Prosperity – Realities

Sayings — On Credit Creation

Banks have a special power that no other player in the economy has, and that is the power to create money.

Excerpts from an interview with Richard Werner by Tucker Carlson in July 2025

How banks create money out of thin air. Economics has made no progress in a century, why is that? The answer is bank credit creation. This is a subject that is taboo in modern economics. Banks have been frozen out of economic theory. But if you ask business practitioners in any town what is important in the economy, they will mention banks. An academic economist, if asked the same question, will not mention banks. The reason is that the economists follow the theory that banks are merely intermediaries, that they just gather deposits, do their credit analysis, risk assessment and all that, then they allocate the funds to investors, just taking a percentage. But that’s wrong. That’s a theory of banking that’s still dominant in all the textbooks and leading journals.

There are actually three theories of banking. An older one is fractional reserve theory. Same intermediary function, but it posits that banks draw down deposits to make loans, hence reserve ratios can be used to regulate the scale of lending.

Then there is a third theory, and that one has been made out to be a wacky conspiracy theory. It was actually well known until about a century ago. That one is the credit creation theory of banking. This one says banks are not intermediaries. They are unique. They have a special power that no other player in the economy has, and that is the power to create money. Most people think this power is exclusively reserved to government. But it’s not true. That’s not how it works. The majority of the money supply is created by banks. Knowing that changes the analysis entirely.

What makes banks unique is the Client Money Rule [UK]. Something similar exists in the U.S. and other countries. If you have client money, this money has to be kept off your books. You have to hold it in custody, like a custodian. Everyone has to separate client money from their own funds — except banks. Banks are exempted from the Client Money Rule.

At law, there is no such thing as a bank deposit. It’s simply a loan. We give credit to the bank when we do what is called depositing our money. A bank deposit at law is not privileged. When you take out a loan, you issue an IOU and the bank will buy it. Then, when you want to take possession of the money the bank is lending you, the banker says ‘You’ll find this in your account with us‘. No transfer is made. Your account is credited because the accounts payable liability that arises from the loan contract is represented, or misrepresented, as another type of liability called a customer deposit. That is the trick you can only do when you [the bank] are the keeper of the record. Only banks can do that. Others have to keep it off their books. They can’t do this trick, of switching the type of liability between loan-contract accounts payable and another type of liability called client funds.

If the banks are engaged in money creation, that has great public impact. It’s very important who a bank is lending to and what is the purpose of the loan. If the bank were merely an intermediary, it wouldn’t matter so much. But because the bank is actually creating credit, there will be an impact on all of us. Bank credit can be a marvelous engine of enormous economic growth, prosperity, and in fact abundance. We can have stable economic growth and prosperity for the majority of us, without inflation and without crises. But we’re not getting it.

The Basel framework has been encouraging banks to lend for unproductive purposes such as asset purchases. That doesn’t contribute to GDP or national income. You’re merely purchasing an asset from someone else who owns it, not adding value. GDP is a value-added concept, and it [asset purchase] is not in there. When banks lend for asset purchases or financial asset purchases, they are creating money for unproductive purposes.

Now look at what Japan was doing in the 1980s. They were lending massively to people to buy real estate. If banks were merely intermediaries, it would not be a big deal. But the banks are creating money and pumping it into the real estate market. You don’t have to study economics to tell me what’s going to happen to real estate prices. But it’s a Ponzi scheme, because it works only as long as the banks create credit for others to join the game and buy these assets. And the moment the music stops, the banks don’t increase credit for asset purchases, then asset prices won’t rise anymore.

These asset prices collapse. But they’re the collateral for the loans. And because bank equity is very small, 10 percent, and you’ve pushed up asset prices 300 percent or 400 percent. If from the peak they fall by 20 percent, the banking system is bust, and that’s why we have banking crises. That’s what happened in Japan in the 1990s. We have these recurring banking crises.

Engineering a banking crisis. The Bank of Japan created the asset bubble of the 1980s intentionally. There are eyewitness accounts by insiders, data, anecdotal evidence. Why did they want to do that? In order to blow up a successful system. Japan was far too successful, it had to be destroyed.

TC: Who wanted it destroyed and why?

