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The Issues

The Issues

Our main issue is that our current monetary system is very misunderstood.

While most of us imagine that money comes from the printing press in actual fact money comes from bank loans. This means that almost every euro is created with a corresponding debt.

As well as this most people misunderstand why there is less money during a recession. The reason there's less money during a recession is because once you repay a loan to a bank the money no longer exists. Hence reducing our debts to banks reduces the quantity of money in the economy by the same amount.

Another issue is that we finally appear to have reached the useful end of this system primarily because mortgages have reached their natural limit of duration. They now take two incomes two careers to repay which explains why this is a unique recession.

Read below for more detail on these issues or check out The Fix for our proposed solution.



Where does money come from?

The obvious answer is that money is printed. However, only 9% of euros exist as cash & coins. The other 91% are electronic and exist as the numbers in our bank accounts.

The nearest that economics comes to explaining where this electronic money comes from is through the money-multiplier effect but this theory no longer applies.
Today, money comes from bank loans.
If you organise a loan from a bank, the bank creates the money for the loan by typing new money into your bank account. Because the vast majority of money is created this way almost every euro has a corresponding debt.




How money comes from bank loans


For a detailed explanation of how Euros are created and destroyed download our publication How Banks Create and Destroy Money. (28 pages)

If you're already familiar with economics or accountancy you can read our paper on this subject How Money is Created and Destroyed. (17 pages)

For an explanation from a highly reputable source you can read the Bank of England's publication Money creation in the modern economy. (14 pages)

If you're new to this subject the following quotes from central bankers should confirm this:

"Banks extend credit by simply increasing the borrowing customer's current account."
Paul Tucker
Deputy Governor of the Bank of England (2010)

Speech: Money and Credit: Banking and the Macroeconomy
"Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money."
Michael McLeay, Amar Radia and Ryland Thomas
Bank of England (2014)

Money creation in the modern economy
"When banks extend loans to their customers, they create money by crediting their customers' accounts."
Mervyn King
Governor of the Bank of England (2012)

Speech to the South Wales Chamber of Commerce at The Millenium Centre
"When banks make loans they create additional deposits for those that have borrowed."
Bank of England (2007)
Benes J., Kumhof M. (2012), The Chicago Plan Revisited, p.9
"Each and every time a bank makes a loan, new bank credit is created - new deposits - brand new money."
Graham Towers
Former Governor of the central bank of Canada (1939)

Canadian Government's Committee on Banking and Commerce
"Money is primarily created through the extension of bank credit...
The commercial banks can create money themselves."
Bundesbank (2009)
The New Economics Foundation (2011), Where Does Money Come From?, p.18
"This new technology of money creation exploiting the law of large numbers is the pre-condition for two salient features of today's economies: the emergence of private banks and the emergence of inside money created by private issuers and circulating alongside outside money issued by the financial authority."
Peter Praet
Member of the Executive Board of the European Central Bank (2010)

Speech at the Bargeldsymposium organised by the Deutsche Bundesbank, Frankfurt am Main, 10 October 2012
"In the real world, banks extend credit, creating deposits in the process."
Alan Holmes
Federal Reserve Bank of New York (1969)

Paper: Operational Contraints on the Stabilization of Money Supply Growth



Why is there less money during a recession?


When banks process a loan repayment they destroy digital money when they lower the borrower's bank balance.

If loans repayments are greater than new loans the money supply decreases. This is why there's less money during a recession. People saving rather than spending can make it seem like there's less money during a recession also.

For a detailed explanation of how euros are created and destroyed download our publication How Banks Create and Destroy Money. (28 pages)

If you're already familiar with economics or accountancy you can read our paper on this subject How Money is Created and Destroyed. (17 pages)

The following quotes should confirm that money is destroyed through loan repayments :

"Inside money, instead, is named this way because it is backed by private credit: it would cancel out if all the claims held by banks on private creditors were to be settled. So, it is one form of currency that is created - and can be destroyed - within the private economy."
Peter Praet
Member of the Executive Board of the European Central Bank (2010)

Speech at the Bargeldsymposium organised by the Deutsche Bundesbank, Frankfurt am Main, 10 October 2012
"Just as taking out a new loan creates money, the repayment of bank loans destroys money."
Michael McLeay, Amar Radia and Ryland Thomas
Bank of England (2014)

Money creation in the modern economy
"What the banking system has been doing is destroying money."
Mervyn King (2011)
Governor of the Bank of England

BBC News website, 25th October
"If all bank loans were paid, no one would have a bank deposit, and there would not be a dollar of currency or coin in circulation."
Robert H. Hemphill
Former Credit Manager Federal Reserve Bank of Atlanta (1935)

Foreword to 100% Money by Irving Fisher




What's different about this recession?

For the money supply to grow and for us to return to business as usual either businesses, households or governments need to acquire bank loans.

For the first time in history businesses, households and possibly governments appear to have little further borrowing capacity.




During the 1980s the amount of cash in the economy reduced to around 5% with bank-account money forming the remainder. However the amount of digital money in the economy has doubled about every ten years since then and this is why economies have appeared to function reasonably well for the last few decades. However, it's not feasible to double the money supply every decade for the foreseeable future.

Furthermore, for more money to come into circulation someone has to organise a bank loan. Despite low interest rates, quantitative easing in other economies and central banks buying Government debt (indirectly) with new digital money, not many people are willing or able to organise loans.

Also, Mortgages have traditionally been a reliable source of new money since they involve large numbers and gradual repayments. Mortgages have always been able to increase in duration. However, they are appraoching the point whereby they take two incomes around thirty years to repay and cannot increase further.

Since Governments, businesses and households can no longer be relied upon as ever increasing borrowers this is a very unique recession.



Now why not view our proposal: The-Fix

Or review some F.A.Qs.






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