The majority of politicians are revealed not to know where money comes from

Tucked away in a short almost whimsical piece in the Guardian, written by Zoë Williams (How the actual money tree works, G2, 30 October 2017), were the results of a survey of MPs on the subject of money and how it is created.  The astonishing figures were that only 15% realised that money is created by our banks.  70% thought (incorrectly) that money was created by the Bank of England.  Thirdly, 28% thought that banks were only the middle-men in the lending process, that is, lending the money placed with them by depositors.  If this survey is correct (it was run by the survey firm Dods and commissioned by Positive Money) then it is woeful that such ignorance exists among the people supposedly running the country.  The Tories did slightly better than Labour.

At a Salisbury Compass meeting, Phil Tyler explained how money is created.  Most money is created not by the BofE but the high street banks and occurs when an individual or company gets a loan.  The bank simply creates the money based on its view of the creditworthiness of the borrower.  If the banks were solid, responsibly run organisations with directors who knew what they were doing this might be just about all right.  But recent events have shown that directors had little idea of the risks they were running which led up to the crisis in 2008; millions have been paid out arising from the PPI scandal, and they have been involved in the financing of arms sales resulting in hundreds of millions in fines.  There was the Libor scandal involving Barclays Bank among others.

Is this method of money creation serving the country well?  Andrew Jackson and Ben Dyson in their book Modernising Money (2014, Positive Money) explain that this it is not.  They explain that:

When banks feel confident and are willing to lend, new money is created.  Banks profit from the interest they charge on loans, and therefore used bonuses, commission and other incentive schemes to encourage their staff to increase their lending, creating money in the process.  The loans they make tend to be disproportionately allocated towards the financial and property markets.  As a result our economy has become skewed towards property bubbles and speculation, while the public has become buried under a mountain of debt.  (p22)

A common theme over many decades is that businesses – especially and the small and medium sized ones – find raising funds difficult to do whilst the banks are only too ready to inflate the property market now at ludicrous levels in London.  A major part of lending is towards non-productive actives such as property and financial speculation forcing up asset prices (houses for example).  The government is seriously worried about the level of unsecured debt now said to be £204bn.  The system is being run for the benefit of banks and their shareholders, not with the wider interest of the nation in mind.

This creation of money is rather akin to a ‘magic money tree’ to coin a phrase.  It is simply created by the banks.  There are no depositors funds or gold to support it.  Yet during the election, when Mrs May was tackled by nurses over their lack of a pay rise for many years, her answer was ‘there is no magic money tree’.  This phrase became one of the key arguments during the election to stifle suggestions that more should be invested in the economy.  It chimed well with similar phrases such as ‘maxing out the nation’s credit card’ and played into people’s beliefs that the country’s money was very similar to their own household finances.

The system is precarious and unstable.  If, as has been revealed, the members of our parliament do not understand the basics of money creation, it is extremely worrying.  If interest rates do go up tomorrow, stand by for MPs being interviewed on the news channels opining about a subject they seem singularly ill-equipped to understand.

Peter Curbishley