#7 - If you don't believe "bank-lending" uses fraudulent accounting, you must believe in "Bank Magic"*.

Where we all went wrong [reading time: ~10 minutes]

for “Bank Magic”* see “#1 - Bank Accounting: Magic?”

Why smart economists don’t see bank fraud.

Steve Keen¹ and Prof. Richard Werner² are ‘renegade’ professional economists who apply accounting rules to economics; Prof. Perry Mehrling³ is another, who goes a step further, saying bank loans are not loans but exchanges of equal IOUs. These experts all agree banks “create money out of thin air” or “create bank deposits” in a process they call “lending”, but none of them has exposed the fraud in that process, though Werner has said it “looks fraudulent” [more on him below].

I’ve also investigated this “banking question” since about 1975 but also failed to see fraud for almost four decades.

Douglas Social Credit

Social Credit articles by C.H. Douglas (1879 - 1952) always made sense. As early as 1923, he described bankers as “lending something without parting with anything and making a profit on the transaction”⁴ noting that, whatever they were lending, they were getting it for nothing.

Though he saw banking injustice, Douglas never accounted for “Social Debit”⁵, and his followers still haven’t solved the riddle of bank “credit creation”. Banks are still doing today what they were doing over 300 years ago, as Douglas said: “lending something without parting with anything and making a profit on the transaction”.

This article explains what we all missed.

Overconfidence?

All these experts were as overconfident as I was, that they knew certain things “for sure”, but this is a stumbling block Mark Twain knew well:

“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”⁶

I now see the terms “social credit” and “creating money (or credit) out of thin air” as such stumbling blocks. They certainly were for me and the impasse I faced was only broken by the contributions of two Certified Practicing Accountants.

After 40 years, the old dog learns a new trick.

I reached my watershed moment shortly before I retired in 2015. My tax accountant shared some accounting knowledge that was easy to understand and made sense logically and morally. It was so simple and basic that it forced me to re-examine some strongly held beliefs and wrong assumptions.

I’d asked for his professional opinion of a 2014 paper by Richard Werner, which concludes (on p.16):

“The bank does not loan any existing money, but instead creates new money. The money supply is created as ‘fairy dust’ produced by the banks out of thin air.”⁷

After reading the paper, he stated:

“You can’t lend a liability”.

Such a simple fact seems almost trite. But it forced me to realise that all “bank credit”⁸ is a bank liability. At about the same time, an article in the Bank of England's 2014 Quarterly Bulletin (Q1) explicitly confirmed my accountant's view⁹. This was high authority indeed. I couldn’t avoid the implications of this simple fact. But this was only the first key. Another accountant gave me the second key I needed.

She showed me the best way to think about “credit” or “debit” was NOT to think “plus” or “minus” at first (which was counter-intuitive to me).

First, you MUST know whether any account has a Debit balance or a Credit balance. Then you can tell whether it’s an Asset account or a Liability account, which determines which sign (+ or -) to apply to credit and debit items.

The KEY is knowing which type of account you’re looking at because, by definition, Asset accounts have Debit balances and Liability accounts have Credit balances; the type of Balance DEFINES the type of Account (and vice versa).

Then she explained what makes the Balance Sheet Equation balance: “credit” and “debit” each have two possible meanings, and swap meanings when you move from one type of account to the other, as follows:

Credits increase Credit balances, as Debits increase Debit balances; which means Debits reduce Credit balances, as Credits reduce Debit balances.

So, “banking maths” is not just adding and subtracting; it depends on double-meanings of “credit” and “debit” in “Asset accounts” and “Liability accounts”.

Double-meanings = Ambiguity = Confusion

This counter-intuitive logic opened my eyes and unlocked the “language of bankers”; it changed my view of accounting in general and Social Credit in particular.

Now I know why, if a useful form of Social Credit ever does appear, it will appear as a Credit balance in a Liability account and a matching Social Debit will be recorded (as a Debit balance in an Asset account) in a bank.

But “Social Debit” doesn’t appear in the lexicon of “Social Credit”.

