The Consequences Of Allowing Banks To Create Money
All our current financial problems are rooted in the system of allowing banks to create money.
The G20 have failed to realise that it is impossible to end the current crisis as long as we allow high-street banks to create as much money as we can borrow.
The system was the root cause of the US sub-prime crisis, and even in good times has incredibly damaging consequences upon the economy. Allowing the banks to create the vast majority of the money in our economy will always lead to instability and – eventually – complete economic collapse.
How Does Allowing Banks To Create Money Lead to the Sub-Prime Crisis?
The truth is that securitization and the sub-prime mortgage fiasco was not the cause of the financial crisis.
It was simply the area where the collapse occurred first. The real root of the crisis is the design of this financial system, which allows commercial banks to create as much money as we can borrow.
Over the last few years we have seen the prices of housing skyrocket as banks became willing to lend more and more on mortgages. Every mortgage that they lent was used to buy a house and the money found its way to the bank account of the house seller. This means that every pound that the banks lent for mortgages returned straight to the banking system, like a boomerang, as new deposits. The new deposits were then used to make even further mortgages.
So if the banks lent a total of £1billion in mortgages on Tuesday, then on Wednesday morning they would find £1 billion of new deposits, and use these ‘new deposits’ to make a further £1bn of mortgages. This process would continue indefinitely.
In essence, the same initial ‘block’ of money was lent many hundreds of times. There was no limit on the amount of money that could be created. When the banks ran out of good risk borrowers they would look for bad-risk borrowers (hence the abundance of adverts offering money to those with bad credit histories). When we then ran out of bad-risk borrowers in the UK, we look for bad-risk borrowers in the USA. Eventually these ‘sub-prime borrowers’ are maxed out on debt to the point where they can no longer afford the repayments. They default and the whole house of cards comes tumbling down.
It’s easy to scape-goat the banks for doing this. However, the system is designed in such a way that if they stopped this cycle of infinite relending – even for a few days – the economy would grind to a halt. This is exactly what we have seen happen over the last few months.
The current financial crisis is not a result of poor regulation or greedy risk-taking. It is the natural and inevitable result of a financial system where high-street banks are allowed to create as much money as we can borrow.
Debt Goes Up and Up…
The system naturally drives people into more and more debt – to the point where the average household debt is now equal to 135% of their annual income.
This system provides an explanation for the fact that, while historically 1 worker could adequately provide for a family of 4, it now requires 2 adults working long hours simply to buy a shelter and provide for the family. Even though we have become more productive and more efficient every year, we work harder and longer than ever, and this is entirely due to the illusion of poverty created by this monetary system.
The System is Morally Wrong…
It’s important to realise that the current state of affairs, where high-street banks are allowed to create money, is ethically no different to the government giving say, Tesco*, a printing press and the license to print as much money as the public wanted to borrow. Tesco would then be able to print nearly £2 trillion, lend it to individuals, companies and the government, and then collect the repayments plus an additional £2 trillion in interest payments (since the interest on a loan is usually at least as much as the original amount borrowed).
Even worse, as Tesco printed more and more money, we’d get inflation (prices would start to rise), making things more expensive and requiring us to borrow even more in order to afford the essentials.
Naturally we would never give one company the rights to create all the money that society needs. However, through the government’s head-in-the-sand approach to money creation in the banking sector, we have allowed a group of around 60 companies to do exactly that.
*Tesco is the UK’s largest retailer.
Read On: How Did We End Up In This Situation?