POLL RESULTS: Only 1 out of 10 MPs understand that banks create money

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MP poll

MPs lack basic knowledge about the fundamentals of money, leaving them ill-equipped to understand the impending dangers of another house price boom or a second credit bubble, according to an exclusive Dods Monitoring poll commissioned by Positive Money, the campaign body calling for fundamental reform of our money and banking system.

When asked questions about who creates the nation’s money in the UK, nearly three quarters got the wrong answer. 71% of MPs believed that only the government has the power to create money. In reality, the government now only creates coins and notes, which make up just 3% of all the money in the economy. The other 97% of money exists as bank deposits – the electronic numbers in your bank account). This type of money is created by high-street banks – not by the government.

Just over 1 in 10 MP accurately understood that banks create new money every time they make a loan, or that money is destroyed whenever individuals or businesses repay loans.

Ben Dyson, founder of Positive Money, said: “MPs have no chance of understanding the house price bubble unless they know these basic facts about money. The financial crisis was caused by banks that created too much money and lent it recklessly. We’re now in danger of repeating the same mistakes.”

MPs should read the Bank of England’s report on money creation

MPs’ understanding of how money is created is in direct contradiction to a Bank of England paper released in March 2014. The article “Money creation in the Modern Economy” says:

“[The] majority of money in the modern economy is created by commercial banks making loans. 

When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created

Just as taking out a new loan creates money, the repayment of bank loans destroys money.”

MP Poll Results (Smaller)

MPs unable to prevent another financial crisis

Without understanding that banks create new money whenever they make loans, MPs are ill-equipped to appreciate that:

  1. The boom running up to 2007 was fuelled by the creation of new money by high street banks. Over £1 trillion of new money was created as the banks went on a lending spree.
  2. The housing bubble is driven by money creation by banks, rather than the scarcity of housing. The £22 billion of new mortgage lending provided in 2013 resulted in £22 billion of new money being creating by the banks and pumped into the housing market.
  3. Governments can create short-term economic growth by encouraging households to go further into debt, because every new loan from a bank creates money. But this ultimately increases the risk of another financial crisis.
  4. If households try to pay down their debts, money disappears from the economy. This could potentially lead to a recession.

Educating MPs is a Priority

It is essential that MPs understand that the power to create money has shifted to the same banks that caused the financial crisis. We’re launching a campaign to educate MPs about the way money is created, and why it matters.

Does your MP understand money? Email your MP now!

Notes on the Poll

One hundred MPs were polled through Dods Monitoring in July 2014. MPs were asked to read a number of statements and indicate whether they were true or false. They could also select “Don’t know”.

In response to the statement “Only the government – via the Bank of England or Royal Mint – has the authority to create money, including coins, notes and the electronic money in your bank account.”, 71% said this was true, 20% said it was false (the correct answer) and 9% said they didn’t know. There was no significant difference between the parties.

In response to the statement “New money is created when banks make loans, and existing money is destroyed when members of the public repay loans.”, only 12% of MPs gave the correct answer: true. 64% of MPs said this was false, while 24% said they didn’t know.

Total responses came from: 39 x Conservatives; 45 x Labour; 10 x Lib Dems; 6 x Others.

The full results can be found here.

 

 

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  • Marco Saba

    “!In response to the statement “New money is created when banks make loans, and existing money is destroyed when members of the public repay loans.”, only 12% of MPs gave the correct answer: true. 64% of MPs said this was false, while 24% said they didn’t know.” The 64% were right. Money is NEVER destroyed whenever individuals or businesses repay loans. Money simply disappear from accounting. But the monetary means are still around hanging registered on cash and clearing accounts. So HOW MANY REFORM GROUPS REALLY UNDERTAND MONEY ? That’s interesting indeed…

    • bankster01

      Money is taken from the general economy to repay loans, so in that sense money is destroyed. I am certainly poorer when I repay my mortgage, although there is nothing to stop the bank using my repayments as the basis for further lending, which is probably what happens in practice. In an accounting sense, both sides of the balance sheet increase when a bank makes a loan – see massive the expansion of RBS bank’s balance sheet up to 2008. They have been told to reduce their balance sheet to become safer, so they have made less loans, bad debts have beenwritten off, and a lot of loan repayments made, so their balance sheet is smaller on both sides compared to 2008.

