Transcript of You’ve Been Lied to About the History of Money – Richard Werner

If you want to do empirical work, you need actual data series. So what data series are we using? They would say things like, “Oh, it’s very complex. And nowadays with complex derivatives and financial market deregulation, nobody knows what money is. We don’t know what money is, but it’s really not that important. Let’s move on.” And that always was a red flag. If you are in a certain field and then the sort of fundamental issues remain obscure, that definitely is a red flag.

The Federal Reserve supposed to be the expert in this question. Their official view is there’s a quote I have in my presentation which is something like “we don’t know what money is because it’s written in central banking language in all its meanings and definitions. We cannot define money, we don’t know what money is,” which is a joke. I mean the Fed claims we don’t know what money is, but that’s being used essentially to hide the real answers.

Defining Money: The Problems with Traditional Approaches

In my work I came to the conclusion after quite a few years looking into it and working with it, that it’s possible to define money. It’s just not what the mainstream theories say and it’s not what the central banks would like us to use as money. The central banks, for practical purposes, because they don’t want to be nailed down to particular definitions, they give us a menu. Well, maybe money is M0, also known as M naught, high powered money, monetary base or narrow money. I mean it’s got like more than half a dozen names for the same thing, defined as a bank’s reserves at the central bank plus cash and currency in circulation. That’s M0 and which is kind of interesting.

If you start there with the smallest M, of course then we have M1, M2, M3, M4, all the other M’s, if you compare just to M1, suddenly they drop reserves, banks, reserves at the central bank and it’s essentially site deposits, current accounts, very short term deposits at banks. And so, well why is that? And why are reserves dropped? So it does give you a hint already there is something about the banking system that has to do with the definition of money, but they don’t really expand on that.

And so then from M1, M2, M3, M4 onwards you just add other deposits, longer term deposits, savings deposits. The trouble with that is because essentially you’re measuring private sector assets that are savings. You know, it’s a subset of private sector savings, savings held in banks in various forms, various maturities. Well, where’s the limit? Why not include non-bank savings?

In fact, there are people who’ve said, and there’s definitions that also look at other assets and instruments held, owned by the private sector, held outside the banking system. And then where do you draw the line? The maturity can get longer. Well then why not? All sorts of things, stocks, real estate, anything is actually potential money. Because that’s really what we’re talking about. And that’s the trouble with this traditional approach to defining money. All the M’s, they focused on money that’s actually out of circulation money that’s potential money. But at the moment of measurement, we know for sure it’s not actually being spent, it’s out of circulation.

So that’s very unsatisfactory and has empirically, when you try to use that, has not been that successful. And there have been some puzzles in macroeconomics, for example, that these M definitions of money, M1, M2, M3 or even M0, they’re supposed to be in a stable relationship with the economy, economic growth.

The Quantity Equation and Its Failures

ROBERT BREEDLOVE: Which of course they’re not from the.

RICHARD WERNER: Quantity equation, but that broke down this stable relationship. And so in this, you know, quantity equation, you’ve got also PV equals mq.

ROBERT BREEDLOVE: Exactly. So you’ve got velocity in there, which is a plug. Exactly. It’s like the residual.

RICHARD WERNER: Yeah, linking M, MV, you know, money, whatever, M1, M2, M3, whatever, whatever you want to use them. So this M times a constant or some kind of stable factor, velocity, the.

ROBERT BREEDLOVE: Number of times it changed hands, originally.

RICHARD WERNER: Comes from this idea. Gold coins going around, how fast are they going round? Right. But of course it’s no more gold in circulation. And then on the other side, you’ve got nominal GDP. P times Y is just the price level times real GDP, Y, the abbreviation for real income. But the I for income had been used for investment already when Keynes did this. So then he used Y for real income multiplied by the price level gives you nominal income, which is nominal GDP.

So really we’re saying very simply, money which is nominal times something velocity, a constant equals nominal GDP. And that worked in the 1950s and 60s, which is why monetarism got a boost. And then Milton Friedman was quite successful in marketing the monetarist approach, which is very much focused on this quantity equation. But it basically broke down in the 70s and even worse in the 80s and ever since this relationship had broke down, the velocity have become unstable.

And there’s three different names for that. The velocity decline you see of literature on particularly in the 80s on this puzzle of the velocity decline. But the same thing can be expressed as if you look at the Cambridge equation over at the other university and I was at Oxford, so we don’t mention the name, it’s called the other university. And the same in Cambridge, of course, when you talk about Oxford.

So at the other university people had formulate the so called Cambridge equation. And that’s simply solving for money and putting velocity as 1 over v on the other side, which they called little K. Renaming it is another economist trick named after Marshall. The Marshall which when stock market analysts use quite a lot and there’s a little bit of truth in there for something, for a reason. I’ll come to in a moment.

But the idea is that this M now is called the money demand function. They just say that’s money demand, okay? And that’s now a function of still nominal GDP. But with the factor now on the other side, the V is one over V is renamed K. And so the velocity decline and velocity instability is the same as to say the money demand function has become unstable. And so they had these stable money demand functions they’ve been estimating and then it didn’t work. So all this stuff basically didn’t work. And as usual in economics, as you get more sophisticated in your mathematical formulations, the actual value added seems to be rapidly.

ROBERT BREEDLOVE: Yes, yes, because then also the data, you know, why being so super sophisticated.

RICHARD WERNER: I mean this is a simple one, but of course they’re much more complex ones but the data may be even worse. And then what’s the point?

The Mystery of the Missing Money

Now there’s a third way of referring to this puzzle and that one gives us some good hints. In the 70s some economists referred to this because that’s when the velocity decline happened first this relationship between money and the economy. GDP didn’t seem to be there anymore. And they talked about the mystery of the missing money.

Now that was de-emphasized because basically it gives you too many clues. The mystery of the missing money. Why? Well, because basically the money supply was rising a lot in the 70s and we’re not supposed to talk about it because the inflation is supposed to be in the 70s inflation in half a century ago. It’s supposed to be due to the oil shock, oil in the Middle East and all that.

ROBERT BREEDLOVE: And at this time this was still when they were saying that central banks did not create money. Right. Was this, well, that argument still being made?

RICHARD WERNER: Well, I mean, probably the textbooks will say central banks create money, but banks don’t create money. And the central banks, well, maybe yes, they can create money, but essentially somehow they can only supply the money that’s demanded and there’s limited demand for money or some story like that.

I mean, I faced that in Japan quite a lot when the central bank was creating this 20 year recession. And then throughout the central bank claimed, well, nobody wants our money. So you know, you can just, and they quote this Keynes expression, you can only lead the horse to the water, you can’t force it to drink. We can only offer the money, but nobody’s taking it. Which always was complete nonsense. Whenever they said that, like in public meetings, they would say, well, here’s my Japanese bank account number, send me some. I will take it, I will take it gladly, thank you. They never send any. So there’s so much propaganda in economics, as you will discover, of course.

ROBERT BREEDLOVE: Can we then? Because last night you were telling me this very interesting story about the origin of the term stockbroker and tally sticks and what, and this being like a proto form of money also related, I think, to the genesis of the state in a way. Right. The way this hierarchical relationship was arranged. Could you go into that as like a precursor?

RICHARD WERNER: Absolutely.

ROBERT BREEDLOVE: In fact, to all of this modern monetary.

The Truth About Money Has Been Hidden

RICHARD WERNER: And then. Because then we can come full circle and actually when you analyze the historical development of money, what money really is, then we can apply to the current system and our days and then we will have a definition of what money is. And it’s usable. I’ve been using it in my econometric work, it works very well. But of course you come to conclusions that the powers that be don’t like the central planners at the central banks. They’ve been investing a lot of resources in basically hiding the true answer to the questions you’ve been asking. What is money? They’re all about constantly distracting you with other things.

There’s an awful lot of that going on. And of course the central banks have had a very significant impact on the development of economics, of course, academic economics, research economics, published economics in refereed learner journals and also very clearly concerning textbooks and what is taught at universities. There’s a good article I mentioned yesterday in the Huffington Post 2009 called “How the Fed Bought the Economics Profession.” And it’s definitely one of the achievements, if you want to put it that way, of the central banks that they have really managed over the decades to control the economics profession, academic economics, the teaching of economics. And by that they’ve influenced so many people, people’s thinking, how they approach this. And so ultimately that’s helped them in hiding the truth. So the truth about money has been very much hidden, buried basically.

And you can make a good career if you play ball and don’t ask the difficult questions, participate in the lie. There was a Belgian economist called Bernard Littar. And he was a PhD student at the MIT, together with Paul Krugman who was his fellow PhD student. You know, it’s a bit like me at Oxford doing the MPhil and then doctorate DPhil. My fellow student was Mark Carney, who’s now the Prime Minister of Canada for some strange reason because he wasn’t elected to be Prime Minister of Canada. And before, of course, he was Bank of England governor and the Canadian Central bank governor.

Anyway, so Bernard Littar was saying they had this conversation, Paul Krugman and him had this conversation. And Bernard Littar is somebody, when you look at his work, he’s always talking about money. He realized money is so important. How can people not actually discuss how we define money? How do we shape the institutions that deal with money? It affects everything. So important. So he was very much on the right track there. But Paul Krugman told him, you keep going on about money. This is a video clip where Bernard Littar basically relates that and tells his audience about what Krugman told him. Fellow student Krugman, he said, “Bernard, you know, you keep going on about money. Haven’t they told you, don’t touch the money thing? You won’t get invited to the important dinners. It’s not going to be good for your career.”

And so this essentially sums up the reality. So if you toe the party line and don’t question the money thing, then you can have a great career as an economist, as a professor of economics. You can publish in top journals and you get promoted.

ROBERT BREEDLOVE: Yeah, they turn into economics rock stars.

The Rewards for Not Questioning Money

RICHARD WERNER: As you were saying. Yeah, exactly. Suddenly these people with books that can be quite shallow or quite meaningless really when it comes to reality, then become these economics rock stars, rock star economies, or they become governor of a central bank. That’s the other major reward. And so they do have these rewards. And that seems to work for a lot of people. So they just play ball.

And that is, of course, the answer to this other mystery. I mean, we agree money is important, and we’ll try to get to the bottom of it. But why aren’t more people asking this question? How come there’s all these learned scholars, economists and experts in even monetary economics, and they don’t ask the question, how’s that even possible? Because some people can say, well, hang on, there surely can’t be anything new we can discover, because we have these experts and they tell us there’s nothing to see here. Well, they’re being paid off to see nothing and to not ask these questions.

Historical Monetary Systems

But to come back to your question of the historical roots, you’re referring to the Old English system. Actually, you started with the Normans, the Norman Exchequer. That’s one very important historical development where we have very good records. There may be many other historical developments. We just don’t have good records of them. But this one, we have very good records.

The other one is, of course, the Chinese monetary system, which started, I mean, they had the first paper money started in the 10th century. And then we have good descriptions. I mean, the Chinese have their own description, and they’re ancient scholars, but we also have Western descriptions. Marco Polo, in his very readable and amusing book, usually translated as the Travels. I mean, in the original Italian version, it was more like the world that he described, that he experienced after 20 years working for Kublai Khan, the great Khan of khans and Emperor of China.

And he personally dealt with him because he spoke fluent Mongolian, because it was his second visit when he was there first, when he was 16 years old, because traveling there takes two years. On the way, he picked up Mongolian. And then Kublai Khan took a liking. He was always interested in Western things and Christianity, by the way. So when they met for the first time, he said to Marco Polo and his father, who, you know, Marco Polo was translating, his father was there and his uncle, his father’s brother, Kublai Khan, send them back. “Go back, you Latins. Go back to your Latin country. Go back to the head of all your Latin countries in Rome, you know, your big head, the big chief, the Pope he was referring to, and tell him the Khan of Khan, the Emperor of China, is interested in Christianity. Send 300 of your best theologians. They will debate my theologians, and I will back them.”

