Sodium Haze: Is our money supply created as debt?

Thursday, 2 June 2011

Is our money supply created as debt?

Here are some quotes gleaned from the wonderful folks at Positive Money.

 This is Martin Wolf, chief economics editor for the Financial Times:

"The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending..." Financial Times, 9th November 2010

Here's further confirmation from a Bank of England paper. Note that the term 'bank deposits' refers to the numbers in your bank account.

“When banks make loans, they create additional [bank] deposits for those that have borrowed the money”1

So when you take out a loan from the bank, the 'money' is just typed into your account and created effectively out of nothing. Here's further proof from Paul Tucker, Deputy Governor of the Bank of England and Member of the Monetary Policy Committee:

"...banks [make loans]2 by simply increasing the borrowing customer's current account...That is, banks [make loans] by creating money."3

Or this, also from the Bank of England:
"The money-creating sector in the United Kingdom consists of resident banks (including the Bank of England) and building societies"4

That's a very mundane way of saying that the creation of money in the UK has been privatised. In other words, banks are able to create all the money in the economy and lend it to us.

This has a wide range of rarely-discussed consequences and effects upon the economy and society, and is surely something that we should be questioning in the wake of a huge financial crisis.

There's more:

"... changes in the money stock [i.e. the total amount of money in the economy] primarily reflect developments in bank lending as new deposits are created."5

And if you need further proof, here's a letter written by the Bank to a correspondent of Positive Money (see the original here).

they asked them:

 "When a commercial bank makes a loan to a borrower, does the commercial bank in effect create new money? In other words, when a bank makes a loan to a borrower, is that 'money' just created out of thin air?"

Bank of England response: "When banks make loans, commercial banks do indeed create much of the money in the economy."6
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