Rethinking banking. Debt discounting and the making of modern money as liquidity

The article radically challenges the conventional view of modern banking as financial intermediation and rejects the mutually related notion, firmly entrenched in both the mainstream and alternative imaginary, of fractional reserve banking. By contrast, it argues that modern banks are peculiar financiers which, far from banking other people's money, are originally and primarily involved with making money by creating a most fundamental institution of capitalism: liquidity. Crucially, central to the bank-engendered creation of liquidity is a negotiation of value that does not involve any formal lending of cash by a creditor – in fact, it does not require a creditor at all. Instead, it relies on a quid pro quo of debts performed by means of discounting whereby a regime of fluid property relations of mutual indebtedness, commonly known as debt finance, is established. In this regime of liquidity, money is constructed as entirely a debtors’ money: it is the outcome of a process of monetisation of bank debts entangled with a capitalisation of other people's debts.