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Making money and banking work for society

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Magic Money Tree

Politicians often like to point out that there is no “magic money tree”. But that raises the question, where does money actually come from? The answer is more complicated than many people realise.

If you listened to some government ministers, you might assume that there’s a fixed amount of money in the economy, or that the amount is strictly controlled by the Bank of England.

But in fact, money is being created out of thin air all the time. And this process has hugely important implications for issues like housing, inequality and the environment.

Most of the money we use comes in digital form, as the numbers we see on our bank statements. This money is created by private banks like HSBC and Natwest when they make loans. They create it by simply typing numbers into a computer – some might call this magic!

Sound implausible? You don’t have to take our word for it – the Bank of England itself has confirmed that “whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money.”

Unfortunately, banks direct most of their lending towards property and financial speculation, which pushes up house prices and makes financial crises more likely. Banks prefer lending to the ‘financial’ economy than the ‘real’ economy, where most ordinary people would see the benefit. This means they do a bad job of lending to businesses which create jobs and grow the economy in a sustainable way.

And because commercial banks were slow to start lending again after the 2008 crisis, the Bank of England stepped in with its own money creation programme called quantitative easing. It’s chosen to pump this new money into the financial sector, which is pushing up the value of assets like houses, shares, and corporate bonds.

This policy has done very little for ordinary people, but the Bank of England’s own research has shown that quantitative easing made the richest 5% over £128,000 richer. So at a time when politicians are using the absence of a “magic money tree” to justify austerity, the Bank of England policies are enriching a wealthy few.

All of this exposes how dysfunctional our money and banking system is. But we know it doesn’t have to be this way. We can reform the system so that it supports a fairer and more sustainable economy.

  • Instead of the Bank of England pumping new money into financial markets through quantitative easing, it should be spent via the government into infrastructure, green technology, or as a cash transfer to help households pay off their debts and improve their finances.
  • And we need to transform our banking system so that banks lend money to support investment and jobs in the real economy. This means having a more diverse range of banks and government policies that encourage lending for productive purposes.

What we're doing

Since 2010 Positive Money has been working to educate the public, politicians, economists and the media about where money comes from and how banks work.

Through our 45,000-strong network of supporters, and dozens of local groups around the UK, we work to educate ourselves and others in our local areas about how our money and banking system works.

Our team of researchers have written two books, several papers, and been published in academic journals, in our attempts to reach economists and the wider public.

And our policy and advocacy team work on educating and influencing MPs, political parties, and the media.

We also collaborate with other civil society organisations such as the New Economics Foundation, the Finance Innovation Lab, Rethinking Economics – an international student society working to reform economics teaching in universities – and Economy.

We have over 66,000 followers on Facebook and active engagement on Twitter.

One breakthrough for us came in 2014 when the Bank of England published a paper confirming what we’d been saying about how new money enters the economy. You can read more about our key achievements here.

RESOURCES

Check out our viral video exposing the Magic Money Tree.

Watch the video

This free animated video course (total 57 minutes) explains how the modern banking system creates money, and what limits how much money banks can create.

RESEARCH

The Proof

The way that money is taught in universities is often very inaccurate. These papers and sources from central bankers and other experts show how the system really works.

How We Got Here

The laws that make it illegal for you to print your own £5 or £10 notes have been in place since 1844. But these laws have never been updated to account for the fact that 97% of money is now digital.

How Much Money Have Banks Created?

From the time when the Bank of England was formed in 1694, it took over 300 years for banks to create the first trillion pounds. It took them only 8 years to create the second trillion.

BOOKS

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Positive Money is a company limited by guarantee registered in England and Wales. Registered number 07253015.
Registered office: 104 Davina House, 137-149 Goswell Road, London EC1V 7ET.


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