Money, Credit, and Debt: Who Creates Purchasing Power and Under What Conditions?

What is money and how does bank credit create deposits?

Money is not one single thing In the euro system it helps to distinguish cash, central-bank reserves, and bank deposits. Cash is a central-bank liability, reserves are electronic central-bank money used mainly for settlement by banks, while the deposit in our account is a commercial bank’s liability to us. The ECB explicitly distinguishes central-bank money from commercial-bank money.

A loan can create a deposit When a bank grants credit, its balance sheet normally records both a claim on the borrower and a new deposit for the borrower. The Bank of England describes this directly: the loan and matching deposit are created together. As principal is repaid, part of that deposit money is extinguished.

Banks create money, not automatically wealth A new deposit provides purchasing power, but a debt stands on the other side. Borrowing €100,000 does not automatically make us €100,000 wealthier: we receive money and a liability at the same time. Credit can finance wealth creation, but it can also finance an overpriced asset or consumption without a future return.

Limits to money creation, settlement, and the central bank

Why banks cannot create without limit The ability to create deposit money is not an unlimited licence. Lending is constrained by credit risk, expected profitability, capital, liquidity, regulation, collateral quality, demand from creditworthy borrowers and the need to settle payments with other banks. EU rules explicitly impose capital and liquidity requirements.

When money leaves a bank, settlement matters If a borrower pays a seller who uses another bank, the lending bank cannot merely type another number and end the story. The interbank payment must settle. In the euro area, TARGET systems settle large-value payments in central-bank money. Deposit money and reserves are therefore not the same thing, but they are linked through settlement.

The central bank shapes system conditions A central bank does not normally decide whether we personally receive a mortgage. But through policy rates, operations, collateral frameworks, reserves and the regulatory environment it strongly affects funding costs, system liquidity and banks’ willingness to lend. The ECB describes monetary transmission as official rates affecting money markets and, indirectly, bank lending and deposit rates.

Interest, credit, and the creation of purchasing power

Interest does not prove a mathematically unpayable system The fact that a loan creates the principal deposit does not imply that an equal amount of new debt must be created just to pay interest. Interest becomes bank income; when the bank pays wages, suppliers, taxes or dividends, money circulates back into the economy. An individual debtor still needs income from others. The debt problem is therefore about cash flows, income, asset prices and distribution — not a simple equation that “interest is missing from the system.”

Credit is a claim on the future Credit moves purchasing power from the future into the present. In exchange, part of future income is committed to repayment. This can be sensible for a home, machine, education or business; it becomes dangerous when debt grows faster than repayment capacity or when credit mainly inflates existing asset prices. IMF research links rapid leverage growth and credit booms with greater medium-term financial vulnerability.

So who creates purchasing power? The most precise answer is not simply “the bank”. The bank creates the deposit, the borrower accepts the debt, regulators define constraints, the central bank shapes conditions, and the legal system determines enforceability. Purchasing power emerges within an institutional relationship. It is therefore legitimate to ask who receives credit, against what collateral, at what price and for what purpose.

Credit power can shape the structure of the economy A bank does not merely distribute existing goods; by choosing which projects to finance it helps determine who can buy an asset today with tomorrow’s income. If credit systematically flows into property, financial assets or particular sectors, it can affect prices, ownership and future concentration. That is not evidence of conspiracy. It is a reason to treat credit allocation as a question of power and responsibility.

The central bank, trust, and financial power

Central bank: neither private cartel nor ordinary ministry The manuscript correctly highlights central-bank institutional independence, but some formulations require correction. The ECB is politically independent under the Treaties and its capital is subscribed by national central banks. The US Federal Reserve has a mixed public-private structure, but the Federal Reserve explicitly states that the system is not privately owned in the ordinary corporate sense; the Board of Governors is a federal agency, while member banks hold a special statutory share in regional Reserve Banks.

Independence solves one problem and opens another The case for central-bank independence is that day-to-day political power cannot simply bend monetary policy to short-term electoral interests. The cost of that protection is substantial power in an institution outside direct daily political command. Independence therefore requires mandate, transparency, explanation and accountability — not a myth that the bank is either wholly private or politically neutral.

Why we trust the number in an account A bank deposit functions as money because it can normally be converted at par into cash or transferred to someone else. Regulation, supervision, central-bank settlement and deposit-guarantee schemes support that trust. In the EU, eligible deposits are generally protected up to €100,000 per depositor per bank. Private bank money is therefore not merely a private promise; it operates inside a publicly supported institutional architecture.

Power check: who can say yes and who cannot? Do not look only at the quantity of money. Ask: who holds a banking licence; who sets underwriting standards; who values collateral; who receives a better rate; who is excluded; who changes capital rules; who provides emergency liquidity; who bears losses when credit fails? Financial power is often the power to set conditions of access.

Alternatives and trade-offs in banking architecture

Alternatives are not just a new currency Alternative financial architecture can mean a cooperative bank, credit union, mutual fund, community lending network, public development institution, more equity finance, or limited mutual-credit arrangements. Each reallocates risk and authority differently. If we merely rename the money without examining the issuer, backing, losses, governance and exit, we may create a new centre of power.

