Money is made from nothing. How does the banking business work?

With Jacek Chołoniewski – co-author of the book "Banks, money, debt. Unknown fact about the modern financial system" – we are talking about where commercial banks take money for loans, why the average citizen can no longer set up an account with the National Bank of Poland and who benefits from the current financial system.

(Interview is simply a edited and completed version of the podcast Are you aware? p. Banks, money, debts. Unknown fact about the financial system).

Rafał Górski: “The financial sector in its present form will blow up sooner or later. erstwhile the accident occurred in 2008, there were no alternatives available, so we returned to the old system. The key now is to be ready erstwhile he falls again. Then we begin the attack," said Joris Luyendijk in an interview entitled “This cannot be true. From the life of bankers”which he gave to the Week of civilian Affairs. What are we waiting for erstwhile the financial crisis, akin to the 1 in 2008, repeats?

Jacek Chołoniewski: I think it's nothing terrible. It should be explained where the crisis came from in 2008 and why it had specified a strong impact on the economy.

Each company or bank has assets and liabilities. If the assets are larger than the liabilities, then the bank has any value. The largest banks in the planet are global entities, usually based in London City or the United States. These banks had in their assets quite a few alleged junk subprime loans, or advanced hazard loans, which were granted to people with very mediocre solvency. These persons did not repay the loans they had taken, which caused the securities based on these loans to cease to have any value – at the time many banks faced a collapse due to the fact that they had more liabilities than assets, i.e. those banks as a full had a negative value.

Commercial banks must have reserves in their reserves, or digital cash. Reserves are issued only by central banks. The central bank of the United States could cover the failure in the balance sheets of US banks, and the central banks of individual European countries could do so in Europe. And so it did: central banks issued reserves, digital cash, and they bought those junk papers. This mechanics is called quantitative loosening. I think that in the event of another financial crisis quantitative loosening will be applied again.

So large banks had no consequences for their recklessness due to the fact that central banks swept their sins under the carpet. Who, then, incurred the costs of the financial crisis? Regular citizens?

The issue of reserves (digital cash) by central banks is not performed at the taxpayer's expense. These banks have the statutory and method ability to make money, i.e. reserves, completely at no cost.

In fact, the economy has been hampered due to the fact that the strategy of the planet economy is based on loans. There was a kind of detention, but there was no mass bankruptcy, people were not starving. The scale of the 1930s crisis was incomparably larger.

In 2008, 1 bank, Lehman Brothers, went bankrupt due to the fact that 1 had to find any scapegoat, and it was not the bank that sinned most. As in the ballad of Wojciech Młynarski about 2 horses: the driver was afraid of the disobedient horse, so he beat the another – the obedient to show his deed:

‘(...) in the stable, already by the manger
This driver took his whip,
He took him in both hands.
And a good horse he washed
And to the rude he utilized to say,
Dressing your voice to a harsh tone:
If you stand up, you bastard,
Then you will get hurt just like him!”
[‘Ballada on 2 Horses', by Wojciech Młynarski, muz. Jerzy Wasowski – ed.]

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How did the crisis in 2008 affect average citizens of the United States, Poland, the Netherlands?

News of the banks' bankruptcy has spread worldwide and business activity has decreased. Quantitative relaxation was not started immediately, only after a fewer weeks or even months, so the banks were de facto in bankruptcy. They have either suspended or limited lending, which has greatly affected the business activity of companies, corporations, which thrive through loans.

How should we prepare for the next global financial crisis?

We don't truly have quite a few options, we can keep more cash at home.

In the face of a akin crisis, a citizen may fear, first of all, the failure of work. Fortunately, there were not many specified cases in Poland in 2008. It has even been said that we are a green island, due to the fact that the drop in employment was the smallest of the European countries. Foreignly, the drop in employment was a fewer percent, inactive small.

The fear may besides be that the bank in which money is held will go bankrupt. It didn't happen here either, due to the fact that I don't think anyone was holding money at Lehman Brothers. In addition, there is simply a Bank warrant Fund in Poland, which guarantees contributions from individuals as well as companies. This warrant reaches the level of 100 000 EUR, or half a million PLN. Therefore, if anyone has more money, they better keep it in a fewer banks.

In Poland banks went bankrupt very frequently in the late 20th century. At the time, more than a 100 of them went bankrupt, while in the 21st century, only 3 of them went bankrupt. Given the last 20 years, the hazard of bankruptcy of the Polish bank is minimal, although there is one.

When he went bankrupt in 2015 Volomino quite a few people, companies, foundations or associations lost money and never got it back.

Please arrange the terms we use.

The central bank (National Bank of Poland) can make reserves, or digital cash, which can later be converted into paper. Only a central bank can do that.