He didn’t say that part, but we know from our records, he actually was very sympathetic. He was going to back them. And there was a chance. And he said that, you know, if they convinced them, and of course, being the Khan of Khans, he could help in the discussion, the entire Mongolian empire will become Christian. That was the offer. Unfortunately, when Marco Polo went back and his father, and the Pope was not interested, there was a second pope. There was all these wars and conflict, so it never happened. But he did come back because he’d invited them back and of course it was great for trading. And then he stayed on for 20 years.

Now he describes there the monetary system that they had in China, which is the other system. So we’ve got the Norman Exchequer in England, 12th century. And we have Marco Polo’s 13th century description of the Mongolian system. And the third one, slightly older. Perhaps we should start there and I’ll try to be brief on this is the Babylonian system. It is older. We are talking about almost 5,000 years ago. But the three systems have a lot of similarities. They’re essentially the same system and they have the sort of features which were then used and abused by private entrepreneurs to create the system that we have today.

Because these were all state or government money systems. Because ultimately when we’re talking about money, it’s also a question of, okay, who creates it? Once you agree what it is, who creates it, who has the power to create and allocate money, which clearly gives you enormous economic and therefore also political power and power over everything. And power with the media, with the money you can buy anything. Politicians, media, PR, you know.

ROBERT BREEDLOVE: Yes. As if purchasing power is the most fundamental power that you can buy political power, you can buy narrative power.

RICHARD WERNER: You can buy political power, you can buy military power.

The Babylonian Monetary System

RICHARD WERNER: And so ordinary people, and I’ve confirmed this with a big survey believe that money clearly is very important. Everyone knows that common sense, you don’t need to be a scholar. Therefore surely this is controlled by the government. That’s people’s assumption. I did a survey with my students in Frankfurt, over a thousand results in the survey, over a thousand people we had the questionnaires filled out and it found that 84% of the population—and it’s probably above average central Frankfurt where you’ve got the ECB and the Bundesbank and the financial institutions and universities—believe that the majority of the money supply is created and allocated by the government or the central bank. But that’s not true. That’s not the system we have.

So really it’s wishful thinking or people just assume that surely something as impossibly important as that, the government is in charge, otherwise there can’t be any democracy. And if not surely somebody would have stepped in and pointed this out. Well that’s where all the propaganda comes in and the controlled narrative we have in economics. So the system we have is not what people believe we have. That’s the first point, isn’t it? So there is something very important to see here. And that’s why they say, don’t stay here, don’t look at this, just move on. Let’s talk about something else.

So the old system was such a system where the government was in control and the government was creating, allocating the money supply. It started in Babylon with the temples. Why? Because the king would put his gold treasure in the temple. And we have lots of descriptions of that in the Bible. It was also true for the Israelites, you know, once they had the temple, the treasure was kept in the temple whenever there’s another war and some loot was taken be put in the treasury after everyone gets paid, you know, whatever they’re due. And so that was the system. So people knew, okay, in the treasury, in the temple was the treasury. That’s where the gold was.

Now actually it was in 2007, a scholar, Michael Jose from Vienna translated one of those clay tablets we have, you see from Babylon we have good records because they used to write on clay. And then when things get burned down and cities get burned down, the clay actually just got hardened and survived. So we have all these records, tens of thousands of clay records. They’re mostly in the British Museum. You wonder why. And mostly they still haven’t been translated. And so one of them he found, which I thought was particularly relevant, sort of this big, it’s tiny in Assyrian cuneiform writing.

ROBERT BREEDLOVE: The Babylonian cuneiform, right?

The History of Money in Ancient Babylon

RICHARD WERNER: Yes. And this one created headlines because he found the name of the chief official which is like the prime minister of King Nebuchadnezzar II being mentioned there by name, Nebuzakim. And that’s been mentioned in the Old Testament, Jeremiah. And nowhere else have we found such a record. So people would say, well that’s just the Bible story. But it turns out that throwaway detail in the Bible is accurate. And so scholars were amazed. And that’s why actually in Britain it was a number one page headline, front page headline in the newspapers with the picture. And of course for a researcher and money it was really interesting because what did this clay tablet say? It said that I, Nebuchadnezzar II and my chief official, Nebusar S Kim, have deposited the equivalent of something like 750 grams of gold in the temple in Babylon. And that was the receipt for having Deposited it.

ROBERT BREEDLOVE: It’s like the original banknote.

The Temple Banking System

RICHARD WERNER: Yes, yes. Now the question, of course is, and I always ask my student that question, you know, you show the picture of that. And I asked him, well, why does this even exist? Why does this receipt exist? Do you really think that King Nebuchadnezzar, the great king of Babylon, when he feels like, oh, I want to go shopping, I’m going to get some gold out of the temple, 750 grams. When he walks up to the temple with his entourage, the king is coming, all the high priests and temple priests and staff, you know, attendants, they all fall down, surely flat, face to the ground, not even allowed to look at the king. And he waltzes into the temple, hushed silence, and he says, I’m withdrawing 750 grams of gold. Do you think any of these temple priests and attendants will say, lying down, sire, hast thou brought thy deposit receipt with thee? No, surely not. In other words, the king doesn’t and his prime minister need this deposit receipt. Why does it even exist?

And that’s where, of course, we come to the sort of the hidden history of money. Because, you know, when archaeologists dig, they find coins, okay? That was their money. Here’s the answer to your question. What is money? It’s a gold coin, it’s a silver coin, you know, it’s a bronze coin. Well, we know from Babylonian records that coinage, which was first, the first coinage we have records of is the 7th century BC coinage came much later than this temple system, which actually was a full blown credit system. A full blown banking system.

Yeah, because the temple banks were giving loans, they were conducting cash free, you know, these were essentially gyro bank transfers, cashless transactions, collateralized loans, uncollateralized loans. You had, you know, all the standard banking transactions, deposits, withdrawals. But the system, so essentially it was modern banking.

Three Theories of Banking

And so here the question was, the question is, well, what is banking? How do banks work? And strangely, even for the last 100 years, the scholars haven’t even agreed on that. There have been three theories of banking and they’ve been arguing:

1. Banks are just financial intermediaries. There’s nothing happening there. This is still the dominant theory, the financial intimidation theory of banking. They just gather deposits, do their analysis, credit research and whatever, and then they lend money. These deposits are being lent out. That’s the current official view. Central bank supported. All the textbooks have it. The leading finance journals have only that theory, economics journals, and of course, by the way, they use that argument to drop banking from economics models. So in standard Macroeconomics models, you don’t have banks in them. And there’s no other, because there’s no real function for banks. They’re just intermediaries, but they don’t do anything. Money is created, well, they say by the central bank, which the public likes to hear, because that’s what they think is happening. But the reality is central bank money creation is only 3% of the money supply, where the 97% coming from.

2. The fractional reserve theory of banking. That one quite a lot of people still remember. It used to be mainstream in the textbooks until the 1960s and of course that survived and some old books have still been used. So a lot of people know about that one. The fractional reserve theory says that each individual bank is just a financial intermediary, just like the financial intermediation theory. Gather deposits, lend out the money. But there’s a caveat. As the banks interact with each other, you get money creation in the system. But not individual banks. They’re just intermediaries because they’re lending out.

ROBERT BREEDLOVE: More than their reserves. That’s the fractional reserves.

RICHARD WERNER: Yeah, I mean, it’s a convoluted theory. They relate. Essentially they have a narrow measure of money, high powered money like M0. And then you have a broad measure of money where you say, well, somehow we have all these bank deposits like M2, M3. Well, how’s it possible? Here’s this narrow M0 and then this broad measure. Where do all these deposits come from? Something’s happening. We don’t know what’s happening for sure. Each individual bank, they’re just intermediaries, they’re not doing anything. It must be somehow in the system the money is being created. It is somewhat complex and people haven’t really been convinced by this. And the reason is that this is also wrong. This is not the truth.

3. There’s a third theory, and that one says banks create money out of nothing when they engage in what’s called bank lending.

ROBERT BREEDLOVE: So it’s like a zero reserve theory. They’re just lending it into existence.

RICHARD WERNER: And it’s each individual bank, you see. So they’re not intermediaries. They don’t take deposits and lend out that money. No, they create the money when they lend, that creates the deposit. So it’s the other way around.

ROBERT BREEDLOVE: Right.

The Evolution of Money in Europe

RICHARD WERNER: But to understand that and actually then to come back to the Babylonian temples and then the other system, maybe let’s look at how it started in the modern era, because the same thing happened over and over again in history. And it’s also an era where we have fairly good records. It’s really 16th, 17th century in England.

The general view was, well, money is gold and silver. So when Marco Polo returned to Europe, that’s what he was faced with. I mean, he knew money can be paper and that was a very efficient system. Kublai Khan issued a fiat where he ordered everyone several times a year to bring all their gold to the mint, the government, the treasury, where the money was issued, and they would assess the gold and then pay the value in paper money. So, you know, Kublai Khan was amassing all the gold and the silver and the jewelry and everything. So these were the first open market operations, of course, when you acquire assets. And so that’s what Marco Polo then.

ROBERT BREEDLOVE: One of the first FIAT currencies. Right. Like by decree.

RICHARD WERNER: What’s the first paper money?

ROBERT BREEDLOVE: Yeah, you submit your gold and we’ll give you this IOU. But the IOU is actually irredeemable. It sounds like.

RICHARD WERNER: Well, certainly the Chinese system was the first paper money. But it, you know, we had clay, we had wood in England. So and that means whether it’s wood or clay or paper, that’s not so important really. So the system has been around.

But when Marco Polo came back, he was shocked. How sort of simplistic everyone is thinking about money in Europe because people thought gold and silver is money. As a result, governments thought, well, we need to pay, we have some expenses, we need to build some bridges here and do some infrastructure investment, pay the army, protect the country, all these expenses. Taxes were quite low, but also rulers were. I mean, they’re much higher today than they were in medieval times. People shouldn’t forget that we talk about the Dark Ages. Well, taxes were mostly zero for most people in the past, okay? Because the taxes came with the invention of central banks, which is a modern phenomenon in the US only since 1913. Right. That’s also when they introduced the federal income tax, which didn’t exist before, and.

ROBERT BREEDLOVE: Passports and the IRS and all that.

RICHARD WERNER: And it’s the same with the foundation of the bank of England, 1694. It was introduced with an act that talked all about introducing these new taxes. Why? Because the government’s supposed to not issue money anymore, but borrow at interest.

ROBERT BREEDLOVE: Of course.

RICHARD WERNER: And who’s going to pay that interest? Where does it come from?

ROBERT BREEDLOVE: Taxes, the labor of the taxpayers.

RICHARD WERNER: That’s the link.

ROBERT BREEDLOVE: That’s the collateral for the fiat system.

Alchemy and the Search for Gold

RICHARD WERNER: And so now the rulers, when Marco Polo came back, let’s say 13th century, the governments the princes, the kings thought gold and silver as money. The trouble then is you can’t control the money supply. They tried. So they invested a lot in essentially, well, what’s called alchemy. They tried to make gold and every, particularly Germany, the Holy Roman Empire of German nation which is what Germany was before the modern, much smaller versions.

This Holy Roman Empire of German nation which of course included, you know, what is nowadays Netherlands, you know, the low countries of Germany, Switzerland before it became, you know, was broken out from there, you know, all these other pieces were broken out from that. But also northern Italy, you know, was part of it. Milan, you know, Myland was a city in the Holy Roman Empire of German nation.

Anyway, so there were 355 principalities in there. So it was always a very decentralized system which is good for people because you know, your ruler is local. And then you had this broader, bigger, you know, and the emperor was elected by and among the kings. Now they all invested in alchemy to create gold. Yes, that’s of course where Germany became the leading force in chemistry. And most of the famous chemists, all Germans, because there was such, over centuries, such heavy investment in alchemy as a byproduct chemistry.

ROBERT BREEDLOVE: Carl Jung said that alchemy was the dream from which science was born. That actually trying these methods, systemizing these methods to try and create gold, led to the scientific method, basically.

RICHARD WERNER: That’s right, yes. Intriguingly, the alchemists did point to mercury as the substance that could perhaps be turned into gold. And we know with nuclear physics that’s true. That’s the only substance. And we can do it nowadays. But the process, it’s so expensive, you just, you know, you don’t bother.

