Here is Graeber’s explanation ( Debt: The First 5,000 Years , p. 49) of the way the British monetary system has worked since the founding of the national bank in 1694: “In 1694, a consortium of English bankers made a loan of 1,200,000 pounds to the king. In return they received a royal monopoly on the issuance of banknotes. What this meant in practice was they had the right to advance IOUs for a portion of the money the king now owed them to any inhabitant of the kingdom willing to borrow from them, or willing to deposit their own money in the bank.” Anyone who took out a loan from the bank, represented by a banknote, had a claim on the king’s new “cash on hand.” He could pass that IOU on to someone else in exchange for goods because the IOU banknote carried with it the promise that it was backed up from the king’s reserves.
As Graeber says, “this was a great deal for the bankers (they got to charge the king 8 percent annual interest for the original loan and simultaneously to charge interest on the same money to the clients who borrowed it).” He adds, “but it only worked as long as the original loan remained outstanding. To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist.”