Many people believe that allowing a bank to create money and charge for it constitutes usury. The money was created out of nothing, therefore nobody owned it before it was created. To take a share of profits for this type of money creation is to take a profit dishonestly.
To this they add that, if banks by this process take more out of the economy than they put in (as is obvious that they do), the money supply will gradually disappear unless money is imported from outside the economy. Eventually the banks will own everything in the economy.
There is some truth in these positions — but some serious misunderstandings and distortions as well.
First, we have to realize that, even if a region is served by a single commercial bank, a single loan that results in the creation of new money does not constitute the entire money supply. The money supply actually consists of anything that can be used to settle a debt — anything. Thus, the money supply is not restricted to currency or demand deposits, but to anything that has value that can be exchanged for other things that have value. "Money" is not just currency and demand deposits, then, but is derived from the total produced goods and services that exist in an economy, and the present value of a projected future stream of income from to-be-produced goods and services.
Thus, everyone (not just banks) has the capacity to "issue money," that is, to make promises. What they don't have is the capacity to issue currency, legal tender or otherwise. This is why we have banks. Not everyone knows everyone else, and even if they do, not everyone trusts everyone else. Everyone has to trust the issuer of a currency, or the promises standing behind the currency won't "pass current," that is, be readily acceptable by virtually everyone without question.
Not that it's strictly necessary that money be in the form of currency or demand deposits. If you have packs of cigarettes and someone else is willing to exchange his dead chickens for your cigarettes, two debts have been created and settled in the transaction, and money has been created and canceled.
Thus, the only thing necessary to be able to create money is the power to make promises and the trustworthiness to make good on the promises you make. When a bank exchanges its good word for a lien on the present value of a borrower's project that does not yet exist, it is creating money that did not rely on existing savings. For this service the bank is legitimately due a fee; what the bank is doing is not usury. The bank is also entitled to a "risk premium" based on the likelihood that the borrower will not repay the loan, thereby leaving the bank responsible for making good on promises that are backed by bad promises. A risk premium is not usury, either, any more than an insurance premium is usury.
What is usury, however, is charging an interest rate, that is, a share of profits, on money that did not previously have an owner. That is, the money did not come out of an existing accumulation of savings belonging to someone, but was created "out of nothing," that is, out of the bank's general trustworthiness and the borrower's presumed ability to pay back the loan. Now that is usury, because a lender is only entitled to a share of profits generated by that which he saved, owns, and lent to another for a productive project.
Thus we have the conundrum that commercial banking, while not usurious by nature, is engaged in usury. This is due, ironically, to the mistaken belief that capital formation can only be financed out of existing accumulations of savings. While demonstrably false, this belief is so engrained even among bankers and professional economists that they truly don't seem to realize that they are misusing a system in a way that undermines the very system they think they are protecting. A commercial bank is an institution designed and intended to operate to finance capital formation without the need for existing accumulations of savings. The problem is that most people act as if a commercial bank is an entirely different kind of bank, the bank of deposit.
The difference is what we will look at in the next posting.