The Bank of England knows that all money is created by lending. It has published papers that confirm that fact. They must, as a result, also know that government spending has to take place before any tax can be paid. But they never say that. They take part in a conspiracy of silence on that issue to deny the public the truth. Why is that?
This is the audio version:
This is the transcript:
Why won't the Bank of England tell the truth?
It's a big challenge that I've just presented because implicit within it is the fact that I believe that they are not telling the truth, and I am quite certain that is the case, so let me explain my evidence.
In 2015, the Bank of England published a paper that said that banks in this country, and to be honest, banks around the world now do not lend the funds that people deposit with them to the people to whom they provide loans.
They dismissed what is called the loanable funds model of banking outright. They said it does not exist. They said that banks are not dependent upon the availability of money from savers to let them make loans. Instead, they said that Banks create money when they make loans to companies and individuals who want to borrow, and those funds that those individuals borrow when redeposited become the savings that are actually deposited in banks.
In other words, what they said was that loans come first; savings come second.
And that, as a matter of fact, is true.
If you look at the double entry of banking, you can't do it the other way around because, if you try to, you cannot find a start point for where the money comes from in the first place that depositors are going to put into the bank. It doesn't exist because that money is commercial money, and it has to be created by commercial banks.
This is not Bank of England created money, except with regard to notes and coins, and that's a tiny part of the whole economy now. Therefore, for that money to have been created by the commercial banks to allow the deposits to take place, it must have been created during the loan process.
This fact, which is, I hope, no great news to people who follow this channel, is something that we need to explore as to its consequences. If the Bank of England know that the loanable funds model does not exist, in other words, that savers do not fund loans, then they also know that The Bank of England funds government spending and taxation does not.
They must also know that actually tax is paid to cancel the consequence of that government spending in exactly the same way as deposits are made by people who have received money from those who have borrowed from a commercial bank.
If you think the loanable funds model does not exist with regard to the commercial banking sector, you cannot believe, as a consequence, that the government is dependent upon what politicians like to call taxpayer money because actually, taxpayer money was created as a result of government spending, funded by the Bank of England in the first place, and that taxpayer money is used as payment or settlement of the liability that those taxpayers owe to the government created by law solely for the purpose of cancelling the inflation consequence of the money that the government created in the first place.
The two have to go together.
You cannot pretend that you don't believe in loanable funds, but you do believe in taxing coming before spending. It's not possible to do that.
So why does the Bank of England pretend, and still does every day pretend, that the government is dependent upon tax payments to actually fund its spending, when it knows as a matter of fact, because it operates the bank accounts for the government, that in practice, it creates money day in, day out, on the government's behalf?
And why doesn't it say that?
Why doesn't it correct the politicians of this country when they like to claim that they are utterly dependent upon tax payments to allow them to spend when the Bank of England knows that isn't true?
I wish I could answer that question. Because if they would only do that, they could turn the whole of politics in this country upside down.
Politicians would no longer be able to claim, “I'm very sorry, but we can't supply what you need - like, to relieve child poverty - because there isn't enough tax available to pay for it” because tax doesn't pay to solve child poverty. Money created by the government can be used for that purpose. Money that would then result in additional taxation paid, with the government's books balancing as a consequence.
But they don't want to say that.
And my belief is that there is a conspiracy going on. A conspiracy between the politicians of the single transferable party, which is what I describe the Conservatives and Labour as, because they all seem to have the same consistent policies, and the Bank of England to say nothing about what really happens when it comes to government finances to keep us all in the dark so that the majority of people believe that it is impossible for the government to solve the problems that are in fact completely within its reach.
I wish they weren't conspiring in this way.
I wish the Bank of England would tell the truth. I think it is beholden on it to do so. I think it should be challenging our politicians to tell the truth. But it isn't. And for that reason, I think its whole basis of existence has to be questioned. Because if it won't do its job properly, which includes telling the truth about what it does, then, it needs to be radically reformed and its independence to be curtailed.
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Thank you for a most relevant article?
Might the Bank of England. Have a fiduciary duty due to the citizenry of the United Kingdom?
I agree 100% with everything you have written in this post, however I would like to offer you an answer to the heading. I will use a snippet of your post:
“I wish I could answer that question. Because if they would only do that, they could turn the whole of politics in this country upside down.
Politicians would no longer be able to claim, “I’m very sorry, but we can’t supply what you need – like, to relieve child poverty – because there isn’t enough tax available to pay for it” because tax doesn’t pay to solve child poverty. Money created by the government can be used for that purpose. Money that would then result in additional taxation paid, with the government’s books balancing as a consequence.”