The one country that was most unhappy about Japan was the United States of America. They had one political initiative after another to try to force the Japanese to change their economic system. Structural impediments initiative, etc. Unfair, you must change all your business practices. Officially it was ‘we want to help you become a stronger economy‘. It didn’t work politically. So the central bank was used as a traitor. The Asian Financial Crisis [of 1987], it was clear the goal was to blow up the system, create a crisis, then use the IMF to force them to open up to foreign investment. The Asian crisis, the Korean crisis, the Japanese crisis, this was all to force them open so that Western investors could buy assets cheaply and participate in this growth.

The book Princes of the Yen, published only in Japanese, rocketed to the top of the best-seller lists in Japan. I was constantly interviewed on TV, wrote columns for the popular and economic press, became very widely known in Japan. Then one of the biggest advertisers told a broadcaster that Richard Werner cannot be on the show. They had nothing against me, they’re very sorry about it, but it was their bank saying that. The bank had to say that because the central bank (BOJ) asked them to do so. So I was cancelled. A magazine also had to not publish an interview, killed it at the last minute because of the pressure.

Recall, the book was published only in Japanese. Some years later, someone asked me to help translate it into English. The puzzle [of this request] was solved when someone came to visit me, said ‘Great book on Japan, Princes of the Yen‘. Well, hang on, you don’t read Japanese. No, of course not, but the translation is circulating in Washington. A few months later, I got the call from the U.S. Embassy. We have a request from the U.S. State Department. A senior person from the State Dept wants to arrange a meeting with you. He’s coming to Tokyo to see you. I thought, let’s meet in a public place, not a dark alley. And sure enough, when we met, the main message was, the CIA is watching you. There was no quizzing or trying to manipulate me. It’s just the CIA is watching now what you’re doing.

Why the Japanese economy was successful: decentralized banking. What is the link between the size of the bank and the size of the borrower? Big banks want to do big deals with big customers. Small banks want to do business with small firms. Why is that important? Small firms are the biggest employer, they employ 65 to 70 percent of the work force, in every country of the world. 99.9 percent of companies don’t issue publicly traded stocks and shares. They are small firms. Where do they get money from? Internally, family and friends. Externally, from banks. Which banks? If you have a banking system dominated by large banks, small firms don’t get money. Everything is affected by the concentration of banking in a few large companies. Even demographic trends and fertility. If you have to move to the cities where property is more expensive and apartments are smaller, you can’t have another child. So many things in society are affected directly by this trend [of banking concentration].

This concentration is driven by central banking. The ECB, the newest central bank, only founded around 2000, has already managed to kill 6,000 banks in Europe. Through over-regulation, reducing profit margins, forced mergers. So the number of banks goes down, and that means banks lend less for productive business investment. Germany when it had many many local banks also had the largest number of ‘hidden champions’, companies we never heard of that are the top in their niche. Germany had by far the largest number in the world of these hidden champions, because of its extremely decentralized banking system. That explains why Germany in the past did very well, but that’s now being eroded. Same in the U.S.

What happened in the 1930s [in the U.S.] is that farmers became destitute, their land was the collateral for the loans they couldn’t repay, they lost their land, they lost their livelihoods. The central banks when push comes to shove, they pursue the agenda of concentrating the banking system, and reducing the number of banks, which increases the power of the central banks.

Deng Xiao-Peng came to Japan seeking the magic elixir of economic growth. He didn’t care whether it was capitalist, communist, or anything, just so it would create prosperity. Japanese Ministry of Finance officials asked him ‘How many banks do you have?‘ One. One bank for what was then a population of 600 million people. They told him you need thousands, in every village and town, each with ten or twenty loan officers, five million people making loan decisions and creating credit. Deng went back to China and — we don’t know that he specifically implemented the Japanese model, but for two decades since Mao’s death in 1976 China experienced double-digit growth and brought hundreds of millions of people out of poverty. [Japan’s pre-1989 system of decentralized loan decisions and credit creation, it can be inferred, is what created what was then often called the Japanese ‘economic miracle‘.]

Full interview

Sacred, Not Scared

We need not ‘run scared’ if we recognize *something* sacred as the real source of authority in human affairs.

