HOW MONEY IS CREATED

October 7th 2011

This is copied from the POSITIVE MONEY website at http://www.positivemoney.org.uk/

How Money is Created: A bank is able to extend more money than it actually has in its reserves. That means, that if you want to borrow £10,000, the bank can write those digital numbers into your account even though it doesn’t actually have £10,000. What it does have is faith that you will pay £10,000 back…in real money…that you’ve worked for.

Now if you don’t pay it back, if you default, then the bank has to mark that £10,000 down as a real loss. So there is a risk there! The bank can create money that doesn’t exist, but if you don’t pay it back then the amount will represent a very real loss for the banks. That is what has been happening in the last few years. Banks making big losses on bad loans.

This new money, created by the banks, exists simply as electronic digits in your account. Today, around 97% exists only in electronic format.

Created and lent electronically – in an intangible way – and spent largely with plastic cards.

Banks have created all this new money, out of nothing, and loaned it into society, but they have done so imprudently, and now they are feeling the pain as the defaults start rolling in…and the banks have to account for them as real losses.

Consequently, they are afraid to lend out (effectively create) any more.

So…to recap…banks can extend more money than they have in reserves – and this means they effectively create new money every time they make a loan…and they enjoy the privilege, profit and power which comes from creating the national money supply in this way. Every time banks extend new credit, they are effectively creating new money.

Are you sceptical of that claim?

Well, here is Martin Wolf, Chief Economics Editor at the Financial Times. He says, “The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending.” (The Financial Times, 9 November 2010.)

Here is President Obama: “…the truth is that a dollar of capital in a bank can actually result in $8 or $10 of loans to families and businesses. So that’s a multiplier effect…” (President Barack Obama, “Remarks by the President on the Economy”, Georgetown University, Washington, D.C., April 14, 2009.

Britain’s money supply is not, contrary to popular belief, created by the Bank of England.

It is created overwhelmingly by the High Street banks, every time they make new loans…by multiplying upon the basis of their actual real reserves.

Banks creating this electronic money out of nothing…has become the way in which virtually all money is supplied to our economy.
 
Now that has consequences for us all.

The first is a democratic consequence! 

The natural state of our economy is to be held hostage to the banks!

The health of our economy is utterly dependent upon the health of the banking sector.

When the banks go down, as a consequence of their “often foolish lending”, they take us with them. 

When the banks fail to lend, because they have decided they need to be more prudent…then – while that may be a sensible business decision for them, as companies – it means, for us, that no money comes into society! 

Our economy goes into recession because there is no new money being created and entering society. 

As a society we have no control over the financial decisions of these private companies. Now, if banks were like all other private companies, then that would not, necessarily, matter so much…but when these companies represent the creators of our very means of exchange, the very life blood that our economy needs to function, then that is a serious problem.

We have allowed them to be in a position where they can turn the tap on and off depending upon their own business decisions.

Fine for them as private companies, but bad for us as a society.

It is a premise of the Positive Money proposal that we should not, as a society, be so dependent upon these companies in this way. In short, the Money Supply is a democratic issue.

Let’s be clear…the Positive Money proposal here is not to nationalise the banks (that wouldn’t make any difference at all if we kept the system as it otherwise is), the proposal is to “nationalise” – which is so say, bring under public control – the money supply…and we have a fully worked out plan which will do exactly that…which I’ll get to.

And of course there are other consequences. The Positive Money website does a very good job of listing these. At present it is engaged in a research project which is detailing many of these…
 
So three questions arise:

1. Is there some way that the national money supply can be publicly-owned by the people and for the people – rather than by the banks and for the banks?  In effect, this means, is there some way that it can be operated by a national institution owned by the public? 

2. Is there some way this money supply process can be made subject to democratic control and accountability, which in effect means through the mechanism of elected politicians and Parliament – unlike at present where there is no democratic control over the unaccountable corporations which create the money supply as a private, profit-making venture; and

3. Is there some way that we, the people, can enjoy the profit from creating the national money supply. In effect that means some way in which the profits can go directly to the public purse at the Treasury – rather than at present where the corporate banking system enjoys the privilege and profit of that power?
 
And the answer, you’ll be pleased to hear…is yes, there is a way! 

Let’s summarise it in two steps… 

Step 1. Commercial banks to be forbidden from creating money out of nothing. All money to be created by a national institution accountable to us democratically through Parliament.

This money will be created “debt-free”, and accounted as such. That means, it will be created and simply spent into society by Parliament in the usual way, via spending in the public and private sectors.

That money will then circulate in society. 

Step 2. The commercial banks will then compete with themselves to attract that money so created, into their savings accounts, and lend out only that money which they have acquired in that manner.

This will not result in inflation since the banks will be unable to multiply up new loans on the basis of any new money they receive.

Our economy will be safe from the consequences of bank failure because we will no longer be relying upon the commercial health of the private banking sector for our national money supply.

In time, it is possible that overall levels of personal and national debt may decrease, rather than rise exponentially as they do at present.
 
Furthermore, Positive Money, as a consequence of 2 years careful work, has assembled this reform in proper legislative format, as a potential draft Westminster Bill, which they have entitled “The Bank of England (Creation of Currency) Bill”. It is an astonishing piece of work, which represents the collective work of many dedicated people, and hard copies of this 60 page A4 Manual are available for a donation to Positive Money.

It can also be read on the Positive Money website here

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