On Thursday 20th November 2014, for the first time in 170 years, UK parliament has debated the creation of money. Few people know that 97% of our money supply is created not by the government (or the central bank), but by commercial banks in the form of loans.
As the results of our recent poll show, most MPs lack a sufficient understanding of money creation. A worrying number of our MPs do not understand where money comes from. This leaves them ill-equipped to predict another financial crisis, deal with rising debt, housing bubbles or understand a fundamental driver of inequality.
Positive Money is a not-for-profit research and campaign group. They work to raise awareness of the connections between our current monetary and banking system and the serious social, economic and ecological problems that face the UK and the world today. In particular they focus on the role of banks in creating the nation’s money supply through the accounting process they use when they make loans – an aspect of banking which is poorly understood. Positive Money believe these fundamental flaws are at the root of – or a major contributor to – problems of poverty, excessive debt, growing inequality and environmental degradation. For more information, please visit: http://www.positivemoney.org/
Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.