In the rapidly receding 20th century, America finished off the Third Reich and Soviet Communism, only to face updated versions of the same in the 21st. Historian James Kurth relates the dramatic collapse of The American Way of Empire to the implosion of its financial industry in 2007 – 08 and its subsequent consolidation into a plutocracy disdainful of ordinary Americans, domestic industry, and the exceptional nature of American prosperity. The severing of attachment to family, community, nation takes with it the sacred ties that animate collective effort.

Tribal affinity replaces citizenship, while new identity-groups proliferate to take what they can from those who work and pay taxes. Morbid guilt is systematically exploited to inflame inter-group hatred, on any pretext — race, sex, wealth, political party, national origin — whatever might spark riots to terrorize the populace, local officials, and the judiciary, and extract resources from the vulnerable directly, through government agencies, and extorted corporate ‘donations’. Mass surveillance eliminates privacy, while tech-oligarchs routinely censor any mention of facts embarrassing to their favorites, or departures from the party line of the day. Cultural Marxism, a modern version of the old self-destructive ideology, ‘goes viral’ from academia to government, business, science, and lately even the military. Only a moment ago, freedom of speech, expression, enterprise, and worship, national interest, human rights, and privacy were sacred principles in America. Now (2021) these notions are suddenly relics of an earlier era, suppressed and hidden, but nevertheless indispensable elements of any sustainable society.

The predicate to these sweeping changes is what philosopher Roger Scruton called ‘de-sacralization‘, leaving a cultural vacuum from which all the content had been sucked out. America had actually been ‘running on empty’ for a while, referring all matters of business, political, moral, and aesthetic judgment to short-range economics-first thinking. At every level, from individual to societal to global, economic considerations installed themselves in the collective psyche as paramount. Workers even recited the free-trade homilies as their factories were shuttered: ‘I guess we’re not competitive anymore’, meaning they couldn’t compete with slave labor.

Economics-first thinking is what happens to a nation devoid of any other guidance. With religion banished to the periphery, people revert to tribal self-worship, and deification of celebrities, experts, billionaires, media-owners, and politicians. These self-appointed overlords really believe they are entitled to overturn popular choices, ignore the will of the people and elementary human rights, silence heresy and ex-communicate heretics, re-order the natural world to their momentary liking, and in general act without the slightest regard for the common run of humanity. Endowed with riches beyond reckoning, their images plastered on billions of TV screens and computer monitors, puffed-up with algorithmic formulas, or granted dominion over millions of lesser mortals, their sense of entitlement knows no bounds.

Prioritizing economics above all else makes Marxists of all who worship at that shrine. For it was Marx who preached economic determinism. So the captains of industry who know nothing more than the bottom line speak the same language as Communists from BLM to Beijing. No wonder American business was such an easy mark.

The Chinese Communist Party (CCP) sized up the situation accurately and gave the Western capitalists exactly what they longed for — cheap labor, quick profits, Wall Street endorsement, and giddy consumers dumbed-down by education-cum-indoctrination. To the academics and government officials who fed at the CCP trough, the CCP provided money, prestige, and a soupçon of Oriental intrigue. This decades-long strategy is glowingly expounded by a Chinese economics professor in self-praising detail. It is not rocket science, but rather simple bribery, on a massive scale, as revealed in numerous reports suppressed (but not entirely stamped out) by tech-oligarchs.

The CCP merely took advantage of the ongoing de-sacralization of American and Western norms of civilization. As the muses of art and wonder were annihilated by noxious ideologies, the only thing that crawled out of the rubble was a grotesquely misshapen species of numerology. ‘You want to cut your labor costs?’, the CCP asked, ‘We’ll give you slave labor. Can’t get any cheaper than that. What do you say? Move your factory to Shenzhen or Zinjiang’. Steve Jobs, the avatar of woke capitalists, answered the call, along with thousands of other Western business ‘leaders’. He liked calling a factory manager at 3:00 am whenever he had a whim, say, to use beveled glass in his mobile phones. Having gleefully put thousands of American workers out of work, the ironically named Jobs informed an ignorant U.S. president ‘Those jobs are never coming back’. Economists of the free-trade persuasion whined that only a ‘magic wand’ would bring those jobs back. Hopelessness was given an aura of inevitability with the fancy label of ‘secular stagnation‘. Yet factories, jobs, and prosperity did in fact return to America when another U.S. president applied shiatsu-like pressure to rectify the terms of trade.

