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By Tim Di Muzio.

Excerpt from: The Tragedy of Human Development: A Genealogy of Capital as Power. London & New York: Rowman & Littlefield International. 2018.

The radical divisions in life chances experienced by many are not a natural point of arrival—some iron law of history working itself out—but the result of past colonial practices, the unequal power and privilege of a few (mostly white) men, political decisions, and the way in which money is generated in capitalist world order. I will discuss the European colonial legacy in greater length and depth in Act II and we will encounter many political choices throughout this work that contributed to inequality, but it is worth briefly discussing money here (for a more in-depth treatment see Di Muzio and Robbins 2016, 2017).

As the reader is likely aware, there is considerable confusion over what money is and how it is created in an economy. Economists typically define money by considering its main functions: a unit of account, a medium of exchange, and a store of value. However, ask most professional economists how the money supply expands and you are highly likely, at best, to get the answer that it expands through a fractional reserve system of banking when people make deposits. This is not only incorrect but also logically flawed (Di Muzio and Noble 2017).

Werner’s seminal research (2014a, 2014b) uncovered that there were three explanations for the expansion of the money supply in the finance and economic literature: (1) the theory that individual banks create money when they make loans; (2) the theory of fractional reserve banking whereby the banking system as a whole expands the money supply because of a reserve ratio; and (3) the theory that banks are not special institutions but simply act as intermediaries between those who save money and those who want to borrow it. Werner argues that the last theory is by far the most dominant theory but that it is incorrect and also as logically flawed as the fractional reserve theory since it too relies on people making deposits. To test the theories beyond logic, Werner conducted an empirical study of a German bank to observe its balance sheet when making a loan—in this case to Werner himself. What was discovered is that new money is created when a bank makes loans to customers (see also McLeay et al. 2014).

While certainly not all powerful, what this means is that banks have a tremendous power to allocate new money. Since banks have the power to create new money, governments are structurally forced to go into debt if they want to spend more money than they accrue in revenue (e.g., from taxes, fines, fees, and the privatization of public assets). Another way of putting it is to say, following Veblen (1904, 1923), that the money supply of most modern economies has been sabotaged for private profit since publicly listed banks are privately owned institutions. And given the highly uneven pattern of wealth ownership both within and between societies, we can be sure that only a tiny minority benefit from this ownership and act of sabotage. Last, as Rowbotham (1998) noted sometime ago, when banks create money as loans to customers, they do not create the interest charged on the loan. This means that there is always more debt in the system than there is the ability to repay.

Thus far, it is likely fair to say that most of society has taken the current banking system as self-evident—that it has been this way and always will be and that there is only one way to organize our money system—but this is not the case as a number of academics and civil society organizations such as Positive Money and Monetative argue (Di Muzio and Robbins 2017; Huber 2017; Pettifor 2017). The current system is crisis-prone and a flawed human creation, albeit beneficial to the few who own it. Indeed, at the time of this writing, the Swiss Sovereign Money movement known as the Vollgeld garnered enough signatures to hold a referendum on a proposal that would disallow banks to create new money and put that power into the hands of their democratically elected government through the Swiss Central Bank. In other words, if the referendum is successful, the citizens and their representatives would decide how to allocate new money in Switzerland and citizens would not have to be indebted to private social forces who capitalize their state’s ability to generate a revenue stream, largely through taxation. This would also mean that the state is not forced into debt if it desires to spend more money than the revenue it collects.

Thus, a key challenge to overcome is the prevailing monetary system that largely benefits a small handful of individuals and families who own the banks.


Di Muzio, Tim, and Leonie Noble (2017) “The Coming Revolution in Political Economy: Money, Mankiw and Misguided Macroeconomics,” Real World Economic Review, Vol. 80: 85–108.

Di Muzio, Tim, and Richard H. Robbins (2016) Debt as Power (Theory for a Global Age). (New York: Oxford University Press).

Di Muzio, Tim, and Richard H. Robbins (2017) An Anthropology of Money: A Critical Introduction. (New York: Routledge).

Huber, Joseph (2017) Sovereign Money: Beyond Reserve Banking. (Basingstoke, UK: Palgrave Macmillan).

McLeay, Michael, Amar Radia, and Ryland Thomas (2014) “Money Creation in the 
Modern Economy,” Quarterly Bulletin Q1. (London: Bank of England). 

Pettifor, Ann (2017) The Production of Money: How to Break the Power of Bankers. (London: Verso Books).

Rowbotham, Michael (1998) The Grip of Death: A Study of Modern Money, Debt Slavery and Destructive Economics. (Charlbury, UK: Jon Carpenter Publishing).

Veblen, Thorstein (1904) Theory of the Business Enterprise. (New York: Transaction Publishers).

Veblen, Thorstein (1923) Absentee Ownership: Business Enterprise in Recent Times: The Case of America. (New York: Transaction Publishers).

Werner, Richard A. (2014a) “Can Banks Individually Create Money out of Nothing? – The Theories and the Empirical Evidence,” International Review of Financial Analysis, Vol. 36: 1–19.

Werner, Richard A. (2014b). “How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking”. International Review of Financial Analysis, Vol. 36: 7177. 


The above excerpt is taken from: Tim Di Muzio. 2018. The Tragedy of Human Development: A Genealogy of Capital as Power. London & New York: Rowman & Littlefield International.  Pages 9 – 10. 

Tim Di Muzio is an Associate Professor of International Relations and Political Economy, School of Humanities and Social Inquiry, University of Wollongong, Australia. He is also an Associate at the Centre for Advanced International Theory, University of Sussex, UK.  And he is the editor of Review of Capital as Power (RECASP).

His publications relevant to monetary theory and reform are:

Di Muzio, Tim & Robbins, Richard. 2016a. Debt as Power: Theory for a Global Age. Manchester, UK: Manchester U.P.

Di Muzio Tim. 2016b. “Energy, Capital as Power and World Order”. In Cafruny A., Talani L. & Pozo Martin G. (Eds), The Palgrave Handbook of Critical International Political Economy. London: Palgrave Macmillan.

Di Muzio, Tim & Robbins, Richard. 2017. An Anthropology of Money: A Critical Introduction. London: Routledge.

Di Muzio, Tim & Noble, Leonie. 2017. “The Coming Revolution in Political Economy: Money Creation, Mankiw and Misguided Macroeconomics “. Real-World Economics Review, 80 (26 June 2017): 85-108. .

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Govert Schuller
Govert Schuller
2 years ago

This is a powerful introduction to both monetary theory as well as international political economics.