This logic opens up a new way of thinking about the works of Douglas. It puts his inherently ambiguous abstract noun, “credit”, into its practical banking context, where its dual meanings are explicit, precisely defined, and explain how banks perform their criminal “Magic”.

The evils of money-creation by banks will never be remedied without a clear understanding of the language used to conceal the bankers’ historic crimes.

My accountant’s advice revealed the distinction I’m making here, between Douglas’ “social credit” (where “credit” is an ambiguous abstract NOUN) and “credit” as the clearly defined accounting VERB or ADJECTIVE, which I invite Social Crediters to ponder. This simple grammatical distinction has given me a much deeper appreciation of what Douglas has written and ultimately the confidence to create this Substack series, which openly proclaims the intimate details of bank lending fraud, without fear of contradiction (or prosecution) by any banker.

Using “credit” as an adjective is the simplest antidote to the lies banks are telling us. The ambiguous noun does invite confusion.

---

Professional Opinions

1. Reaction from Prof. Werner

In an exchange on Twitter [now X] in March 2022, I challenged Prof. Werner to change his description of bank-credit as “fairy dust” to “fraudulent accounting”.

“Agreed, provided he replaces his ‘fairy dust’ explanation of bank-credit with the correct ‘fraudulent accounting’ explanation.” Pat Cusack @plcusack . Mar 19

He referred me to another 2014 paper in which he had posed a similar question himself and explained why he avoided answering it. His final comment was:

“This is academic language in a peer reviewed journal for saying ‘this looks fraudulent’ but such assessment is a matter of law, hence outside the scope of a finance paper.” Professor Richard A. Werner @ProfessorWerner . Mar 20

So, he agrees that bank lending of credit “looks fraudulent” but, to ensure his journal articles would be published, couldn’t use those words.

I now see his use of “fairy dust” as an allegorical nod to the “magical” nature of “credit creation”, which does imply deception.

---

2. Prof. Mehrling comes close … but no cigar

To understand Prof Mehrling’s approach to “credit creation” I completed the first 6 lessons of his free online lecture series¹⁰ at the Coursera website. He is known for one of his sayings about banking, viz., “All banking is a swap of IOUs” and he applies this concept to creating bank credit by lending.

I agree that the NUMERICAL accounting record produced by a “lending” bank accurately describes “a swap of IOUs”: the customer makes one promise to the bank (to pay money to the bank) and the bank makes a matching promise to the customer (also to pay money to the customer). So it is an exchange of equal IOUs rather than a loan.

But, even though Mehrling recognizes this aspect, he doesn’t see the paradox of banks pretending to lend a banker’s IOU, which is indeed a bank liability.

---

3. Steve Keen, the debunker-in-chief of economic nonsense.

I haven’t had a chance to challenge Steve on this topic. He has developed two brilliant computer modelling programs: Minsky - which incorporates the Balance Sheet Equation into a ‘system dynamics’ graphical interface to model economic “stocks and flows” dynamically; and Ravel - which replaces spreadsheet programs (like Excel) for graphing extremely complex data tables.

But in his published works I’ve read, or videos I’ve watched, I’ve never seen him cite the “No lending of Liabilities!” rule or claim bank lending of credit is fraudulent.

---

4. Douglas Social Credit movement

The writings of C.H. Douglas (1879 - 1952) on banking highlighted the injustice of lending something that they get for nothing and charging a fee for it - as though it were an asset - when we now know it’s a bank liability. So Douglas, the engineer, gets top marks for being well ahead of professional economists in his day, but not for the imprecision of his accounting terminology.

Social Credit Balances are also Bank Liabilities

The problem is that his worldwide movement - which is today battling to cleanse its title of “contamination by association” with the Chinese Communist Party¹¹ - has made no substantial inroads against the injustice Douglas saw 101 years ago. Banks still lend credit today, as they did 300 years ago. And they still do it illegally by “creation of credit out of thin air”.