Cash in the form of banknotes is utilized to pay in a store, at a bazaar or in places where they do not accept cards. any keep their savings in cash: the bills lie in the closet and are kept in case. Banknotes are besides paid in the grey area, which is estimated at respective percent, although I fishy that this respect is undervalued.

The second form of cash is simply a being that we call digital bank money. This is the money we have in our accounts, which is digital records. Digital bank money is created by commercial banks.

What is the relation between banknotes and digital bank money?

The National Bank of Poland has been reporting statistic since 1996, i.e. since denomination. According to these statistics, the share of banknotes in all cash is reasonably constant and amounts to about a twelve percent. In 1998 it was 16%, in 2002 it fell to 11%, and in 2013 to 10%. At the beginning of the Covid pandemic there was a large request for paper cash. Over a twelve days, over 50 billion zlotys were paid. erstwhile the war broke out in Ukraine, 35 billion more were besides paid than could be expected. Since 2022 the share of banknotes comparative to all cash has fallen slightly, now it is 16%. Thus, cash in the form of banknotes is inactive firmly held and, in addition to respective percent fluctuations, is at a akin level.

How do banks gain from lending?

Banks usage digital bank money already mentioned above to grant credit. They make this money out of nothing, they just make a digital record. erstwhile we wrote a book 5 years ago “Banks, money, debts”, this information about digital bank money actually appeared only in abroad publications. Now I see that this cognition is becoming more common in Poland as well. I think it caused quite a few our book, which is inactive selling well. This is the only, easy accessible, publication that describes how the current strategy works.

How does “money come from nothing”? What precisely does that mean?

Let's say someone's taking a $100,000 car loan. The bank authoritative after checking the solvency of this client enters the one, then 5 zeros, a click enter and the money comes from nothing. erstwhile the client pays off his credit, the money that comes out of nothing disappears. This has been the way the banking strategy has been around the planet for at least a fewer decades. The public found out about this in 2008, due to the fact that then quite a few publications were published on financial topics. It was done by institutions with authority, for example UK central bank published a reportwhich explicitly states that banks make money for loans out of nothing. A akin study was published by the central bank of Germany.

Let's get back to the question: how do banks make money on loans?

An example of car rental can be utilized to explain this. First you gotta invest: to buy a car, to insure it, and then you make money from renting it. For banks, money is borrowed alternatively of a car. But here they form from nothing, at no cost. The computer strategy fits into the numbers and this creates something that can be rented. Of course, the borrower must pay more than he borrowed.

The banking business is so a very profitable and very privileged venture.

This is mainly due to the regulations on banking accounting (in Poland it is the Accounting Act) which is conducted on a different basis than the accounts of all another entities that are not banks. Without these peculiar regulations, banks couldn't make money out of anything. specified creation, in English-language texts, is described as a "money creation out of thin air" (making money from thin air), which may be useful for those who would like to deepen their cognition of this subject utilizing an online search engine.

What is this mechanism: recycling reserves (digital cash)?

The State is in debt as follows: The Ministry of Finance releases government bonds which banks buy exclusively for reserves (digital cash). The Ministry of Finance does not accept digital bank money (such as created from nothing), but just wants reserves (digital cash). Reserves transferred by banks affect the account of the Ministry of Finance, which transfers money to individual ministries or ZUS. Subsequently, the ministries or the Social Insurance Institution spends this money, which means they transfer it back to the banks.

Recycling reserves so involves commercial banks buying reserve bonds and getting those reserves back in a moment.

They can so re-buy bonds for these reserves they have received back. It is simply a financial perpetuum mobile, which is very beneficial for banks.

In Poland, households are in debt to PLN 800 billion, for companies it is 400 billion. On the another hand, the public debt of the Polish state presently amounts to 1,500 billion, so it is more indebted than companies and individuals combined. If the state is so indebted to commercial banks, then these banks make quite a few money. Moreover, the state is simply a good client due to the fact that it has never gone bankrupt.

This mechanics is rather incomprehensible.

To better realize this process, you can imagine individual who bought a bike and then received a cashback of 100%, meaning he received the full amount back. specified a individual buys another bike and one more time gets an overall refund. He's got a second, third, 4th bike indefinitely.

The Polish State, erstwhile it wants to pay off another tranche of bonds, does alleged rolling. function is that the State releases bonds for a larger amount and these fresh bonds pay back the erstwhile ones with interest. This debt grows year by year. That's how banks make money in debt.

This strategy is even more amazing than the 1 where the company or private individual is on the side.

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How is that even possible?

The banking strategy has been operating this way since the dawn. For hundreds of years it has been that, in addition to valuable items, there are besides so - called securities. We're all utilized to the fact that a part of paper, like a banknote, has any value. erstwhile we sign a bill for a million zlotys, in 1 minute a part of paper is worth a million zlotys. Securities may be banknotes, reserves (digital cash) or digital bank money.

