The election campaign is generating new interest in Positive Money’s proposals, not least because of the Green Party’s manifesto commitment to put money creation in the hands of a new, independent monetary authority.
The BBC’s ‘Reality Check’ series includes an explanation of the party’s policy, and busts the most common myths about money creation:
There are two common misconceptions about how money currently works:
- The Bank of England controls the amount of money circulating around the economy, perhaps by “printing money”
- The ability of private banks to lend is limited by how much other customers have deposited in their vaults
Neither of these is quite true.
The vast majority of money is created by private-sector banks – not the Bank of England.
Positive Money, a group that argues for reforming the monetary system, says 97% of money is created by banks.
Each time a bank makes a loan, it essentially creates money.
And it is basically up to banks to decide how many loans they create.
Money then disappears when the loans are paid back.
So the Bank of England actually does not have much control over how much money there is circulating around the UK economy.