When a Highlander says: “There can be only one!” he could be talking about “credit in a bank”; because all credit balances in banks can rightly be called Social Credit balances, as they were all created by, and are all owned by a member of “society”, not by a bank (or a “fairy”).

The point we were all missing:

Experts who can’t see accounting fraud in “bank lending of a bank liability” are missing one simple rule of accounting:

Liabilities cannot be lent; only Assets can be lent.

which is confirmed on p.16 of the Bank of England’s 2014 Quarterly Bulletin (Q1).

Social Crediters should try focusing on “Credit Balances”, knowing that an account with a Credit Balance, by definition, is a Bank Liability account, because the Root Cause of any Credit Balance in your bank account is always your deposit of a valuable thing with the bank¹².

Whether you deposit $1,000 cash, or a “$1,000 loan agreement”, the accounting is the same: the bank gets your deposit (recorded as a $1,000 Debit balance in an asset account); you get a $1,000 Credit balance (recorded in the bank’s liability account). The bank can’t lend either of these $1,000 liabilities to anyone: not to you; not to anybody else. The reason? It doesn’t OWN either of them; it can’t lend what it can never own. It’s impossible.

Here’s a brief recap of a “$1,000 loan” deception:

Your deposited $1,000 Promise “vanishes”; by a magical incantation - describing a “mythical funds transfer” [Abracadabra] - the vanished promise seems to reappear in a different place under a new name, having been transformed into a $1,000 Cr balance in a bank liability account in your name. Not knowing accounting rules, the $1,000 Cr balance seems to have appeared out of thin air, via an immaculate conception and virgin birth. You are told, “Your deposit was not the father of this $1,000 Cr balance child”.

What confuses you is this: (i) the WORDS written in the accounting record TELL YOU the final $1,000 Cr balance originated as a “bank withdrawal” from an empty asset account [“Opening balance: $0.00Dr”], even though (ii) the NUMERICAL record SHOWS YOU the contradictory deposit of your $1,000 Promise INCREASING its Debit balance from $0.00Dr to $1,000 Dr.

Those CONTRADICTING WORDS are the definition of ACCOUNTING FRAUD.

If anyone tells you they can “lend credit”, you now know they are lying.

If you still believe they CAN do it “out of thin air” you now know you have been skillfully deceived by a deliberate lie.

I enjoy the small pleasure of greeting new subscribers.

If you know others who might enjoy this article, please share it.

1. Steve Keen was Assoc. Prof. of Economics at the University of Western Sydney until 2013, and is the authour of “Debunking Economics”

2. See Wikipedia’s CV for Prof. Richard Werner.

3. Perry Mehrling was a Professor of Economics at Columbia University for 30 years until 2017.

4. Douglas, C.H., “The Breakdown of the Employment System”.

5. An accounting “Debit” does NOT automatically imply a legal “debt”.

6. A-Z Quotes reference: Mark Twain (2014). “Mark Twain on Common Sense: Timeless Advice and Words of Wisdom from America's Most-Revered Humorist”, p.12, Skyhorse Publishing, Inc.

7. Werner, R.A.; “Can banks individually create money out of nothing? — The theories and the empirical evidence”; International Review of Financial Analysis 36 (2014), pp. 1–19; [http://dx.doi.org/10.1016/j.irfa.2014.07.015]

8. In the broad sweep of economics, what Richard Werner calls “fairy dust”, the Bank of England calls “bank credit” and “bank deposits”. When C.H. Douglas coined the term “social credit” it was an abstract concept, not a bank accounting item.

9. “Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out.” McLeay, Radia & Thomas; Money creation in the modern economy; Bank of England Quarterly Bulletin 2014 (Q1); p.16.

10. Perry Mehrling: Economics of Money and Banking [https://www.youtube.com/playlist?list=PLSuwqsAnJMtwZEwkJgHZCod2xP9b7skF5]

11. Since 2014, the name “Social Credit” has been used by the CCP to describe its surveillance system, with its rewards for “toeing the party line” and punishments for “social sins” like jaywalking.

12. Except for interest paid by the bank on “term deposits” or “savings accounts”.