Who’s Making All the Money?


The Latin motto of the City is “Domine dirige nos”, which translates as “Lord, direct (guide) us”.

Money is power. By giving banks the power to create money we hand over incredible economic influence to banking directors who’s tendency is to prioritise corporate profit and personal wealth over the stability of the economy. They decide where in the economy this new money is directed, most of it going into mortgages, credit cards and financial speculation.

Day by day, more and more of us understand that big banks are at the heart of the UK’s failing economic model and have an unhealthy influence over our political system. But still too few of us understand exactly how the banks have become so powerful and why they are so toxic. Banks and finance didn’t just take control of our economy and society out of nowhere. So how have our banking institutions and “too big to jail” bankers come in to being? The major contributing factor is that they have been allowed to take control of the power to create money. Most people don’t understand this simple fact – to our great peril.

Our MPs have the power to change the current situation, but worryingly, even they are mostly in the dark about this issue. A recent survey found that nearly three quarters of UK MPs, (71%) answered incorrectly when asked about the technical workings of our monetary system. Little wonder: it is 170 years since a debate was held in Westminster about the rules that govern money creation. This is about to change. In a few days time, on Thursday 20th November, for the first time since 1844, MPs will attend a three hour debate about ‘Money Creation and Society’.

If you – unlike our MPs – are up to speed with the mechanics of money creation and the economic, political, social and environmental consequences of the current process, you might want to skip the next few paragraphs and read about how we can take advantage of the up coming parliamentary debate. To find out how three basic factors have combined to create our banking industry and subordinate our political institutions to banking and The City of London, read on…

How is money created?

Three factors have combined to create our monetary system. Each factor, on its own, is not necessarily a problem, but combined they are a toxic mix. These three factors are: firstly, that almost all money is created as debt; secondly, that interest payments are owed on this debt (money), and; thirdly that private commercial banks currently have the power (and unwarranted privilege) to create almost all our money (debt). Sir Mervyn King, former Governor of the Bank of England, put it like this: “When banks extend loans to their customers, they create money by crediting their customers’ accounts.”

So, although money creation is governed by a highly complex patchwork of rules and regulations, in essence, as King makes clear, understanding our monetary system is remarkably simple. Essentially, money is created out of nothing by commercial banks making loans that must paid back with interest – that’s it! Simple!

The obvious catch twenty two here is that almost all money is debt plus interest. So each year we as a society have to take on more debt to pay previous years debts and interest.

What are the consequences of the way that money is currently created?

One obvious consequence is that the current monetary system leads to economic instability and a boom and bust economy. Or as Lord Adair Turner, former chairman of the UK’s Financial Services Authority (FSA), and former member of the Bank of England’s Financial Policy Committee pointed out in 2012, “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.”

What Turner failed to highlight however, is that under the current arrangements there are no effective ways to constrain banks’ creation of private credit – i.e., money. Detailed work by Ben Dyson, founder of the Positive Money campaign, and Andrew Jackson, at the New Economics Foundation, in their 2013 book, Modernising Money, clearly establish this fact.


Killing the golden goose

A second obvious consequence is the corporate take over of our high streets and monopolisation of almost every area of our lives. Put yourself in the shoes of a banker who has the power to create new money out of nothing and loan it to whoever he or she likes. The only thing you have to worry about is that the people you make the loans to, keep up with their interest payments – because if a significant number of people stop paying the interest payments, your bank becomes insolvent and eventually goes bust. You’ve killed your golden goose.

So who are you going to lend to?

You’re not going to lend to risky innovative businesses are you? Neither are you going to want to lend to small and medium size businesses that have to compete with each other, in case they go under.

The sensible and rational choice is to lend to big businesses to help them expand and monopolise local, regional and national markets. Big businesses that have a monopoly control can stifle competition, force prices up, force costs down and by doing so guarantee increasing profits to make their interest payments. It’s a sure bet. If you back a corporation and provide it with access to an almost unlimited supply of money it can do whatever it needs to push competition out and establish a monopoly position. This is not good for the rest of us because, as any economist worth his salt will tell you, jobs and innovation are created by small and medium size businesses that contribute to local economies, whereas, corporate monopolies drain wealth out of our communities and corrupt our political systems.

