How Do High-Street Banks Create Money?
'Boomerang loans' are the root of our financial problems. Every pound that is lent comes straight back to the banks and is relent again, creating a huge pyramid of debt.
Every time a loan is made by a commercial bank, new money is created.
Due to flaws in the design of the banking system, rather than simply moving the money from Bank A to Bank B, the money is effectively duplicated.
This duplication of money is only possible because most money nowadays is simply numbers in a computer system. In computing terms, it is more like ‘copy and paste’ than ‘drag and drop’.
In fact, only 3% of money now exists as cash (paper notes or metal coins). The rest – some £2,094 billion (as of July 2011) – has been created within the computer systems of commercial banks over the last 30 years! In fact, throughout 2007, commercial banks were creating over £1 billion of new money per day!
Find this difficult to believe? Here’s a quote from Barack Obama, President of the USA, on April 14th of 2009:
“Although there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask – the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.”
Obama is stating the fact that, if the government injects £1 billion, the banks can use it to create £10 billion of new loans – new money, new debt. In other words, banks are creating money out of thin air by endlessly relending the same amount of money to multiple people.
While his comment is technically accurate, what he doesn’t tell you is that the money injected into banks will result – after the money creation process – into an extra £10 billion of debt, owed by the public to the banks, and the interest payments on that £10 billion, which the banks get to collect simply for creating money out of nothing.
A government bailout directly to the public will reduce the debt burden of the public; in contrast a bailout to the banks increases the debt burden of the public and generates windfall profits for the banks.
If Banks Can Create Money, Why Did They Run Out Of Money In The Credit ‘Crunch’?
The system above means that the banks can keep lending as long as we (individuals, families, companies and the government) are willing to keep borrowing. The problem only arises when our debt repayments become such a large proportion of our income that, once the mortgage and credit cards have been paid, there is no money left over for food.
When this happens, people default (stop paying back) on their loans and the banks start to lose money. This is exactly what happened in the sub-prime crisis. However, if nobody had defaulted, the banks could have gone on creating and lending money indefinitely.
