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97% Owned | Creation of Money | Finance Documentary | Debts Explained

Moconomy・73 minutes read

Banks create the majority of money supply through loans, leading to exponential growth in the money supply and financial instability. The financial system extracts wealth from the economy, increasing debt and inequality, impacting individuals' standard of living.

Insights

  • Private banks create the majority of the UK money supply through loans, with commercial bank money constituting 97.4% of the total money supply in 2010, highlighting the significant role of private institutions in shaping the economy.
  • The banking sector's control over money creation influences economic growth, as banks' willingness to lend and create new credit dictates the expansion of the money supply, impacting inflation rates, asset values, and overall financial stability.
  • The financial system's evolution towards speculative activities and wealth extraction from the economy, coupled with income inequality and debt burdens, underscores the need for a reevaluation of monetary policies to prioritize productive investments and equitable wealth distribution.

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Recent questions

  • How is commercial bank money created?

    Commercial bank money is primarily created through loans issued by private banks. When a bank extends credit to individuals or businesses, it essentially creates new money in the form of deposits in the borrower's account. This process allows banks to expand the money supply by issuing loans, which in turn contributes to economic growth and activity.

  • What is seigniorage in the context of currency?

    Seigniorage refers to the profit made by the government from issuing currency. It is essentially the difference between the face value of notes and coins in circulation and the cost of producing them. This profit margin allows the government to earn revenue from circulating physical currency, which plays a role in the overall management of the money supply and financial system.

  • How did the Bank of England gain authority over paper notes?

    In 1844, a law passed by the Conservative Government of Robert Peel granted the Bank of England exclusive authority to create paper notes. Prior to this legislation, private banks were also able to issue bank notes. This shift in authority consolidated the power to create paper currency under the Bank of England, marking a significant change in the regulation of the money supply in the UK.

  • What is the impact of banks creating money through loans?

    When banks create money through issuing loans, it leads to an expansion of the money supply. This process allows for the circulation of additional funds in the economy, which can stimulate economic growth and investment. However, it also means that banks have significant control over the allocation of this newly created money, influencing various sectors and activities based on their lending practices.

  • How does the banking system influence the money supply?

    The banking system plays a crucial role in controlling the nation's money supply. Through the creation of commercial bank money via loans and credit extensions, banks have the power to influence the overall amount of money in circulation. This ability to create and allocate money impacts economic activity, investment, and financial stability, highlighting the significant role that banks play in shaping the monetary landscape.

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Summary

00:00

UK Money Supply: Banks Create 97.4%

  • The total UK money supply in 2010 was 2.15 trillion pounds, with only 2.6% being physical cash and the rest, 97.4%, being commercial bank money.
  • Commercial bank money is created through loans issued by private banks, with the Bank of England creating only 3% of the money supply.
  • The profit made by the government from issuing currency, known as seigniorage, is the difference between the face value of notes and coins and their production costs.
  • In 1948, notes and coins constituted 17% of the total money supply, contributing to post-war reconstruction, including the establishment of the NHS.
  • Prior to 1844, private banks created bank notes, but a law passed in 1844 by the Conservative Government of Robert Peel gave the Bank of England the sole authority to create paper notes.
  • Today, most money is digital, with commercial bank money being created through loans issued by private banks, and destroyed when loans are repaid.
  • Banks create new money whenever they extend credit, buy existing assets, or make payments on their own account, leading to the expansion of the money supply.
  • By 2010, the ratio of bank-created money to Treasury-created money was 37:1, with the commercial bank money supply expanding by 7% to 10% annually in the years leading up to the 2007 crisis.
  • The public's understanding of how banks operate is often misconstrued, with many believing that banks simply hold deposits rather than creating money through loans.
  • The majority of new money in circulation is created by private banks, not the government or central bank, with banks deciding how this money is allocated and profiting from the interest on loans.

17:29

Banking System's Growth and Impact on Economy

  • A growth rate of 7% equates to doubling the money supply every 10 years.
  • In the last decade, an astounding 1.2 trillion has been created out of thin air.
  • The banking sector's assets surged from $2.5 trillion in 1980 to $40 trillion.
  • Global bank assets in 1980 were 20 times the global economy, escalating to 75 times by 2006.
  • UK bank assets as a percentage of GDP remained stable until the late 1960s, then surged.
  • Speculation, not production, is the most lucrative economic activity today.
  • Banks can now create new credit limitlessly based on their willingness to lend.
  • Banks' money creation through loans necessitates borrowing for economic growth.
  • Banks are incentivized to create more money through loans to earn bonuses.
  • The banking system's impact is immense as it controls the nation's money supply.

