I´m sorry for all the mistakes, because I´ve translated myself the article from Spanish into English.




   I am now retired, but I was Professor of Polytechnic University and taught the trunk subject "General Economy and Applied to Construction". When we came to the teaching of Money and Banks in Macroeconomics every year I said the same thing: "Someday I have to explain those important issues so that everyone knows them."

   Those issues need to be known, because many social problems with respect to money were dispelled and the functioning of banks will be better understood, resulting in greater social understanding.

   Specifically, the section "The Multiplication of Bank Credit" will surprise you by understanding what happens with your money when you enter it into the bank; students were like, "How come we haven't noticed it until now?

   The commercial bank is one more company, which has the legal expression of Public Corporation, but gathers its own characteristics that make it a peculiar company. As we will see, banks have the ability to create bank money, which is accepted as a general means of payment, which sets it apart from any other company.

   As a company, however, it maintains a balance sheet with its assets and liabilities. The first are the goods and rights, such as the following: furniture, computer media, the actions of other companies, the documents of the loans it makes to its customers, etc. The elements of liability are the debts and obligations of the commercial bank, such as the following: current accounts, bonds, loans from the central bank of the country, etc. Shareholders own the bank based on their share and receive the profits generated.

   I'm going to try to explain all of the above to you, it's all very simple. Whatever your level of study is, you will surely understand it when you read it and will be very satisfied to acquire those knowledges, as was the case with the students. In the article, however, we will finally see how bank mismatches are solved in the Cosmosociety or society of the future, which we already know from other articles. It wil be developped with the following Index:



1.1 Origin

1.2. The creation of money by the ancient banks


2. 1. Demand deposits

2.2. The creation of money nowadays by the banks

2.3. Circulation of bank money


3.1. Dinamic of the banks

3.2. Principles of management

3.3. The objective of profit

3.4. The two kinds of deposits


4.1. Case of a single bank

4.2. Case of many banks


5.1. The figure of the primary customer on demand and term deposits

5.2. The sharing of bank profits


6.1. Cosmosociety is necessary

6.2. The banking function towards the Cosmosociety



   The metal currency, controlled by the Government's initiative through the Treasury, and Central Bank banknotes, such as euros, both constitute legal money; but there is another kind of money, which is the one created by commercial banks, as we will see.

1.1. Origin

   The use of cash turned out to be historically inoperative for use in increasing commercial traffic. For reasons of caution and commercial ease, holders of cash realized that it was appropriate to deposit it in banking establishments, as they were responsible for checking the weight and law of the coins, in addition to their custody.

   The bank gave the customer a certificate, which guaranteed the deposit made. It turned out to be comfortable to use the certificates of deposit to release the debts, to the point that there was no need to resort to the cash, initially deposited in the bank. They therefore began to circulate banknotes, which certified the deposit made, which were accepted if the solvency of the issuing bank was trusted.

   Bankers soon warned that banknotes were circulating freely, and that the use of cash, which was the real guarantee of the deposit, was no longer used. Funds were withdrawn; but there were also new deliveries, so cash was accumulated in bank boxes.

   The next step was to lend on those funds, which remained idle at the bank. They then put into circulation unguaranteed banknotes of their cash deposit, which was higher that kind of money in circulation, than that of the cash held by the bank.

   Note in this curious description that banks lent bank money without correspondence with metallic cash, which did not exist, for which they charged interest, and based on existing cash in the bank's boxes that were not their property, but of the customers who had deposited it. The cash funds were therefore much lower than the certificates of deposit emitted.

   To understand the above you have to know well what is considered as money. Money is considered a means of payment to release debts, which is generally accepted by the public. That is, the significant thing about money is that it is generally accepted as a means of payment; it's worth anything. What is used as money has to have, however, certain characteristics such as having little weight, being transportable, being divisible, etc.

   The money we manage, like the euro, is just a kind of money or legal money. The following anecdote is said: "When America was discovered, a scribe was shocked that the Indigenous people used mollusk shells, as money, to conduct their trade and wrote that they were retarded savages." Actually the "retarded" was him, as those shells are money, as they were used as a generally accepted means of payment.

