An article entitled “So where does money come from anyway?” written by Paul Ferguson from our sister organisation in Ireland Sensible Money was published on a national radio station’s website NewsTalk on 4th January 2013.
Here is an extract:
Believe it or not, digital money comes from bank loans. Banks create the money they lend ‘by simply increasing the borrowing customer’s current account’ to quote Paul Tucker, deputy Governor of the Bank of England. As a result every digital Euro has a corresponding interest-bearing debt to the banks. For us, this process of money creation is the root cause of the debt crisis and indeed many of our social problems. In fact because banks charge interest on loans, they create more debt than they do money and this means that it’s impossible for everyone to repay their loans. Another problem with creating money this way is that if no-one is willing or able to get a loan from a bank, there is no significant source of the lifeblood of the economy, money.
Unfortunately it seems this system is very misunderstood by many of our politicians, journalists and even our economists. In fairness what’s still taught in university is an outdated model of banking that dates back to when loans were processed in cash form only. Thankfully there have been a number of articles and papers on this subject recently and it seems some economists are beginning to suspect that the creation of money in parallel with debt is the cause of over indebted economies.
One solution to the debt crisis lies in running the economy the way most people think it runs. This involves the central bank creating the entire money supply, cash & digital, and having the banks do banking. i.e. Banks would process all the electronic transfers within the economy and act as an intermediate between savers and borrowers. This is known as full reserve banking.
Read the whole article here.