Who benefits and who loses the fact that the banking strategy functions like this?

Banks make quite a few money on their operations. They make a profit, which goes to capitalists, i.e. bank owners or shareholders, and indirectly to people employed in banks.

However, all those who usage banking services lose out. For example, a country that could easy produce money from nothing for its own needs.

Central banks are not independent entities and are managed by the Bank of global Settlements based in Basel. During the Covid pandemic, the Bank of global Settlements allowed central banks to finance state deficits. The Polish improvement Fund (PFR) released the bonds that the NBP bought, and thus 300 billion zlotys were placed on the market. To preserve appearances, the PFR first sold these bonds to respective selected banks and only from them, bought them from the NBP. For this banal operation, the banks earned a large commission. PFR paid out these PLN 300 billion to Polish companies as part of various compensations. In addition, in 2020, NBP bought (for nothing reserves, or digital cash) crucial amounts of Treasury bonds on standard tenders! This shows that all public debts could be reset. There are no obstacles.

Then why don't you do it?

Because commercial banks would lose their profits. Economists advance communicative in all media that the state can spend only as much money as it takes from taxes. This is not true, due to the fact that the state actually spends much more due to the fact that it is in debt. The Polish circulation is PLN 2400 billion. On the another hand, public debt is 1,500 billion and private debt is 1,200 billion, a full of 2700 billion. So we see that the value of the loans to be repaid is 300 billion PLN higher than the sum of all the money in circulation.

We so know that this debt cannot be repaid. It can't be done.

The fact that banks make money out of nothing and that public debt could be zeroed by simple legal procedure, among another things, says erstwhile bank heads. They say that erstwhile they're retired and they can afford to tell the truth.

Is there a erstwhile bank manager in Poland who talks about it?

Nope. The heads of banks want to delight institutions specified as the global Monetary Fund or the planet Bank, due to the fact that they can be awarded the position of director. If you follow the resumes of people active in finance, you can see that they are given prestigious post positions in fresh York or London.

Let's go back to economists. What do they say in the media?

As regards economical media, they are dominated by the financial sector. The media invites people who are representatives of banks to their broadcasts. For example, there is the chief economist of bank X or bank Y and is treated with large reverence. The media wants those banks whose representatives invitation to buy advertising from them. On the another hand, the bank enjoys an image advantage: since an expert from a bank speaks in the media, specified an institution is trustworthy. The roundabout's spinning.

What precisely is simply a bank? A public trust institution or a private company?

Banks are different from another companies or corporations due to the fact that they manage money. By authorising commercial banks, the State transferred any of its activities to private entities. However, the Polish central bank – the National Bank of Poland is surely not a private company. The NBP Act states that the central bank cannot declare bankruptcy. And that's due to the fact that any central bank can emit digital cash that can then be converted to paper. This issue, as I have already said, but what is worth highlighting, is not carried out "at the expense of the taxpayer". Until any time, both companies and individuals may have had an account in the NBP, but now there is no specified possibility.

Why can't you start an account with the National Bank of Poland?

Suppose the NBP announces that any company and private individual can set up an account with them. Many people would choose to do so, for example, due to deficiency of assurance in private banks or due to pro-state attitudes. This would consequence in a crucial amount of reserves being transferred to the NBP, which would origin a major problem in private banks. Private banks could run out of reserves and go bankrupt.

There was a time erstwhile you could have an account in the NBP. erstwhile did they retire?

I can't tell erstwhile precisely this option is no longer available.

Transformation in Poland was not the first in the world. They have been akin in various regions of the planet before, for example in South America, so the global financier knew how to act in specified a situation.

Professor Zbigniew Brzeziński mentioned the gathering of General Jaruzelski with David Rockefeller taking place in 1985, a fewer years before the transformation. In the Polish People's Republic, in addition to NBP, there were only 2 banks: PKO BP (for people) and PKO SA (the alleged abroad exchange bank). erstwhile General Jaruzelski returned from the meeting, respective banks were created, from 1986 to 1988, of which 9 were separated straight from the NBP. most likely to privatize them later. It can be assumed that General Jaruzelski decided to do so in exchange for safety guarantees.

Can you imagine specified a situation: Institute of civilian Affairs mobilizes Poles and Poles to exert force on politicians so that each of us has the chance to establish an account in the NBP alternatively of a private bank?

I'm in favour of it myself, and I'd put even part of the money in there. Especially since there's something called a deposit rate. The reserves held by commercial banks in the NBP are presently at 5.25%, due to the fact that that is the deposit rate. If I had set up an account there, I should have the same interest rate, not on the deposit but on the "ordinary" account, due to the fact that it should not be that the money in the NBP is different interest rate for banks and individuals. At present (we have the year 2025) no bank gives specified advanced interest rates.