      • Marco Saba

        “there is nothing to stop the bank using my repayments as the basis for further lending” and further spending if they see it fit.

        • bankster01

          There is a period of time when the repayment will reduce both sides of the bank’s balance sheet, money is destroyed, and money has been taken from the economy to repay the loan if it is someone like me paying down a mortgage for example. Most banks were told to reduce their balance sheets after the financial crash and build up reserves to become ” safer”.

      • Ruud Harmsen

        ==
        Money is taken from the general economy to repay loans, so in that sense
        money is destroyed. I am certainly poorer when I repay my mortgage,
        although there is nothing to stop the bank using my repayments as the
        basis for further lending, which is probably what happens in practice.
        ==

        Yes, but you are two different senses of ‘money’ in your statement, which is confusing. Please distinguish “money = claims of the public on banks” and “money = monetary value”.

        • bankster01

          What do you mean by monetary value ? What you can buy with money ? Credit issued by banks becomes money as soon as it arrives as a deposit in someone’s account and can be used to buy something. It is unfortunate that many classically trained people confuse matters by conflating credit and money, when they are really the same thing. Where does money come from ? is a good body of work by Positive Money, and it is indeed unfortunate that so few of our politicians and many economists do not know how money works, or they are wrongly trained and advised.

          • Ruud Harmsen

            > What do you mean by monetary value ?

            What banks owe the public, in other words, on demand (= readily available) claims of the public on banks.

            > What you can buy with money ?

            That’s not the same thing. A bank, for example, can buy computers with money it earned as interest, but that it is NOT money in that first sense, until it is actually spent on those computers.
            Likewise, the government can buy computers (or whatever else) with tax money, but again, that is NOT money in the monetary sense, until it is actually spent.

            The reason is that banks and the government do not belong to the public (which is: households and commercial firms), so their “money” is not money in the monetary sense. And it is exactly that “strangeness” which explains that seemingly enigmatic phenomenon, that so few people understand: money creation.

        • Simon

          You describe the money multiplier model of money creation on your web site which is not what happens in practice in the UK. I need to read your web site further, but at first glance it seems to over complicate matters when describing money.

          • Ruud Harmsen

            It happen like that everywhere. There is no other way for it to happen. Please do not only read articles 1, 2 and 3, but also 10 and 11 (seemingly different, but in essence the same), and 16 and 19 in conjunction with. The order in which I presented the material may not have been optimal in hindsight, but that’s because it reflects the learning process I myself went through when writing the articles.

          • Simon

            There is a lot of evidence now that the multiplier model is invalid and not a correct description of the reality. I suspect you are a trained banker or economist, but it has taken systems guys and engineers to show how the money system really works. A lot of economists are poorly informed. The reserve requirement is a very weak regulator as are interest rates usually. The UK money supply tripled in 11 years from 1997 as the banks went on a lending binge. The only limiting factor was banks willingness to lend, and borrowers willingness to borrow, eventually the debt mountain was too great. If all the banks increase their lending in step, they can expect new deposits to return to them, and that is why the UK money supply tripled in 10 years. They did the lending first and sought the reserves later. There was not extra money created by the bank of England from 1997 to 2008, or an army of grannies finding excess savings behind the sofa.

          • Ruud Harmsen

            ==
            I suspect you are a trained banker or economist, /
            ==

            I’m not. My resume is openly on the web. Zero formal training in economics.

            ==
            but it has taken
            systems guys and engineers to show how the money system really works.
            ==

            In fact, I was trained as an electrical engineer, and system theory and exponential functions were part of that. Laplace transforms and such things.

            ==
            If all the banks increase their lending in step, they can expect new
            deposits to return to them, /

            ==

            Not only do they expect it, it happens instantly. The second the loan is made available, it has returned, by being in an ‘on demand’ account.

            ==

            and that is why the UK money supply tripled in 10 years.
            ==

            Perhaps the Bank of England allowed that because they feared restriction money supply growth would cause of aggrevate a recession? What is wisdom? I don’t know.

            Some say the Fed caused or worsened the 1929 crisis by limiting the money supply.