Were they to admit the truth, it would indeed turn politics upside down. No government would be able to wring their hand, and lament that they would like to do so much if only they could afford to (a lie). They would have to admit that all the evil (and it is evil to starve people), they have perpetrated over the years, was entirely deliberate.
That is why no “journalist”, politician, commentator or other pundit will ever utter this truth. Corbyn did, when he said Austerity was a political choice, and they did for him.
It will take a party with a mass movement behind it to challenge this. My hope is that the Green Party will step up, but if they do, then all those who abandoned Corbyn when they came for him, will need to show some mettle in the face of what is likely to be a very vicious campaign against them.
Given what is about to happen to university fees, a timely post.
I agree with you about the conspiratorial aspect of this.
We are governed by lies and lying.
Culturally though, it’s a bit deeper than that.
I see money as resource, a utility. The truth is that money is man made and we all have to use it.
Yet markets have this weird effect in that they can lead to the deification of resources. This leads to the mystification of these resources and those that accumulate them or begin to exert control over them.
It’s a bit like saying that our kings were related to ‘God’ or whatever.
Money is now worshipped openly in our society and those that have lots of it claim a God like status ascribed to them by themselves and their legal and accounting/banking entourages – or should we say, their beneficiaries.
Andrew Bailey’s remuneration is hush money effectively – he’s being paid well to ignore the truth, to be stupid and dumb.
Those beneficiaries also include politicians – the ‘ten percenter’s’ Colonel Smithers mentions – taking their cut and joining the club.
Only those with money deserve money apparently. It is their way of taking more for themselves. And by restricting it and making it scarce they make the money they have more valuable and more potent. It’s monopoly behaviour – one of the oldest tricks in the book.
How can you have a democracy when voters aren’t given a coherent explanation about how the country’s money is created leaving the very real possibility this failure is due to the fact private sector bankers want a monopoly to maximise their ability to extract money from a country’s citizens? Why is it the mainstream media are never asking this question when MMT has been around for thirty years providing the incentive to ask the question? The cat is out of the bag now and the failure will simply be growing a belief that there is a deliberate conspiracy taking place and that in turn will undermine market capitalism from which many have undoubtedly benefitted. In the long run human beings have always taken action to suppress those who’ve used special knowledge to disadvantage the many at the expense of the few.
I’ve learned a lot from your channel so please keep up the good work!
But I think you need to more regularly deal with “inflatiophobia” and “yieldophobia” (fear of falling gilt prices – sorry I couldn’t think of a better term!). Because it’s amazing how often people comment ‘ah, but hyperinflation’!
I have dealt with it, often
Including on the YouTube channel
But I will do so again
I was watching Newsnight last week when Kevin Hollinrake was on with Thangam Debbonaire. I think that was 29 October..
He was defending the historic high level of taxes under the Conservative government before the election. To paraphrase, he said something like “we needed to tax back the high level of spending under covid”. Around 25 minutes. Here. https://www.bbc.co.uk/iplayer/episode/m0024htn/newsnight-can-kamala-harris-win-on-the-economy
And I immediately thought, yes, you know government spending comes first, before taxation brings the money back. That it is spend and tax, not tax and spend. And there is no such thing as “taxpayers money”.
Indeed….
“A conspiracy between the politicians of the single transferable party, …..and the Bank of England”
This is only part of the picture. Let’s say BoE & STP (single transferable party) had a damascene moment & realised that everything you said was correct.
Who loses? I’d suggest the parasitical financial establishment – of which the BoE is part. The trend to NHS privatisation would be dead, re-nationalisation of various monopolies would happen etc etc. Cue – finance parasites imitating Munch’s “The Scream”. This blog challenges neo-libtard norms & story lines – BoE is neo-libtard to its finger tips and thus in answer to your question -” why don’t they have a diff view” ……….QED.
I do not believe that the situation is retrievable – change will not happen without large-scale disruption, the UK establishment is locked into a neo-libtard fantasy world & has no inclination to escape – why would it? it likes it/it suits it – as foir serfs like me (or you) we don’t count.
I agree with you, but my head hasn’t fully grasped the way the “commercial money creation” logic works. I wouldn’t dare try and explain it on the omnibus, or depend on it as a logical proof for government money creation.
I think the reason I don’t “get it” is because I’ve never learned about double entry book-keeping or accountancy.
And, I assume that if I save money with the bank, then it must have been money that the government previously created, and spent into the economy, which found its way (admittedly only as numbers in a computer) to me, and then got moved from my current, into my savings account.