33:18

Evolution of Banking Systems and Currency

  • Just before the crisis, there was only 20 billion in the accounts at the central bank, crucial for making payments.
  • The Bank of England ensures there's enough central bank money in the system to prevent a system shutdown.
  • Banks have faced changing reserve requirements since 1947, with a minimum ratio of 32% of reserves to deposits.
  • In 2006, the Corridor System allowed banks to set their own reserve targets monthly.
  • The Bank of England introduced quantitative easing in March 2009, providing settlement banks with central reserve currency for free.
  • The gold standard, prevalent in the 1880s/1890s, disintegrated after WWI, leading to the Bretton Woods agreements pegged to the dollar.
  • The collapse of the Bretton Woods system marked the modern era of the financial system.
  • Fiat money, not backed by a commodity, emerged post-1971, leading to exponential money creation.
  • The World Economic Forum called for a $100 trillion credit expansion to boost investments.
  • Inflation rises with increased money supply, leading to a housing boom and speculative credit creation.

50:03

Financial bubbles, inequality, and governmental weaknesses in economies.

  • Financial bubbles fuel expansion in the US and UK, reflecting governmental weaknesses in challenging financial markets.
  • The Netherlands' financial innovation, like public lotteries and public shares, allowed for widespread investment in tulip bulbs.
  • Efficient financial systems in the Netherlands enabled them to compete against larger countries like Spain and Portugal.
  • To avoid inflation, money should only be issued for productive investments, creating jobs and additional purchasing power.
  • Central banks historically regulated credit creation to control inflation, focusing on productive credit allocation.
  • The UK has experienced a decrease in real incomes over the past 8 years, leading to a decline in the standard of living.
  • The current financial system distributes money from the poor to the rich, worsening inequality and decreasing purchasing power.
  • Banks receive significant government guarantees and benefits, such as deposit insurance and liquidity support.
  • Government policies, like spending cuts and privatization, shift debt from the public to individuals, increasing vulnerability.
  • The current monetary system allows banks to extract wealth from the economy without providing productive returns, leading to increased debt and decreased standard of living.

01:06:46

Wealth gap widens, debt rises, democracy threatened.

  • Income differentials have widened over the last 30 years, benefiting the rich while ordinary people have not seen significant improvements.
  • The economy relied on providing cheap credit to sustain itself, leading to increased debt among those who couldn't afford it.
  • The Bank of England purchased corporate debt at lower interest rates post-crisis, yet individuals face higher borrowing costs.
  • Debts between the wealthy or governments can be renegotiated, but debts from the poor to the rich are often considered sacred obligations.
  • Traders prioritize making money over concerns about fixing the economy or the overall situation.
  • Key European leaders, including the Prime Ministers of Greece and Italy, and the President of the European Central Bank, have ties to Goldman Sachs.
  • The imposition of banker-led governments in Europe raises concerns about democracy and accountability.
  • The banking crisis drove over 100 million people back into poverty, with significant mortality rate increases.
  • The Federal Reserve intervened during a financial crisis to prevent a collapse that could have had global repercussions.
  • Currency wars involve countries competing to devalue their currencies, impacting trade balances and economic stability.

01:22:35

Global financial markets: volatility, speculation, and impact.

  • The foreign exchange market reached $4 trillion in daily currency exchange by 2010, making it the largest and most liquid market globally.
  • Volatility in financial flows can significantly impact countries, especially developing ones, leading to fluctuating financial conditions.
  • Coping mechanisms for countries facing financial volatility include increasing production, lowering prices, and potentially facing increased poverty.
  • International economic systems heavily rely on sentiment and beliefs rather than actual economic performance, leading to rapid shifts in financial markets.
  • Financial contagion can occur within minutes or seconds, transforming stable economies into targets of market speculation.
  • Major financial crises often stem from rapid currency withdrawals, termed financial warfare, benefiting large institutions like Goldman Sachs.
  • Deregulation in financial markets has led to immense wealth accumulation and market expansion, favoring speculation over production.
  • Developing countries often face debt crises, advised by institutions like the IMF to restructure economies by boosting exports, which may not alleviate debt burdens effectively.
  • Structural Adjustment Programs imposed by the IMF require countries to cut public spending, liberalize markets, and conform to dominant financial systems, often leading to dependency on developed nations.
  • The financial system has evolved with securitization, derivatives, and volatility management tools, shifting towards speculative activities and away from tangible assets.

01:38:39

"Stable Currency Proposal & George's Financial Struggles"

  • Proposes the idea of creating a stable currency by forming a basket of currencies or commodities to back international currencies, similar to the Bretton Woods agreement, to bring order to the international macro economy.
  • Narrates the story of George, a banker in London whose bank went bust, leading to financial struggles. It appeals for donations to help George, detailing specific amounts needed for items like champagne, car tires, and a suit, emphasizing the impact of support on George's life and the industries he contributes to.
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