Who creates money?

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If you ask a person in the street ‘how is money created?’ they will probably look at you blankly. A couple might hazard a guess and say the Bank of England, writes Fran Boait, Positive Money’s director in the Oxford University Politics blog, 19th Jan 2016. 

Here’s a short extract of the article:

There’s a Chinese proverb that says: ‘The fish is the last to know water.’ Money is all around us, playing a role in almost everything we do, yet it can be difficult to understand. We are swimming in a society that depends on money—that’s become obsessed with money—but few of us know where it comes from or how it actually works.

A landmark paper released by the Bank of England in March 2014 explains how private banks create the vast majority of money we use when they make loans. When you go into a commercial bank and take out a loan, the money is created out of thin air: ‘Ping!’ Money is created and at the same time, so is debt. 97 per cent is created in this way, the remaining three per cent of the money in circulation is in the form of cash; the coins and notes in your pocket.

It is perfectly possible to carry out QE for People without it leading to inflation. Runaway inflation is no more likely to result from QE for People than it is from giving banks a licence to create money or from flooding financial markets with new money created via traditional quantitative easing. In fact, if you look at the impact of recent UK monetary policy on the housing market, it clearly has grossly inflated house prices. Leaving money creation solely in the hands of private, profit-seeking banks creates housing and asset bubbles, which increases inequality. The fear around uncontrollable inflation and the taboo on discussing money creation is a direct result of the lack of understanding outlined earlier. There is a great responsibility on the part of economists and politicians to challenge the conventional wisdom that led to the 2007 crisis. If we don’t understand the money system we have created, we’ll be destined to repeat our mistakes.

 

Read the article in full here.

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  • Great article Fran – very clear.

    I look forward to the cudgels of PM being taken up by the powerful Oxbridge movers and shakers to batter some sense into our financial system .

  • Chris Cook

    Yup. Money is created when banks lend, and so is debt. But the money is the object of the debt or ‘that which is borrowed': it is not the debt itself, and it is not cancelled when the loan is repaid.

    • bankster01

      Yes, but money is taken from an account to repay the debt, so M4 and M4 lending would both decrease.

  • The person that is making the loan is creating the promissory note according to the bill of exchange act in the UK. The bank then takes that promissory note as an asset on its books and types the amount into the liability side of the book. So banks do NOT create the money!

    • RJ

      The liability side is bank credit. This is our money. It’s a liability to the bank but a money asset to us.

      That’s what money is today and almost always has been. A financial asset where one party holds the debt liability and another the money asset.

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