Somehow the leaders of American business and finance, in their mindless quest for ‘globalization’, failed to notice that their decisions, individually and collectively, destroyed their own firms’ social capital, know-how, corporate memory, technology, and security of supply chain. For the CCP, these American business leaders, and their facilitators in government and academia, played their foreordained part as useful idiots — Lenin’s evocative term for those who contribute to their own demise — by keeping their eyes glued to the bottom line, as if nothing else mattered. For them, nothing else even existed — not nation, not community, not workers, not even their own firms swallowed up by globalization. But some activities contrive to exempt themselves from accountability.

Precisely where economic discipline is most needed to restrain value-fantasies, it is abruptly abandoned. Thus stopping the climate from changing is deemed to be of such paramount value that mere cost-calculation is beside the point. ‘We’ll do it whatever the cost’, say its advocates, who are even proposing dimming the sun with clouds of chalk, seeking effects similar to those of large-scale volcanic eruptions or nuclear winter. Ditto for other programs like inducing self-effacing diffidence in white males, forking over public and corporate funds to Communists attacking citizens and burning down cities, emptying out jails to let murderers and rapists loose on the public, promoting genital mutilation of children, and teaching students to hate their country and all its history. These programs remain untouched by considerations of economic consequences, or any consequences for that matter; though Sweden finally cancelled its earlier planned participation in the sun-dimming project.

Nor is there any accounting for the contracting-out of bio-weapon ‘gain-of-function’ research to the Wuhan Virology Institute. In bio-warfare, unlike nuclear research, offensive and defensive efforts are indistinguishable. Bio-warfare scientists can claim and believe they are helping to counter enemy threats, while an enemy is using the same research to develop bio-weapons, or exploiting the lethality and virulence of a discovery to wreak havoc on other nations. For a mere seven million dollars of U.S. taxpayers’ funds given to the Wuhan Virology Institute bio-weapons laboratory, CDC career bureaucrat Anthony Fauci gained immunity from U.S. oversight of what some scientists at the time knew was insanely risky research. So the research was off-shored, laundering the money through a U.S. cutout posing as the contractor. The CCP, which took over the Wuhan lab soon after its aggressive potential was realized, gained a weapon of immense power and quasi-plausible deniability.

The CCP’s SARS-CoV2 plague killed millions of people, cost trillions of dollars, and inflicted long-term damage on Western social democracy. Like Marx turning Hegel on his head, the Chinese Communists turned that biz-school staple, Ricardo’s theory of comparative advantage, on its head, with their strategy of comparative disadvantage. Curtailing domestic travel during January 2020 minimized Chinese losses, while continuing international travel, knowingly and intentionally maximized losses in the rest of the world. The CCP then proceeded to hoard supplies of protective equipment and dribbled out defective versions of them to rest-of-world as ‘gifts’ to enhance virus effects. Now the Faucis and their cronies in medical and bio-research, having demonstrated mind-boggling naivete in trusting CCP scientists, ask us to ‘follow the science’. What can one say? The Tao that can be named is not the Tao.

No one witnessing the tragically inept response of public health authorities to a global plague can wish to abolish scientific or economic judgment. We rely on science to tell us how Nature works, and on economics to distinguish worthwhile from worthless activities. Until recently, these disciplines operated within and subordinate to over-arching precepts of civilization, art, culture, and religion. Absent the guidance provided by these sources of inspiration and restraint, scientists conduct mad experiments to transform the earth and all its inhabitants, merely because taxpayers have placed the technical means at their disposal. An informed public fortified against the inevitable howls of ‘anti-science’ can withdraw this support, at least until a consensus is reached on whether such research as is likely to release a global plague, or damage global food supply, should be done at all.

Those who obtain dominion over us, by whatever means they use — fraud, violence, bribery, demagoguery, virtue-signaling, mass-misinformation, the whole panoply of techniques to buy office and incite the populace against itself — are installed as secular deities. They wield the power to blow up the world, take the means of livelihood from one group and give it to others, bestow honors and titles, determine the fate of industries and enterprises, enable prosperity or impoverishment, bring forth waves of human migration, prod or restrain the forces of civil conflict, and encourage or suppress freedom.