   The fundamental reason that initially influenced this whole process was fear of thieves, although banks sometimes behaved "similarly." Indeed, everything was fine until there was a banking panic, and the public went to those establishments to exchange the certificates for cash. Evidently, the deposited cash was insufficient, therefore, the panic increased.

   Finally, the State had to intervene in all countries by controlling the issuance of banknotes and definitively assuming that function itself. The institutional figure of the Central Bank, more or less controlled by the Government, which is responsible for issuing legal money, such as the dollar, will appear later.

   That means, too, that it is now the Government that runs the legal money-making machine, and it no longer has any higher controllers, allowing it to make payments with newly created banknotes even though it has no backup in gold or currencies. Now, if the public and the other countries accept it, everything is fine!

1.2. The creation of money by the ancient banks

   When banks began issuing banknotes without full metal backing, they were creating money, as they were generally accepted by the public. However, they had to be careful that there was enough cash in the box, to deal with differences in inlets and exits, so that the public would not be alarmed.

   There was, therefore, a metal reserve in the bank, which was a fraction of the banknotes in circulation. In this way, banks evolved, from being mere custodians, to being money makers, and naturally collected the profits derived from that power of creation. Although this may lead to rejection, things are like this, so we accept them and place our trust in them. God was once trusted, but now faith is concentrated in money and banks.

   There is, however, a huge positive effect on that bankers initiative; economic development would not have been possible without such a mechanism, for lack of means of payment. There was therefore a commercial substitution of the money-merchandise which was the cash with real value close to the nominal, such as the gold or silver currency, with the sign-money, since the banknote has no real value.

   This substitution was, however, decisive in addressing the growing commercial traffic, which emerged in the 18th and 19th centuries. It could not have been served on gold and silver coins, even if it was of low law in which the nominal value of the currency is less than its real value as metal, since it has been added a metal of lower value, such as copper.

   Banks, however, subsequently lost the possibility of issuing banknotes as in the past. Now only the Government issues banknotes, which are already legal tender and which we are all obliged to accept in each country. They also serve international trade, such as euros, dollars, rubles, etc.

   However, once the gap was opened, the banks continued to create another kind of money, bank money. It is another form of money, as we will see, that we all accept as a means of payment, and that is derived from the demand deposits that customers open in the bank.


   In one country there are, therefore, two kinds of money; 1) Legal, consisting of metal coins and banknotes issued by the Central Bank, such as the old peseta, called in our country Bank of Spain, which is generally accepted as a means of releasing debts, regardless of the personal credit of the person who delivers it; 2) Bank money, consisting of demand deposits of bank customers, which we see below.

2. 1. Demand deposits

   When a person has legal money it deposits it in a bank, just as it did in the past with the metallic cash. Then it is recorded in its accounting, that a debt or liability has been generated for the amount of that deposit, which is an asset for the customer. This function is implemented with the opening of current accounts.

   The demand deposit, therefore, appears as an accounting record of the bank's debt to its client. It knows that it can be mobilized that deposit through the checks it signs or the transfers it makes, which are taken care of by the bank, from its checking account. In this way, the public has an asset that mobilizes with simplicity.

   If the customer is a company, the bank account will appear in their chart of accounts to collect the value of the deposits, and it is obviously an asset account. For the bank, on the other hand, the demand deposit is a liability account, as it represents a debt to its client. This practice is analogous to that done in the past, when certificates were issued against deposits of cash made by the public.

2.2. The creation of money nowadays by the banks

   When a customer enters money into a bank, a primary demand deposit is constituted. Subsequently, based on that money, the bank opens new deposits to those customers who apply for loans. These derived demand deposits can also be mobilized by checks, transfers, etc.

  Banks will expand their deposit volume, giving loans and credits to their clients, to the point where they have no liquidity problems, to deal with differences between legal money in and outs, made by the public. Note that demand deposits are money, as they are accepted as means of payment. Checks are not, however, as there is no certainty of the existence of the deposit.

   The banks have therefore created bank money, which consists of all the deposits of commercial banks. Also note that bank money is not accepted by taxation, as is the case with legal money, but because the public relies on the functioning of banks, we believe in banks!

2.3. Circulation of bank money

   In any economy, checks are constantly being signed, charges and credits are being made to current accounts, granting and canceling loans with their corresponding deposits, etc.

