On 7 August 2013, a BBC camera crew squeezed into a small cooperative bank in Wildenberg, a town in Lower Bavaria, Germany. The bank had eight full time staff. Two larger banks had already said no. In the room were the bank’s two directors, its credit officer Ludwig Keil, and an economist named Richard Werner, the same man widely credited with coining quantitative easing on Day 22. He was there to borrow €200,000. Werner wasn’t borrowing for the money. He wanted to settle an argument economists had been having for more than a century. When a bank makes a loan, where does the money come from? There were three competing answers. Banks only lend out your neighbour’s savings. Banks can’t create money individually, but the banking system does collectively. Or each bank simply creates new money when it lends. Werner designed his loan as a live test of all three. Keil processed the loan while the camera rolled and every screen was photographed. The moment the contract was signed, a new account appeared on the bank’s system with a balance of €200,000. Next to it sat a loan account showing minus €200,000. Werner then traced the bank’s records. No money had been moved from other customers or from any other bank. The bank simply typed it in. In 2014 he published the result in the International Review of Financial Analysis, under the title “Can banks individually create money out of nothing?” Only the third theory survived the test. The same year, the Bank of England published its own paper, “Money creation in the modern economy”, explaining that commercial banks create most of the money in circulation when they lend. Australia’s Reserve Bank followed in September 2018 with “Money in the Australian Economy”, confirming that when banks make loans, they create new deposits, and that the old reserve requirements had been removed. None of this was entirely new. Ludwig von Mises described banks creating unbacked money back in 1912. In 1961, the Federal Reserve Bank of Chicago published a booklet called “Modern Money Mechanics”, explaining how the banking system creates money, and kept revising it until 1994. But it told the story through the second theory, with reserves coming first and money multiplying through the system. The idea that each bank simply creates money the moment it lends stayed on the fringes. Some economists still argue the distinction matters less than it sounds, because banks are limited by capital rules, profits and demand for loans. Remember Day 16, though. In Australia, none of those limits is a cap on how much money gets created. So here is the question worth sitting with. If economists described this in 1912, why did it take a global financial crisis before most central banks explained it this plainly? Was it too technical to matter, or too uncomfortable to say out loud? Tomorrow, the day an entire nation voted on whether banks should keep this power. Follow and ring the 🔔 on our profile so you don’t miss a day.

On Saturday 16 March 2013, people in Cyprus woke to find they couldn’t move their money. Overnight, European finance ministers had agreed on a rescue for the island’s broken banks, and there was a catch. Every bank account would pay a levy. 9.9 per cent on deposits above €100,000. And 6.75 per cent on the rest, including the savings that were supposed to be guaranteed. Cyprus’s banks had grown far too big for such a small country, and had lent heavily to Greece, whose debt had just been written down. Now someone had to cover the hole. Europe’s answer was the depositors. Cypriots were furious. On 19 March, parliament voted the levy down. Not a single member voted for it. The banks stayed shut until 28 March. People queued at ATMs, and Laiki Bank limited withdrawals to €260 a day. On 25 March a new deal was struck. Laiki Bank was closed. At the Bank of Cyprus, 47.5 per cent of every deposit above €100,000 was turned into shares in the bank. Insured deposits under €100,000 were spared this time. Controls on moving money out of the country lasted until April 2015. Cyprus made one thing impossible to ignore. Remember the goldsmith’s receipt on Day 5. A bank deposit is not your money sitting in a vault. Legally, it is a loan you made to the bank, and in a crisis, lenders can be asked to share the losses. Economists call it a bail in. In Australia, deposits up to $250,000 per person per bank are guaranteed by the government, and the 2018 crisis laws target certain bank investment securities rather than ordinary savings. That is real protection. But it is still protection that depends on a government promise, which is exactly what Cypriots thought they had too. That is why this system is worth questioning. Cypriots didn’t do anything wrong. They saved, they trusted their banks, and they believed the guarantee. In one weekend, the people who wrote the rules tried to rewrite them, and only a parliament saying no stood between ordinary savers and a bill for a crisis they didn’t create. Your savings are years of your life, stored up. It is fair to ask who really controls them, and what their promises are worth when it counts. Tomorrow, the economist who walked into a small German bank and borrowed €200,000 for science. Follow and ring the 🔔 on our profile so you don’t miss a day.

On 21 November 2002, a US Federal Reserve governor named Ben Bernanke gave a speech in Washington about how to stop prices falling. The government, he explained, “has a technology, called a printing press (or, today, its electronic equivalent)”. It could produce as many dollars as it wished, at essentially no cost. The press nicknamed him Helicopter Ben. Six years later, as Chairman of the Fed, he got to use it. The tool is called quantitative easing. It sounds technical, but the idea is simple. The central bank creates brand new money and uses it to buy government bonds and other assets, mostly from banks and investors. Nothing is printed on paper. The money is created as entries on the central bank’s ledger, called reserves. The term is widely credited to economist Richard Werner, who used it in a Japanese newspaper article in 1995. Ironically, he meant something different. He wanted policies that got banks lending to businesses again, putting money into the productive economy rather than into bond markets. When central banks later adopted the name for buying bonds, he became an outspoken critic, and in 2013 said the UK’s version had failed. The Bank of Japan dismissed quantitative easing as ineffective as late as February 2001, then adopted it the following month. After 2008, it went global. The Fed began buying in November 2008, and the Bank of England followed in March 2009. In August 2007, the Fed’s balance sheet was around $870 billion. By early 2022, it was nearly $9 trillion. Australia’s turn came later. The Reserve Bank began buying government bonds in March 2020. In November that year it launched a $100 billion program, doubled it in February 2021, and kept buying until February 2022. It also lent banks $188 billion at ultra low rates. Between the two, its balance sheet grew from around $170 billion in early March 2020 to $623 billion by December 2021, more than triple. Where does all that money go? It pushes up the price of bonds, which pushes investors into shares, property and anything else that might still pay a return. Remember Cantillon on Day 18. The first receivers are banks and asset owners. Wage earners and savers come last, after prices have already moved. Defenders say quantitative easing stopped the 2008 crisis turning into another Great Depression, and they may be right. Austrian economists reply that it rescued asset prices rather than the economy, kept failing companies alive and rewarded the people who already owned the most. And once started, it is hard to stop. Today, the Fed still holds around $6.7 trillion. Tomorrow, the week a government came for people’s savings. Follow and ring the 🔔 on our profile so you don’t miss a day.

