Hello!
Jeremy Corbyn’s new chancellor John McDonell wants nationalisation – of railways, health, and other sectors. This is a good topic for discussion, but there is one special case which I want to talk about first – should we nationalise the banks? To help answer that, let’s recap how banks work.
Suppose you go to a bank and agree a loan of £100,000. The money is entered into your account and you can start spending – on a house, a car, whatever. The bank will charge you interest, at, say 4%. Now, where did the money come from? And do the banks deserve the interest?
Some people might think that the money belongs to the bank, and they are charging you for its use, but this is wrong. Unlike money lenders, banks do not loan their own money.
Other people imagine that the money has been placed in the bank by depositors who allow the money to be lent out, and that the bank gets its money from the difference between what it charges on loans, and what it pays for deposits. But this is also wrong. Unlike building societies, banks do not loan out deposits made by other customers.
Many knowledgeable people believe that the bank uses a “fractional reserve” system (this is a bit complicated. You can skip this paragraph). If 100 people deposit 100 pounds each, the bank has 10,000 pounds in hand. The bank can safely lend out 9000 pounds, keeping back 1000 pounds knowing that it will not have to pay all 100 depositors back at once. This 9000 is used by the borrowers to buy cars, and the car saleswomen – deposit the money back in their own accounts in the bank! The bank now has 9000 pounds in hand in deposits, and lends out 8000… and so on. In this way, the 10,000 pound deposit is loaned out several times to different people – totalling about 100,000 altogether. The bank has a limited amount of money and so it lends the money to people who will pay the best rate according to market forces.
This is an interesting story, and merits further discussion. But it is also wrong.
The truth is this. When the bank makes a loan, it simply enters “100000” into your account. This is new money, and you can now go and spend it on whatever you like. No other account is affected in any way. The bank creates the money fresh, on the spot. It takes about 5 seconds. There is no limit on how much can be created. It costs the bank nothing. There is no risk, because banks are backstopped by the government. And for that 5 seconds work, the bank will charge you 4000 pounds a year, until you pay back the “loan”. (I have put “loan” in quotes because this is clearly not a “loan”, since the bank did not have anything to loan you in the first place.)
In fact all the money in our economy, all the money we use every day, was created out of nothing by the banks at zero cost and zero risk. And they charge interest on every penny, at rates up to 30%. This is why they are so fabulously rich.
When I first discovered this I found it shocking. I told other people – and they got quite angry. They thought I was a mad conspiracy theorist. But it is true. The Bank of England recently wrote a report which explains it very clearly. You can find the report here;
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
Now, the interesting question is – what about Government borrowing? Who does the Government borrow from? The Bank of England is much less clear on this point, and talks about bonds and money markets, and market makers… but as far as I can tell, if you follow the trail the answer is the same. When the government borrows 10,000,000,000, the money is created by commercial banks, at zero cost and zero risk – and we taxpayers pay the banks 100,000,000 pounds a year for it.
This is simply outrageous!
But it does not mean we have to nationalise the banks.
The solution to all the countries financial problems can be solved at a stroke by a single, simple change to the rules. Instead of the banks creating money and lending it to the Government for interest – the government could create the money and lend it to the (private) BANKS for interest. The right of banks to create money would be revoked; if they wanted to lend money to a customer, they would have to borrow it from the government first – and pay interest. VAT could be completely scrapped. And the government would never be short of money, since it could create however much it needed for nothing. Rules could ensure that the money was collected back in taxes and destroyed, so as to avoid inflation. And the bankers would be reduced to the status of mortals.
Why does no-one do this? Because it is illegal under the Maastricht Treaty. Which was written by the banks.
I would welcome discussion on this – but I get so much spam here it is ridiculous. If you have a comment – please send a mail and I will post it here.
Have a nice day!
Tim.