An important piece of information missing from the speech was that prior to July of 1994 there were reserve requirements meaning that commercial banks were required to hold a certain percentage of reserves relative to the amount of liability deposits which is consistent with the money multiplier model in the textbook. However, empirical research initiated by Basil Moore (Moore 1979, 1983, 1988a, 1997, 2001) and later independently corroborated by numerous researchers, including Kydland and Prescott (1990) discovered that banks extend credit first and then go looking for reserves later, exactly opposite to what is suggested in the textbooks. 

The first hurdle to overcome is to dispel common myths about where money comes from. For example, most people think when acquiring loans from banks, the banks simply lend out deposits from other customers that are not currently using that money or other assets that they hold. Would you agree with that assumption? Yes, continue, No, where do you think the money comes from?

It’s funny, actually one of the best arguments against this popular misconception is anecdotal. For example, in your own experience has your savings account suddenly dropped $1000 and you went to the bank and asked why this happened? And they responded by saying, “Oh we didn’t think you needed that money right now so we lent it out”, have you ever heard of that happening to a family member or a friend? If no, where does that money come from? (We are strictly talking about savings or demand deposit accounts, not investment or pooled funds accounts)

Before I go further I am going to preface what I am going to say with a quote by a Canadian born economist named John Kenneth Galbraith, “The process by which banks create money is so simple that the mind is repelled”.

This is how it works. When you walk into a bank looking to acquire a loan and the loans officer is satisfied you are a good credit risk, meaning that it is likely that you will pay it back. That loans officer simply types that digital money into existence! That money does not come from anywhere; it is brand new digital money!

Ok, so that is how money is created what’s the problem? The problem is that this extraordinary privilege has been given to privately owned commercial banks by our federal government. Banks are just like any other business and are profit motivated which means all other considerations are secondary. For example, the environment, healthcare, and education just to name a few.

We as a people need to take more control of where money flows. 

A Royal Commission or a general inquiry should be convened to expose the existing weaknesses in the current monetary system and move to a more stable and fair system for the many, not just the few.