So as a result, the rulers, I mean, they didn’t give up. They still worked on it, but they realized, okay, we’re not getting results that we can immediately use. So what do we do? Well, we have to get gold from somewhere. And this is where this other development happened. Because if gold is your money supply, of course there is a big problem with that. The risk. I mean, just think about nowadays, if I’m in, say, London, a major city, I would not want to walk around with a lot of gold on me.

ROBERT BREEDLOVE: Sure.

RICHARD WERNER: And the police will advise you, don’t do that. And that’s 21st century. So imagine say 13th, 14th century. No, you don’t want to walk around with this gold. That’s the reality.

ROBERT BREEDLOVE: Because it’s a bare asset and can be seized, basically.

The Evolution of Banking and Money

RICHARD WERNER: Yeah, exactly, exactly. So. And of course, you know, there is crime, there is violence. So what do you do? And what people did was, well, they realized, well, we have to put this gold where it’s safe. But where is it safe? Ultimately it’s safe where? And that’s what they found with somebody who has gold already themselves and that they don’t need to steal my gold so I can deposit it with them. They work with gold, they have their own private army and they’re safe to, you know, private army to protect it, you know, security people. So why don’t they put it there? And these were the goldsmiths, you know, they’re working with gold, making jewelry for rich people, for the aristocracy, for the king.

And that’s what happened. Now of course you do need when you place your gold with them. Okay, I’ve got this gold bar here, you know, I want you to look after. I’ll pay a small fee. You do need a receipt, not because you distrust the goldsworth but just for practical reasons. Well, accounting the one. Exactly. But also, you know, the goldsmith may get ill or may have a bad memories like you need the record to make that claim. Oh, what if the goldsmith dies and somebody, you know, his son takes over? You need a record to say this is my gold. So goldsmith deposit receipts came about.

The next step is also quite logical because if you know, let’s say we’re neighbors and you’ve got more land than you need, I’d like to build a little hut, I need a bit of land. And we come to an agreement. I’ll buy this piece of land from you. It’s how much? Okay, we agree on the price right now everything Agreed. Okay, I want to pay you now. I can go to the city and there’s the goldsmith. That’s where my gold is. I can get the gold. I have to walk back, travel back, depending on how far that is risk, it’s going to be risky. I’ll give it to you. What are you going to do with it? If there’s a chance. Exactly. You’ll bring it back to the same goalsmate. Listen, why don’t I just give you my deposit receipt in fact, to make up the sum. Okay. It’s three deposit receipts of this money and it’s yours. And yeah, and everyone thinks that’s better, that’s more efficient. Makes sense.

ROBERT BREEDLOVE: So the credit instrument becomes monetized at that point.

RICHARD WERNER: Now at this point actually nothing much happened because the gold is stored and the deposit receipts which are one to one linked to the stored gold are used for transactions. That’s actually quite efficient. And in a way you’ve addressed the security problem and nothing much else happens.

ROBERT BREEDLOVE: I Often say. Sorry to just. I say this point a lot, but it perfectly mirrors what you’re saying here. That one good definition of money is that it’s a device for moving purchasing power across space and time. And so in gold, we had something that’s really good at moving purchasing power across time because it’s a good savings technology. But for all the reasons you’re highlighting here, the physicality of gold invites certain risk, opens you up to the threat of violence, coercion, et cetera.

So we innovated around that basically by putting the gold on deposit with a goldsmith and then taking this deposit receipt that’s much more portable. Right. Much lower risk to transact in this, or what would later become an electronic representation of that deposit receipt or banknote. And so we gained the ability to have to move purchasing power across space really well with a gold linked currency.

RICHARD WERNER: Right.

ROBERT BREEDLOVE: And so that’s a great monetary instrument, works really well, but it introduces this need to trust the custodian.

The Birth of Fractional Reserve Banking

RICHARD WERNER: Yes, but this is really just where the story starts. That’s the starting point. And really we’ve become more efficient and we’ve become clever about it. There’s good use of this instrument to transfer purchasing power. Great. Now imagine what the goldsmiths were saying. And of course, in those days, every profession, they were organized in guilds. They would meet regularly and they talk shop. Literally, you know, all the carpenters and they had of course also their business because they’re running quality control. They were examining people to become master of their trade, to then be allowed to practice. You know, that’s the system, the guild system.

And so the goldsmiths, when they get together, they were talking to each other and they noticed, well, hang on, you know, nobody’s picking up this gold. Actually, you know, withdrawals are quite rare because have you noticed they’re using our receipts to pay. This creates temptations.

ROBERT BREEDLOVE: Yes.

RICHARD WERNER: What is the temptation? Well, at the same time, of course, people realize, well, these goldsmiths, that’s where the gold is. So let’s say you need some money, where do you go? You go to the goldsmith, that’s where the gold is. Everyone knows that. So a lot of people were of course going to the goldsmiths.

Now the goldsmiths were very much aware of the laws and they were dealing with authorities and kings and princes because they had to be careful. They would want to be within the law. And the law said, this was European law until 330 years ago. In most European countries, charging interest is forbidden. It was illegal. But the people were coming to the goldsmiths and saying, can I borrow some gold? I’ll pay you interest.

Now that created immediately this temptation that the goldsmiths were exposed to and essentially they gave in. Okay, we’ll lend out some of the gold at interest. And of course, it has to be secret for two reasons. Number one, charging interest was illegal. Number two, and it wasn’t a minor thing. You know, in the Bible, charging interest in the list of sins, it is a capital sin. Right after murder, murder is higher and then comes charging interest. Wow.

ROBERT BREEDLOVE: Yes. Yeah.

RICHARD WERNER: So it wasn’t a minor thing. But secondly, it had to be kept secret because you didn’t want the depositors to realize that’s not their gold. Really, some of the gold is not there, it’s no longer deposited because really, this was a breach of contract.

ROBERT BREEDLOVE: Now, yes, you’re violating, they’re reaping the reward, but put the risk on the depositor.

RICHARD WERNER: Right. So what happens is three things. Number one, breach of contract. The moment the goldsmith lends out money as a loan to somebody at interest, breach of contract, plus breach of the law, you’re charging interest. An attractive business model comes about because you’re charging for time, because interest accumulates over time, you don’t have to do anything. Normally, if you start a business and you want to grow it as you, as you grow the business, you have to have to put in more resources. You’ve got some costs. And this is not true with interest.

ROBERT BREEDLOVE: Right.

RICHARD WERNER: So that’s the second thing. Is it a business model where you just sit back and as time goes by, you get more and more money? That’s attractive. But thirdly, the money supply is expanding because the moment the gold says you’re lending out some of the gold, it wasn’t anymore this one to one relationship between the deposits, the gold deposit not circulating, and instead its image, the receipts circulating. So there’s no macroeconomic implication, but the moment you lend out some of the gold, you’ve expanded the money supply. There’s now in total more purchasing power chasing.

ROBERT BREEDLOVE: And aren’t they lending to the actual paper receipts rather than the physical. Physical goals?

The Evolution of Banking Fraud

RICHARD WERNER: Are you’re talking about the next step? This is what happens next. Because of course, the goldsmiths were smart as you are, and they realized, well, I guess a few meetings down the road, they realize, okay, we’ve got to be careful, we shouldn’t lend out all this gold, you know. And they also realized, by the way, we need to collaborate because if somebody gets more demands, we need to collude. So if somebody needs gold because they’re you know, trying to hand in their deposit receipts and get the gold out. The other goldsmiths need to help.

So there you create essentially the interbank market. The banks have to work together. It’s still true today. Banking is a network industry, and banks have to constantly collaborate very closely. The automobile industry is very different. Turn on my BMW. It’ll work no matter what Mercedes Benz is doing. But not in banking. You can’t do even a simple transfer in most cases, if the other banks, or particular banks are not cooperating. It is a network industry. So that’s a big difference.

And so the goldsmiths realized that, okay, we’ll work together. But they also realized, and I guess a smart goldsmiths had this idea. Hang on, we don’t need to lend the gold. I’ll show you guys next time. This guy always comes around every Monday and wants a loan. And so far I’ve given it. I’ll give it to him today and I’ll show you what we’re going to do.

So this guy comes around. Oh, please, I need this money. I’m bothering you again as the last few weeks. I need these 200 grams of gold. I need to pay this and that. And the goal is to say, okay, I’ve listened to you and you’ve been very consistent. And I think, okay, we can do it. Here’s the usual contract with the small print, you know, is the interest repayment schedule, collateral, your house, your wife, your two daughters, you know, collateral. They will be sold into slavery, obviously, if you don’t pay, you know, the usual.

But one more thing, it’s a small thing, it won’t bother you. Here’s the gold, you see, I’ll give it to you. I want you to deposit it with me once you’ve borrowed it. Oh, but I need the gold. Yes, and of course, once you’ve deposited with me, I give you the deposit receipt. Ah, okay. And yes, you can use the deposit as everyone is doing.

ROBERT BREEDLOVE: It’s accepted by all the other banks in town too, right?

RICHARD WERNER: Exactly. Oh yeah, of course. Yeah, fine. That’s fine. We’ll do that. And so what happens now is much more dramatic. What we have is, this is no longer breach of contract. This is outright fraud. Why is it fraud? Because the goldsmith is now issuing a fictitious deposit receipt. Right? Of course, the fiction is it’s a.

ROBERT BREEDLOVE: Liability with no asset behind it.

RICHARD WERNER: Well, you know, here’s the gold. The goldsmith lends the borrower the gold to then deposit it and then gets the deposit receipt. So on the surface it seems proper. This is what double entry accounting was invented for. Because in double entry accounting you can make this appear proper when actually it is fraud. Because you create an asset and a liability at the same time. You lengthen the balance sheet.

But really this is fraud. Why is it fraud? Because you can prove it’s fraud in two ways. Number one, the guy who goes to the goldsmith before he borrows the gold. Check. Check. Does this guy have any gold on him? No. Then he leaves the goldsmith with a receipt that confirms he’s deposited gold. Well, how did that happen? He didn’t have any on him. Right. Secondly, check the total amount of gold at the goldsmith. He’s issued more deposit receipts now. But has the total amount of gold stored at the goldsmith increased?

ROBERT BREEDLOVE: No.

RICHARD WERNER: Of course they will say, well, we work together with the other goldsmith. Somehow we can, you know, we sort of. It’s an interbank liability. And don’t worry, the truth is expressed.

ROBERT BREEDLOVE: In the ratio, right? That the liabilities have increased, but the assets have not.

RICHARD WERNER: So a double entry, everything is increased. That’s why the double entry accounting.

ROBERT BREEDLOVE: But that’s the illusory part, right? Yes, because it’s assets equals liabilities plus equity, actual liabilities.

RICHARD WERNER: The loan is the asset.

ROBERT BREEDLOVE: Yeah.

RICHARD WERNER: And the deposit is created the moment the loan is extended. The borrower’s account at the bank is credited with the amount of money. So, but let me come to this. So this is now fraud. Secondly, the business model has just got even more attractive because you can now get revenue, get interest on income streams, and your cost is simply writing a deposit receipt.

ROBERT BREEDLOVE: The risk is zero too. If they default on it. It’s not even your goal that you lent out.

The Credit Creation Theory of Banking

RICHARD WERNER: There are some things they have to watch out, but that again, if they collude with each other, they can manage these risks. And thirdly, the money supply now can really be expanded. And that’s something you have to watch. And there are macroeconomic consequences depending on what the money’s used for. I’ll come to that. That’s my quantity theory of disaggregated credit, where you have to look at the money creation and its use. Because not all money creation leads to inflation. It depends. There’s three scenarios, but I’ll come back to that. And so the money supply expands.