In 1719, Paris was in a frenzy. Shares in John Law’s Mississippi Company were soaring, fuelled by a flood of new paper money. An Irish banker named Richard Cantillon bought in early, sold near the top, and made a fortune, even though he believed the whole scheme was unsound. When the bubble burst, he walked away rich. Around 1730, Cantillon wrote down what he had learned. New money, he argued, does not raise all prices at once. It enters the economy at a particular point, and the people who receive it first can spend it before prices have adjusted. By the time it reaches everyone else, prices are already higher. The first receivers gain. The last receivers pay. His essay was so sensitive it was not published until 1755. By then Cantillon was long gone. In 1734 his London home burned down, and he is generally believed to have been murdered, though one biographer suspects he faked his death to escape the many people who blamed him for their losses. Economists now call his idea the Cantillon effect. Today the first receivers of new money are usually banks, governments and people who already own assets. The last are wage earners, savers and renters. Think back to 2020 and 2021, when the Reserve Bank created hundreds of billions of dollars. Home values rose 22 per cent in 2021, while wages grew 2.3 per cent. Those who already owned houses got richer. Those trying to buy one fell further behind. Defenders of that policy say it protected jobs during the pandemic, and unemployment did fall to a near 50 year low. Both things can be true. But money printing is never neutral. It always moves wealth from someone to someone else, and it is rarely the people at the back of the queue who gain. Tomorrow, how a modern country ended up printing a 100 trillion dollar note. Follow and ring the 🔔 on our profile so you don’t miss a day.

How much of your deposit does your bank have to keep in reserve? Most people guess something like 10 per cent. In Australia, the legal answer is zero. It was not always this way. For decades, banks had to lodge a share of their deposits with the central bank, money they could not lend out. In 1988 that was replaced by a lighter rule. Banks had to lodge up to 1 per cent of their liabilities with the Reserve Bank, earning interest about 5 percentage points below market rates. On 1 July 1999 that last remnant was abolished and the money was handed back to the banks. Since then, Australian banks have had no legal reserve requirement at all. Neither do the UK, Canada or New Zealand, and the US cut its requirement to zero in March 2020. So what stops banks lending without limit? APRA requires them to hold enough capital to absorb losses and enough easily sold assets to survive a rush of withdrawals. The Reserve Bank sets the cash rate, which makes borrowing cheaper or dearer. And someone has to want the loan. Look closely and you will notice these rules manage risk and price. None of them set a ceiling on how much money gets created. Every time a bank approves a loan, it creates a brand new deposit, and that is where most of our money comes from. Broad money in Australia now runs to around $3.5 trillion, while physical cash is around $100 billion. The goldsmiths at least had to worry about gold walking out the door. Today the vault does not need anything in it. It just needs you not to ask. Tomorrow, who measures inflation, and what they leave out. Follow and ring the 🔔 on our profile so you don’t miss a day.

In the 1970s, getting a home loan in Australia could mean months of waiting and years of saving with the same bank, just to prove you deserved one. The government capped the interest rates banks could pay and charge, and at times the Reserve Bank told them how much they could lend. Credit was rationed. Then the walls came down. Ceilings on deposit rates were removed in 1980. The Campbell Committee’s report in 1981 made the case for freeing up the whole system. In 1982 the Reserve Bank announced there would be no more direct lending controls, in 1985 sixteen foreign banks were invited in, and in 1986 the last ceiling on home loan rates was lifted. Credit flooded in. Banks competed hard to lend, and borrowers lined up to take it. Corporate high flyers like Alan Bond and Christopher Skase built empires on borrowed money, and commercial property boomed. To cool things down, rates were pushed higher, and home loan rates hit 17 per cent in 1989. The bust followed. Two state owned banks, the State Bank of Victoria and the State Bank of South Australia, collapsed under bad loans in 1990 and 1991, and taxpayers covered billions in losses. Keating called the downturn that followed the recession we had to have. Unemployment passed 10 per cent. Deregulation brought real benefits, from more competition to easier access to loans. But Austrian economists like Ludwig von Mises described this pattern long before it happened here. When banks can create credit freely, money pours into speculation and assets, creating a boom that looks like prosperity until it has to unwind. The lending limits came off. The anchor never went back on. Tomorrow, the year Australia dropped its last reserve rule. Follow and ring the 🔔 on our profile so you don’t miss a day.