Around 97% of money today is created by commercial banks when they make loans.
One problem is that when banks decide whether or not to make loans, they also decide where the money they create will go. Because they lend far more to property and finance-sector businesses than they lend to businesses in the real (i.e. non-financial) economy, most newly created money starts its life in the speculative economy, rather than creating jobs.
A second problem is the more money banks create (by lending), the more profit they earn. So they have a real incentive to create too much money. This happened in the financial crisis that started in 2007, and led to the current global recession. More here.
A third problem is that this system makes it necessary for the level of household and business debt to keep rising, in order to keep the economy growing. This is because banks create money when they make loans and destroy money when loans are repaid. So we face a catch-22 choice between having:
- More money AND more debt, or
- Less debt AND less money
So even though we have historically high levels of private debt, the government’s economic strategy relies on growing the economy through further borrowing.
This monetary system leads to a wide range of other problems. See the Issues menu above for more.
Posted in: 2. The Current Monetary System