Hello!
In this post I will explain where money comes from.
Luckily for me, the Bank of England recently published a paper that explains very clearly in simple terms how money is created. You can find the paper here;
[SPOILER! Unless you know this already, you will probably be quite surprised!] According to this paper,
Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money
There. Are you astonished? Stunned? Shocked?! No? Oh. Then either you knew it already – or the implications have not sunk in. You see, what the BoE is saying is that when you get a mortgage from your bank for £100,000 pounds, the bank simply types 100,000 in your account. It does not move the money from another account. It simply creates the money from fresh in your account, by simply typing in a number. That’s it. You now have £100,000 to spend on a new house.
I have had this conversation with a number of people over the years, including accountants, and people who worked for banks in the City – and they flatly refused to believe it. It seems so shocking! So impossible! How can it possibly work!? It is certainly not well publicised. But it is a fact, as the BoE have very clearly explained.
One common misconception is that the money loaned to you by the bank comes from deposits made by other customers. Nope. The BoE explicitly rules this out. According to the BoE,
banks do not act simply as intermediaries, lending out deposits that savers place with them… bank lending creates deposits
Another common idea is that the bank has to have “reserves”, which it uses to create the loan. Nope. Again, this is explicitly ruled out by the paper above. According to the BoE,
banks do not ‘multiply up’central bank money to create new loans and deposits
Well well. As the BoE disarmingly points out,
The reality of how money is created today differs from the description found in some economics textbooks
Right. When you take out a mortgage of £100,000 pounds, the bank CREATES the money, simply by writing 100,000 in your account. When you pay the money back, the debt is cancelled, and the money ceases to exist. And in the mean time – you pay the bank interest on money it created out of nothing! Amazing isn’t it? As the famous economist and writer J K Galbraith has said, “The process by which banks create money is so simple that the mind is repelled”.
The same thing happens when you spend money on a credit card. The money is created in the act of makng a purchase. The same applies to overdraughts, personal loans – any bank loan in fact. This is how nearly all money is created. Nearly all the money in circulation in the Western world – trillions and trillions of pounds – was created by private banks making loans. And by the way – they charge interest on every penny. Yes. No wonder they are filthy rich!
Sometimes people say that people should pay off their debts, and save money instead. But in our current system, money IS debt. It is only possible for Jo to have savings if Billy is in debt. If all debts were paid, there would be (almost) no money – and so, no savings. If there were no bank loans, there would be (almost) no money.
Most people react to this news with flat disbelief. They think there must be a misunderstanding. But the BoE paper has been written explicitly to debunk these common misconceptions. It is quite clear and unambiguous. Money is created by banks in the act of making a loan.
If you feel slightly outraged by this you are not alone. According to Josiah Stamp, himself a former Director of the BoE
Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again… if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.
Certainly you can understand why this is kept rather quiet. To quote Reginald McKenna, a Director of the former Midlands bank,
I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people
Finally, if you don’t believe me, or think I may be mistaken, I urge you to read the report for yourself. It is very clear and simple, and the quotes here all come from the first few paragraphs.
By the way, this is not how a building society works. Building societies lend out money they have collected in deposits. Building societies do not have a licence to print money. Because that is in its literal sense exactly what a bank is. A bank IS a licence to print money.
So if you want to make money – become a bank.
Now it doesn’t have to be this way – this is just the way money works in the West in the 21st century. Many other kinds of money are possible, and many have been tried. And actually, now that I am used to the idea I see that the idea of creating interest bearing loans in this way is rather brilliant – but the process has been hijacked by the banks, giving them monstrous, outrageous, unconscionable wealth and power.
Many solutions to this problem have been suggested – more on this in later posts.
Further Reading
Just Money by Ann Pettifor
Where Does Money Come From published by the New Economics Foundation
Debt: The First 5000 Years by David Graeber
Web of Debt by Ellen Brown
Interesting, thought provoking.