I posted this video on YouTube this morning:
In case the video is not embedded properly (and that happens sometimes) it is available here.
The transcript is as follows:
The way that banks create money is so hideously simple that everyone needs to understand it.
People presume that somehow or other, creating money is really complicated. A dark art, a mystery that is beyond the comprehension of most human beings. It isn't, because you take part in that process every time you ask for a loan, which includes every time you tap your credit card, I stress credit card, on a payment machine, because you are asking to increase your loan from the bank every time you do that.
What are you doing? You're saying to the bank by tapping your credit card on a credit payment machine that you would like to have an extra loan, which you promise to repay to the bank. The bank knows you because it's done credit checks on you and says, “yes, okay, we believe that you will repay us. Therefore, we'll let you have this money to make this payment now, to the person to whom you want payment to be made.”
It's your promise to the bank to repay, matched by their promise to make payment to the person you've asked them to make settlement to that creates money. Literally, your exchanges of promises – the bank to you, you to the bank - creates the money that exists in this country.
Now, not all the money - because some is also created by government. We'll leave that aside at the moment.
The money that's used in the day-to-day economy is bank-created money, and that's how it's made. By a person making a promise to a bank and a bank making a promise to a person. It would be the same if the loan, by the way, was for a quarter of a million pounds to buy a house or a flat. You promise to repay the bank. They promise to pay the person who's selling you the flat. That's what a mortgage is. It's just an exchange of promises to pay. That also creates money.
And that money exists until one critical event happens, and that is that you make repayment of it. So, if you clear your credit card bill, the money that the bank created for you disappears because you have fulfilled your promise to pay. They paid that person, but you've now paid them. And as a consequence, the money that was created by your mutual exchange of promises has now gone.
It's literally destroyed. It hasn't gone anywhere at all. It's disappeared. Therefore, the continual supply of new money into our economy is essential if we're going to have enough cash to make the economy go around.
That's why credit is so common. Because all our money is based upon this simple principle that all money is debt - the exchange of promises to pay. And that's why we have a debt-based economy.
All money is made like this. All money is debt. There's nothing else. And if anybody tells you that there is another form of money which is not debt, I'm sorry to say, they're telling you something that isn't true.
So, for example, if they say that money could be gold or silver or something else, that's not actually the case. Gold has no inherent worth as money. It does as rings and jewellery and everything else. But as money, it's just a symbol of a debt. It's security for the payment of the debt. It secures the promise you've made. That's all it is. But it isn't actually the money itself. The money is the promise to pay that the gold represents.
And that's the critical point. There is nothing else but debt-based money, because throughout the economy, throughout history, we've always made promises to pay. And since the development of modern banking - about the 17th century - it's always been banks and people who've exchanged those promises to create the money we use to make our economy go round.
And it is as simple, as straightforward as that. You promise to pay, the bank promises to pay who you instruct, money is created, and when you repay the loan it's cleared, destroyed, disappears. And that's it. That's all you need to know about money creation.
Thanks for reading this post.
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Is it worth mentioning that when a bank creates money by extending you a loan, and that money is destroyed on its repayment, there is also the matter of interest repayments to the bank, and this must derive from money that already exists in the economy. It tends to be the less well-off that take out loans, so they end up having to funnel money to the banks, increasing inequality.
The film was already pushing limits
The captions are much better. Well do to the team.
This is a big learning process.
Great video but there is an instance of “made” being subtitled “mad” which could ruin it.
We do our best. Unfortunately, once posted we can’t change these – and subtitling errors are so common throughout the media now that I think most people tolerate small mistakes. But, I stress, we do try with multiple views before going live – and still some slip through.
You are confusing ‘money’ and ‘credit’ and not differentiating between the narrow money supply and broad money supply.
Presumably you are doing so in order to simplify things for your non-technical readership. However, in doing so, you create a misleading picture (at best) and are factually wrong in some areas (at worst), so it doesn’t help your credibility when experts look at this explanation.
I am confusing nothing at all
I am simply describing exactly what happens whenever money is made
And all money is credit, in case you were not aware of it
Money and credit are not the same thing, at least not to economists. These have particular definitions in economic which you may not be aware of, hence the confusion?
Pretending they are the same thing is simply wrong.
You might find this odd, but I know what conventional economics says about money, almost all of which is wrong as even the BoE has said.
So why should I want to listen to nonsense from you?
Richard,
Where do you get these blatant lies from?
“The Bank of England says most of what conventional economics says about money is wrong”
A link would be helpful to justify your claim
Bank of England Quarterly Review Volume 1 2014.
You really are not very well informed, are you?
Come back when you apologise. I wouldn’t bother until then.
It’s not just the Bank of England’s 2014 paper – other central banks and institutions have come out with similar papers, explaining how banks create money when they lend. So yes, mainstream economics is fundamentally wrong in how it describes banking. And it’s wrong on quite a lot else. As non-economists, not conditioned by a mainstream economics education can see quite clearly. However, mainstream economics perfectly supports the neoliberal agenda and the financial institutions at its core.
Mainstream economics institutions are more like madrassas or theological colleges, than the rational, scientific institutions they claim to be.
Your videos are excellent Richard.
This one would be simpler and clearer if a different example (a mortgage?) was used at the beginning.
The credit card is not
straitforward example of money creation because of temporal complications.
At the time of the transaction, the credit is provided by vendor not the bank. It is only if the bank pays the vendor before the customer has paid the bank that money is created.
That is not true in the UK. The transaction only happens with bank uthiristion, and so the vendor does not provide the credit here. The US might be different.
Forgive my clumsy reply Richard.
The point I am making is that a credit transaction does not involve immediate money creation because the bank does not credit the vendors account until many weeks after the goods or services are supplied to the purchaser.
Money is debt
The debt is due
Money is created
The vendor is a mere intermediary
The bank and its customer create the money
Thank you for your explanation Richard.
Much appreciated.
I have been struggling with the definition of currency. To a layperson like me, currency has not been created if it is not liquid and nobody can actually spend it in the economy.
Thank you for spending time on this.