A fourth thing happens. Banking is born. This is modern banking. Now that is also explained by this third theory of banking, the credit creation theory of banking. So we said we have three theories. The financial intermediation theory. There’s no money creation. Banks are just gathering deposits, lending them out. You have the fraction reserve theory, which is a bit of a mixture. It says each individual bank is just an intermediary. Nothing much to see here. But somehow, yes, there is somehow money creation in the system as they interact in a slightly dubious sort of process that’s not fully convincing when they explain. And thirdly, there is this credit creation theory, and that says banks are not financial intermediaries. Each individual bank creates money. Banks are creators of the money supply, and each bank creates money how and when it gives out a loan.

Now, I thought this is quite curious that we’ve had over the last century. And a bit these three theories of banking and economists argue about this. Which one is it? And people, of course, the majority nowadays supports the financial intermediary theory. There’s nothing to see here. Banks are just intermediaries, no money creation. But some economists would say, well, hang on, there’s credit creation going on. So you do get these arguments.

And of course, over the 20th century, you had different proponents of different theories. Schumpeter was supporting the credit creation theory. The fraction reserve theory was pushed by Keynes in 1930, although earlier he was aware and had supported the credit creation theory. And then later he would switch to further, even to the financial intermediate theory in his 1936 general theory. So it’s very suspect what Keynes been doing, moving further and further away from the truth.

And then, of course, from the 60s, they’ve been pushing this financial intermediation theory. Tobin was asked to set up a whole new journal called Journal of Money, Credit and Banking, which by its title, you’d assume must be all about this. And anyone who discovers a bit of truth or realizes there’s something about banks and credit, well, that seems like the right journal to look up. But no, it’s completely ideological. It’s all about banks don’t create money banks, just financial intermediaries. That’s how this was really pushed in the last few decades.

And central banks, of course, have been pushing this hard. Therefore we can drop banks from macroeconomic models. When the 2008 crisis happened, the banking crisis happened. The truth was, if the journalists interviewed an economist at, say, Harvard, MIT or central bank economist, had they honestly answered, they would have said, sorry, I can’t answer your question about the banking crisis. Why not? You’re an expert. You’re this famous professor of economics. Well, yeah, but our economic theories don’t include banks, so how can I comment? That would have been the honest answer. Obviously they were making up some stuff they didn’t want to admit that, but that’s been the reality in these macroeconomic models.

ROBERT BREEDLOVE: So that’s by design, right, as you said, to exclude banking from economic models, basically to make them invisible and not subject to scrutiny.

Empirical Testing of Banking Theories

RICHARD WERNER: Yeah, exactly. And this whole process of money creation, credit creation by banks should be invisible. But I thought, well, the scientific thing is to actually test these three theories of banking. And so I conducted the first empirical test, which is written up and published. It’s the most downloaded paper of all Elsevier publications. One is called, and I made it open source, so you can just Google it, you’ll get it. “Can banks individually create money out of nothing?” And the second one published 2014 and second one published 2016, is “Lost Century in economics,” because for the past century this has been denied.

ROBERT BREEDLOVE: The same century of central banking. What did Ron Paul say? That it’s no coincidence that the century of total war is also the century of central banking. Is also this lost century of economics?

RICHARD WERNER: Yes, exactly. Lost economics. The lost century for economics is not economic truth. And also the century of rising taxes. All these things happen together. Warfare, taxes, centralization, central controls coming in.

I did this test. I needed a bank to collaborate with me, and I found a bank and I actually took out a loan. €200,000 in Europe in a bank that was very representative because it was a cooperative bank, which is the largest number of banks are cooperative banks in Europe.

ROBERT BREEDLOVE: And what does that mean?

RICHARD WERNER: Cooperative. It’s like a… Oh, cooperative. The governance structure of the bank is like a stakeholder bank.

ROBERT BREEDLOVE: Got it.

RICHARD WERNER: So it’s not for profit, strictly speaking, it’s for its members. And that’s the largest number of banks in Europe are cooperative banks. Germany has by far the largest, but also Austria, Switzerland, Italy, lots of these cooperative banks. And they use in Germany, they all use the same system, the same IT obviously the same accounting in Europe anyway. It’s all standardized auditing rules and everything. So we know this is representative.

I borrowed the €200,000 and wanted to transfer it out of the bank. And the question was, where did the money come from? When I received the loan, we actually had the BBC there filming on the day, and I had all the bankers in the room and we watched them, what they were doing and they showed us the internal, you know, their system and I could demonstrate. And they actually even signed that, confirming that the money for my loan did not come from deposits, it did not come from reserves. They didn’t even check their reserves. They made no transfer of this money from either inside or outside the bank. It was newly added because really the legal view of this makes it actually quite clear.

Banks are not… Economists always say banks are deposit taking institutions that lend money. That’s not true. The legal reality is banks don’t take deposits and banks don’t lend money, they don’t take deposits. Because at law, in England where modern banking was created with the arrival of the Bank of England, the laws were also put in place. And at law there is no such thing as the bank deposit. It doesn’t exist at law. The status of a depositor is simply a general creditor. It’s a loan to the bank.

ROBERT BREEDLOVE: Right.

RICHARD WERNER: So deposits are actually our loans to the bank. The tables are turned.

ROBERT BREEDLOVE: Right, right, right. And this is in the fine print of online banking, banking agreements even in the US that you’re not the customer, actually you’re the creditor to the bank.

RICHARD WERNER: Yes, that’s right.

ROBERT BREEDLOVE: And they’re the borrower.

RICHARD WERNER: Exactly.

ROBERT BREEDLOVE: And they can default on you.

How Banks Create Money

RICHARD WERNER: Exactly, yes. So on the one hand we lend them the money, so they are the borrower. Then what about when they do what we call lending to us? Well actually what they do is they purchase our promise to pay. Our loan contract is a promissory note that we’ve issued, we’ve issued a security, an IOU. The bank buys it and then it owes us money. Right. Oh, but that’s called a deposit. When they owe us money. Right. So they invent a new deposit.

Because actually in accounting terms, you know, you studied accounting and audit. The accounts payable liability arising from the loan contract for the bank is now fraudulently, essentially misrepresented as another type of liability called customer deposit. That’s what it is, that’s all it is. And that’s how money is invented. That’s how banks create money. So I could prove that. And so now it’s established, actually there’s two tests, another test, this “Lost Century in Economics” paper, but I could prove empirically, peer reviewed journal, it’s no longer a matter of dispute that banks create money.

And this is how in most countries around 97% of the money supply is created by banks. Of course it started historically with these systems where, for example, with the goldsmith bankers, you know, whenever you have a system where people deposit valuables and the deposit receipt can easily be created at very low value because it’s either paper or it’s wood or something or clay. Even then there is the temptation for the issuer to issue fictitious deposit receipts. You know this.

So now we know what really this was this little clay tablet was this big. It really had quite rounded edges, as if it’s been circulating 750 grams of gold. I mean, that’s almost a kilo of gold. That’s like, what, in dollars? I don’t know, it’s like $70,000 or something. So. And it’s only a piece of earth, so that’s brilliant. That’s alchemy, which has turned earth into gold.

ROBERT BREEDLOVE: Right, right.

RICHARD WERNER: So how did this happen? And this is the answer to this puzzle. Why does this deposit receipt even exist? Does the king of Babylon, Nebuchadnezzar, need a deposit receipt? No, clearly not. It’s when the temple gave a loan to the government through issuing a fictitious deposit receipt. But everyone will use these deposit receipts. They were used as money. And that’s why it’s important, because of course, the name of the king and the prime minister on there is for credibility, the temple. And that’s how it could be money.

Historical Origins of Money Creation

ROBERT BREEDLOVE: So this is kind of the same reasons we have dead presidents on United States dollar bills. There’s still this imprinting of political credibility onto financial instruments today. But still there’s this scheme beneath the surface. It’s a different scheme now, but it sounds like this was maybe its origin point, actually.

RICHARD WERNER: Yeah, yeah, exactly. And so now. So that’s what happened in Babylon. So the government could acquire resources, pay for the king’s household, pay the army by essentially issuing these fictitious deposit receipts. But it was the government doing it through the temple, that the government, the king, could control.

And the same system came about in a slightly different way in England. And of course, the paper money system in China is another version. So the English system was really originally a tax system. When William the Conqueror had conquered England, next he was going to tax people. Well, actually, to be fair, not ordinary people. They had zero taxes. It was the rich people. And who were the rich? Well, it was his Norman barons because they took all the land from the formerly from the Saxon rulers and barons.

You know, some became outlaws. Like this is where Robin Hood, you know, Robin of Lopsley. The story, you know, has its truthful origin because the Saxon rulers were displaced. Some became outlaws fighting the Normans. But the ruling lords who had the big estates, a lot of land, farms, they were Normans and William of Normandy, William the Conqueror had put them in place because they come with him. They were his fighters, you know, the leading army, key guys that helped him take over England.

Not all of England, London. He did not take over which makes us very suspicious. Instead he walked up to, marched up to London, he’d conquered the rest. But in London is where all the gold is and all the jewelry and wealth, and he didn’t even try to conquer it. That’s very strange. Of course, he had a lot of bills to pay to fund his army and his invasion, all the ships to cross the Channel. How did he pay for that? Well, my guess is it must have been the City of London paying him.

And the deal obviously was the City of London will not be part of his empire, of his sovereign rule. That’s the only rational explanation. Why would you conquer England except London, the one major target that you’d otherwise go straight for and forget about the rest, you know, so. So that was the deal. And essentially he was told, well, you can tax England, you can tax the rest of the country, but the City of London, the Square mile, which is today still separate, it’s within London, a tiny territory where the Bank of England and all the banks are, became a sovereign territory outside the sovereign rule of the King. And that’s true even today. So King Charles doesn’t have the permission per se to enter the City of London Corporation. He has to ask for permission. He’s not allowed to enter without permission because it’s not part of his sovereign.

ROBERT BREEDLOVE: There is a money power above even royal political power in London.

The City of London Corporation and Norman Rule

RICHARD WERNER: Absolutely, absolutely. And it’s a political reality that the City of London Corporation is a sovereign territory, it’s not part of the United Kingdom. We know from this, you know, the fact that the sovereign is not allowed to enter and it has powers over the United Kingdom because they have a deal going where they can attend all the parliamentary meetings with an unelected City of London Corporation representative. For what purpose? To make sure that nothing happens in Parliament. No law is passed that’s against the interests of the City of London Corporation. Wow. That is the reality in England.

So William the Conqueror had this deal and so he couldn’t touch London or, you know, he stuck to the deal. They funded, I guess they must have funded his entire campaign, but he was allowed to, of course, tax the rest. And that’s what he did. And of course it was mainly his Norman barons that were now these rulers of these estates. You know, he did the survey first, the Doomsday Book, quite an advanced survey for tax purposes of the land, how big it is.

ROBERT BREEDLOVE: Old school.

The Norman Exchequer and Tax System

RICHARD WERNER: Census, basically, yeah, census, who owns it, you know, how much can we tax? Tax is always the question. So whenever the government asks too many questions like that, you know, what’s coming next, taxes. And in Germany recently, a few years ago, they did this big survey of all the housing stock available. Everyone had to respond. It was unique and people are quite concerned. And of course, they then started to increase property taxes, asset tax on housing.

And so this tax was. The tax system was actually very sophisticated. It was the sort of center of. It was. This was the Norman Exchequer, which existed inside the royal treasury, which originally was in Winchester because that was the capital of England. London as a city didn’t exist. There was the city of London that’s just been, you know, ruled outside of William’s domain, outside his kingdom. Then there was Westminster, of course. Later it sort of merged and became the political London. But in those days there was only Westminster. But before Westminster became de facto the capital, it was Winchester, the old Saxon capital, where the Saxon kings are buried in the cathedral.

And so he had a new cathedral built and his palace built in Winchester. And in the palace was the royal treasury with the magic exchequer. Now, the exchequer is named after the chessboard cloth that was put on a very large table, which was a giant abacus for calculating numbers, namely taxes. The taxes were gathered. The tax collectors were the sheriffs, there were the reeves, the counts grafen in German, the reeves of the shires, the sheriffs, shire reeves, and they had to bring the tax.

