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​From Debt-Based Banking to Mutual Credit 


John G Root Jr

June 2014




Most of us are aware, at least vaguely, that the banking system has a particularly significant role to play in how well our economy is doing. If you think about what happened in the fall of 2009 when the too-big-to-fail banks got in trouble and were bailed out by the Government, you may have wondered about how much influence they have. Why not let the too-big-to-fail banks fail? It would certainly be good for all the community banks, the credit unions and cooperative banks! Why did we bail out the perpetrators rather than the victims of the banking fraud? Why didn’t we hear about any alternatives to bailouts? Why did the major media not question the wisdom of preserving the big banks? The minor media certainly did; the internet was abuzz with alternative ideas. The rationale the mainstream media gave was that the too big to fail banks were crucial to the economy because without them credit would dry up and the recession would be worse. Why didn't the major media report, as most of the alternative press did, that the bail out money was spent by the banks to buy up smaller banks and to invest more in derivatives and did not get lent to Main Street where it was needed most? Just imagine if the trillions (yes it was trillions) the Fed made available to the too-big-to-fail banks had been lent to the people at 1/4% interest. We could have had a booming economy with everything we, the people, value getting funded. Congress works for the too-big-to-fail banks, not we the people. What is it about banking that makes it so powerful? Are bankers above the law?


Contrary to popular belief, the too-big-to-fail banks own the Federal Reserve, which is not Federal and has no Reserves. The Federal Reserve exists to serve the interests of banks. All of our money is issued as a debt to the banks. Watch the video Money as Debt 2 Promises Unleashed:


Once we grasp the consequences of all our money being a debt to the banks, we will realize that this is the source of our economic misery, war, and environmental destruction. Money as debt is decimating the middle class, and the interest on the debt is transferring the wealth we all create together inexorably to the super wealthy.


Rather than lamenting the situation, and petitioning or lobbying to change it, we can create a new system, and by word of mouth and it going viral on the internet we could very well supplant the banks and enjoy a just and sustainable abundance. We may be used to struggling financially, competition, war and climate change, and we may feel that there is not much we can do about it, but we can create a new monetary system that issues our money as money, debt and interest free. Then, We the People will decide what is valuable and we will issue money for the things that benefit everyone. And, if we use a participatory, inclusive, decision-making process that leads towards consensus - such as Sociocracy - we will indeed create an economy and society of, by and for the people.


To understand how this is possible, we need to take a good look at banking. We need to understand what money is, why our debt based monetary system puts the banking system in control, and how we can create an alternative that serves all of us.




The Payments System


The banking system is entirely trustworthy as a payments system. It is very rare that a bank will make a mistake, and if it does, it usually finds the mistake before we do. The system is well designed and well managed. It may be an expensive system, but banks are totally reliable in following the instructions we give them when we write a check, swipe a card, direct deposit, bank online, etc. This function of the banking system, transferring money from one account to another, used to be a fairly complicated affair, with check clearing and manual accounting. If you are old enough, you may remember banking hours, when banks closed a 3PM so they could process all the transactions of the day. But nowadays, with computers and the internet, the cost of settling the accounts is minimal, because it is largely automated. There is a company called Dwolla which can effect payments for 25 cents each (regardless of the amount), and transactions under $10 are free. They aim to disrupt the banking system and bring down the cost of transactions to a reasonable level.  


Cash or Accounting? Deposits or Loans?


While making payments is what everyone with a bank account is familiar with, the problem does not lie there, but rather with lending. Banks would have us believe that they have money to lend and that they are doing what we do when they lend money. But this is not the case. The problem lies in the language of banking, and the difference between money as cash, i.e. paper notes with pictures of dead presidents on them, and what is called checkbook money, or money as accounting. When you deposit money in the bank, you think of it as your money in the bank, but you have actually lent the bank money; you have made a demand loan to the bank. The bank is obligated to pay it back whenever you demand it. You usually demand it when you write a check or swipe your debit card or withdraw cash at the ATM. If you lend cash to the bank (deposit cash), the cash goes into the vault and becomes an asset of the bank and the increase in your bank balance, which you think of as your money, is the corresponding liability of the bank, the bank’s obligation to pay you that money when you demand it. If you withdraw cash from the bank, the bank takes the cash from the vault, which reduces its asset, and the amount that it owes you, which is its liability, reduces by the same amount. Because you deposited cash and are withdrawing cash, you think of your money in that bank as if it were holding the cash for you. A merchant may not accept your check, or card swipe, but it will accept cash. In fact, it has to accept cash because cash is money: “legal tender for all debts public and private”. Cash, which makes up only about 3% of the money supply, is the basis for the way we think about banking. It behooves us to follow closely what actually happens when we borrow from the bank.


Borrowing Money


When you borrow money from your friend, or your family, or a company that is not a bank, you are borrowing money that they have, and once you have it, they no longer have it. They won’t have it again until you pay it back. You are likely to have made an agreement with your family or the company about the terms of the loan, i.e. the amount, the term, the interest rate, the payment schedule and maybe even some form of collateral. Because we have this experience, we tend to think that this is what banks also do, i.e. lend us money that they have.  