   Again, with these practices, banks have enabled the increasing trade traffic of modern economies. Bank money moves like this with great ease, and the whole economic order is substantially based on that kind of money. In general, bank money has been far superior to the legal money in circulation. Commercial banks, therefore, occupy a vertebrating position of the economy.


   A commercial bank is a company, and as such has a profit plan, in order to be able to distribute money to shareholders. It is, in principle, a company, whose conception appears relatively simple, although very unique.

3.1. Dinamic of the banks

   The tasks of these financial intermediaries are as follows:

a) Receive funds from lending clients to whom they deliver indirect assets, such as term deposits or investment funds.

b) Provide funds to borrowers to finance the acquisition of real assets, such as housing or factories.

   These tasks are carried out with an unique characteristic: part of the liabilities generated are the demand deposits, which are bank money because the public considers it. Commercial banks therefore play, as we know, a strategic role of great importance in the economy because of its dual role of:

1) Creators of money.

2) Financial mediators between lenders and borrowers.

3.2. Principles of management

   Banks' lucrative activity is limited by the following causes:

a) The need for liquidity to deal with the demands of legal money made by the public. It is therefore a banking problem of constant decisions in the very short term.

b) Solvency, which means that the carrying value of their assets should not be less than the total value of their deposits. This problem has often been possible to solve it in the medium term by banks, based on not losing liquidity, which is what ultimately matters to the public.

c) On the other hand, the company's own profitability.

   The principles of liquidity, solvency (security) and profitability also apply to the bank's wide range of assets. A Treasury bond is more liquid and safer than a loan; but this one is more profitable. These asset conditions influence the development of the banking function.

   There is no simple formula that successfully resolves that triple interdependence of liquidity, solvency and profitability. Because of this difficulty, the banker's intuition must be accompanied, in decision-making, by the data provided through an adequate information system.It is necessary to know continuously:

1) The volume and structure of deposits.

2) Liquidity, profitability and maturity of all assets.

   All that must also be known on a permanent basis, because this business happen is strongly changing and dynamic.

3.3. The objective of profit

   There is a direct and immediate relationship between deposits and profitable assets. If a bank encounters excess of liquidity, it will attempt to create derivative deposits through credit transactions to its clients. This will increase the bank's profitable assets; but also deposits, which is a liability.

   The profit target drives banks to generate deposits, so they can acquire profitable assets. If a customer borrows, the bank will pay their value to the current account and apply an interest rate on the transaction. The following has therefore occurred: an extension of deposits; the holding of an asset, which is the customer loan document; a return on the value of the same.

   The pursuit of profit has, however, a double limitation: the need for liquidity and the legal imposition of maximums on the total formation of deposits, the control of which is borne by the Central Bank of each country.

   Banks are required to have LR legal reserves, which are a certain C1 ratio of total DD and DP term deposits, even if the latter are not bank money. Banks should also have additional AR cash reserves that absorb differences between inputs and outputs to stay within LR legality. In total, the TR Total Reserves , as seen below, are:

LR= C1 (DD + DP) TR= LR + AR

   Banking activity, therefore, involves a constant and fluid restructuring of assets and liabilities. It must agree with the principles of liquidity, solvency and profitability that need to be coordinated, taking into account other business objectives. All this is reflected in the structure of the bank balance sheet.

3.4. The two kinds of deposits

There ae then two types of deposits of different nature, but which also appear as current accounts:

1) Primary deposits.
   These deposits are born when a customer makes an income into their current account, increasing the demand deposits at the Bank. This type of income has some stability, and the bank expects a certain average balance to be maintained, due to these deposits.

2) Derived deposits.

   These deposits are the result of the bank's active operations. Based on excess of LR on the required one, banks open derivative deposits in their lending operations to their clients. This way: they create money, collect interest and act as financial intermediaries.

   As already said, this function is legally limited, as the bank must have a total of deposits, which depends on the mandatory cash ratio C1 imposed by the Central Bank of the country. This limitation ensures liquidity, and so can the latter more easily structure the composition of its deposits.


   In the quest for balance, commercial banks continuously structure their deposits and the assets they acquire. When a liquidity change occurs, a set of actions and reactions is put into operation, leading to a new equilibrium situation. Let's then consider the sequences that can take place by increasing liquidity in a commercial bank in the system.