Now, the system was the honest type of accounting, the single entry accounting, known as charge discharge accounting, because of the Norman exchequer, because the sheriffs were charged, they were the accused in that court, they were summoned twice a year. And based on the Doomsday Book, there was a total amount of money they had to deliver in taxes. Of course, it was proper commercial business. So they had costs and they could subtract the costs. There was a proper calculation, you know, you know, all the things they did, other people, they had to pay all their coercion cost. Well, you know, do you have maintenance, you’ve got horses, you’ve got staff, you’ve got this.

ROBERT BREEDLOVE: But these guys are physically going out into the countryside and extorting people for money. Yeah, and then remitting it.

RICHARD WERNER: But it came. But just to make clear it was not from ordinary people. Ordinary people had zero taxes. It was the large landowners they were extorting from the large landowners. But that was the deal they had with William. I mean, they were given the land by William. You know, essentially the king owned all the land that was the Norman system, and then gave it out as lien. He could actually take it back if you wanted to, but they had to pay this tax on it. But ordinary people that didn’t own an estate had zero tax, you know, so it wasn’t that bad as a system. But what they then did was quite clever. So they had this big, this big chessboard which, where the calculations were done, it was essentially a giant abacus.

ROBERT BREEDLOVE: And this is because they’re using Roman numerals still.

The Origins of Financial Terms

RICHARD WERNER: Exactly. And it’s the same in the Chinese system because when you have, you know, 1, 1 line is 1, 2 lines is 2, 3 lines is 3. Like in both Chinese writing and Roman writing, it’s very hard to do calculations, even abacus. So both the Romans had an abacus and the Chinese and the Japanese have these abacuses for calculators. Of course, nowadays everyone uses calculators.

ROBERT BREEDLOVE: Well, once we got zero based numeral system, it makes calculation a lot easier. And you don’t need these.

RICHARD WERNER: Exactly. Yes, exactly, precisely. Now so that was the name of the source of the name. This exchequers, the Normans were speaking French and in French it’s check, you know, it’s the name for chess, it’s chess board. Now this Norman exchequer had these two sessions twice a year where the sheriffs were summoned. It was a court, a high court. And there were court proceedings and there were the accused.

And in these court proceedings they then had to bring the money or the evidence, the receipts, if they’d spent something on permitted expenditure, bring the receipts, you know, it’s just proper accounting. It was also spoken. So it was auditing audira to listen. There were all the experts were listening. It was a court of audit as well. And records were made. The records were issued, were written on cow skin vellum and rolled up. It’s quite thick and lasts, you know, a thousand years. So this was a thousand years ago. We still have those records. They were rolled up as a counter, you know, check. And in French that is contre roll, the counter roll to check. Contre roll. This is where the word control comes from. From the contra roll of the Exchequer. The word check. Writing a check comes from the Exchequer and. And for good reason, because there were.

ROBERT BREEDLOVE: Checks issued and audit, an auditory had a connection.

Tally Sticks as Money

RICHARD WERNER: The audit comes from there. And the checks issued were the tally sticks. Now what were they? They were essentially a wooden stick which notches were put in and then it was split in half. It was the split tally that created what in Bitcoin terminology we call a public key and a private key. The longer bit one was longer, one was shorter. The longer bit was kept in the Royal treasury as a sort of public Key and the, the well, or you can call that the private key. And the other one was circulating, and the shorter one was the stock from German stock stick, because there’s a stick of wood that was circulating.

Now, these tally sticks were tax receipts. So when the sheriff had paid taxes, he received the receipt. And they were valid in future, because you met twice a year in a future exchequer session, you could use them as receipt that you’ve paid tax to the government. And so they circulated as money. It also meant that the government could spend without limit. There was no budget limit, and therefore there was money creation. Because the government, the king could say, well, we need to buy some more cows, we need meat or we need horses, whatever. You go to the estates where there’s the farms and the resources. Well, okay, we acquire these. What is the price? Okay, we agree on the price. Here’s your payment. It’s a tally stick. It’s a tax receipt. Because now you’ve paid future taxes to the government and you can use in the future.

ROBERT BREEDLOVE: Okay, so they’re giving them a tax credit.

RICHARD WERNER: Exactly, it’s a tax credit. And. And so, of course, money is whatever you can use to pay taxes. You know, that’s another in the status paradigm, reliable definition. If you have taxes, then of money and what will be accepted for money. And it worked because you couldn’t forge these because of the split tally. Because when you split the wood, you’ve got. It’s like a fingerprint. The grain of the wood is unique. So you could always check, go back to the royal treasury. I think this could be fake. Okay, let’s check. And you put them together. If they match, they tally. And if they don’t match, because the. So one was the stock and the one kept in the treasury was the foil, the don met, you were foiled.

ROBERT BREEDLOVE: Foiled, yeah. Wow.

RICHARD WERNER: So all these expressions come from there.

ROBERT BREEDLOVE: And stockholder came from there.

RICHARD WERNER: Yeah, Stocks and shares comes from that tally stick. Because later, when the government was then issuing government debt, it would be called a stock because that’s how the government, you know, because basically issuing these tax receipts was a debt that the government had.

ROBERT BREEDLOVE: Interesting.

RICHARD WERNER: And so that’s where the first government bonds, you know, came about. They were stock and they were called stocks.

ROBERT BREEDLOVE: Yeah.

RICHARD WERNER: And then of course, later it was used when companies do the same, you know. Okay, let’s call. Call it the same. Yeah.

The Origins of Nation States and Monetary Systems

ROBERT BREEDLOVE: It’s so fascinating that the origins of kind of these bear asset tax credit monetary instruments and the origins of the modern nation state go so closely together. Because what you’re describing here, it is kind of this hierarchical extortion scheme, right, where you’ve got the, what did you call it? The Equity Court. The Court of Equity.

RICHARD WERNER: Yeah, it’s a High Court of Equity.

ROBERT BREEDLOVE: High Court of equity. But then they’re creating these sheriffs basically to go and extort people out in the country on land that they own presumably. So they’ve lent out the land on lean, but then they go and extort people. So it’s very, I mean it’s very telling about just how social organization has evolved. You know that we have these, you know, history books and often in history class, you know, there’s these kind of moral crusade stories told. We’re like, oh, this country was evil and this country was good and then the good guys won and then, you know, the good country was set up and this is how it worked. But that’s not actually how it is, it’s these payment schemes, right? It’s the flow of funds that determine how society actually organizes itself.

The Norman System and Money Creation

RICHARD WERNER: And of course who’s in control of those and the control the money creation. Now that. So the Norman system was really very successful. As a result, Norman England was really wealthy. It was a high growth economy, fantastic wealth was created and they used it, they were Christian, they used it to build cathedrals. Unbelievable. And of course castles. The number of castles and cathedrals built in a short time period is just mind blowing. And it wouldn’t have worked without the money creation process being used because gold and silver, you know, would have been insufficient. The government would not have been able to control resources based on gold and silver. But in this way the government could lay claim on resources and also motivate people, pay people, which is why it worked.

And of course perhaps it’s a good moment to come back to the modern system because who didn’t like this? Well, the bankers didn’t like this because the government could now issue debt without interest, without paying interest. And the bankers were not needed. Same in Babylon, when the government issues this claim money, the bankers are not needed, they had interest and you could borrow at interest. But they also realized because from the King from the government, you could borrow at interest. But they also realized that this leads to massive inequality. So whenever King died, all the debts were cancelled, the slates were wiped clean. The jubilee.

So and we adopted the system with interest. But we don’t have a solution to the massive inequality that compounding interest creates. Because essentially you’re taking from the many you give to the few who receive coupons and government bonds. And they have developed their own propaganda to encourage an economics as part of this mainstream economics, to encourage Keynesian economics to encourage debt issuance and government debt. It’s wonderful for those who live off government bonds.

ROBERT BREEDLOVE: Sure.

RICHARD WERNER: You know, 37 trillion in U.S National debt. Unbelievable.

ROBERT BREEDLOVE: And no jubilee ever.

RICHARD WERNER: Exactly. And so, and MMT you know, people like that, they’re all about, oh, just more spending is good, there’s no downside, just keep spending. Wow. And of course the users and rentiers living off the coupons and government bonds, they love it. Yeah. Keep, keep it coming, keep it coming. So now the Norman system was, was therefore very successful and it lasted for centuries. The tally sticks were used right until the 19th century.

ROBERT BREEDLOVE: Wow.

RICHARD WERNER: Even when the Bank of England as a privately owned central bank was created, some of the shareholders paid with tally sticks. It was accepted. But of course the bankers wanted to phase out the tally sticks because that was a competing system. Because principle. The idea is, as we said earlier, once you create a central bank, the government should stop issuing its money, its debt, its money. By issuing money for spending and putting into circulation, which means there’s no interest to pay. Just stop doing that and instead borrow from the bankers at interest. When the central bank comes into play in the Bank of England was all about lending money to the government at interest.

ROBERT BREEDLOVE: Which is still how we do it today.

Central Banking and Taxation

RICHARD WERNER: Exactly. And so that’s why when the central bank is created, usually it’s all about okay, which tax are we going to introduce and how we’re going to make sure there will be an income stream from taxes based on just burdening ordinary people with this to pay that interest to the small group of people who own a central bank in the Federal Reserve. The Federal Reserve banks are all 100% privately owned.

ROBERT BREEDLOVE: Yes. So you have to create demand for those monetary instruments such that people will. There’ll be reservation demand for them. Therefore it will have purchasing power, which is done through taxation.

RICHARD WERNER: Taxes. Yeah.

ROBERT BREEDLOVE: And therefore people’s. The labor of the taxpayer becomes the collateral for that scheme. So they can actually siphon actual. The products of human labor can be siphoned through money printing.

RICHARD WERNER: Yeah, yeah, yeah, yeah.

ROBERT BREEDLOVE: But people, again, it’s like people don’t understand that flow. So they’re just okay, you know, use whatever money they’re told to.

RICHARD WERNER: That’s right now. And so of course, if you look at the Bank of England that essentially this system of private banking took over and you know, I explained the story of the goldsmith bankers which became the bankers. And so now that’s what we have. The banks creating the money supply, the government creating no more money, and the central bank creating only a tiny amount. And the majority is created by banks through lending. That means it’s very important what sort of banks you have in the country. If you have many small local banks, that’s good news because that is a very decentralized system of money creation of local banks which are therefore locally accountable.

ROBERT BREEDLOVE: Yes.

RICHARD WERNER: They can’t do strange and crazy stuff.

ROBERT BREEDLOVE: And if they do, they blow up. You don’t get systemic risk as much.

Small Banks vs. Big Banks

RICHARD WERNER: Exactly, exactly. So the decentralized system is the best. Where you have many small banks also, of course it’s more egalitarian. It helps keeping this inequality in check. Because who’s the main employer in every economy? The US economy, the German economy, Japanese economy, Chinese economy, it’s always small firms. Small and medium sized enterprises account usually for 70 to 80% of all employment. Where do they get money from? Small firms can’t access capital markets because the minimum transaction fees are so high that it’s impossible. The ratios don’t work. They can’t justify borrowing millions. When you’re just a small firm. You can borrow $200,000, say, but not 10 million. Right. But then Wall Street is not going to talk to you. You can’t access capital markets because you have to pay all those fees and so on.

So the reality is small firms can only get money externally, beyond the sort of family and friends circle from banks. And that’s what banks, small banks do. Which banks lend to small firms? Only small banks. Because when a bank is big, it needs to do big deals, otherwise it’s totally unviable commercially. The trouble therefore is in banking systems where the number of banks is small and we’re have a small number of very big banks, they want to do big business with big companies and they’re essentially not lending to small firms. So having many small banks is best. They also tend to lend for productive business investment with these small firms.

Three Scenarios of Money Creation

And that brings me to these three scenarios we have. When money is created, is this created through bank credit? When money is created, there’s three possibilities. Mainstream economics only recognizes one of them, namely, oh, we create money that leads to inflation. Well that’s when credit is created for consumption because then you have more purchasing power, more demand, but you have the same amount of goods and services. Therefore now more people demanding goods and services, but the same amount of goods and services, you drive up the prices. That’s what we had in 2021-22 based on the massive money creation of 2020 under the pretense of some worst pandemic in human history.

