The Origin of Bank Deposits.

Edgar Hardcastle (H) 29th October 1993

1). Bank Deposits are money deposited by depositors.

No doubt most people who have bank deposits believe that bank deposits originate with the depositors who, having spare cash, choose to lend it to banks in return for the interest they receive, confident that whenever they want to withdraw it they will be able to do so.

This is a correct description of what goes on, but it is denied by some economic theorists who hold that bank deposits are “created” by the banks through the act of making loans.

Hartley Withers in his “THE MEANING OF MONEY” (1921, page 61) says:

The greater part of the banks’ deposits is thus seen to consist, not of cash paid in, but of credit borrowed. For every loan makes a deposit”.

2). The two versions of the Book “Banking”.

In 1926 the Home University Library published the book “BANKING”, written by Walter Leaf, ex-chairman of the Westminster Bank.

In his book, Walter Leaf supported the view that deposits originate with depositors and ridiculed the theory that deposits are created by the banks through the act of making loans.

He wrote:

The banks can lend no more than they can borrow –in fact not nearly so much. If anyone in the deposit banking system can be called a “creator of capital” it is the depositor; for the banks are strictly limited in their banking operations by the amount which the depositor thinks fit to leave with them” (page 102).

He went on to argue, quoting figures relating to the “big Five” banks, that the Hartley Wither’s theory “will not stand confrontation with the facts”.

In 1948 the Home University Library published a new version of “banking” not written by Walter Leaf but by W. J. Thorne, and published a second edition of the Thorne book in 1962.

The Thorne version put the view that bank deposits are created by the banks through making loans; that is to say it put the case which the Leaf version had argued “will not stand confrontation with the facts”. The Thorne version made no attempt to argue that the Leaf version was wrong.

The Thorne version (page 94) put the view that deposits are created by the banks, in the following terms:-

The cheque drawn by the customer in favour of other people go to the credit of their accounts and thus it comes about that money lent creates a deposit except in the few cases where the borrowed money is paid to somebody in notes that for some reason never find their way back into a bank account”.

In the controversy about the rival theories many banks from Britain and abroad supported the Leaf version that bank deposits originate with depositors.

3). The MacMillan Committee (Committee on Finance and Industry 1929-31).

This committee, of which J. M. Keynes was a member, supported the view that bank deposits are mostly created by bank lending. Paragraph 74 of the Committee’s report opened as follows:

it is not unnatural to think of the deposits of the bank as being created by the public through the deposits of cash as representing either savings or amounts which are not for the time being required to meet expenditure. But the bulk of the deposits arise out of the action of the banks themselves, for by granting loans, allowing money to be drawn on overdraft or purchasing securities a bank creates credit in its books, which is equivalent to a deposit”.

Keynes was a member of the Committee and is believed to have drafted the above mentioned Paragraph 74.

Although the members of the committee signed the Report without dissenting from Paragraph 74 they did not all agree with Paragraph 74. Before the Committee was set up in 1929 Professor T. E. Gregory had been stating his opposition to the view that Bank Loans create deposits and continued to do so after publication of the Report.

A Banker member of the Committee when asked by a member of the Socialist Party of Great Britain employed by him how he could support Paragraph 74 admitted that he had not read it.

J. T. Walton Newbold, when asked by another member of the SPGB how he came to sign the Report without dissenting from Paragraph 74 he was indignant that that he could be believed capable of agreeing with the nonsense written in Paragraph 74 but explained that he was put on the Committee to support another member, Ernest Bevin, who favoured Keynes general attitude, and had no alternative but to vote with Bevin.

Another member of the Committee when asked if he agreed with Paragraph 74 said that he didn’t but was unwilling to be drawn into the controversy.

Professor Edwin Cannan derided this new banking theory as “the mystical school of credit creation”.

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Object and Declaration of Principles


The establishment of a system of society based upon the common ownership and democratic control of the means and instruments for producing and distributing wealth by and in the interest of the whole community.

Declaration of Principles


1. That society as at present constituted is based upon the ownership of the means of living (ie land, factories, railways, etc.) by the capitalist or master class, and the consequent enslavement of the working class, by whose labour alone wealth is produced.

2. That in society, therefore, there is an antagonism of interests, manifesting itself as a class struggle, between those who possess but do not produce and those who produce but do not possess.

3.That this antagonism can be abolished only by the emancipation of the working class from the domination of the master class, by the conversion into common property of society of the means of production and distribution, and their democratic control by the whole people.

4. That as in the order of social evolution the working class is the last class to achieve its freedom, the emancipation of the working class will involve the emancipation of all mankind without distinction of race or sex.

5. That this emancipation must be the work of the working class itself.

6. That as the machinery of government, including the armed forces of the nation, exists only to conserve the monopoly by the capitalist class of the wealth taken from the workers, the working class must organise consciously and politically for the conquest of the powers of government, national and local, in order that this machinery, including these forces, may be converted from an instrument of oppression into the agent of emancipation and the overthrow of privilege, aristocratic and plutocratic.

7. That as all political parties are but the expression of class interests, and as the interest of the working class is diametrically opposed to the interests of all sections of the master class, the party seeking working class emancipation must be hostile to every other party.

8. The Socialist Party of Great Britain, therefore, enters the field of political action determined to wage war against all other political parties, whether alleged labour or avowedly capitalist, and calls upon the members of the working class of this country to muster under its banner to the end that a speedy termination may be wrought to the system which deprives them of the fruits of their labour, and that poverty may give place to comfort, privilege to equality, and slavery to freedom.