Fractional Reserve Banking


But you actually know that this is not true, because the bank does not lend its capital, it merely has to have a small percentage of its capital as a reserve; it doesn’t lend you cash, it makes a “deposit” into your checking account. It doesn’t lend its depositors money either, which you can know because the bank never says that you can’t withdraw your money because it has lent it to someone else. So where does the bank get the money it lends you? We can discover this when we look at what happens when you borrow from the bank. When you deposited cash in the bank, the cash became an asset of the bank and the money in your account is not the cash but the obligation of the bank to pay it when you demand it. The bank put the cash in the vault and wrote the corresponding amount into your bank account as its liability.


Value and Money


So when you borrow money from the bank, you give the bank something valuable, which becomes an asset of the bank. It is called a promissory note, your promise to pay. It is an asset of the bank because it is valuable, you are promising to pay the bank money you most likely will earn, or inherit, or be given, but in any event you are promising to pay real value. The bank also makes sure that you are good for it; it checks your credit score, it takes collateral, and in the case of a car or a house, it takes the title to the car or house, because if you don’t pay, it can sell the car or house and pay off the loan that way. Just like with the cash that you lent (deposited in) the bank, which is an asset (it is valuable) of the bank, the bank writes the amount of the principal of the loan into your bank account as its liability. It doesn’t get the money from its money, its capital, and it doesn’t get the money from its depositors. It issues it. It creates the money as an accounting entry in your bank account. It issues bank credit or checkbook money.


By the way, this is not controversial. The Federal Reserve describes this in detail in its publication on Modern Money Mechanics:

and the Bank of England recently published a paper explaining this:




What you didn’t learn in school, and the mainstream media never tells you!


What is controversial is the consequences. All our money, except coins, is created by banks as loans and the bank only issues the principal of the loan. You have agreed to repay the loan with money representing real value, and not just the principal, but also interest. The interest might amount to more than the principal, so you are agreeing to pay approximately twice as much as the bank issued. Where is the money to pay the interest going to come from, since only the principal was issued? There is only one place it can come from. The interest has to come from new principal, from new loans. Also, because the money is created as a liability of the bank, as you pay off the loan, the asset of the bank reduces and so does the liability (the money). This means that if everyone paid off all their bank loans, there would be no money. Because this never happens, there must be a loan that is never paid off and that loan has to be big enough to serve as the permanent money supply. That loan is the Federal Debt, which has not been paid off since Andrew Jackson paid it off in the 1840’s.


Banks Decide 


It should be obvious that, with all the money being created by banks as debt to themselves, our problems are a result of what you can borrow money for. In our monetary system, money can only be issued as a debt to the banks. It can’t be issued to pay for something that would benefit everyone, like infrastructure. Even the government has to borrow the money. It can’t be issued as a grant, for example, to pay for education, or the arts. Only banks issue money, and only as an interest bearing loan. Banks are completely in charge of the economy and we accept that the terms of loans and the purposes for which banks will issue money are justified.


All this because we mistakenly believe that money is issued as cash, by the Government as the means of payment, and banks are just performing a necessary service. 


The Rich Get Richer By Design


The worst consequence of our monetary system is that interest on loans is automatically transferring the wealth from the people who pay more interest than they receive (about 98% of us) to those who receive more interest than they pay. This happens automatically as a direct consequence of the system. And along with that problem is the fact that interest is mathematical; it is due and payable regardless of what is happening in your life or in the economy. The fact that you have to keep paying the loan, regardless, has a profound effect on our culture. Just about everyone is doing everything necessary in order to have the money they need to keep up the loan payments. The mathematical nature of loans and interest is creating the reality we live in. All the money in circulation is a result of someone borrowing it from a bank as a mathematically calculated interest bearing loan. If the banks shrink the money supply by tightening credit - not your fault - and you get laid off because the business you worked for loses customers because there is no longer as much money available as there was before the tightening of credit - not your fault - then you have to find another job, perhaps at half the salary, and as you use up your savings, you have to downsize, and perhaps eventually default on your loans, -not your fault -and even declare bankruptcy, which is now more common than divorce. If money were issued as equity investments, then the money would follow, not create, the reality. We all live in existential fear of not being able to pay our mortgage or car loan, and becoming homeless and carless.




Every freely entered into, honest exchange of a good or service for money or money for a good or service benefits both parties to the exchange. Both parties benefit or profit from the exchange. If they weren’t better off as a result of the exchange, they wouldn’t bother. This is a characteristic of human nature, and it is the engine of our prosperity.  


Currently the “better off” or profit from an exchange is going towards the payment of interest, to the banking system and the owners of the banks, concentrating the wealth in the hands of less than 1% of us. Just consider that interest makes up between 25% and 50% of the price of everything. 


If we set up a software and internet based accounting system similar to what the banks use, we could issue money debt-free and interest-free to pay for what we value. If we used an inclusive, participatory decision making process that leads towards consensus to determine what we value, everything would change. We would discover that we can create an almost unimaginable abundance. We could create a just, sustainable, peaceful, economy and society.  


The participatory decision making process that leads towards consensus that is reasonably well proven is called Sociocracy and the mutual credit or payment system with the most potential to be the instrument of our prosperity is called rCredits, by Common Good Finance.


Check out both: and 

All of this is explained in detail on 

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