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The System of Money | Documentary Money Creation | English | Finance System

Moconomy・73 minutes read

The total UK money supply in 2010 was 2.15 trillion pounds, with most being non-physical money created by commercial banks. The public's misunderstanding of banks creating money leads to economic confusion.

Insights

  • Commercial bank money constitutes the majority of the UK's money supply, with only a small percentage being physical cash, highlighting the significant role banks play in creating and circulating money.
  • The public's misconception of banks merely holding deposits rather than creating money out of thin air contributes to economic confusion, emphasizing the importance of understanding how money is generated and circulated in the financial system.
  • The evolution of the financial system, marked by deregulation and the rise of speculative activities, has led to wealth concentration, widening income differentials, and economic instability, underscoring the need for regulatory measures to ensure productive investments and sustainable economic growth.

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Recent questions

  • How does the Bank of England create money?

    The Bank of England creates money by transferring 3% of it to the Treasury as a form of fundraising. This money creation process contributes to the total money supply in the UK, with commercial bank money making up the majority of the supply. The Bank of England's authority to create money is crucial for maintaining the financial system's stability and ensuring there is enough central bank money in circulation to prevent a system shutdown.

  • What is seigniorage in relation to currency?

    Seigniorage refers to the profit made by the government through issuing currency. It is calculated as the difference between the production costs of currency and its face value, with the excess amount going to the Treasury. This profit plays a significant role in the government's revenue stream and helps fund various public services and initiatives. Understanding seigniorage provides insight into how governments generate income through the issuance of currency.

  • How do commercial banks contribute to the money supply?

    Commercial banks contribute to the money supply by creating new money through loans and other financial activities. When banks extend credit, buy assets, or make payments, they effectively increase the overall money supply in the economy. This process of money creation by commercial banks is a fundamental aspect of modern banking systems and plays a crucial role in economic growth and stability.

  • What is the historical significance of the 1844 law regarding bank notes?

    The 1844 law passed in the UK gave the Bank of England the sole authority to create paper notes, eliminating the previous practice where private banks could issue their own bank notes. This legislation marked a significant shift in the regulation of currency issuance and aimed to centralize the control of money creation. The law's implementation had lasting effects on the UK's monetary system and paved the way for the modern banking practices we see today.

  • How has the concept of money creation evolved over time?

    The concept of money creation has evolved significantly over time, with a transition from physical cash to digital money dominating the modern financial system. Commercial banks now play a crucial role in creating new money through loans and other financial transactions, contributing to the expansion of the money supply. Understanding this evolution sheds light on the complexities of modern banking practices and the mechanisms behind economic growth and stability.

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Summary

00:00

UK Money Supply: Cash vs. Digital Creation

  • The total UK money supply in 2010 was 2.15 trillion pounds, with only 2.6% being physical cash.
  • Commercial bank money constituted 97.4% of the total money supply, with 53.5 billion in physical cash.
  • The Bank of England creates 3% of money, which is essentially transferred to the Treasury as a form of fundraising.
  • Seigniorage is the profit made by the government through issuing currency, with the difference between production costs and face value going to the Treasury.
  • In 1948, notes and coins made up 17% of the total money supply, contributing to post-war reconstruction.
  • Prior to 1844, private banks created bank notes, but a law passed in 1844 gave the Bank of England the sole authority to create paper notes.
  • Today, most money is digital, with commercial banks creating new money through loans and destroying it when repaid.
  • Banks create new money whenever they extend credit, buy assets, or make payments, leading to the expansion of the money supply.
  • By 2010, the ratio of bank-created money to Treasury-created money was 1:37, with commercial bank money supply expanding by 7-10% annually before the 2007 crisis.
  • The public's understanding of how banks operate is often misconstrued, with many believing banks simply hold deposits rather than creating money out of thin air.

