How the banking system works

According to Richard Werner, banks do not make loans and they don’t take deposits.

During what we think is a loan process, the customer issues a promissory note (IOU) and the bank buys it from the customer. But the bank does not actually give the customer money.

To see what is happening, we must switch to the bank’s accounting process. The bank places an asset on its balance sheet. On the liabilities side of the ledger, it creates an “Accounts Payable”. The customer is told the money is in that account. But really it’s just a ledger entry.

See a sample balance sheet
Sample balance sheet - from

Now, I don’t quite know the next step, but it seems we are using the Accounts Payable entries as our money! We are passing around ledger entries.

One key point is that there was no loan. The bank does not transfer money to the customer’s existing account (if the customer was already a bank customer). The bank creates the new ‘account’ and says that is where the loan money is. Yes, in a way, this is the truth, because our money may actually be ledger entries. So by creating the Accounts Payable entry, the bank created money, and is allowing the customer to use it. Fascinating!

As for deposits, banks do not accept deposits. They borrow money from a customer, and the ‘deposit’ or checking account is actually also an Accounts Payable on the bank’s financial books.

If this gets your head spinning, you’re not alone.

Let Richard Werner explain further (and see transcript below):

Visit Richard Werner’s Website

Transcript of First Video

Banks are being thought of intermediaries, but this not really what’s happening. Banks are creators of the money supply.

I produced the first empirical studies to prove that [banks create money out of thin air].

Banks are thought of as deposit-taking institutions that lend money. The legal reality is banks don’t take deposits and banks don’t lend money.

So what is a deposit? A deposit is not actually a deposit. It’s not a bailment. And it’s not held in custody.

At law, the word deposit is meaningless. The law courts and various judgements have made it very clear if you give your money to a bank even though it’s called a deposit, this money is simply a loan to the bank. So there is no such thing as deposit. It’s a loan at a bank.

So banks borrow from the public. So that much we’ve established.

What about lending? Surely they’re lending money. Umm. No, they don’t. Banks don’t lend money. Banks again, at law, it’s very clear. They’re in the business of purchasing securities. That’s it.

So you say. OK. Don’t confuse me with all that legalese.

I want a loan. Fine, here’s the loan contract. Here’s the offer letter. And you sign. At law, it’s very clear, you have issued a security. Namely a promissory note. And the bank is going to purchase that. That’s what’s happening.

What the bank is doing is very different from what it presents to the public that it’s doing.

How does this fit together? So you say fine, the bank purchases my promissory note, but how do I get my money? This is a loan. I don’t care about the details. I want the money. The bank will say you’ll find it in your account with us. That would be technically correct. If they say, we’ll transfer it to your account, that’s wrong because no money is transferred, at all, from anywhere inside the bank or outside the bank. Why? Because what we call a deposit, is simply the bank’s record of its debt to the public. Now it also owes you money [for the promissory note] and its record of the money it owes you is what you think you’re getting as money [as a loan]. And that’s all it is.

That is how the banks create the money supply. The money supply consists to 97 percent of bank deposits and these are created out of nothing by banks when they lend. Because they invent fictitious customer deposits. Why? They simply restate, slightly incorrectly in accounting terms – what is an accounts payable liability arising from the loan contract having purchased your promissory note – as a customer deposit. But nobody has deposited any money.

I wonder how the FCA [Financial Conduct Authority] deals with this because in the financial sector you’re not supposed to mislead your customers.


One thought on “How the banking system works

  • September 15, 2022 at 11:04 pm

    I love both videos!! Very useful and very powerful!!

    Thanks for posting.

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