    • murrayzz1

      Read the quote above:

      “Just as taking out a new loan creates money, the repayment of loans destroys money.” – The Bank of England.

      Seems you think you know better than the BoE. Maybe it’s you that doesn’t understand.

      • Marco Saba

        Maybe. Maybe not: I worked in an international investigation on money clearing institutions and so I know very well where do the money end up after refluxing to the banks…

      • donald dietrich

        I think he is on about reserves not being destroyed as he mentions ‘cash’ and ‘clearing’. Suppose he could say what happens when we pay down our loans with more clarity. Which would probably be exactly what we know happens on their spreadsheets. Some people still split hairs in regards to ‘money’ and ‘credit money’ which we know is an expectable means to pay your taxes and thus, is money.

    • Ruud Harmsen

      ==
      Money is NEVER destroyed whenever individuals or businesses repay loans.
      ==

      Oh yes, it is. In a sense, it depends on what you mean by “money”. Monetairy money or day-to-day ordinary people money? An important difference. http://rudhar.com/economi/monydebt/en/016money.htm

  • bankster01

    Robert Peston in his book “How do we fix this mess ?” on page 183 I think, says ” Only the bank of England can create money”. This book describes very well how the financial crisis occurred, I have not got to his proposed solutions, which probably mainly involves separating risky investment banks from boring retail banks. He is a top economist and journalist, but in his book he gives no adequate explanation as to how the UK money supply tripled in 10 years from 1997. He seems to imply that central banks created, then lent money at very low rates to the commercial banks who then lent it on to us. Some banks used securitisation, or sold on their existing loans so they could further increase their lending. I do not think over £1 trillion pounds was created in 10 years by the Bank of England for commercial banks to lend on, or a wall of foreign money was used by the commercial banks to increase lending either. The Bank of England has provided cheap credit for schemes like “Funding for lending”, in the hope that commercial banks would lend it on when the economy was on it’s knees, but it was not doing that in the boom years. It was simply all the banks increasing their lending in step, knowing that new deposits would then flow back to them, to support further lending. Peston writes a lot of good stuff, but he implies like a lot of economists that money is just “oil” for the economic machine, when really it is petrol, fuel for the fire.

  • simonthorpe

    One way to illustrate the role played by banks is to look at the amount of Assets that Banks have relative to capital. It is commonly believed that banks can only lend around 10 times their capital. But the most recent figures show that while the 50 largest banks in the world have $67.6 trillion in assets, they only have $722 billion in capital – an overall ratio of about 88 to 1. Indeed, several banks have more than 1000 times more assets than capital (see http://simonthorpesideas.blogspot.fr/2014/08/the-50-biggest-banks-676-trillion-in.html.)

    How do they do it? Well, the Basel II and III rules say that when banks create money to lend to AAA to AA- rated governments, such loans have a risk weighting of 0% – meaning that they need no capital at all to make the loans. It’s not surprising that Europe’s governments now owe over $11.4 trillion to the financial system, and that last year European taxpayers paid €365 billion in interest payments, bringing the total amount of interest paid to €6.2 trillion since 1995. These are interest payments made to a financial sector that didn’t even have the money that they lent. (see http://simonthorpesideas.blogspot.fr/2014/04/european-government-debt-and-interest.html )

    This insane situation is likely to continue while 7 out of 10 MPs have not understood that when the UK government borrows money from the markets, that money is created out of thin air. Well done Positive Money for showing how ignorant our leaders are.

  • Gregory Schoenmakers

    Presumably PM classifies the nationally owned Bank of England as part of the private banking system rather than part of the government. The fact is that when a central bank buys government securities, it creates money to do so which is not the same as bank created credit.

    I’m not sure how it works with the BoE but any profits the Fed makes from buying bonds gets remitted to the Treasury so it is effectively the government printing money.

    • Gordon Brooks

      The Fed may return its profits, but we have no way of knowing how they define profits. Before or after the guaranteed dividends to the member banks. And the Fed also injects money directly into the markets, including the member banks, which own the Fed system. And the difference between the government creating money and the Fed (or BofE) creating money is that the latter is always created as debt.