4.1. Case of a single bank

   We first consider a hypothetical example, in which there was only one bank. It will not fear, when its liquidity increases, that funds will be drained, when the value of the deposits created is withdrawn from the public. In this case of a single bank, all exits return to it, if we assume that the public does not retain a higher proportion of legal money by increasing their deposits.

   If the legal cash ratio C1 is 4%, and a customer generates a primary deposit of legal money 100, the bank can, for example, do the following restructuring of its profitable assets:

Acquisition of Public Funds.. 500

Acquisition of private values 900

Granting loans and credits 1,000

Cash reserves......................... 100

Total..................................... 2,500

   In this way, the bank has opened derivative deposits worth 2,400, with a certain management of the liquidity, risk and profitability of the assets it has acquired. The bank money created is 2,400; bank reserves 100 remains at 4% of total deposits 2,500. Bank money worth 2,400 has been created, as we see.

   The public will mobilize by checks the derivative deposits opened by the bank, and the recipients will enter those checks in the single bank. In this way, there is no decrease in the total volume of deposits, so the bank reserves does not vary. There is, therefore, complete stability, which allows it to perform the operations described above.

   Thus there has been a multiplication of bank credit, due to an increase in liquidity; but with the limitation of maintaining the legal ratio 4% so that there is balance between income and payments in legal money. This is obviously a hypothetical case, but it is illustrative of the specific functioning of all banks.

   There also are other ways for explaining this process of the multiplier of bank credit, but are not so easy as this one. The relevant for us is to see how the bank obtains profits with this process with a money that is not itself, thanks to the credibility of its customers. It is like prestidigitation, because the private values, as the actions of its customers are now of itself without paying them actually.

4.2. Case of many banks

   Let's say now that there are many banks, and that there is an increase in liquidity in one of them. It could not fully develop that previous expansion, as it would experience bank losses as a result of withdrawal of funds to other banks. In this equilibrium position, all banks have seen their holding of profitable assets increased with the possibility of higher profits, as shown in my Macroeconomics book (Ed. UPV).

   If, for example, the legal cash ratio is lowered, banks would encounter an excess of bank reserves, which would prompt them to increase their assets. The public would thus find greater credits, allowing for an expansion of economic activity.

   It should be noted that the success of expansive policy depends on banks effectively abating it through the sequences described. The Government has a greater initiative in the case of a policy that increases banking reserves, as banks would be forced to restrict their activity, therefore, also reducing overall activity.


   Everything we have said above has a significant impact on the members of the Consumer Society, which we need to know.

5.1. The figure of the primary customer on demand and term deposits

   We remember that it is a lender of the banks, because it deposits its legal and banking money in them as a result of their operations. The bank, therefore, makes it a credit to their current account in bank money, which is an asset to it and a liability to the bank. From here various operations are initiated.

   The primary customer will then make purchases, asking the seller to upload it directly to its account, because it has it arranged with it, or it will pay it on a visa. In both cases it trusts that the bank will owe it its payments in the current account, which it will credit to the seller's current account.

   However, no legal money has been mobilized, but everything has been done with bank money; but why is this happening? Because all customers trust that bank money is money, so everyone accepts it as a general means of payment. They actually think it's money because banks are trusted, although they really only keep a bank score on the computer. There's no more, there's only one computer ghost! but people believe in it with faith.

   We then draw a first consequence for public behavior in banking panics. In the past, customers deposited their cash in banks, with a value as a merchandise; then, if there was a banking panic everyone wanted to get their money-merchandise back. Now it's different because bank money has no physical existence. In addition, it may even be that the lender client did not impose legal but bank money, paid perhaps by its workplace, so it cannot claim with right to be given legal money in exchange for the bank if there is a general panic.

   There is a very peculiar circumstance, which seems to be prestidigitation. If there is excess liquidity, managers can also create derived opaque accounts for their more or less justifiable expenses. This is unclear that it is a real robbery, because they steal bank money that did not exist before stealing it. It only happens to reality at the time of stealing it.

