Where’s the interest in creating money?

 —  April – May 2013

politics

Where’s the

interest in

creating

money?

We’ve become used to the idea that a society

based on loans is normal and sustainable

paul ferguson

N s’ recession preceded the great

famine. Worried about their savings

and the future, people reined in their

spending which only exacerbated the

downturn. Since food was actually then abun-

dant, it seemed odd to most people that routine

trading was hampered by what was explained as

the mass hysteria of people saving rather than

spending. While most people, then and now, nat-

urally expect a continuously rising standard of

living, the student of economics expects a rise

and fall despite the fact that technology rarely

if ever goes backwards.

In the s, banks simply printed money with

their own name on it, to facilitate loans. So after a

particularly long ‘fall’ the leaders of that era began

to suspect this might be the root of the problem.

After all, each pound lent created a matching debt.

If people settled their debts with banks, business

was no better oﬀ because the money used to do so

was out of circulation. Indeed people struggled to

repay their debts because banks only created the

principal of the loan and expected that back, plus

interest. And yet there was no interest in the mon-

ey-creation process.

Cue the Bank Charter Act of  which took

a year to make its way across the Irish sea. By then

the Bank of England had taken the exclusive power

to print the legal tender of the land in a bid to pro-

vide a stable money supply and foundation for the

economy. Of course people were free to trade with

whatever notes they could but Bank of England

notes enjoyed preference over all others since they

alone were acceptable in payment of tax. Eventually

banks were restricted to lending existing money

only under the watchful eyes of the queen, on every

note.

Ireland had its own issues in  but thankfully

the act put an end to the problem of banks simply

creating the money they lend such that every

unit of currency was issued with a corre-

sponding debt.

Well, not quite.

Hard as it may be to believe banks

simply create the money they lend today,

albeit somewhat under the radar by working elec-

tronically. In most countries, about three per cent

of money originates from government mints that

make notes and coins. The rest is ‘digital’ and cre-

ated by banks when they issue loans. When we go

to a bank to take out a loan, the bank does not lend

its own money or that of its depositors. They simply

type new money into your account. So we’re actually

still in the position whereby the vast bulk of money

can only co-exist with an even higher amount of

debt. Since the money used to settle debt becomes

a victim of double-entry bookkeeping, reducing

our debts doesn’t leave us in a better position either.

This explains why the banking sector as a whole can-

not behave prudently (even if it wanted to). What’s

in circulation is the principal, or partial principal,

of every recent loan. What’s owed back is the prin-

cipal plus compound interest. We owe more than

exists. The banks’ role in this is reprehensible but

systemic!

Furthermore the main reason why

there’s less money during a recession is

because once you repay a loan to a bank

the money no longer exists. Reducing our

debts reduces the money supply by the

same amount which is why reducing our lev-

els of personal and business debt isn’t a solution to

the debt crisis. Economists had convinced them-

selves the problem in a recession was that people

save instead of spending.

Encouragingly, just like in the s, the lead-

ers of our era are beginning to suspect that the

creation and destruction of money in tandem

with debt may be the root of our economic prob-

lems. Reforming the foundations of the monetary

system was discussed by the Icelandic parliament

recently and there is a ﬂowering of academic and

media interest.

One proposal being discussed to bring about

a transition from the money-as-debt problem

involves declaring all digital money to be legal ten-

der. With your bank balance already acceptable as

payment of taxes there’s no reason why it shouldn’t

join the legal-tender club with cash. If electronic

money boasted the status of legal tender, immedi-

ately the banks would have to halt their routine of

deleting it upon repayment. Eﬀectively outlawing

the creation of euros through loans would get right

to the root of the debt crisis problem also and the

banks would automatically become the intermedi-

aries of existing money only, as many of us always

assumed they were. Now armed with blight vaccines,

Sensible Money is hoping history will repeat itself

along similar lines.

Paul Ferguson is founder of Sensible Money. For

more information on how money is created and

destroyed: www.sensiblemoney.ie

In most countries, about

three per cent of money

originates from government

mints. The rest is ‘digital’

and created by banks when

they issue loans