How Banks Create Money, and What The Money Masters Gets Wrong

The Money Masters is a long documentary from 1996, made by Bill Still and Patrick Carmack, that tells the history of money as a story of hidden manipulation: goldsmiths lending out gold they did not own, a privately owned Bank of England, and a “cabal of international central bankers” who supposedly took over nation after nation. It is still widely shared, usually under the line that banks “create money out of thin air”.

That line is, surprisingly, close to what central banks themselves say. The conclusions the film draws from it are another matter. Here is what is accurate, what is not, and how modern money creation actually works.

What the film gets right

Most people picture a bank as a middleman: savers deposit money, and the bank lends it out. In 2014 the Bank of England published a widely read paper saying this picture is wrong. In its words, “the majority of money in the modern economy is created by commercial banks making loans” (Bank of England Quarterly Bulletin, 2014 Q1).

When a bank approves a loan, it does not take cash out of a vault. It simply credits the borrower’s account with a new deposit, and that deposit is money the borrower can spend. As the paper puts it, “the act of lending creates deposits”. The film is also right that this system has deep historical roots, and that most people are never taught how it works.

What actually limits how much money banks create

Where the film goes wrong is in suggesting that this power is unlimited and secretly controlled. The same Bank of England paper sets out what restrains it:

• Profit and competition. A bank must lend at a profit. If it cuts rates to lend more, the new deposits tend to move to rival banks, and it has to find funding to replace them.
• Risk. Banks have to manage the risk that borrowers default and that depositors withdraw their money, which pushes up the price of loans.
• Regulation. Capital and liquidity rules limit how much risky lending a bank can do.
• Monetary policy. The central bank’s interest rate shapes how much people want to borrow and how much banks pay for funding. This is the ultimate limit.
• Repayment. Money is destroyed as well as created: when a loan is repaid, the deposit disappears.

The paper also rejects the textbook “money multiplier”, the idea that banks mechanically multiply up a fixed stock of reserves. Its account is more ordinary than the film’s: money is created by lending, and it is restrained by prices, rules and policy.

Who owns the central banks?

The film describes the Bank of England, founded in 1694, as the first privately owned central bank to put a nation in “economic slavery”. It was indeed founded as a private company: a Royal Charter created it to raise money for a war with France, and more than 1,200 people bought its shares. But it was nationalised in 1946 and today is wholly owned by the UK government (Bank of England: Who owns the Bank of England?).

The US Federal Reserve is the other usual target. According to the Fed, it is not “owned” by anyone. Its Board of Governors is a federal agency whose members are selected by the President and confirmed by the Senate. Member banks must hold stock in their regional Reserve Bank, but that is a condition of membership, not ordinary ownership, and after expenses and a legally fixed dividend the Reserve Banks pass their net earnings to the US Treasury (Federal Reserve FAQ). There are fair debates about how independent and accountable central banks should be, but they are public institutions with published rules, not private cartels.

The famous quotations: real, garbled and invented

The film and the many pages that share it lean on a set of quotations from famous people. Several do not hold up:

• Thomas Jefferson, “banking institutions are more dangerous to our liberties than standing armies”: a garbled version of a real line. In a letter to John Taylor of 28 May 1816 he wrote that “banking establishments are more dangerous than standing armies”. The longer passage often attached to it, about private banks and “inflation” and “deflation”, has not been found in his writings and uses words not documented in his lifetime (Monticello).
• Henry Ford, “there would be a revolution before tomorrow morning”: unconfirmed. The Henry Ford museum notes that many sayings credited to Ford cannot be traced to him, and its list of verified quotations includes only those traced to a reliable source (The Henry Ford); this one is not on it.
• Mayer Amschel Rothschild, “Give me control of a nation’s money supply, and I care not who makes its laws”: invented. No record supports it, and its earliest known appearance is in a 1935 book by Gertrude Coogan, an antisemitic writer. In 2024 a publisher apologised and removed it from a former UK prime minister’s book (Mediaite).
• Louis McFadden, calling the Reserve Banks “private monopolies”: real, but context matters. McFadden chaired the House Banking and Currency Committee from 1920 to 1931; the words come from a House speech of 10 June 1932, after he had left the chair. He went on to cite the forged Protocols of the Elders of Zion and claim that Jews controlled the government (Wikipedia).

The pattern is worth noticing: the strongest quotations are the least reliable, and two of them lead straight back to antisemitic writing about “international bankers”.

How to watch The Money Masters critically

The film can still be a starting point for learning about monetary history, as long as you watch it with a few questions in mind:

1. Check the quotes. If a quotation sounds perfect for the argument, search for its original source and date.
2. Separate mechanism from motive. “Banks create money by lending” is a fact you can confirm with central banks. “A cabal planned it” is a claim that needs its own evidence.
3. Ask what limits the system. Any account that leaves out interest rates, regulation and loan repayment is missing half the picture.
4. Watch for “international bankers”. When a story about money narrows down to one family or one ethnic group, it has usually left economics behind.

Real reform debates exist, from proposals for “full-reserve” banking to arguments about central bank independence, and they are worth following. They are argued in the open, with data.

For a closer look at the shareholder side of the same story, read who really owns the big banks, which checks the claim that a few families control the largest banks through investment funds.

Sources: Bank of England, “Money creation in the modern economy” (2014); Bank of England: Who owns the Bank of England?; Federal Reserve: Who owns the Federal Reserve?; Monticello: Private banks (spurious quotation); The Henry Ford: Henry Ford’s quotations; Mediaite, April 2024; Louis T. McFadden, Wikipedia.

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