5.2. The sharing of bank profits

   The bank therefore operates by managing the primary deposits of its lending clients, which allows it to grant loans to its borrowing customers, according, where appropriate, to the multiplier of bank credit. The former are given a meager interest, if they give it to them, but instead they charge a high interest in the latter. All of that has a significance influence in the interest market in the finantial sector, which conditions the inversons of the companys because they need funds to purchase their assets.

   Shareholders are the ones who cleanly receive bank profits, which are also not numerous because banks' share capital typically does not exceed 10% of assets and even much less, so they are instable. Comparatively in production companies that figure is 30%. The social capital of banks is, therefore, concentrated in few shareholders and even in a family, which favors the generation of plutocratic groups with a power over the Economy and Politics superior to that of the same State.

   On a bank's balance sheet, almost everything there is debts and credits. There may be a paradoxical case even if a lender customer of legal money is forced to borrow and the bank is granted an interest on a bank money generated by the multiplier over their lender money. Truly absurd!

   In sum, lending customers, who are the foundation of the bank, receive no profits and shareholders, even on a speculative basis, take them all away. EVERYTHING, however, is due to the acceptance of bank money, as money, because of the public's trust, which has moved its faith in the gods to banks.


   All those distortions are corrected in Cosmosociety. This has been covered in almost all articles of the Blog and is widely realized in the book "Alphabet of Thought and Cosmosociety", which appears with free download on my website: www.cosmosociedad.es .

6.1. Cosmosociety is necessary

   We must emerge from this widespread destructive situation. It was already done in the other four previous Historical Stages of the Humanity. To achieve this, it is essential to generate a new perspective of thought that guides us in the transit and establishment of the next 6th Historical Economic Stage of Humanity, which I call Cosmosociety.

   Cosmosociety is not a renewed society of the present, but is to live the experience to which we aspire from the bottom of ourselves, as an expression of the deep feelings of our human species. It's what we're really aiming for, that's what we're looking for.

   We reject it too, because we believe it cannot be achieved. This is the historic moment The Revolution in Consciousness is needed to emerge achieve it and thus fulfill our aspirations for a new life.

   There can, therefore, be no return to "normality"; this is a self-deception that politicians constantly send to the population to try to hide their ignorance from a future horizon and also to soothe growing social distrust. It is an absurd message because it is that "normality" that has thrown us into the current situation (2,020).

   Our current demands will have to be renewed, forcing the necessary Revolution in Consciousness (RC). We can't keep feeling and thinking like we've been thinking so far. It is the current kind of thinking that is leading us to decline. If everything continues to be the same or if we introduce changes with the same system of thought present, that decadent deviation increases exponentially, as is actually happening. What is worked is usually based on how we feel, think and love.

   We cannot, therefore, resort to the historical experiences of thought systems, which time has been eroding or making them disappear. Then we have to open ourselves to the purest and more original as possible. To emerge from the current situation, after its collapse, it is already necessary to sow the original thought, which makes it possible. It is, therefore, necessary that there be Purification of the Mind (PM) in order to attain Cosmosociety (CS).

   We will then base our purpose on the most original conceivable source of knowledge, which is the Alphabet of Thought (AP). This has been discovered and offered in the book APyCS.

6.2. The banking function towards the Cosmosociety

Banks do not access stock markets, as this external credit figure does not exist in its constitution.

▼Commercial Banks remain custodians of the money deposited by their clients.

▼Those that are primary deposit lenders in demand current accounts and on time are actually the genuine owners of the banks and receive the benefits.

▼The General Assembly and the Governing Board are constituted with them in a weighted role.

▼ Banks are financial intermediaries in the relationships between their lending clients and their borrowing clients.

▼The existence of means of payment, which are substitutes for legal and banking money, will be promoted.

Bank levies will be moderated to stimulate the opening of current accounts and profit-making.

Publicly-ticking companies have to report the real value of the stock, obtained from their effective assets subject to rigorous control by the CS.

The speculative profits obtained on the Stock Exchange will be charged high.

▼The speculation of banks is also put on brakes, but without tying their function!

▼For greater prosperity of the economy, the market interest rate obtained in the financial sector will not condition its necessary value in the productive sector.

▼The system of Meritocracy must be created (etymologically: government by people of merit). Meritocrats must now be independent people who freely use their intelligence and who possess a social sense of solidarity. The more the better!