Just think what the UK could have saved if there were more restrictions on banks


Lee Williams
Tuesday 27 November 2012 15:51
Businessmen walk past the Bank of England in the financial district in London, England.
Businessmen walk past the Bank of England in the financial district in London, England.

A trillion pounds is a lot of money.

If you counted it, one pound every second, it would take you 32,000 years. Stacked in pound coins, it would reach beyond the moon. It could pay off a quarter of all third world debt and could run the entire state of New York more than ten times over.

It is also the amount of money the UK government could have saved if there were more restrictions on banks, according to banking reform campaign group, Positive Money.

This truly unimaginable sum is what private banks injected into the UK economy in just the years 2002-2009 by the creation of digital money through lending. That’s £1 trillion that should have been injected into the public sector rather than – as it actually was – pumped into financial and housing markets. It’s £1 trillion worth of tax cuts or £1 trillion worth of extra public spending – enough to fund the entire NHS for ten years.

The total UK national debt is approximately £1 trillion, so yes, it’s also enough to have paid off our entire national debt. Far from the government worrying about reducing the deficit, there would hardly even be a deficit and spending cuts would be merely a thing of politicians’ bad dreams.

Instead we have a government obsessed with cutting public spending and unsuccessfully reducing a deficit which refuses to budge. And to top it all off, we are staring down the barrel of the loss of our triple A credit rating. How has this happened? How have the government let so much money slip through their, and our, fingers?

It wasn’t always this way. Money creation used to be a valuable source of revenue for the government before the advent of the digital age. This is because the Bank of England prints money and sells it to high street banks at face value, making a healthy profit on each note. This money is paid directly over to the treasury and enters the government coffers, saving us taxes and increasing public spending.

From 2000-2009 the government made approximately £18 billion from the creation of physical money. This, of course, is a lot of cash but it pales into insignificance compared to the £1 trillion created in digital money by the banks’ lending over roughly the same period, almost doubling the total money supply of the UK.

It’s not just the amount of money that is staggering either; it’s the short amount of time it was created in. To put it into perspective, the total UK money supply currently stands at around £2.5 trillion. It took the Bank of England over 300 years, from its founding in 1694, to create the first trillion. It took private banks just seven years to create a second trillion.

But it is the fact that the government – and hence we the public – got absolutely zero profit from this digital money creation that really sticks in the craw. This is because banking laws have not kept up with growth in technology. Instead we find ourselves in the absurd state of affairs where it is illegal for anyone except the government to create physical money (counterfeiting) but any old bank can create as much digital money as it likes simply by lending it out to customers (there are a few constraints on banks’ lending, but not nearly enough).

There is one important proviso here. The figure of £1 trillion is slightly misleading in the context of government savings. The government wouldn’t actually have saved £1 trillion because it wouldn’t (we hope!) have been foolish enough to have created so much money in such a short space of time. It is a measure, in fact, of just how far out of control the banks had become, that the amount of money they created – through lending – is so large.

You might also ask: what about inflation?  If all this money really was created by the banks in such a short space of time, surely we would have hyperinflation on the level of Zimbabwe or Weimar Germany. The answer to this is: we do. It’s just limited to certain bubbles where banks do most of their lending.

As the chief researcher for Positive Money, Andrew Jackson says: “Why hasn’t the £1 trillion of bank-created money created inflation? The answer is: it has. It’s just all gone into the housing market and financial markets.”

Ever wondered why there was such a ridiculous housing bubble in this country? Jackson’s point might well hold the answer.

What should we do then? Hand the reins of money creation back to the politicians and pray they do a better job than the bankers? Isn’t political power over money creation equally abhorrent? Don’t governments have a similar tendency to print money, leading to hyperinflation?

The answer is simple, according to Positive Money. We already have the institutions in place to restrict the political use of money creation – namely the Bank of England and the Monetary Policy Committee. All we need to do is hand the power of digital money creation back to them. They already have the power over physical money creation, so they’ve had a bit of practice after all.

In a healthy economy a democratically elected government chooses how to spend public money but an independent and transparent financial body, such as the Bank of England, chooses how much is created, and it does this solely with the interests of the economy at heart.

When you think about the current creators of digital money – the private bankers – and the interests they have at heart, it becomes quite clear just how unhealthy our economy really is.

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