I know that’s somehow incorrect but I don’t yet understand why/how.
I CAN explain where gov’t money comes from, but I still struggle with your explanation of where the money in my building society savings account came from.
I CAN see how commercial banks create money by lending it, I CAN see how the double entry stuff works there.
But my savings? I don’t understand where they came from, if you say they were at some point created by a commercial bank. Help!
Robert
Try from page 409 here https://taxingwealth.uk/wp-content/uploads/2024/04/Taxing-Wealth-Report-2024-Full.pdf
This isn’t simple, but that was a serious attempt to address this…
Let me know it it works
Richard
And especially P413, although it looks from that as if the first 3 recipients don’t save anything. And it probably needs gilts in there somewhere. Given, of course. that it might become overcomplicated.
They are in there
Thank you!! I will get reading.
I have a little project under way, which is a letter from me and my fellow omnibus passengers (who want to understand more about how money works and who feel we aren’t getting told the truth by the economic and political journalists and their editors, and so are writing to financial and political journalists asking why they don’t do their jobs in challenging monetarist orthodoxy on air/in the press, particularly the “we can’t afford it” rubbish, and the “taxes finance public spending” consensus that seems to mandate inevitable austerity whatever is going on out here in the real world.
It feels futile but just writing it is helping me research and understand better.
I’m compiling a list of key financial and political journalists/editors, and all assistance in finding them is welcome. I’m not bothering with the very far right but I’d like to get to the GuardianUK, Mirror, Telegraph, Independent, i, FT, Daily & Sunday Mail, Metro freesheet, ByLineTimes, and on the broadcast front, BBC, ITV, C4, Sky, LBC.
This particular thread seems a good one to ask for suggestions about who should be on my circulation list.
I’m quite aware that the main influencers are further up the management chain, but I have no illusions about influencing any of them.
Good idea
But too tired to think tonight
I know bigger things are afoot today – but here’s my answer having read the relevant section of the Taxing Wealth Report and studied the diagrams…
The Taxing Wealth Report makes it quite clear that for the sake of avoiding confusion, the diagrams do NOT monitor the flows of commercial bank created money. I understand that, and have read the text carefully as well.
I also see that the ONLY part of the diagrams that deal with “created money” (dark blue arrows) is the one section in the top right, where the government creates money. Again – presumably to avoid complexity.
I DO understand (I hope) what is on the diagrams, the creation of money by the government, how it finds its way into the economy, and how it generates its own multiplier effect, and how some of it can end up being saved by an individual back with the government in NSI or gilts and become part of the national debt/peoples’ savings.
I understand how banks create money by making loans and how that works in terms of double entry book-keeping and how that money behaves (the circular animations in “Finding the Money” from Stephanie Kelton are helpful in showing how commercial money and government money interact). But in the post here, the argument on this, based on the BoE publication from 2015 states,
“….banks create money when they make loans to companies and individuals who want to borrow, and those funds that those individuals borrow when redeposited become the savings that are actually deposited in banks.
In other words, what they said was that loans come first; savings come second.
And that, as a matter of fact, is true. If you look at the double entry of banking, you can’t do it the other way around because, if you try to, you cannot find a start point for where the money comes from in the first place that depositors are going to put into the bank. It doesn’t exist because that money is commercial money, and it has to be created by commercial banks.”
If the article is talking purely about “bank created money” that starts life as loans and then at least in part, via various routesfinds its way back to a bank as savings, then I have no problem – I understand that fine.
But – what is NOT covered in the diagrams AFAICS, in relation to money that might end up as savings in a bank, is the other sort of created money, which was originally created by the government, and then ends up, by various routes, as my private wages, or state or private pension, or profit from trading, or perhaps an inheritance, some of which send on round the system, but some of which I put in my bank or building society account (entered on both sides of the ledger, as a plus and a minus by that organisation). I can’t see any bank-created “loan” in the chain of THAT sort of money. I assume that it is government created money from your diagrams that found its way to me as a recipient, who then decided to save it (either with a bank, building society or by purchase of NSI or gilts).
Am I right to assume that in the post above, AND in the relevant pages of your Taxing Wealth Report, and in that quote from the BoE, that I have re-quoted here, you are NOT referring to THAT sort of money, and that I am correct to put it in the “government created money that ended up as private savings” column?
Or to put it another way – if I am right, then not ALL savings that are deposited in banks, start life as bank created money. Some of them start life as government created money?
If I am wrong, then do those quoted words mean there is ONLY ONE SOURCE of the money that ends up as savings in banks, and that it can ONLY come from its creation by banks as a loan. Or are there in fact TWO sources of money that can end up in savings in banks, some created by government, some by banks?
