Given that the debt crisis has caused a near doubling of suicide rates in Greece and resulted in tens of millions more people below the poverty line, perhaps we should have a better understanding about debt and why there is so much of it. As a child I was one of those annoying kids who wouldn’t stop asking questions. This has pretty much continued and one question that has puzzled me particularly is “who is all this debt we hear about actually owed to?”
There is currently £1.45 trillion (US $2.2 trillion) of personal (household) debt in the UK equivalent to £29,681 ($45,618) for every adult. UK government debt currently stands at £1.0 trillion ($1.5 trillion) not including bank bailouts and then there is also financial and commercial debt. The figures for 2009 for total debt as a percentage of the final value of all goods and services produced yearly (GDP) by country show the UK at 466%, the U.S at 296%, Canada at 259% and India at 129%. Who is it in any of these countries that still has any money to lend to anybody?
Well, in the UK, Australia and Canada it seems the government somehow does. £4.9 billion ($7.5 billion) of UK taxpayer money was allocated to student loans in the 2010/11 academic year. However much of this government spending is funded by bank loans and banks loans also supplement student income in the UK, Canada and Australia and finance much or all of students’ expenses as in the U.S and India. So whose money are these banks using?
The answer, although it took a while to sink in, is uncomfortably simple. As Paul Tucker from the Bank of England explains, money is created by private banks as debt. The vast majority of money that is lent didn’t have to belong to anyone else before (although a small proportion may have). It was simply created out of thin air by numbers being added to your bank account.
“Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank writing a cheque on itself. That is, banks extend credit by creating money”
Paul Tucker, Deputy Governor for Financial Stability, Bank of Engalnd, 2007
In the case of government funded loans provided free from a profit motive the money actually had to exist beforehand and the government had to choose to forego spending it on something else (although this is complicated by government borrowing). However, when the student loan is provided via a bank, the money is created from nothing and interest payments still have to be made on this new money.
“In the real world, banks extend credit, creating deposits in the process, and look for the reserves later.”
Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)
This poorly understood fact is very important not only because of the question of fairness it exposes as many students and other borrowers pay banks often excessive interest payments to borrow money the banks never had, but also because it is a major barrier to a more equitable, democratic and sustainable world. While in the UK many people have been fighting to keep the NHS public, few realise that our money system here and around the world has already been privatised benefitting a tiny fraction of people at the expense of the public good.
If you are struggling to fathom how profit driven private companies can possibly be creating the money supply of most of the world’s nations then the following questions should help. First, what exactly is money? A good answer is anything that can be readily exchanged for goods and services and is accepted in payment of taxes. Globally digital transactions through banking systems account for the overwhelmingly majority of these exchanges by value. In the UK digital (bank deposit) money makes up 97% of the money supply with the remaining 3% being coins and notes.
The second question is who controls this digital money? Nothing in law stops banks increasing the numbers in your account in exchange for a loan contract. The only thing they have to concern themselves with is providing small quantities of cash on demand via ATMs and having sufficient reserves at the central bank to transfer to other banks (who are also creating money as interest bearing debt) should customers spending activity result in the total payments going out of their bank to other banks being more than that coming in on any given day.
Not only have private banks gained the benefit of creating most of the worlds money and controlling where it is allocated but the system under which they create it means that money comes into existence as interesting bearing debt, (even new coins and notes are only obtainable via a bank account and so ultimately through someone somewhere taking out a bank loan). This makes the levels of debt we see causing so many problems practically unavoidable.
When debt is literally killing people by pushing them to suicide as in Greece and below the poverty line as in much of the rest of the world, isn’t it time we questioned alternatives to this system and viewed debt as a major public health concern that has to be addressed?
For more information on this issue and how it relates to the fundamental conditions required for health, peace, shelter, education, food, income, a stable ecosystem, sustainable resources, social justice and equity, see bsd.wpengine.com.