ROBERT BREEDLOVE: So I was like putting the L on there plan-demic pandemic.

RICHARD WERNER: Yep. Yeah, exactly. Very artificial crisis which people say, well then that caused all these problems and the war, Russia and Putin, that’s caused the inflation. It’s not true at all. It’s just the central banks. That’s right, that’s it. They created the money using QE of the type I originally recommended for Japan. Which is why in 2020 when they saw the data in May 2020, I put out my tweets saying, well, we’ll get significant inflation now in 18 months time. There’s no other way. And that’s exactly what happened, irrespective of what then happened in Ukraine or other things. You know, it’s just not relevant. It was the massive, massive, massive money creation, this QE before we come to QE actually.

So there’s three scenarios. So one is bank credit for consumption leads to inflation. Yes, but what about bank credit for productive business investment like by these small firms? That doesn’t lead to inflation because you’re.

ROBERT BREEDLOVE: Increasing goods and services a portion of the money supply.

RICHARD WERNER: Exactly. So you have money creation. Yes, but you’re using it to reorganize a selection of inputs in such a way that you get a new product because usually it’s a new idea, new technology, increasing productivity. You add value so that the value is higher than the sum of the price of the cost of the components. Right?

ROBERT BREEDLOVE: Yes. Presupposing that the capital is being allocated intelligently and the businesses are successful in producing goods and services.

RICHARD WERNER: Right. And of course, you know, it’s not always the case, but it doesn’t matter because you have large numbers. Particularly when we’re talking about small firm lending. It’s usually over collateralized. It’s the safest form of lending. There’s never been a banking crisis based on too much small firm lending and you can afford a small number of defaults there. It’s not going to be a dramatic problem. It’s very different. We talk of big banks and big deals they’re doing so productive business investment is bank lending. For productive business investment is the best form. It creates growth without inflation and jobs and wealth. That’s really what we want.

ROBERT BREEDLOVE: It does detract from there’s foregone price deflation because you’ve increased the money supply to increase the output of goods and services. Had you not increased the money supply and just increased the output of goods and services, general price levels would have declined. So that sort of gets washed when you have the expansion of the money supply to do that. So there is like a foregone benefit. But to your point, there’s not price inflation per se.

Asset Inflation and Banking Crises

RICHARD WERNER: Exactly, exactly. And of course, the third possibility is if banks create credit. And it’s not even used for GDP transactions, it’s used for asset purchases, to buy real estate, land. That’s not part of GDP. Because GDP is a value added concept. If you just change the ownership of assets.

ROBERT BREEDLOVE: Yes.

RICHARD WERNER: There’s no value added.

ROBERT BREEDLOVE: You just have asset inflation at that point.

RICHARD WERNER: Exactly.

ROBERT BREEDLOVE: Yeah.

RICHARD WERNER: Now that also explains this puzzle of the velocity decline I mentioned at the outset. Velocity was declining, the money demand function was unstable. And also you could express it as the mystery of the missing money, because the money supply grows, but GDP doesn’t grow as much. Where’s the money going? Well, it’s because the old quantity equation MV equals PY is wrong, of course. Even though the textbooks say, oh, it’s true by definition, always and ever. No, you’re assuming all money goes into GDP. That’s not true. There are non GDP transactions, the asset transactions. And a lot of bank credit is granted for buying assets, financial assets, real estate, and that’s not part of GDP. But it does create asset inflation.

ROBERT BREEDLOVE: Yes. And so because people are trying again, you’re compromising the store value function of money when you’re printing it. So people naturally try to put their purchasing power in assets that can’t be printed, like real estate, commodities, equities. So you’ll get this asset inflation, which is a means of escaping the consequences of the expansion of the money supply. So it’s almost like the faster you expand the money supply, the faster you’ll expand assets, depending on how concentrated wealth is.

RICHARD WERNER: But of course, you’re not actually able to escape. You’re sort of able to postpone. Because what happens is this asset inflation is a Ponzi scheme. It will continue as long as you create more credit for more asset purchases. And that usually happens. So for years this can go on, sometimes decades.

ROBERT BREEDLOVE: You’re imputing a monetary premium to these other asset classes.

RICHARD WERNER: Yes, but really the moment the music stops, the moment you stop lending for more asset purchases, asset prices won’t rise anymore. So then initially the late coming investors that bought at the peak, they need further rises for their calculations to work out out it’s not happening. They start to default, start to get non performing loans, the banks start to get cautious. They actually reduce credit now for asset purchases. Now asset prices start to fall and then the whole thing, it just goes into reverse and you get a lot of non performing loans and usually from the peak because you know you boost asset prices by 2,300% from the peak. They just need to drop by, I don’t know, something like 20% depending on how big the asset lending share was. And that’s enough to wipe out entirely the banking system because they only have 10% equity.

ROBERT BREEDLOVE: Right? Right. This closely mirrors Mises. His Austrian business cycle theory basically says once you start printing money, you either have to keep printing it and keep running that Ponzi scheme until the currency hyperinflates, because if you stop at any point you’re going to get this catastrophic deflation and widespread collapse.

The Quantity Theory of Disaggregated Credit

RICHARD WERNER: What the Austrians haven’t done, and same for MMT is they have not disaggregated credit, which is what I’ve done in my quantity theory of disaggregated credit into these three different possibilities. The credit for non GDP transactions for assets. And so you get two quantity equations. One is first of all I replace M with C for credit and then subscript R credit for the real economy drives, that’s nominal GDP. That’s similar to the old equation, but you have specifically credit only for the real economy, right, which includes consumption, but for investment. And then you’ve got CF credit for financial or asset transactions. And that is not connected to GDP at all. That’s connected to asset values and asset transactions. And that works very well. It’s very stable. We get a stable velocity. All the puzzles are solved with this.

ROBERT BREEDLOVE: Equation that also is driving the disparity between rich and poor. Right? Because you’re increasing the value of assets, assets and asset holders at the expense.

RICHARD WERNER: Of those, of course. Exactly. That’s right. So if you want to grow an economy, which is always possible, you can do so by, you can always do so by increasing bank credit for productive business investment. Even at full employment, you can always have higher growth. That’s of course how the high growth economies did it in Japan, China, Korea, Taiwan, Singapore. You make sure that bank credit creation is mainly for productive business investment. And it can be, can expand by 15, 20% and you get 15% GDP growth for years. For years. And of course if you’ve got 15% national income growth, then you every year after four and a half years you’re doubling national income. Every four and a half years you double national income. And that’s what they did. That’s how you move from developing countries to status to develop country status in a generation.

ROBERT BREEDLOVE: Amazing.

RICHARD WERNER: You need this double digit growth and it’s been done. And the only way to do it is credit creation for productive purposes. They did this through so called window guidance, guidance of bank credit through the central bank by telling the banks no no asset loans and no consumer loans. It has to be for productive business investment.

The Japanese Real Estate Bubble and Capital Flows

ROBERT BREEDLOVE: Can I ask you about. There’s two things I want to ask you about. You tell me which order you told the story last night about the Vikings in Paris, which I want to get on to some point. But also I think maybe the natural place to go now is Japan, the real estate market. This was in the 80s, I think, and as it pertained to it being used as collateral for international flows and how you came to that conclusion when this was a very serious mystery for everyone else.

RICHARD WERNER: Yes. Yeah, well, let’s talk about that. The capital flows and of course that’s always a current story.

ROBERT BREEDLOVE: International mix in the Japanese truth telling here that you talked about last night was very.

RICHARD WERNER: Yes, well, I learned a lot. I learned most of the things in my 12 years in Japan. Initially as a student in Japan, they have this, this idea that there’s two truths. The official truth. And in any official meeting it’s only going to be the official truth, which everyone knows is not true. And the real truth. The real truth you’re allowed to speak after hours, after sort of 6, 7 o’clock. It’s off the record. And that’s when everyone talks straight, the real truth. But you’re not supposed to quote people and say, oh, he said that, and that it’s supposed to be off the record. And because Japan is very formalistic, there’s a lot of that official truth. So people get very tired. They’re quite keen to actually, you know, let’s meet tonight, let’s talk straight, you know, about this. It’s too tiring to always be in this fictional world of official truth. And as a result, I mean, they’re quite keen to tell you the real truth. That’s how you learn about everything, including how central banks really work. The central bank has told me, off the record, the real truth, the banks, how the bankers do it and all the tricks of the trade.

Now, I was a student, I had this Position at the Development bank of Japan. And I had to choose a topic. And of course, at the time, this is the late 80s, end of the 1980s, Japanese capital flows were a big puzzle. Japanese money seemed to be conquering the world. But where was it coming from? And why so much money? Because it was more money than all the economic theories expected. And it was against the interest rate differentials, which usually are the main variable in the standard models. So it was a puzzle. My proposition was it’s probably somehow connected to the other puzzle, which is this real estate boom. People didn’t call it a bubble at the time. That’s only afterwards you call it the bubble. Once it’s burst right at the time, it’s an asset price rise that’s justified by XYZ usually, or productivity gains and all sorts of reasons why, why this is justified.

But it was extraordinary. You know, the, the little plot of real estate in central Tokyo connected to the Imperial Palace. The Imperial palace garden is not that large. I mean, it’s, you know, it’s decent, but had the same market value as the entire state of California, including Los Angeles, San Francisco, you name it. Crazy. Which is completely crazy. I mean, that’s. But to me, it seemed that if you have that sort of relationship, surely many Japanese landowners want to just own a little bit of foreign land because, you know, just for diversification, because you get much more out for your money.

ROBERT BREEDLOVE: Abroad you have a massive unrealized gain in your position, you might as well diversify.

RICHARD WERNER: Exactly, exactly. And so somehow I thought, there’s a link. But, you know, as a student, I was looking for papers that models theories that, that were linking real estate and capital flows. There was nothing until somebody pointed out, oh, there’s this paper by Jeffrey Sachs. He was in Japan with his, I think, PhD student, Peter Boone. And they wrote a paper at MITI about it, Ministry of International Trade and Industry. So I went there to the ministry and asked around. Yeah, yeah, we had these Americans here, Professor Sachs. Yes. And they showed me that. Here’s the discussion paper from meti. And I thought, great, I don’t need to reinvent the wheel. And these are famous. Jeffrey Sachs, famous economist. I’m just a student. And so that’s fine. I’ll just have a slightly different version of the same model. I quote him. That’s fine.

So initially, same idea of land bubble, capital flows. Extraordinary. Nobody can explain both. Surely there’s a link. So then they do the analysis, conclusion, there is no link. And why not? Well, the logic was, how did the Japanese cash in on this enormous real estate bubble in time, and they did invest abroad. So how do they cash in to then buy foreign assets? Well, you’ve got to sell the land, but to who? Foreigners weren’t buying it because it’s so ludicrously expensive. No foreigner would buy Japanese land. That’s true. So then it’s other Japanese buying it. But if other Japanese buying the money stays in Japan, therefore there’s no link was their conclusion. And I realized after some divine intervention that actually that’s wrong. That’s not how it works. The story is, of course, when, when we’re talking big money, one way or another, banks are likely to be involved. And so the story is you don’t sell the land. The land is used as collateral, and the banks are creating new credit, which is new money on the back of it. And some of it spills over abroad as capital flows. And so once I’d realized that, then I looked for the day.

ROBERT BREEDLOVE: This is a real mystery. At the time, as you were saying, people were saying, don’t look into it, it’s not worth it. No one can figure it out.

RICHARD WERNER: All the experts had told me, this is impossible, this puzzle can’t be solved. You know, all the capital flow experts and financial market experts and Jeffrey Sachs saying the opposite. So here I was, you know, a student who could solve the puzzle. It’s still the only paper published in the Review of International Economics, 1994. Japanese asset prices, Japanese Capital Flows and the asset price bubble, something like that, is the type. It’s the only model to explain the huge surge in capital flows, but also what followed, which was a complete collapse in capital flows. And so of course that also couldn’t be explained with standard models. But in my model worked very well because the driving variable is bank credit for real estate purchases. And that collapsed first. And then Also from the 1990s onwards, capital flows collapsed and actually Japan became a net import of capital.

