Reality Blind - Vol. 1

~ Money Creation in the Modern Economy – The Bank of England

Summary: Contrary to what most economic classes and business schools currently teach, over 95 percent of our modern money is created by commercial banks out of thin air. 132 This may sound preposterous, but it’s true. If you need $250,000 to start a business, you go to a bank, convince the loan officer that you are credit- worthy, and receive that sum as an electronic entry in your bank account. At t he same time, the bank adds $250,000 to the bank’s assets as that loan’s value. And that is all that happens . $250,000 of newly created purchasing power pops into existence from nowhere and is added to the economy via your bank account, from which it can immediately be spent on stuff. Yet nowhere did an equivalent amount leave the system. This means that the overall amount of money that needs to be paid back to the bank, to generate a return for the bank, to pay interest to the bank’s bank, has gone up. This $250,000 loan of money, that you now understand represents a claim on the finite amount of nonrenewable resources (even if economists don’t), has suddenly increased for no reason at all, other than you were deemed creditworthy and the bank had good standing. It was pure dilution of the money which was already in circulation. This view is quite different from what economics textbooks claim, which is that banks are simply intermediaries, allocating scarce capital via a fractional reserve banking system. Banks don’t allocate capital – they create it. 133

So, does it matter that banks create money out of nothing? Well....

For a long time, while nations were rich in untapped resources, this worked out reasonably well. It appeared that more money generated more ideas and technology, which created more demand, and more demand in turn produced more resources. People with ideas for businesses and open land with resources needed to buy stuff and pay people to execute their plans. In that situation, having more money in circulation accelerated the process of “developing” the environmental r esources. Historical incidents that reveal the fragility of money, such as hyperinflation in Weimar Germany (you can Google images of the literal wheelbarrows full of cash needed to buy a loaf of bread), are written off as flukes.

But if you accept the proposition that the total amount of recoverable


Powered by