Hello!
I have explained in previous posts that money is created by the banks. For example, when you buy £100 worth of clothes on a credit card, the bank adds £100 to the shop’s account, and adds £100 to your credit card bill. Nothing else in the system is affected – this is new money. Let us suppose that you yourself work for the shop. At the end of the month, the shop pays you the £100 pounds back as part of your wages, which you can then use to pay off your credit bill – and the money disappears. In effect you have done £100 pounds worth of work for your clothes. In this way, money is continually created and destroyed in the economy. This is a brilliant system for creating the “oil” which an economy needs to enable transactions to take place – but there is a catch. The bank charges INTEREST on the loan.
Of course the banks provide an essential service in mediating transactions in this way, and if they charged a fixed fee, I would have no complaint. But the bank can create £1000,000 as easily as it can create £10, and has no additional expenses whether the money is paid off in an hour or a decade. By charging interest on something they created at almost no cost – and since every penny of the trillions of pounds circulating in the economy has been created as a loan – the banks impose a burden of tens of billions of pounds on the economy. When it is understood how money is created, it is easy to see that this is essentially money for nothing.
In my last post I suggested that if the Government took control of the creation of money, all the interest on our money supply would flow to the government. This would bring in so much income, it would greatly reduce our tax burden. To me it is very obvious that this is the just and proper way to do things. The government represents “we the people”, and “We the people” have a right to engage in transactions with each other without paying exhorbitant costs to a third party. This is particularly stark when you consider government debt.
The government has a debt of around 1.4 trillion pounds. There is no realistic prospect of ever paying this off. When payment becomes due, it is “rolled over” for another 1, 10 or 50 years. The interest on this debt is around 45 billion pounds a year – equal to the defence budget.
I have found it quite difficult to get a clear answer as to how Government debt is created. When pressed, people talk vaguely about “money markets”, “market makers” and “secondary markets”. In the Bank of England paper mentioned in my first post, it states quite clearly that commercial banks create new money when the government sells treasuries or bonds, or gilts, but the example given involves a pension fund as a third party. Other texts say that these “instruments” are distributed to big commercial banks, but don’t explain how they are paid for.
However, the mechanism is not important. At some point banks created that 1.4 trillion pounds out of nothing, because that is how all electronic money in the economy is created – and on that basis, they will charge the taxpayer 45 billion a year for ever. Is that just?
Many people believe that this is indeed just – we were brought up to believe that loans must be paid, and that we should pay interest on those loans (actually this is a recent phenomenon – historically, Judaism, Christianity and Islam have banned the payment of interest, and Islam still has that ban in place). But whether or not you believe in paying interest on a genuine loan, it is very hard to see why interest should be paid on money created out of nothing. The Government, “we the people” could create our own money, and use it to pay for public works and public services. The money can be destroyed again by collecting it in (light) taxation in order to avoid inflation. This is not a crazy fantasy – there are many historical example of governments creating their own money in this way, and these have often been extremely successful (Ellen Brown’s book “Web of Debt” lists several examples). By taking control of the creation of money, “We the people” could not only collect the interest ourselves for our own social purposes, we could save tens of billions in interest payments to the banks.
If you are interested in taking this further, I strongly recommend that you check out “Positive Money”, a not-for-profit organisation which has produced detailed plans, and which is actively campaigning for change along these lines.