Money

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What is Money?

The definition given by the Oxford dictionary is.

” A current medium of exchange in the form of coins and banknotes”.

A very simple and precise definition.

So who creates money?

The bank charter act of 1844, gives total monopoly of bank note creation to the bank of England. It is a criminal offence for any other person, organisation or private bank to create or issue banknotes.

This all sounds reasonable and it is what the vast majority of people have been led to believe.

Then in 2014, The bank of England published an article called ” money creation in the modern economy.

It states:

” Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money”.

Another Quote from the same article says:

” Just as taking out a new loan creates money, the repayment of bank loans destroys money”.

So what’s going on? Private Banks cannot create or issue banknotes it is against the law. However they are creating new money.

Banks are in fact creating credit, not money,  but we treat this bank credit as money.

So how do banks create credit?

A simple example of two banks creating credit:

Customers from both banks exchange goods between themselves using their bank credit cards.

Customers from bank “A” spend £1 million with bank ” B “customers.

Customers from bank “B” spend £1 million and ten pounds with bank “A” customers.

To balance the books bank ” B” has to give bank “A” ten pounds cash.

Between them the two banks have created £2 million but only transferred £10 cash.

Banks are middle men, they take the risk that some customers will not pay their debt… That is thier justification for charging interest on loans… However if taxpayers have to bail them out, when thier debts turn bad, and customer  deposits are guaranteed by government, what is their justification for charging interest?

The banks do not  use our savings to make loans. They simply create the money they loan. This explains why the bank of England can set interest rates. There is no real competition between banks for our savings. It also explains why house prices are so high. The price of a house is not determined by money that exists in the real economy, but rather by the amount of money the banks are willing to create and loan.

The UK banking system is creating a financial divide, between the younger generation and the older generation. The younger generation are having to borrow ever increasing amounts of money to purchase a home,  while the older home owning generation have benefited from increased house prices.

This new money creation is also fueling consumerism. A large proportion of the consumer supply chain is now owned by corporate companies, who make vast profits but pay their employees low wages. This means, that money created from debt is not recycled  back to local communities. It seems to me that this is a transfer of wealth, from British communities to the corporate elite,  many of whom register their interests in off shore tax havens.

Hopefully as more people understand Money. Politicians will be put under pressure to address the social inequality created by the banking system.

Author

Paul Fear.

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2 thoughts on “Money

  1. The main reason for the wealth gap, is that most financial returns from a business undertaking flows to the owners of the business, whether it be founders, executives with large stock holdings, or investors. These people have taken risks where capital. Rewards result

    Like

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