So it all goes back to bank credit. And I realized, wow, this is such a powerful variable. Surely many other things can be explained by it. And I did some tests and I could explain, if you disaggregated, as I had done, credit for the real economy, excluding these real estate and asset credit, then explains GDP very well. And velocity doesn’t decline, it’s stable. So I could explain GDP growth, capital flows, and if you then look at the credit for asset transactions for real estate, it could explain asset prices very well. That’s the model I’ve been using ever since.

And it works now I then developed a policy recommendation of this because also I realized, wow, this huge asset bubble that happened the 80s, it’s a bubble and it’s now beginning to crumble. This is going to be a banking crisis. So I was one of the first ones to point out, because you have to remember in 1991 when I wrote this, the top 20 banks in the world were all Japanese, right?

ROBERT BREEDLOVE: Yes. People thought Japan was taking over the world at this time.

RICHARD WERNER: Japanese money was going to buy up the world. The Japanese century, the 21st century was going to be the Japanese century.

ROBERT BREEDLOVE: And this was really just a giant credit bubble blown.

RICHARD WERNER: So my conclusion of this paper is published as an Oxford discussion paper back at Oxford in 91. The great Yen illusion I called it, was that Japanese banks were likely to go bankrupt and Japan was likely to move into the biggest recession since the Great Depression. And I’ve been using, I mean, my entire career basically has been built on credit creation analysis. I mean, I then became chief economist at a British investment bank. It was quickly a top in the top three. First number three, then later number one economist on Japan. Using my credit model, I could explain economic growth, which previously had been pretty difficult for people to forecast and explain what’s happening in Japan became very, very clear. And the data is very good in Japan, if you know what you’re doing.

And of course, I then could also apply to many other things. I mean, to analyze history, you get a completely different view. History has to be rewritten with the understanding of who is creating the money supply and who’s buying those politicians. Otherwise historians just study the front men. Okay, here’s Caesar, here’s Napoleon, here’s Adolf Hitler, you know, whatever. Well, why are they in power? Who’s funded their rise? Right. Who’s backing it? Follow the money.

ROBERT BREEDLOVE: Follow the money.

Quantitative Easing: Origins and Implementation

RICHARD WERNER: And you find out. And of course, you know, particularly the First World War, Second World War, I mean, the games played by the central bankers is just really shocking. I hope we’ll have another opportunity to talk about that.

Yes, but what I’d like to still draw out of this and explain is coming back to one of the points you mentioned: quantitative easing. So I realized Japan was going to go into the biggest recession since the Great Depression. But I also realized it’s unnecessary. We can quickly come out of this if you take the right steps. And that’s what I then published in the Nikkei, the Nihon Kezai Shimbun, as a policy recommendation, which I called quantitative easing, a new monetary policy.

Until then the concept hadn’t been used, which is to expand. I mean, basically the audience now knows the answers. You know, what do you need? You need credit creation for productive business investment. But your banks are now bust. After all this, after the bubble, after the bad policies and credit for the wrong things for asset purchases. Well, it’s just a numerical problem, right? It’s an accounting problem. We don’t need to have a recession and unemployment for an accounting problem.

So how can we make the bank balance sheets good again? The problem is the banks thought they had 100 assets. Now it’s only 20 because 80 is non-performing. So no problem. So my first advice was QE1, the first version of QE, to heal the banking system balance sheets. The central bank buys the non-performing assets at face value. So the central bank buys them at 100. The banks now have 100 and it’s cash. I mean, the strongest balance sheet, the highest liquidity ever. So the banking system is fine. You may say, hang on, aren’t you just shifting the problem to the central bank? No, because…

ROBERT BREEDLOVE: Well, no, you’re shifting it to the taxpayer.

RICHARD WERNER: Ultimately, no. There is actually no cost. This is the shocking thing. There’s no cost. It’s a free lunch if you want.

ROBERT BREEDLOVE: If the lending is done productively, which is a big issue henceforth, but that’s the future.

RICHARD WERNER: You see, we’re talking about the past problem.

ROBERT BREEDLOVE: My question would be this. I hear what you’re saying. If the lending is done productively, then it does feel…

RICHARD WERNER: But that’s the next step. We’re just talking about this, cleaning the bank balance sheets.

ROBERT BREEDLOVE: Okay, well then maybe it’s the second question, but wouldn’t the decentralized free banking model be the best way to actually…

RICHARD WERNER: Oh, I’m all for decentralized banking. Absolutely. And of course you’re talking about how to avoid this in the first place. And yes, you have to make sure there’s competition between banks. Many, many small banks. Basically, a free banking system is a good way of dealing with this. You could have some regulation, but within limits. Banking is totally over-regulated. There’s no doubt it’s the wrong regulation. So we still have banking crises and there will be another one. The next one is in Germany in the next two, three years, a massive banking crisis taking down all the banks.

The Creation of Asset Bubbles

It’s always the same game. The ECB has now done again what the Bank of Japan had done first, because the bubble of the 1980s in Japan was created. Why did we have these land prices? It was the banks creating credit for asset purchases, driving up those land prices. It was totally artificially created. But why?

I researched looking for smoking guns. Why were the banks doing this? I asked the loan officers that were actually loan offices in the 1980s. And they were literally giving out those loans. And they told me, “We’re looking back at the edge. Oh, crazy days. I was giving out these loans for companies that weren’t even our customers. I cold called them, said, here’s the real estate. I’ve done the calculation. You just sign, we give you the money, it’ll go up, you’ll make money, we make money.” That’s how aggressively they’re pushing these real estate loans. And they would say things like, “Wow, this is really dangerous. I think we’re creating a bubble there.”

ROBERT BREEDLOVE: That sounds a lot like 2007.

RICHARD WERNER: Yeah, yeah, exactly. It’s always the same game. So why did you do it? “Oh, I had to do it. I was given orders, I was given instructions.” By who? “By the branch manager.”

Next, I interviewed the branch managers and the branch manager said, “Oh, crazy days in the 80s. I was telling my loan officers to increase bank credit for real estate transactions like massively. We’re probably creating a bubble there. It was pretty risky.” Well, why were you doing it? “Well, I was just following orders. Headquarters were telling me strategic planning department at the bank.”

Next, I went to the strategic planning department of some of the big banks. At the time, I was visiting research at the Bank of Japan. So I had a Bank of Japan name card. It was easy to arrange these meetings. Bank of Japan, okay, certainly. And some also I met then for dinner where they were speaking the truth. But anyways, it was because I had the Bank of Japan card. They felt they could actually say what happened because it was a Bank of Japan story, as it turns out.

So the strategic planning department told me, “Oh, crazy days in the 80s. We were telling our branch managers to increase real estate lending like crazy. We’re probably creating an asset bubble then. And you know, it’s probably quite risky what we did.” So why did you do it? “We’re just following orders.” By whom, maybe the CEO of the bank? “No, it was the Bank of Japan. It was the window guidance and the key guys at the Bank of Japan, the key guy deciding this was somebody called Fukui.”

And they told me, “By the way, this Fukui, he was doing this in the 80s. He’s known as the Prince.” Why the Prince? They use the English word. I mean, the whole thing is Japanese. But suddenly in English, you know, “prince.” Why is he the prince? “Because he’s been selected as future governor. He’ll be governor of the Bank of Japan.”

And these key guys, the Princes of the Yen, name of my book, which you can get at quantumpublishers.com, this and the full story with all the evidence and their eyewitness accounts by the central bankers when they were quite willing to speak about this, because I did this research in the early 90s when nobody realized this is going to really blow up big way.

And so these princes were selected so early on because it was a bunch. It was basically, this is how you run a cartel, this is how you run organized crime. It’s about loyalty. They were selected 30 years before they became governor as future governor. I mean it’s quite extraordinary.

Central Bank Manipulation

So the asset bubble of the 80s was created on purpose by the Bank of Japan is one of the major conclusions of my book, Princes of the Yen, which I proved with the eyewitness accounts but also with the data econometric analysis. And it’s undisputed, of course it became a bestseller in Japan, number one bestseller, ahead of Harry Potter for six weeks because it was revealing the truth, how the Bank of Japan on purpose created this method, the asset bubble. And then the crisis and recession, which is only what was still in full swing by 2001 when the book came out.

And so central banks are really very much in charge. That’s what you realize. They’re the ones that cause these problems. So the ECB has done the same in Germany. Created an asset bubble by forcing the banks to increase real estate lending from 2009 to 2022, massive expansion in real estate lending, real estate bubble in Germany. They then burst it by suddenly raising rates in 22. And the rest is going to pan out now slowly. It’s going to be history. This bomb is going to burst. It’s going to take the banking system with it.

Why? Well, I learned already 1989 from a banker, I was an intern at a bank. And this banker I was interning with had just come back from a lunch at the Bank of Japan. And he said, “Richard, you know what I heard of at lunch? 1989, top 20 banks, all Japanese in the world. The Bank of Japan wants to reduce the number of the big banks.” They were called Citibanks, big sort of money center banks consolidation. And there were more than 20, I think 23 or so. “They want to reduce the number of banks from the current, what, 23 or so to 3.” What? How’s this going to happen? Well, they’ve achieved it.

ROBERT BREEDLOVE: Same path.

RICHARD WERNER: Ukraine and asset bubble, the Ukraine crisis and of course the long recession, as I show in the book. Prince of the Yen also had the other purpose of breaking this system, which is too egalitarian for the likings of these central planners. It was a very successful system, giving a lot of wealth creation to everyone, to the ordinary Japanese people. And they don’t like that. And the idea was to break that system with a 20 year recession, which is what the central planners organized in Japan.

Different Types of QE

But you can get, and really the proof is in that you could have got out of it any time using QE. So QE1 is for the central bank to purchase non-performing assets from the banks. The banks are now whole. It’s not a cost to society or to the central bank because it’s not money creation. Money creation is when the banking system creates money and is injected into the non-bank sector. This doesn’t happen here. It’s an interbank transaction between the central bank and the banks. There’s no money creation. So it also can’t lead to inflation. And it doesn’t.

This is what the Fed did in 2008, by the way, Bernanke was listening to my proposal and when he became Chairman of the Board of Governors of the Federal Reserve System, that’s what he did. QE1 in 2008, because they recapitalized the…

ROBERT BREEDLOVE: Banks directly and didn’t do helicopter money. It did not create inflation.

RICHARD WERNER: Exactly. And that’s what confused a lot of people. They thought, wow, this…

ROBERT BREEDLOVE: But it did create a lot of asset inflation.

RICHARD WERNER: Of course, of course, asset inflation. Because you then have banks and this is the next step. You can lend, but what for? And that you’re always back to the three possibilities. If it’s for assets, you get asset inflation. If it’s for consumer credit, you get inflation. If it’s for productive business investment, you get growth without inflation. But that’s not what they aimed at.

So you have to blame the central planners. Again, they’re the ones that see the big figures, the aggregate figures, and they can make sure the incentives are right to get the right result. But they usually want different results.

Now I was convinced that even if you did that in Japan, because the bubble was so big and the pain was going to be so big, everyone realized our bank is bust. The bankers, even if you clean up that through central bank purchases, they will still not lend. So you’ll still get a credit crunch for a few years.

And I came up with a proposal I call QE2, second version of QE in which the central bank can force credit creation through the banking system. Namely, the central bank buys assets from the non-bank sector. When this happens, this is unusual because normally a central bank only deals with banks. But if it buys assets from the non-bank sector, the banks are forced to create the money for it.

My proposal was because Tokyo is a very dense city, it’s a great city, but it doesn’t have many park areas and park service, some beautiful parks, but in terms of, compared to other big cities, it’s very modest. Well, get the Bank of Japan to buy real estate because there’s going to be a huge real estate slump and turn it into parks. That’s all you need. You will force the banks to create money this way. Because this is non-bank purchases.