A third consequence is the mathematical inevitability (barring some well thought out and implemented tax regime) of increasing wealth inequality. This is because currently, the way that money is created transfers wealth, in the form of interest payments and profits, from the productive economy into the hands of bankers, their shareholders and their corporate partners. The evidence of this is there for all to see in the UK’s economic figures and in study after study of wealth distribution.
Distribution not growth

The key point here is that under the current monetary system, economic growth must be sustained at all costs to keep our banking institutions from collapse. The question of whether continued growth – or what kind of growth – is of benefit to society, is of almost no consideration.

Of course, it is true to say that economic growth has brought huge benefits to many. However, the real issue of our time is how to more equally distribute the huge amount of wealth that we have now accumulated, without further depleting the world’s natural resources.

Taking advantage of the up coming parliamentary debate

The up coming debate about ‘Money Creation And Society’, on Thursday 20th November, provides an opportunity to do something about our monetary system, hidden in plain sight, at the heart of our economy. For a start, just getting this topic on the agenda is a great achievement.

The Positive Money campaign suggests that we take this opportunity to educate our MPs by contacting them with the following important questions and suggesting that he or she tables them for debate.

These questions include:

Who should create money?
Should high-street banks have the effective right to create money every time they make a loan, given the recent consequences for the economy?
How should newly created money be used?
Do we want banks to have the power to create money when this leads to unaffordable housing and financial instability?
Should we have allowed the Bank of England to create £375bn with little scrutiny from parliament, and use this money to inflate financial markets? Were there better uses of this money?

Positive Money also suggest that you:

1) Invite your MP to the historic debate on money creation. You can do this in just 2 minutes using the link here.

2) Phone your MP. This is the quickest way to let them know the debate has been announced and find out if they are planning to go. You can simply phone the House of Commons switchboard on 020 7219 3000 and ask for your MP by name. You will be able to leave them a message or speak to a member of their staff.

3) Tweet your MP. Include the hashtag #sovereignmoney in your message so we can follow your conversation. You can find your MP’s twitter handle here – Remember to include their handle in your tweet. Here is an example tweet: Historic backbench debate ‘Money Creation and Society’ > http://ow.ly/DRxpd > @yourmpshandle will you be there? #sovereignmoney

4) Tell your friends, family and colleagues. We need as much support as possible. Share our campaign with your contacts via social media. Email them, or share this.

5) Watch the debate LIVE on Live Parliament TV. On Thursday 20th November you can watch the debate live online here. Approximate expected start of ‘Money Creation & Society’ debate is around 2pm.

For more information, Positive Money has also published a full briefing for the money creation debate that can be read here.


This work is licensed under the Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/.

Comments (18)

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  1. Scott Egner says:

    Good article.

    Ok so the treasury view (fob off) on this is as follows….

    requiring banks to hold deposits wholly in cash would vastly reduce the lending capacity of the UK banking system making it difficult for households and businesses to obtain loans. This restriction on credit would substantially limit investment in the economy, harming long term growth. The Independent Banking Commission has stated that ‘a complete move from fractional to full reserve banking would dramatically curtail the lending capacity of the UK banking system, reducing the amount of credit to households and businesses.’

    1) No one said anything about the banks holding just physical cash
    2) businesses find it difficult to get loans NOW with only about 8% bank lending going to business. How’s that good for growth? Indeed do we have any growth in our economy besides speculating on house prices?
    3) there has been far too much credit (money) creation into mortgages creating inflation in this sector. Threefold increase in house prices over a decade or so. This doesn’t benefit the majority of people or our kids.
    4) what is the makeup of the ‘independent’ banking commission? Is it REALLY independent?
    5) having money creation power in the public sector would have much more chance of putting money where it was needed to create real growth. This means more jobs which means greater tax revenues for government.

    1. Nigel de Sylva says:

      Going for growth………you can’t keep going for growth, it is impossible.As the article says , banks are not inclined to lend to S and ME’s because ,in going for growth, other companies will falter and fail creating unemployment. Tesco’s is a prime example, where local businesses are forced to close, albiet, a few part time jobs are created, but resulting in a massive depletion of cash remaining in the area…something like 6 or 7% the rest going to shareholders and businesses outwith the area.
      There is only one size of pot and you cant keep taking out of the pot more than is in it.

  2. Barontorc says:

    So basically, our economy is based on a banking system that permits a guy, with money back-up, to give a loan, for which he gets as much back in interest as the ‘market’ can get, which then goes into his money-pot and he repeats the business with other loans, and ever onwards…..until the loans start to default and he’s left holding the baby (unpaid credit), too much of that being Fannie-Mae-itis, but how come, we all poor suckers end up paying for the ‘banker guy’s’ risks gone bad? Did we have any say? A choice to make?