It’s not that I think what you have written is wrong, it is that I think I have not fully understood the specifically limited type of bank-created money that you were referring to?
If the answer is yes, say no more, I’m a happy omnibus passenger.
If the answer is NO, someone please give me more homework!
Ok, try this instead…..
https://www.taxresearch.org.uk/Blog/2022/06/21/the-double-entry-behind-the-money-creation-in-the-central-bank-reserve-accounts/
Money and its creation is fundamental. And the possibilities for spending and doing good for the benefit of all citizens are so great and revolutionary that the conspiracy of silence, and worse, the rejection of evidence, is necessary to maintain the rich in their exalted position and keep the plebs in their place.
Prof. Alston, the UN Special Rapporteur reported in 2018 on his findings in the UK on extreme poverty and human rights. He said “poverty is a political choice. Austerity could easily have spared the poor, if the political will had existed to do so”. He quoted extensively from research and from his own observations and discussions with charities, people, politicians, think tanks etc. He felt that “In the area of poverty-related policy, the evidence points to the conclusion that the driving force has not been economic but rather a commitment to achieving radical social re-engineering”.
There we have it. Governments have been driven by ideology, that there is no alternative, that there is only taxpayers’ money, that books have to be balanced, black holes to be filled, that we cannot afford it, there is no money.
Of course the Tory Government rejected his findings outright in spite of the evidence. “Ministers insisted to me that all is well and running according to plan”
It is indeed a giant conspiracy to ensure that wealth cascades upwards and that the poor are kept too busy on a hand-to-mouth existence to cause any trouble. If the 90% realised that money is not a problem there could be a revolution and that just wouldn’t do.
Thanks
Much to agree with
Missed the reference: https://www.ohchr.org/sites/default/files/Documents/Issues/Poverty/EOM_GB_16Nov2018.pdf
I haven’t commented on this blog for some time for the very reason that I have for a long time realised that there is indeed a conspiracy afoot by a very small number of people (probably as few as 80) who control the economic dialogue. So at over 81 years old I’ve given up because I’ve come to the conclusion there isn’t anything I (or you, Richard, for that matter) can do about it in my lifetime. Maybe there’s a chance in yours, but I doubt it.
It was puzzling that the BoE published that 2015 Q1 paper that gave the game away, and I suspect it somehow got past the censors. Then they published that disgraceful book ‘Can’t We Just Print More Money?’ which perpetuated the lies. Even ChatGPT spits out that story.
Unfortunately the misdirection is so powerful that it is very hard to combat. It was started, I believe, by the Mont Pelerin Society in 1947 and later the Institute for Economic Affairs in 1955. When these people have control over most of the media what hope is there?
I’ve said before that if I ever bring up my beliefs amongst friends they just think I am a demented old fool and couldn’t possibly know what I’m on about.
Mind you, I haven’t in fact entirely given up and I am in regular contact with two other like minded chums who are plotting a number of initiatives. One of them is an economics graduate from Kingston University where he studied under Steve Keen, and yesterday went to a publisher with his book, which I proofread. The other has just produced an excellent pamphlet, again proofread by me, and later this week we will be discussing where we will be distributing it.
Funding, of course, is the big restriction, and the opposition have plenty of it.
Thanks Nigel
We have a first chocie to make. One option is to carry on. The other is to give up.
I am carrying on, whatever the odds of success, which we cannot in fact know.
You are doing very much more than many others are and you do have considerable presence in the media, especially social media. I and my colleagues don’t, so please keep it up. At least in this country we don’t have the likes of Putin who would just have you eliminated. Or do we?…..
I seem to be doing radio three times a week right now – mainly LBC and Times Radio, but also Radio 5 and sometimes Radio 2.
“taxpayer money is used as payment or settlement of the liability that those taxpayers owe to the government created by law solely for the purpose of cancelling the inflation consequence of the money that the government created in the first place”
Doesn’t that explain why governments can’t simply spend willy-nilly?
I’d agree with you that (fiat) money is not a scarce resource, but there are plenty of resources which are scarce and if the government tries to purchase too many of them, you will get unwanted and undesirable inflation.
Nobody has ever siad government can spend willy-nilly
Why do you think they have?
The popular perception of money is that it is something tangible, we learn about it as children through our introduction to cash (maybe less so now, with even kids using banking apps?). Even though the gold standard was dropped ½ century ago, the notion still persists, and I suspect many people believe our money is somehow linked to the gold bars in the vaults of the BoE. (Before I started taking an interest in this and have come to understand MMT, I include myself in “many people”.)