As the central bank now instructs the sellers of the land, their banks. You know we’re paying money, right. The banks get reserves on the asset side and they have to credit on the liability side, the deposit accounts of the seller. This is money creation. This is how a central bank can force money creation. They didn’t do it. They claimed, “Oh, we can’t do this.” Well, how come in March 2020 they could do it? This is what all the central banks did in March 2020.

ROBERT BREEDLOVE: Gotcha.

RICHARD WERNER: This is what the Fed did. And the figures were astonishing. Massive, massive purchases of assets from the non-bank sector, forcing the banks to create enormous money unprecedented in Fed history. And that created 18 months later, this double digit inflation.

ROBERT BREEDLOVE: Right, that plus the helicopter money. So you got asset inflation and consumer price inflation.

RICHARD WERNER: Well, they made sure that it was used for consumption because of all these programs, stimulus checks and various programs encouraging people to essentially business were encouraged to be unproductive by shutting down supply chains.

ROBERT BREEDLOVE: Yeah, yeah.

RICHARD WERNER: And then encouraging people to spend. Well, you gotta get inflation. Of course, with this massive expansion in the money supply.

Moral Hazard and Extortion Schemes in Banking

ROBERT BREEDLOVE: Sorry, you only have, I mean, I think we got about 12 minutes left here. But I want you to share your thoughts on the moral hazard implicit to all of this. You know, the fact that, you know, you sort of describe the origins, right, that had this, this extortion scheme. Now we have, I guess a less explicit extortion scheme. With central banking there is still the coercion. If you try to go into the money printing business, well then you’ll face legal, physical consequences. And we were talking last night about how this connection between the corruption of money and the corruption of media and the corruption of academia, it becomes very infectious that proceeds stolen through money printing are used to create pseudo scientific paradigms like Keynesian economics to justify the money printing which becomes this vicious loop. Could you just wax a bit on these things like how this, the corruption of money lends to this moral hazard and everything else.

RICHARD WERNER: Yes, moral hazard and extortion schemes. In fact, actually I’m just writing on my latest substack, which is at my substack rwerner.substack.com on this extraordinary extortion scheme in the pipeline mentioned by both the EU and the German government is likely going to start in Europe first. But usually other governments, when they see an attractive extortion scheme, the German government and the EU commissar, the president of the European Commission, this lady von der Leyen, and they talked about, oh, they’ve got, Germany has all these savings. Because you see German savers like to have the money just safe in the bank. So there’s a lot of cash deposits, savings deposits in the banking system and their simplistic thinking is oh, that money’s not used. We’re going to now utilize that money. Well, how are they going to do that? And I’m going through the possibilities which I think a lot of governments will be sadly looking at to get their hands on people’s money.

So we are in an era where there’s increasing centralization, increasing control and, but also decreasing respect for private property. And really they’re getting ever more aggressive about laying claims on people’s money. So we definitely expect more extortion schemes. That’s coming up now.

Now concerning the moral hazard question, when it comes to a banking crisis, my view is this. The banking crisis shouldn’t have happened in the first place. Now that it’s happened, we need to minimize additional costs from it. Like having a 20 year recession as a result of a bank crisis. That’s crazy. You’re adding more and more costs every year. Lost output, lost wealth creation that could have been there, which is crazy. So you need to quickly rev up the banking system again to be, and then of course hopefully regulate it properly so it does mainly productive business investment or deregulate it or deregulate it and make sure you have the right banking structure, namely many, many small local banks.

Yes, that’s how Germany did it. They didn’t need the window guidance, credit guidance, and they got the same result by having thousands of small local banks, which is what China did. This is how China became so successful, successful in 40 years. Deng Xiaoping, when he came to power in 1978, he said, let’s forget about ideology, let’s do what works. Japan is doing so well. 20 years of double digit growth, Germany’s been doing well, let’s study that. And he did. And he traveled to Japan, he studied Germany with his experts and they concluded and the Japanese told him, how many banks do you have? One bank, G bank like the Soviet system, one mono bank bank that’s not efficient. You need decentralized money creation.

And he did, he listened and he created thousands of banks, thousands of small local banks, credit unions, village banks. And instead of five people at the central bank deciding creation, allocation of the money, they had 5 million loan offices looking at a multiple of that in applications from small firms for, and that, you know, for loans. And that’s how you create money productively in a very diffused process and that’s very stable. So that’s the best way to do it.

But once you have a banking crisis, you quickly should get out of it and you should not use tax money for it. The moral hazard principle is whoever messes up should pay up. If the taxpayer calls this no. So that’s why you’re not allowed to use tax money. And that’s why the central bank has to do it. Because they messed up. It’s the central bank’s responsibility. Of course it’s not enough as a punishment. So you need to think of some other ways, like sacking the key central bankers who did this. That would help probably.

But there’s no reason why you can’t use the central bank to buy up the non performing assets. Because you see, the key point is this. When a bank gives a loan that later becomes non performing, the mistake was at the time when the loan was given. Everything else is spilled milk. So why do you add further costs to that, like a long recession by having a bust banking system when the real cost already happened in Japan, it was in the 1980s or in Germany in recent years until 22, all this property lending, that was a mistake. It shouldn’t have been done. It was done by the central banks telling the banks to do it.

ECB has been adamant they wanted to expand that and they gave banks the regulation and also squeezed the traditional lending, forced them to essentially move into real estate, also with their interest rate policies. And so if you once we get the banking crisis in Germany, my advice will also be, let’s get out of it quickly. But actually the central plan is they do the opposite. They say, oh, this happened because the banks made these mistakes, nothing to do with us. And use tax money. Taxpayers should pay for this. And also, well, that means we have too many banks now. We need to consolidate. And that’s what they want. Reduce the number of banks. Of course, they want to kill the largest number of banks in Germany, in Europe, is in Germany. And they want to kill those and essentially reduce what used to be 2,000 banks into just a small number of banks.

Solutions and Future Outlook

ROBERT BREEDLOVE: Isn’t the arsonist where they often trope about central banking being like the arsonist pretending to be the firefighter? They create this catastrophe and then they come in and say, here’s the way to clean it up. And of course, the way to clean it up completely favors further centralization of their power and control to set them up for engineering future larger crisis. And yeah, it is a very, very pernicious problem. And if you go into solution space, what do we got? We got physical gold. We’ve got bitcoin. How do you think we should be addressing this as a species? Because obviously we’re trapped. We’ve been in this problem pattern for over 500 years.

RICHARD WERNER: And of course, the fact is also that the central planners are still aiming for further powers to be transferred to them and for further increasing their control and their centralization. Central bank digital currencies is a huge threat to mankind. We definitely have to oppose CBDCs, that’s for sure. And it’s necessary to oppose even digital ID, because that’s the intermediate step to get to CBDCs. But this is a control digital prison. We need to avoid that at all costs. So that’s number one premise.

And then how do we secure freedom and independence? Gold. I’ve been a fan of gold for a long time, and that continues. It seems that the schemes the central plans have been using to suppress artificially the gold price are beginning to peter out. They’re in trouble. Lots of strange things happening in London with the gold market and gold derivatives. Bank of England can’t deliver all sorts of strange things. And of course, that’s been the reason why the gold prices recently shot up again. It’s still cheap. Gold is still undervalued. Think about the massive money creation we had since 2020. And gold has only doubled since, you know, early 2020 or something. Come on. Yeah, it should be more like $10,000 per ounce. I would say, not just 3,000, but anyway, that’s one thing.

Digital cryptocurrencies, bitcoin in particular. I mean, bitcoin is attractive as a concept. We have to just be cautious. I mean, I would say put money into Bitcoin, but be ready to cash in, for example, into gold. The moment it’s surged, I think there’ll be a huge surge in Bitcoin. And when it does the final run, I think it’s going to have a massive run, but upwards. But after that, probably the incentives by the central bankers are such that they want to shut it down and there will be a clampdown. They will try very hard to get all sorts of measures against it. And, you know, when they create big crises, they can probably also, you know, outlaw it, it’s possible. And they can cause problems to grow. And so. So I think one can play it, but one has to be ready to also cash out. When we get the big run, I think it still has a good run ahead of it.

Otherwise, real estate, if it’s in the right country, where we’re not just still in the bubble phase. Germany is past the peak. It’s going down, but still prices haven’t actually reflected that. They will go down another two, three years, I think, significantly. And other markets, I mean, in the US It’ll be interesting. There’s still the possibility that when there is a bigger financial crisis, and at the moment, I mean, this looks like it could be the trigger.

President Trump’s trade policy is not entirely unreasonable, but it’s a setup. The timing to me looks like a setup. The central planners pulling the plug, they already tightened credit a bit earlier, ready last year and the year before in some countries. And they want a patsy, you know, a scapegoat. And this is almost ideal. So this will be the. They will say always President Trump’s trade policy.

I mean, on tariffs in principle. Tariffs can be very helpful if they’re used to then, you know, combine it with an industrial policy and develop your own industries, which are helped by the tariffs. We don’t have that at the moment yet. I mean, we have the general idea that companies should sort of onshore again and have their, you know, factories in the US as opposed to in China. The question is whether that’s going to be sufficient. There has to be sufficient policy to expand your production domestically in order to benefit best from tariffs. Otherwise, if you’re just going to restrict international trade as a result, that’s of course not good for anyone.

But President Trump has a point that the US has been essentially the most attractive market for everyone to export to, and all the other countries have been usually less open. I think on a country by country basis, there’s a different story then Some countries have been quite open. Japan also was still criticized, but actually that opened up after the thanks to the bank of Japan’s 20 year recession. It’s now very deregulated and it’s quite open and the yen is quite cheap actually. So foreign companies do have a good chance now in Japan. I think that’s not really justified to have tariffs there.

But, but overall when there is inequality in this trade relationship, yeah, I think it makes sense to tackle that. But the way it’s done and the timing unfortunately could mean, I mean to me it looks like this is the setup for the really big blowout in the financial markets which will be blamed on President Trump. It was the second Hoover, President Hoover who did something similar in 30, 31 and so on. And then the Great Depression came.

ROBERT BREEDLOVE: Right.

RICHARD WERNER: So that is the. There is potential, that’s a bombshell to.

ROBERT BREEDLOVE: End on the Great Depression 2.0. What’s your time frame for that?

RICHARD WERNER: Well, the coming few years really. Yeah, we had sort of five years in in the US in the 1930s as this panned out, but as the central plan has continued to take the wrong policies. And this, this is what will give us indication whether. But the potential is definitely there for this to happen, sadly. And the risk is also fairly high in my view that this will happen. Whether it will actually happen will depend on the actual policies taken.

Because even if you have the worst banking crisis in history, you still can have an immediate economic recovery if you take the right central bank policies. QE1, QE2 usually is the combination. So we need to watch this carefully. I will do this and I will write myself substacks on our awareness substack following this up to see whether this is the big one or not. But at the moment the potential is there.

ROBERT BREEDLOVE: Amazing. Richard, thank you so much for coming to Miami. This has been awesome. You’re a brilliant speaker. So thank you for doing this. You mentioned your substack but maybe you could re mention that and also let people know where they can find you on the Internet.

RICHARD WERNER: Yes. So the substack is rwerner.substack.com A small fee I think $8 per month or cheaper if you get the year. My book Princes of the Yen is at quantumpublishers.com and I’ve got a for the academic research website which is called Professor Werner.org and a general one called Richard Werner.org which is more general and also has some. They also have emails and contact details. I have Twitter X accounts. Scientific Econ is one Professor Werner is another one, so please follow me there. At the moment, they’re still private, which is due to the very restricted permitted scope of discourse in academia. But I will let you in. Everyone will be let in, but I had to keep them private so they don’t grow that much. But I post quite a lot there too.

ROBERT BREEDLOVE: Wonderful. We’ll link to all that in the show notes. Thank you again for doing this and look forward to having you back soon.

RICHARD WERNER: Thank you very much. It’s been a pleasure. Thank you.

ROBERT BREEDLOVE: Thank you. Thanks for watching. If you enjoyed this episode, click here to find more just like it. And here to find our most recent episode. Also, make sure to like this video to help shine light on the corruption of money. And be sure to subscribe to this channel to stay connected.

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