  3. maxblunt says:

    Revoke all private banking licenses, make the BoE the only bank in town, all the savers would deposit there.
    This way the exchequer / the people gain, instead of private profiteers/chancers, aka bankers.

  4. flit2013 says:

    The banks really, really like loans secured against assets as it reduces their risk levels and are directly responsible for every housing bubble through the mortgage market, as it is the easy availability of borrowed money that really fuels house price inflation. The sub-prime crisis was only ever a few mortgage sellers’ mouse clicks away. The increase in housing values (or most other asset bubbles) then fuels further debt laden consumer spending. This is a Ponzi economy and an essential feature of Minsky’s financial instability cycle which has the dubious advantage of being the only really accurate predictor of the boom and bust yoyo. There will never be any stable capitalist system unless this is sorted out. And given the desire for instability by the neo-liberals so they can force through market ‘liberalisation’ aka profiteering there is no incentive for the Tories or any other neoliberal grouping to reform the money supply. No reason why full reserve banking cannot be brought in over time with a capitalisation escalator. And to think these people really believe a low wage economy powers growth…..

  5. What happened to the Thatcherite obsession with money supply in the 1980s? I remember it was all they talked about on the news, once the balance of payments went into deficit.

    1. FlimFlamMan says:

      It became so obviously wrong that even mainstream economists noticed, so it was abandoned in favour of ideas that were less obviously wrong. Still wrong. Just less obviously. Such as “expansionary fiscal contraction”, which ought to be obvious as well but economists and politicians still haven’t noticed.

  6. Craig P says:

    I’ve just started reading about the history of money in Scotland, England and the UK – an interesting subject and apologies on posting on a subject about which others know far more.

    During the days of the Stuarts, Scottish kings often struggled to raise money. Parliament’s power was that it would occasionally grant the king money. However the total amount of money in circulation wasn’t much, one of the reasons for Scotland’s relative poverty.

    From the days of the Plantagenets onwards, England by contrast ran on debt, mainly to pay for wars of expansion. Parliament’s power was that it would occasionally withhold grants of money to the king. The constant increase in debt meant there was always lots of money in circulation, one of the reasons for England’s relative affluence.

    It seems that a ready supply of investment funds is important to take advantage of opportunities. We can see that in silicon valley today, or in Glasgow’s tobacco merchants investing in shipyards to fund the industrial revolution.

    The big question is how do we avoid a massive default when debt levels become unsustainable? It seems remarkable that the UK hasn’t yet gone the way of Zimbabwe or Argentina. I’d be very interested to know how we’ve managed to avoid that so far, and what we need to do to continue walking the debt tightrope…

    1. FlimFlamMan says:

      “The big question is how do we avoid a massive default when debt levels become unsustainable?”

      Do you mean private debt or government debt? Preventing a collapse triggered by private debt will involve increasing wage levels, cutting the financial sector back to at most a third of its current size, preventing what’s left stoking debt based speculation in existing assets both real and financial, increasing investment – including from government – in productive capacity, reducing house prices – perhaps making use of LVT – since they’re the biggest driver of household debt, provide a decent state pension – the saving for private pensions is a constant drag on economic activity and fuels yet more financial speculation – and so on.

      Government debt, in the UK, is indefinitely sustainable provided the UK retains its currency and issues debt in that currency.

      “It seems remarkable that the UK hasn’t yet gone the way of Zimbabwe or Argentina. I’d be very interested to know how we’ve managed to avoid that so far, and what we need to do to continue walking the debt tightrope…”

      Zimbabwe suffered a collapse in productive capacity when its government handed farms and businesses over to people with no experience in those activities. Despite the drop in capacity the government continued to spend as if capacity had not changed, and the inevitable result was accelerating inflation.

      There has been no comparable drop in UK capacity, so the lack of hyperinflation is not remarkable.

      Argentina ran a currency peg to the US Dollar and also issued government debt denominated in US Dollars, and so needed to acquire USD in order to maintain the peg and service the debt. When, with insufficient export income, it could no longer acquire the USD it was forced to abandon the peg and default on debt.

      The UK government issues the vast majority of its debt in sterling, the currency which the UK government itself issues, so it does not need to acquire it from anyone else, and so it cannot be forced to default. The lack of default is not remarkable.