The consequence is that we think of money as something we can own. But if it’s nothing more than a formalised system of IOUs, as fiat money is, ownership becomes an illusion.
This is important, because the neolib view of tax is that it’s government theft of a citizen’s property, and the citizen should be allowed to choose how it’s spent. This idea is of course more aggressively pursued by the rich because they have more to lose, and thus govt always ends up recovering more tax from ordinary working people. The reality of a fiat currency though, is that money is not really something you can own. It’s a token you are entrusted with, and if you hoard more than a reasonable share, you have an obligation to pay it back.
Thus, reframing what currency actually is totally undermines the anti-tax agenda, and so it suits those who hoard it to promote the popular myth. This of course includes the whole financial establishment, particularly the governor of the BoE.
Thanks
Ive sat this year in a small group meeting with a deputy governor of the BofE who trotted out the same old myth about banks lending deposits. So I keep asking the same question about why this is what in effect is a cover-up. Have they really learnt nothing new since their year 1 economics taught them about loanable funds.
One conclusion I come to is that from the commercial, high street banks point of view this is like a manufacturing business that has free raw materials. They create money at no cost, lend it and earn interest on it. Even better when the BofE raises interest rates. Does the cost of their raw material rise with inflation like everyone else…? No wonder they are so profitable. And property makes up the largest proportion of their lending.
A consequence of this which is rarely noted is the impact on house price inflation. Where did all the money come from to fund the mortgages? It’s not from savings. When it was from building societies, it was indeed limited by the deposits that they had received from savers. (Once upon a time I developed financial models for some of them. Run way better than the banks.) That limited supply of funds and the limited size of mortgage that people could get in effect put a limit on house prices. When you can create money like the banks, that removed a constraint and we were into 5-6 times income mortgages. Combined of course with low interest rates that made those large mortgages ‘affordable’. A recipe for massive house price increases.
Ive long thought that the BofE and the Treasury care more about the financial sector than any other sector of the economy, let alone wider society. Then look at the MPC who make those (profitable for banks) interest rate decisions. All economists or from finance sector. Radically changing the make up of the MPC would be a good start
Thanks Robin
I like your anecdotes
Politics, if we can boil it down to a very short sentence, my version would be this: its how the pie gets shared. Your post is alludes to my belief that the pie has actually been taken away from us. “Soveriegn debt” for me is the ultimate oxymoron. There have been some great replys to your post and forgive me for copying some of them below, but I believe they are worth repeating. I will add that the BOE clearly acts as the banker for retail banks and its huge loyalty is to them above all else. Yes the cat is out of the bag about money creation through retail bank credit creation yet the general public have no idea. I have discussed this with many dozens of people and the lack of knowledge is epic. If the public, en masse, were to discover that the BOE creates money out of thin air, then its no leap for them to realise retail banks do the same thing and that these bank loans are not loans at all (but that their deposits with them are!) and all of sudden the curtain comes down, Oz style and everyone realises they have had their pants royally pulled down. All the problems we could solve like the environment and the housing crisis can’t be done, or won’t be allowed to be done, particularly in this country. This is due to the class system and how the sheeple must look up to their betters but also because things building millions of high quality social housing homes would be socialism, which the majority have been brainwashed into believing is the devil. As we know, socialism for the rich is fine though.
COPIED QUOTES……
How can you have a democracy when voters aren’t given a coherent explanation about how the country’s money is created leaving the very real possibility this failure is due to the fact private sector bankers want a monopoly to maximise their ability to extract money from a country’s citizens?
Let’s say BoE & STP (single transferable party) had a damascene moment & realised that everything you said was correct. Who loses? I’d suggest the parasitical financial establishment – of which the BoE is part. The trend to NHS privatisation would be dead, re-nationalisation of various monopolies would happen etc etc. Cue – finance parasites imitating Munch’s “The Scream”
Money and its creation is fundamental. And the possibilities for spending and doing good for the benefit of all citizens are so great and revolutionary that the conspiracy of silence, and worse, the rejection of evidence, is necessary to maintain the rich in their exalted position and keep the plebs in their place. It is indeed a giant conspiracy to ensure that wealth cascades upwards and that the poor are kept too busy on a hand-to-mouth existence to cause any trouble. If the 90% realised that money is not a problem there could be a revolution and that just wouldn’t do.
Thus, reframing what currency actually is totally undermines the anti-tax agenda, and so it suits those who hoard it to promote the popular myth. This of course includes the whole financial establishment, particularly the governor of the BoE.
So much to agree with