Yet these awesome powers exist only with ‘the consent of the governed’. They are nothing more than the collective will of hundreds of millions of people concentrated in one tightly enclosed nucleus. Unpacking this nucleus without an explosion is the work at hand. Efforts are already underway to redistribute effective common-sense governance to those best equipped to realize it — the people themselves, not a political party, nor a race-based ‘movement’, nor any of the ersatz ‘identities’ littering the social landscape. Business enterprise has great, though seldom-recognized, potential as a system of common-sense governance, as Tom Veblen notes in Imagining a World Governed by Common Sense. Engaging in rewarding and innovative enterprises of merit offers what may be the best chance of undoing the desecration wrought by a frenzy of self-destruction. Organized along sacred principles of association, as all enduring social ties have something of the sacred in them, these working societies in their millions will over time exercise the powers that really belong to them.

We need not ‘run scared’ if we recognize something sacred as the real source of authority in human affairs. I do not refer here to any particular faith — that is up to each person. Whether it is the civic religion inherited from the ancient Greeks and Romans, personal experience of a higher power, faith in a traditional deity, the intuition realized from meditation or prayer, or some other source of inspiration, that is what gives us the courage to act. And it is from such sources that a free society gains strength.

Sayings — on Prosperity

‘I’d like to ask the president or whoever writes his talking points what was this damage is if you had the lowest black unemployment rate in history, what was the damage if you had the second lowest Latino unemployment rate in history, why wasn’t that something to celebrate rather than to feel bad about?’

Transcripts of remarks worth remembering

Newt Gingrich’s assessment of the return to the failed Keynesian model

This [proposed] tax legislation would make it harder for Americans to compete in the world market and in effect is one more contribution from the Biden family to the victory of the Chinese Communist party. So let’s take a serious look at the most fun part of it which is towards the end when they finally get around to what they call the made in America tax plan. It actually should be called the tax plan guaranteed to reduce the amount of things made in America. When Reagan campaigned on supply-side economics cutting taxes creating economic incentives a model which worked so brilliantly that we left behind the stagflation of the 1970s, and literally within three years turned the entire economy around launching an economic boom which lasted basically up to about 2008 which is a pretty long boom and Republicans in particular learned that you should cut taxes, and we worked very hard at it when we got a majority in 1994 with the Contract with America we had the largest capital gains tax cut in history which launched an entire boom in the high-tech industry and led to a tremendous amount of new investments which created new jobs.

Well what we have with Biden is a reversion to the Keynesian pre-supply-side economic model, a reversion to a model that says if I raise your taxes enough then somehow magically good things will occur because I would have transferred money from these incompetent Business Leaders to these wonderfully competent bureaucrats and the competent bureaucrats are much smarter than the Business Leaders and therefore they’re going to do great things for us. You could consider the Baltimore school system as an example of great things. The fact is that what President Trump did with the tax cut of 2017 was create an enormous explosion of new wealth new productivity, such that liberals who you would think care about the poor, care about African Americans, care about Latinos, that at the peak of the Trump economy just before covid-19 we had a moment where you literally had the lowest African-American unemployment rate in American history you had the second lowest rate of unemployment for Latinos in American history, poor people were rising from poverty the old-fashioned way they actually got a job and worked you didn’t need as much welfare, you didn’t need as many food stamps because people were rising, they were doing better and why were they were doing better because the tax cuts had liberated entrepreneurs to go out and create jobs.

For the left this is a terrible thing because it took money away from the government employee unions and the various left-wing groups and they’re very straightforward here, they’re saying their tax quote reform will reverse this damage and fundamentally reform the way the tax code treats the largest corporations. I’d like to ask the president or whoever writes his talking points what was this damage is if you had the lowest black unemployment rate in history, what was the damage if you had the second lowest Latino unemployment rate in history, why wasn’t that something to celebrate rather than to feel bad about? Those who make this claim, this tells you how much they live in Alice in Wonderland. This will also make United States a leader again in the world. Well the United States economy before covid-19 was the leader in the world, we were beginning to pull away from China again….