      The UK did briefly peg sterling – nominally to a basket of currencies but effectively to the Deutsche Mark – when we joined the ERM, and sure enough, with insufficient export income, we were forced to leave very quickly.

      So, it’s not a tightrope, but to continue walking the UK government just needs to continue issuing debt denominated in the currency which it also issues. They’re both just government IOUs – one pays interest and one doesn’t – and when they’re both issued by the same government that government can never run out. It simply cannot be forced to default.

      1. Craig P says:

        Thanks for explaining that. Perhaps basing the independence campaign on retaining sterling was a strategic error after all.

  7. Looks to me like it’s time up on this scandal of ‘austerity’ that purports to be the only way to save the economy and reduce the debt of Trillions,according to the LIARS of Wastemonster.
    It ain’t working and the debt on borrowed money is increasing year on year.
    For what,these SELFISH PIGS to trough some more?
    How and why do we-the people who are watching their earnings shrink and their outgoings sky rocket-put up with this fraud?
    It’s surely time to put these criminals in jail and bring this house of corruption,lies, fraud and murder tumbling down to make way for SENSE to prevail.
    The way things are just now is NO LONGER ACCEPTABLE!!
    It beggars belief that this juggernaut of slimy chaos is allowed to roll on and on with nothing being done to stop it.
    Surely this can be halted by the strength of public opinion and OUTRAGE demolishing this sham.
    Starting the change can’t wait much longer because it’ll all go pear-shaped again inevitably.
    Debt bubble on top of debt bubble leads to BURST bubble.
    And the only ones who escape the mess are the same ones who created it-the bankers and the politicians.
    We owe to our children to sort it out NOW.
    We owe it to our elders to preserve what they worked for AND fought and died for.
    We owe it to our youngsters who need a future starting NOW.
    We owe it to our disabled who are being demonised by the very people who should be protecting them.
    We need to give work to the unemployed and better wages to those who need it.
    And it needs to start happening sooner rather than later.

  8. John Souter says:

    Yes, banks do ‘create’ money at the touch of a keyboard – it’s a neoliberal gift horse for the free market buccaneers.

    The banks pay nothing towards the privilege -zilch – not even the small tithe they pay the BoE for the cash required by the inconvenient Luddite (presently around 3% of the ‘cash’ in circulation the rest being in electronic digits.) In fact had the BoE instigated an .001% levy on all the pounds ‘created’ since 1971 theoretically the BoE could pay the UK debt of £1.5 trillion off with cash to spare.

    I say theoretically because of course they would have found any amount of Klondike’s and casinos to waste it on.

  9. maxikerr says:

    Go and watch the Goldsmiths tale on you tube and watch how the bankers did it.The whole family will be able to understand this little film.Now go do it!

  10. David says:

    Not going to offer any better solutions, just tell us the problems any NWO video clip in the last 15 years could have done. Boring, delete, moderator, where art thou?

  11. It is often very difficult to rebut urban myths but unless we only want to make one particular sector of capitalism for all our woes rather than demand a system change we have to debunk the argument that bankers create money via the keyboard. They borrow and re-lend and the difference is where they make their profit. They do not create money. It is no coincidence that everytime there is a recession there is a currency/money movement whether it i the greenbacks or gold standard protagonists in the US

    Try this video for a debate between the SPGB and Positive Money


    Again just refer me to a contemporary primary source of the medieval goldsmith tale not one of its myriad re-tellings on the internet.

    The earliest banking reference i can find is Richard Cantillon’s “Essai sur la nature du Commerce en General” written in 1730. Here’s what he wrote:

    “If a hundred economical gentlemen or proprietors of land, who put by every year money from their savings to buy land on occasion, deposit each one 10,000 ounces of silver with a goldsmith or banker in London, to avoid the trouble of keeping this money in their houses and the thefts which might be made of it, they will take from them notes payable on demand. Often they will leave their money there a long time, and even when they have made some purchase they will give notice to the banker some time in advance to have their money ready when the formalities and legal documents are complete.
    In these circumstances the banker will often be able to lend 90,000 ounces of the 100,000 he owes throughout the year and will only need to keep in hand 10,000 ounces to meet all the withdrawals. He has to do with wealthy and economical persons; as fast as one thousand ounces are demanded of him in one direction, a thousand are brought to him from another. It is enough as a rule for him to keep in hand the tenth part of his deposits.
    There have been examples and experiences of this in London. Instead of the individuals in question keeping in hand all the year round the greatest part of 100,000 ounces the custom of depositing it with a banker causes 90,000 ounces of the 100,000 to be put into circulation. This is primarily the idea one can form of the utility of banks of this sort. The bankers or goldsmiths contribute to accelerate the circulation of money. They lend it out at interest at their own risk and peril, and yet they are or ought to be always ready to cash their notes when desired on demand. If an individual has 1000 ounces to pay to another he will give him in payment the banker’s note for that amount. This other will perhaps not go and demand the money of the banker. He will keep the note and give it on occasion to a third person in payment, and this note may pass through several hands in large payments without any one going for a long time to demand the money from the banker. It will be only some one who has not complete confidence or has several small sums to pay who will demand the amount of it. In this first example the cash of a banker is only the tenth part of his trade.”