Why do banks want as small cash in circulation as possible?

In Poland and in many another countries there is simply a alleged partial reserve system.

Banks have only a fewer percent of their reserves in banknotes (or digital form) in relation to the amount of digital bank money held by people. And this is not due to the fact that banks lent this cash to individual (e.g. borrowers) – banks never had this cash!

If, for example, 10% of the customers of a bank wanted to pay the money simultaneously, the bank would go bankrupt. He would not have reserves, that is, banknotes (or digital reserves that can be exchanged for cash) for specified an operation and would gotta suspend withdrawals from ATMs. It would have caused a immense scandal, due to the fact that if there was no money at ATMs, the customers of another banks would have moved to pay their money too. Banks affected by specified a run would gotta declare bankruptcy. We had a taste of it at the beginning of a pandemic, erstwhile people began to pay money massively. In an effort to calm the mood, the NBP released a video showing that it had immense stocks of cash:

This may have calmed any of them, but it did not matter, due to the fact that the NBP, like any central bank, could have any amount of cash (in digital form it has an infinite amount of money), which does not mean that the commercial banks that touched the run have it.

It is worth knowing, therefore, that banks in this system, which presently exists, blow out this digital money like a balloon, while the coverage in banknotes has respective percent.

The leader of the British Labour organization demanded in 2014 that the Bank of England make reserves and hand them over to the government for public welfare purposes. What's going on here?

If each central bank has the ability to make digital cash (reservation) from nothing, not at the taxpayer's expense, this money could be utilized for reasonable purposes for the public good, specified as building inexpensive housing or expanding public transport.

Has this request been fulfilled? If not, why?

For this would mean a revolution in the worldwide financial system. Its effect would be, among others, to deprive banks of about half the profits – banks have besides powerful influence to let it.

In addition, people would learn that they have been lied to for many years, that governments can spend only as much as they collect from taxes.

Another thing is, would governments spend this "free" money wisely? This is very dubious. It should besides be added that excessive money creation by central banks could origin inflation.

I ask for another examples erstwhile the financial strategy serves average people.

W For respective decades Germany has had a statutory work to invest in housing. In addition, there are municipal, region or municipal banks in Germany, which are not in Poland at all. The owners of these banks are local government units and finance various investments, mostly investments in housing.

It is worth knowing that in Poland until 1997 the National Bank of Poland straight financed the Ministry of Finance. These were crucial amounts, yet inflation continued to decline. It was not until 1997 that the constitution was passed, in which it was prohibited. At the last minute, president Aleksander Kwasniewski agreed to add the evidence that the central bank cannot finance the budget deficit. Since then, there has been a ban and the state must borrow money from commercial banks, even though it could make it from nothing.

Why did president Aleksander Kwasniewski agree to this record?

I erstwhile had the chance to ask him this question at 1 of the meetings, but he answered evasively. I say president Kwasniewski wasn't a large financial expert, and seemingly any lobbying has worked.

Returning to the question: why do we not hear demands from the leaders of the Polish parties to make money for public purposes?

Knowledge of the function of NBP and the ability of the state to make money is zero. Politicians are convinced that the state can spend only as much money as it collects from taxes, and if there is no money, the state must indebted. Everyone's afraid of public debt. In Poland it is comparatively small, it is about 50% of GDP, in France it is over 100% and in Japan it is already 250% and nobody cares about it. These debts are not due and cannot be repaid. This is an accounting evidence that says nothing but the bank's gigantic profits.

W Switzerland held a referendum on June 10, 2018. Residents were asked if they wanted to put into circulation a crisis-resistant sovereign money that would only be issued by the central bank. What is sovereign money?

This is simply a revolutionary thought that would deprive commercial banks of the right to make money from nothing. The bank would gotta act like a debt company. He could only borrow the money he owns due to the fact that he can't borrow his clients' money. He would have had to have a certain amount of money produced by the central bank and he could only borrow it.

In the referendum, 75% of the voters were against the introduction of sovereign money. It is simply a pity that this happened, due to the fact that then we would know what the consequences would be.

Why did average Swiss people vote against their interests?

The media threatened all Swiss with the terrible consequences of specified a decision. Of course, the run was financed by banks. In addition, what must be admitted, specified a decision would mean a financial revolution, the consequences of which were hard to predict.

What crucial question has no 1 always asked you about the subject we are talking about, and what is the answer to it?

That would be a bitcoin question. I think it is simply a tool for speculation. I don't imagine he's replacing the current pay systems. A powerful PR action to encourage the acquisition of bitcoins is being filmed by people who care about the growth of its course. all now and then there are besides discussions about whether Bitcoin will be the future of the financial system. I don't think so.