Full reserves and narrow banking are not trade-off free Models in which transaction deposits are fully or almost fully backed by safe reserves can reduce some banking risks and separate payments from credit risk. But credit must then be funded elsewhere, changing its price, availability and where risk sits. Moving risk is not the same as eliminating risk.

Debt, loss, and collateral

Debt is not just a number but an enforceable contract Credit power does not come only from a bank’s ability to create a deposit. It also comes from the legal fact that debt is an enforceable claim on future income or pledged assets. A mortgage therefore links the monetary system directly to R71: if a household cannot repay, it can lose access to the space used as collateral. Credit power is also the power embedded in contract terms and enforcement rules.

That does not make enforceability inherently unjust. Without an expectation that contracts will be honoured, much long-term lending would be far harder. That is precisely why contract clarity, repayment-capacity checks, proportional collateral, arrears procedures and restructuring options matter. Moral evaluation of credit begins with its terms, not with the word debt itself.

Who bears the loss when credit fails? If a borrower defaults, the loss does not disappear. A bank may first absorb it through the reduced value of its claim and its capital; secured lending shifts part of risk to pledged assets; in systemic crises deposit guarantees, bank-resolution tools, central-bank liquidity or other public mechanisms may become relevant. It therefore matters who receives returns in good times and who stands first in line for losses in bad times.

This is also the purpose of capital requirements: bank equity is meant to absorb losses before problems threaten ordinary depositors or the payments system. The goal is not to eliminate risk but to create buffers and a loss hierarchy. If returns remain private while large losses are automatically shifted elsewhere, moral hazard becomes a real concern.

Collateral can open doors — and reinforce the advantage of those who already own assets Banks assess not only an idea but repayment capacity and often collateral. That is understandable risk management, but it has a structural consequence: existing wealth can make access to new purchasing power easier. Someone with a house, stable income or strong collateral can generally borrow more cheaply than someone with a good idea but no assets.

This is not proof that every interest-rate difference is discrimination. It is a reason to examine whether credit reproduces concentration: wealth improves borrowing terms, credit enables additional asset purchases, and rising prices raise collateral values. R68–R71 are therefore not separate from money — assets and credit can reinforce each other.

Private issuance, public architecture, and the direction of credit

Bank money is privately issued but publicly supported by architecture A commercial bank has a private balance sheet and its deposits are its liabilities. Yet the ability of those deposits to function in daily life almost like “the same euro” is supported by a public institutional layer: licensing, supervision, central-bank settlement, conditional liquidity access and deposit guarantees. The two layers — private deposit issuance and the public monetary framework — are intertwined.

The opposite simplification is therefore also wrong: banking is not a purely private market with no special public privileges or duties. A banking licence grants an unusual capacity to issue widely accepted deposit money; in return the system imposes capital, liquidity, supervision and conduct rules. A legitimate political question is how this privilege should be bounded and whom it should serve.

The amount of credit is not the only question — its direction matters Two economies can have similar bank-balance-sheet growth and very different outcomes. Credit for new productive equipment, energy efficiency or business expansion can increase future productive capacity. Credit mainly bidding for a limited stock of existing land or assets may primarily raise their prices. In reality the boundaries are blurred, so stated purpose is not enough; actual outcomes must be tracked.

This is a point where Prebujenje has a valuable intuition: the creation of purchasing power is not neutral when access is concentrated and when it systematically changes asset ownership. But a serious article must show the channels — underwriting, collateral, prices, sector exposures and losses — rather than infer hidden intent directly from an outcome.

An alternative financial institution must answer the same hard questions A cooperative bank, community bank or mutual-credit system can change who appoints managers, who receives surplus and how priorities are chosen. That can be meaningful decentralisation. Yet credit risk, liquidity, fraud, loan concentration, conflicts of interest and the question of what happens during large withdrawals or losses still remain.

THY-REALITY therefore rejects the formula “local = safe”. An alternative is better only when its rules genuinely improve accountability, transparency, exit, risk distribution and resilience. A local institution that lends to friends without controls or hides losses can fail just as surely as a large one.

A practical audit of debt and credit institutions

Start today: a personal debt map v0.1 For each debt, record: remaining principal, interest rate, fixed or variable rate, maturity, collateral, early-exit cost, monthly share of income, and what would happen after a 20% income fall. Then separate debt that increases capability from debt that mainly moves future consumption into the present.

Start today: audit local financial dependence A community can map which activities require external bank credit, where member funding, cooperative equity, mutual funds or pooled purchasing would suffice, and which needs are too large for a local pool. The goal is not to “live without banks” but to increase genuine options and reduce single-point financial dependence.

A minimum compact for responsible credit institutions Whatever the legal form, at least these should be visible: who sets lending standards, how conflicts of interest are handled, how repayment capacity is assessed, who bears first loss, how deposits are protected, how arrears are handled, how customers can appeal, and under what conditions rules may change. A credit institution without clear accountability can quickly turn assistance into dependence.

Money is trust infrastructure — so power over it matters

R72 does not conclude that bank money is a fraud, nor that the existing system is morally neutral. It reaches a harder conclusion: money and credit are institutional infrastructures that distribute purchasing power, risk and claims on the future. Anyone seeking a freer society must understand the mechanism well enough that criticism does not rest on myth and an alternative does not reproduce the same concentration of power in a new form.