    Cantillon’s full account of how the banks of his time operated can be found here http://evans-experientialism.freewebspace.com/cantillon03.htm

    i should also add for those who describe themselves as socialists yet espouse the idea of credit creationism is that runs counter to one of the basic precepts of Marxian economics, namely that value arises in the sphere of production not circulation. If banks could create credit with the stroke of a pen, that would mean in effect they could create wealth, and consequently the Marxist Theory of Value would be shown to be wrong. However, as time passes the validity of the Labour Theory of Value, i.e. that wealth can only come into existence when men apply their energies to nature, is all too apparent. If credit creationism were true, the solution to society’s problems would indeed be monetary reform, not socialism – exactly the sort of argument put forward by Major Douglas in the 1930s to the American libertarian anti-fed reserve conspiracy theorists of today.

  12. i should have elaborated on my previous comment.

    One of the origins of the banking system was the practice of depositing money for safe keeping with the goldsmiths and paying them for this service. The goldsmiths subsequently adopted the practice of paying interest to the depositor, and they re-lent the money at a higher rate of interest to a borrower. This was only an indirect way of the depositor himself lending his money at interest to the borrower. Whether the goldsmith acted as intermediary or whether the lending was done directly the general effect was the same, i.e., the owner of the money (representing a command over goods) was lending it to a borrower, who would thus, for a specified time, have at his disposal the means of buying goods. It was not an act of “creating” goods or values, but only of lending them, the banks being intermediaries between lenders and borrowers. Fundamentally, the same process underlies the modern banking and credit system. Many proponents of the credit creation myth repeat the goldsmiths allegory as proof of creating money “out of thin air” but as this more or less contemporary account makes clear there is nothing about the goldsmith banker being able (or even trying) to lend more than the 100,000 ounces of silver deposited with them, as often ascribed in the many web accounts.

    i should also add there are three main divisions within capitalist society which share the surplus-value which is socially extracted from the working class; the industrialist, the landlord and the banker. These divisions historically reflect the application of the division of labour to the specialised investment of capital in any field of production and distribution, any process of circulation, of which banking is part. Banks produce nothing. They are really middlemen or custodians of idle capital which must be available as a hoard, as potential money capital waiting to be put to use. Their profit is made during the process of circulation. The difference between finance capital and industrial capital is that the owner of money capital who wishes to earn interest on that money throws it into circulation not as capital for himself, but so that others can use it; and consequently gains a profit by this service.

    Contrary to popular belief, banks do not dominate the capitalist system (The two largest corporatrions in the world are WalMart, bigger than the Pakistan and Exxon bigger than the New Zealand economies). In the list of companies by revenue size the first financial business enterprise to appear is Fannie Mae at number number 16. This mistaken view is due to the fact that wealth is represented by enormous quantities of money. All wealth under capitalism expresses its value in the symbolic money form, but that form tends to conceal the fact that capital exists in the physical implements of the labour, factories, minerals, buildings, ships, etc. If for some reason, whether it be that the market is already overloaded and cannot absorb further commodities, or that over-production has already taken place, then production will be scaled down, curtailed, or in some cases halted entirely, and workers will be laid off. In these circumstances there will be little prospect of profit, and as experience has shown a number of capitalists, the smaller ones, go bankrupt All the machinations of the banks, either by advancing or retarding credit, whether charging low interest rates or not, cannot alter this. At the moment there is no shortage of cash available for investment. However, in a failing market there is little incentive to the industrial capitalist to commit himself to paying interest when the prospects of earning surplus-value on the borrowed money are extremely remote.

  13. oops where did the original message disappear to…i’ll wait and see if it reappears before reposting it

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