How money gets destroyed (new video)

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Remember how new money is created when a bank makes a loan? Well, when someone repays the loan, the opposite process happens, and money is actually destroyed. It effectively disappears from the economy entirely.

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  • DozyHole

    A great addition to the banking 101 videos.

    We have a system of private banks expanding the money supply to supposedly meet demand, good in theory perhaps.

    One thing is certain in my mind, if you subscribe to this system, as all major political parties do, then you must except the other side of the coin, the money supply must be allowed to contract, house prices should be allowed to completely readjust to reflect less money in the economy.

    You either believe in this system or you don’t, what we have now is a system of constant expansion and then propping up the banks and house prices after a bubble.

    It is my belief that if you allowed the system to operate on it’s own for better and for worse it would be more clear how devastating this overly-elastic monetary system actually is. But for now the policy is to drag the effects out over as long as possible so no one will notice and the whole thing can repeat in 10-20 years.

  • Simon Thorpe

    According to the M4 figures from the Bank of England, M4 has been shrinking at an annual rate of 7-8% per year since the financial crisis if you take into account inflation. Normally, the money supply ought to be allowed to increase by the rate of inflation. But it hasn’t been doing that. And, indeed, as suggested in the video, there has been a real and very dangerous contraction of the money supply as a result. It is therefore not surprising that many high street shops are going bust – there simply isn’t enough money in the economy to allow them to stay in business.

    Positive money have the solution. It involves taking money creation (and destruction) out of the hands of commercial banks and making it the responsibility of a publicly accountable Money Creation Committee attached to the Bank of England. But try telling that to George Osborne and David Cameron…. I fear that they are simply incapable of listening to reason. I would love to be proved otherwise.

  • Richard Wise

    A related and important fact is that taxation also destroys money.
    The £ is the state’s IOU & is in effect a tax credit. Taxation extinguishes the the state’s obligation to you and the money is destroyed. These facts about nature of money have profound implications for debates about the deficit and expose the sociopathic arguments of the deficit hawks. Despite what front organisations like the Taxpayers Alliance preach taxpayers actually pay for nothing. There are no treasury coffers. Public spending and taxation are independent operations involving the crediting (creating) and debiting (destroying) of reserve accounts at the bank of England by keystrokes
    Here is an eloquent exposition of this point:

    I think what Positive Money are doing is excellent — but I would like to see more emphasis on the role of public spending and fiscal policy.

  • Juan Romero

    So if money is destroyed by taxation, wouldn’t it mean that money collected through taxation is not utilized; paying federal employees for instance??

  • Ian Duncan

    Hang on a second… Why are the banks are scared to lend money in bad economic times? If they pull money for loans out of nowhere then surely if someone defaults on a loan the bank hasn’t lost anything, in reality because the money didn’t exist? The bank doesn’t owe anyone the money it loaned out because it ‘printed’ it itself so if in turn the borrower fails to pay off the loan, no harm done (as long as costs are covered)?

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