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Where does the money circulating in our economy come from?

30 August 2013


From Mr Andrew Dickie

Sir, - So, Malcolm Dixon (Letters, 16 August) would have us believe that "while commercial banks undoubtedly make a profit from lending money, they do not create that money or debt. Only central banks, which are an arm of government, have the power to create money, and they have been doing so assiduously in recent years."

Oh, dear me, no: this must be rebutted, for two reasons. First, because it is wrong: the Bank of England does not create the money that is circulating in our economy - or at least not 97 per cent of it, which is the product of bank-created debt.

Only three per cent of the money circulating in the economy is created and issued by the Bank of England. All the rest is conjured out of thin air by the banks. Would that they did pay the Bank of England for the privilege, but, alas, they do not.

Does Mr Dixon imagine that, when I create a debt by using a credit or debit card, the card-providers trot off to the Bank of England and ask for increased money to be created to meet the "money" they have lent? If so, he is living in Alice's Wonderland; for, of course, all that happens is that an entry on the electronic ledger is made, recording that I owe £x. This entry constitutes a proprietary right, for the honouring of which I can be sued, but no actual money is issued by anyone.

This "right" is tradable (consider the business of factoring, or of vulture hedge funds, which buy up the debts of impoverished developing countries), issuing into real property only in the form of the object that I have bought, and/or the interest charged to me.

If Mr Dixon prays in support of his argument the concept of quantitative easing, we need to realise that that consisted in the Bank of England's "paying" the Treasury to buy back debt, mostly in the form of gilts, issued by the Government. None of this ever emerged into the real economy, but remained firmly within the banking community, used to bolster the balance sheets of banks.

To add insult to injury, the banks awarded themselves even bigger bonuses for displaying skill and foresight in being in the right place at the right time to receive an entirely unmerited bounty.

This brings me to the second reason why Mr Dixon's thesis must be rebutted: it obscures the real causality of events since the 2007 credit crunch, and allows us to blame profligate Government, which "issued too much money, and spent too prodigally", when the truth is that taxation receipts under the last Government were always comfortably ahead of government spending, until the reckless and potentially criminal (remember the LIBOR-fixing scandal, which made the cost of credit dearer?) behaviour of the financial sector caused the crash of 2007, resulting in a sharp fall in tax receipts, and so producing a deficit. The banks directly caused this.

Where I am in sympathy with Mr Dixon is when he lauds a more prudent age that kept strict control of the amount of credit - a system abandoned in the early 1980s, with its concomitant trashing of mutualisation - and in blaming governments for not stepping in to impose controls.

Too right! A Labour Government worth its salt would have done so, and not supinely subscribed to the neo-liberal mantras that lie at the back of the increasingly polarised and dysfunctional economic system of the past 35 years, which has seen the top one per cent take an ever-greater share of the total wealth, by playing a fixed system to their benefit.

I would say that Bishop Selby's strictures on banks and Government were milder rather than harsher than the facts allow.

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Norwich NR6 6UN

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