So you think you know where money comes from?

By Colin Smith, Glasgow City

So where? Where does the money you have in your pocket and in your bank account come from?

Who created it?

It comes from the Government! ... Nope. It doesn't.
It comes from the Treasury! ... Nope. And that's part of the government.
It comes from the Mint! ... Nope. It doesn't, though they do print some.
It comes from the Bank of England! ... Generally Nope. Though they do have the ability.

Of all of the money we have, almost all of it is created by your local bank. Yes, created.

In the UK, the system of banking we use is called Fractional Reserve Banking. This is a system whereby the government allows the bank to hold a small reserve of any cash it has been given, and then loan out up to the value of the rest. They have to hold on to, on average, about 3% of the cash as "reserves".

The act of loaning out the cash literally creates new money. This is where all of our money comes from. I can feel the scepticism from here. The bank just loans out your money doesn't it, that doesn't create new money...

Well... This is how Fractional Reserve Banking creates new money. Lets pretend the reserve ratio is 10% for easy calculation.

1: The mint prints £100 and gives it to you (Person A).

2: You (Person A) take it to Bank A. They now have £100 in your bank account...

3: Someone else (Person B) goes to Bank A and borrows £90 at 5%. Bank A legally has to hold on to £10 as reserve.

4: Person B sticks the borrowed money into their bank account in Bank B. Bank B now has £90.

5: Person C comes along to Bank B and borrows £81 at 5%. Bank B holds on to £9 as reserves.

6: Person C sticks the £81 money into his account at Bank A.


Bank A now has 181 pounds in their accounts, Bank B has 90 pounds in their accounts...

That does not add up to the 100 pounds the mint originally printed. There is now, £271 worth of cash in our economy. There is £171 worth of new money.

Person A still has £100
Person B now has £90
Person C now has £81

Now, I don't know if you noticed, but as well as the £171 of money which has been created from nothing by the banks when the loans were taken out, there has also been £171 worth of debt created at exactly the same moment.

So there you have it. Almost all of our money (97% of the money in circulation) was created by your friendly local bank, wasn't that nice of them.

But wait.

They don't create this money from nothing for the good of their health. They are slaving over those hot books 8 hours a day to loan you that money they just created... from nothing... They charge interest on the cash which they created from nothing for your loan. They charge interest on the debt. But... if they charge interest, and 97% of our cash comes from loans, how can we repay all the debts?

I've established that almost all of our money is "borrowed into existence"... But if that's the case and the banks charge interest on it that means that more must be repaid than was ever created.

A £100 loan at 5%.

£100 cash and £100 of debt.
1 year later.
£100 cash and £105 of debt. Pay off £20.
1 year later.
£80 cash and £89 debt. Pay off £20.
1 year later.
£60 cash and £72 debt. Pay off £20.
1 year later.
£40 cash and £54 debt. pay off £20.
1 year later.
£20 cash and £35 debt. Pay off £20.
1 year later.
£0 cash and £16 debt...

Oops. No money left in the economy, there is none in existence but we still owe a debt of £16.

What's the solution? Well... What happens at the moment is we simply take out another larger loan to pay off the existing loan and interest and postpone the problem. The debts get larger every year and the amount of money and debt in the economy grows every year.

This is where all the money in our economy comes from and it is also where all the debt in the economy comes from. Our monetary system is debt based, we have trillions of pounds of money and even more trillions of pounds of debt.

So, our money is created by the high street banks; Abbey National, Alliance & Leicester, Barclays, HBOS, HSBC, Lloyds. It is created from debt we owe to these banks, it is not created by the government.

This animated Film explains very simply how our system works.
Please pass it on.

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