The Problem

When it comes to money, the government takes responsibility for creating metal coins and paper notes (the cash in your pocket), but allows commercial high-street banks to create almost all of the electronic ‘number’ money that exists in our bank accounts.

Most people think of money as paper notes or metal coins. However, since the vast majority of transactions are now made through credit cards or electronic transfers, there is relatively little need for this kind of money. Consequently, most money only exists as numbers in a computer system – in fact, only £3 out of every £100 now exists as cash. The rest exists simply as electronic records in massive databases maintained by the high-street banks.

We all know that anyone – other than the government – who starts printing their own fake £20 notes will find the police knocking at the door. The law that made it illegal for anyone other than the state to create paper money or coins was passed in 1844 – before this date, banks were allowed to print their own paper money.

However, there is currently no law that prevents banks from creating the ‘digital’ form of money. The laws have not been updated in the last 160 years to take account of the rise of debit and credit cards and electronic banking.

Money Is Created By High-Street Banks

Privately owned high-street banks have created 30 times more money than the government has ever created.

Privately owned high-street banks have created 30 times more money than the government has ever created.

The flawed design of the banking system makes it possible for banks to create phenomenal sums of money, all without actually breaking counterfeiting laws. They can create money whenever you or I take out a mortgage, loan, credit card or overdraft.

The root cause of the financial crisis is this: money – the foundation of modern society – is no longer issued by the government. It is issued by high-street banks, lent to the public as mortgages, business loans, overdrafts and credit cards, and must be repaid back to the same high-street banks who created this money.

In other words, the money which we all need in order to pay our bills, buy food, and simply live, is created by private, profit-seeking corporations.

How Much Money Have They Created?

It may seem unbelievable that the government allows banks like Lloyds TSB, Halifax, CitiGroup, Barclays and so on to create our money, but statistics from the Bank of England shows just how much money high-street banks have created:

  • Of the £2,058 billion that exist in UK bank accounts, £1,996 billion was originally created by the high-street banks, and must be repaid to them (as of March 2012).
  • Only around £62 billion of cash has ever been created by the government – £3.00 for every £100 of bank-created money
  • Of this £2,058 billion that has been created by the commercial banks, £1,103 billion has been created since 2003 alone. This is according to figures which are openly published by the Bank of England.
  • The total amount of outstanding debt is now greater than the total amount of money in the economy.

Is This A Problem?

‘Creating money’ might sound like a good thing – after all, more money means we can buy new things. But when banks create new money, they also create new debt. When they created £1,103 billion in a little over 8 years, they did it by getting the nation into an additional £1,103 billion of debt. This is what pushed house prices up so far, and what created the credit card-fuelled boom on the high street. This is why we are all stuck in a debt trap right now.

The banks have been allowed to create real money. Despite being legally permitted (due to poor design of the banking system),  it is little different to the government giving a criminal counterfeiting gang a printing press and the license to print as much money as the nation can borrow. The impact on inflation and economic stability is not much different.

Don’t make the mistake of assuming that there is a ‘good reason’ why the government allows this – there isn’t.

Is This Legal?

The fact that high-street banks have created 30 times more money than the government ever has is a legally-sanctioned, commonly accepted feature of our modern banking system.

In fact, it is so uncontroversial that it is even discussed in degree level finance textbooks, where it is referred to as a benign-sounding ‘multiplier effect’. In other words, this certainly isn’t a conspiracy theory or some monumental corporate fraud. High-street banks have been creating huge quantities of money under the knowing eyes of the Treasury and Bank of England for the last few hundred years.

But it is only now we can clearly see the devastating consequences of allowing high-street banks to create the vast majority of money in the economy:

  • soaring personal debt
  • exceptional government debt
  • a housing-market bubble fueled by excessive and irresponsible lending
  • instability in the stock markets
  • the destruction of the value of people’s pensions
  • the Third World debt saga

In this Section:

  1. How We End the Crisis
  2. How Do High-Street Banks Create Money?
  3. The Consequences Of Allowing Banks To Create Money
  4. How Did We End Up In This Situation?
  5. The Solution to the Financial Crisis
  6. This Is Not A New Idea
  7. What Will Happen If We Don’t Reform The System?
  8. How We All Benefit From The Reform