      • Gregory Schoenmakers

        The BoE is a nationalized central bank meaning it is part of the government. So any money owed by the government to the BoE is just money owed by one department to another. That doesn’t mean that buying up bonds is a good idea. It is sending newly created money to the wrong places – the very rich.

        • Gordon Brooks

          That brings up the question, though: if the Bank of England is, in fact, part of the government, then why does it issue money as debt? It makes absolutely no sense for a government to sell bonds to itself.

          • Gregory Schoenmakers

            Even if the government issued the money directly, it would still be a debt for the government. The difference is that like the BoE, it wouldn’t have to redeem these IOUs for anything; they just call it “legal tender”. (It is different for private banks which must be willing to redeem their created bank account credits for government issued money).

            However, the government doesn’t sell bonds directly to the BoE (which would just be an accounting exercise); it sells bonds to (rich) members of the public then buys some of them back via the BoE thus making those members even richer.

            The whole system is back to front. Instead of the BoE reacting to the government’s excess spending, it should determine how much extra the government should be allowed to spend and “lend”/give the money to the government for that purpose.

            Of course, private banks should not be able to mess that system up by creating their own credit.

  • Ian Cox

    This is what I have been told;

    ‘It is not true as your email suggests that it is only banks that create credit – the FPC of the Bank of England sets interest rates which in turn have a profound influence on the money supply and credit. Also I think the point about the amount of physical currency in circulation vs electronic cash is I think a bit of a red herring – the amount of money created by government is not a function of the amount of hard cash in circulation e.g. look at the high levels of QE that have been pursued.’

    Is my MP correct?

    • Andrew Buckley

      The Bank of England doesn’t create non-cash money that you and I spend. That money is created by commercial banks, on their balance sheets. The Bank of England can create cash or central bank reserves, but central bank reserves are not spent in the everyday man’s economy (at the shops). Commercial banks tend to lead the money creation cycle (when they need more reserves the Bank of England steps in to lend a hand).

      Quantitative Easing has little effect on the money supply, because all it does is inflate the price of government securities making those who hold them feel richer. The money doesn’t get to where it needs to go (employing people).

  • Ruud Harmsen

    And what the people behind PositiveMoney understand about the subject? Very little, I fear. For real explanation, read my article series: http://rudhar.com/economi/monydebt/en/ .

    • Simon

      Have a look at the “Banking 101” videos on the Positive Money web site, feel free to comment if you disagree with them. I think they describe well how the existing system works, more technical detal is in the books “Where does money come from ?” and “Modernising Money”.

    • Andrew Buckley

      You’ve basically just told the “money multiplier” story in that link there I’m afraid. The amount of money banks create is limited by the availability of credit worthy borrowers (in turn affected by interest rates and the general state of the economy etc.).

      • Ruud Harmsen

        > You’ve basically just told the “money multiplier” story in that link there I’m afraid.

        In my articles 1 and 2, yes, but see also 10 and 11, for the seemingly different, but essentially equivalent everyday reality. http://rudhar.com/economi/monydebt/en/index.htm#001

        And money creation is not unlimited (even if the cash reserve requirement is not currently used for that). Articles 3, 8, 9.

        • Andrew Buckley

          No one said money creation was unlimited. What PM says is that money creation (creation of new bank deposits) is limited by the availability of credit-worthy borrowers, and only that. Many other things indirectly limit money creation by affecting the availability of credit-worthy borrowers (such as interest rates, health of the economy etc.).

          • Ruud Harmsen

            > No one said money creation was unlimited.

            One of the banking 101 videos by Postive Money does. I’ll write about it later in detail. I may take a few months, possible years, before I find the time.

  • Marco Saba

    “In their balance sheets, banks list deposits and current accounts on the liability side. This wouldn’t make sense (it’s as if a garage manager were to enter parked cars on the liability side!) if it weren’t essential to conceal the way the banks themselves actually work; listing deposits as liabilities in the balance sheet is the only way of concealing the banks’ colossal assets (generated, over time, by their impressive gross operating margin between the amount of money created plus the interest income from loans – on the one hand – and operating costs with the interest on deposits, on the other).Operating margins (loans + interest income minus costs and interest expense) could exceed 90% and would be taxable.”
    (A.Galloni – THE FUTURE OF BANKING Lineaments of banking and financial theory, EURILINK, August 2014)

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