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Where Does Money Come from?

November 2, 2011

“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.” John Kenneth Galbraith writing in ‘Money: Whence it came, where it went’ (1975).

In Sept 2011 the New Economics Foundation launched a brilliant guide to the UK monetary and banking system. Covering much ground not to be found in economics textbooks [NEF 2011].

97% of our money is not in the form of banknotes but in bank balances of one sort or another – and things like repurchase agreements. It is created in the main by commercial banks as credit in exchange for a loan, such as a mortgage. The money lent by banks has not been deposited by others. You cannot tell whether money in your bank account has been created in this way, or has been credited in exchange for cash. Money in your bank account is not legally yours, in the way that the contents of a safety deposit box would be. If the bank goes bust you are just another creditor, and may only get back a fraction of the money, but for the current government guarantees.

In assuming the right to create credit, unchallenged over centuries, commercial banks have awarded themselves an immense privilege to benefit from special profits, which in turn have given them the power to subvert the democratic process.

More on the implications of this in my post ‘Creation and Allocation of Credit’.

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