Funny Money? (SNAFU)
On Thursday 20th November Parliament will debate ‘Money Creation and Society’ (pdf). This is probably the most important economic debate to precede a general election since the Banking Act of 1844 and one which most politicians would like to avoid. While the majority of the public may not know how money is created, the fact that most politicians do not have any understanding of ‘money creation and how we arrived here’ ought to be of great discomfort to them. These politicians being the very people in control of the economy.
It’s extremely unlikely that the debate will even begin to resolve any issue relating to money creation and society. The fiscal policies of successive governments have always relied on debt and taxation; this debate will not improve your economic future, either by effectively regulating private banks or improving the government’s indebtedness.
Whatever your personal status, single, couple, parent, retired, working, or in receipt of welfare, the key to your future well-being is going to be debated. However, I expect your considerations to be lost in the fog of political debate as the politicians focus on political self interest, especially the 2015 general election and the debt funding of the welfare state.
When you pay down your debts, the money that leaves your bank account doesn’t go to anyone else – it just disappears. This is because loan repayments are just the opposite process to money creation: banks create money when they make new loans, and effectively ‘destroy’ money when they repay loans.
So when lots of people try to pay down their debts at the same time, money disappears from the economy. As a result of there being less money and less new lending spending slows down. And you personally can only pay off your debts using money that was created when someone else went into debt. This creates a debt trap, where over time the level of personal debt in the economy has to keep growing.
Our financial system has left us with the highest personal debt in history, unaffordable housing and worsening inequality. Most of money in the UK is created by banks when they make loans. The only way to get extra money into the economy is to borrow it from banks, leaving us all trapped under a mountain of personal debt and mortgages.
How banks operate, and how money is created and supplied by them, are so central to the economy – but so dysfunctional – that widening public debate and discussion of the money system has to be a good thing. That said, the last time Parliament debated money creation, it managed to come to entirely the wrong answer.
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