having profited from war leaving nations with massive debts and more beholden than ever to them, the banks then fund reconstruction.
Bankers have even helped bring wars about. The calling in of loans to the German Weimar republic largely created the conditions for the rise of Hitler.
The pattern was well established by the mid 19th. century - by then international banker and speculator Nathan Rothschild could boast a personal fortune of £50 million.

The Constant Increase in National Debt
In the same way that under the present system, industry and individuals must keep borrowing more and more to enable interest payments to be kept up on their existing loans, so government must constantly borrow more and more to keep up interest payments on its existing loans.
Furthermore, when a particular government stock is due for repayment, the government simply borrows more by issuing new government stocks.

Phasing out of National Debt...
"If the government can issue a dollar bond, it can just as easily issue a dollar bill." Thomas Edison.

Government could stop borrowing money at interest, and start creating it itself by spending it into the economy on public projects and services, at the same time creating jobs and stimulating the economy. It already does this to a very limited extent – the amount it receives from the banks when it sells cash to them is added to the public purse and is available for spending on public services and projects.

Please watch this informative video to gain further insight into the modern banking system: Money as Debt http://video.google.com.au/videoplay?docid=5352106773770802849&hl=en

In addition, for history of the banking system and analyses of our modern economy please watch The Money Masters Part 1 http://video.google.com/videoplay?docid=-1583154561904832383 and The Money Masters Part 2 http://video.google.com/videoplay?docid=-7336845760512239683

I would also recommend that you read the book "The Final Crash" by Hugo Bouleau http://www.finalcrash.com/. In addition, please read "The Web of Debt" By Ellen Hodgson Brown" (http://www.webofdebt.com/)