17:29

Banking Sector's Growth: Money Creation and Debt

  • A growth rate of 7% is equivalent to doubling the money supply every 10 years.
  • In the last 10 years, an incredible 1.2 trillion has been created out of nothing.
  • The banking sector's assets grew from $2.5 trillion in 1980 to $40 trillion.
  • Global bank assets were worth 20 times the global economy in 1980, increasing to 75 times by 2006.
  • Total bank assets of UK banks as a percentage of GDP remained stable until the late 1960s, then dramatically increased.
  • Speculating and making money from money is the most profitable economic activity today.
  • Banks are no longer limited by how much they can lend but by their willingness to lend.
  • Banks creating money through loans leads to a need for increasing debt for a healthy economy.
  • The public's conceptual misunderstanding of money creation leads to economic confusion.
  • Central bank reserves are created out of nothing by the Bank of England for commercial banks to use in transactions.

33:18

Evolution of Financial Systems: A Summary

  • 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, transitioning to fiat money.
  • The World Economic Forum in Davos called for a $100 trillion credit expansion to boost investments.
  • Rapid credit expansion can lead to inflation, where too much money chases too few goods and services.
  • In the UK, a housing boom was fueled by speculative credit, causing house prices to soar due to excessive money pumped into the market.

50:03

Financial bubbles drive US and UK expansion.

  • Financial bubbles fuel expansion in the US and UK for the next decade.
  • The Netherlands' financial innovation with public lotteries and public shares led to widespread investment in tulip bulbs.
  • Efficient financial systems allowed the Netherlands to compete against larger countries like Spain and Portugal.
  • Inflation can be avoided by regulating money issuance for productive investments.
  • Central banks historically regulated credit creation to control inflation and direct credit allocation.
  • The UK has seen a decline in real incomes over the past 8 years, leading to a decrease in the standard of living.
  • Private banks creating money for non-productive use leads to inflation and a decrease in purchasing power.
  • Banks receive government guarantees and benefits, with large safety nets in place for deposit insurance and liquidity.
  • The government's spending cuts shift debt from public accounts to individuals, creating a regressive policy framework.
  • Leveraged Buy Outs and increased debt diversification lead to a boom but can result in staff reductions and financial strain on businesses.

01:06:46

"Rising inequality, debt, and financial instability"

  • Income differentials have widened over the last 30 years, with the rich getting significantly richer while ordinary people have remained stagnant or become poorer.
  • The economy was sustained by providing cheap credit to those who couldn't afford it, leading to increased debt among the less affluent.
  • The Bank of England purchased corporate debt and restructured it at lower interest rates, yet individuals are facing higher borrowing costs.
  • Debts between the wealthy or governments can be renegotiated, but debts owed by the poor to the rich are often considered sacred obligations.
  • Traders prioritize making money over concerns about fixing the economy, with some even dreaming of another recession to profit from it.
  • Key European leaders, including the Prime Ministers of Greece and Italy, and the President of the European Central Bank, have backgrounds at Goldman Sachs, raising concerns about concentrated power.
  • The banking crisis drove over 100 million people back into poverty, with significant impacts on mortality rates.
  • A financial crisis in the US in 2008 led to a potential collapse of the global economy, averted by interventions such as guaranteeing bank accounts.
  • Currency wars involve countries competing to devalue their currencies to boost exports, leading to potential instability and speculation in the market.
  • The modern financial system lacks a gold standard, allowing for chaotic organization of money and exchange rates determined by market forces and speculation.

01:22:35

Global financial systems impact developing countries.

  • 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.
  • International economic systems heavily rely on sentiment and beliefs rather than actual economic performance, causing rapid shifts in financial markets.
  • Financial contagion can occur within minutes or seconds, transforming stable economies into targets of market speculation.
  • Major financial crises in the past decades have been triggered by sudden currency withdrawals, termed as financial warfare.
  • Deregulation has immensely benefited major institutions like Goldman Sachs, expanding financial markets and wealth concentration.
  • Developing countries often face debt crises, advised by entities like the IMF to increase exports to repay debts, leading to economic stagnation.
  • Structural Adjustment Programs imposed by the IMF require countries to cut public spending, liberalize markets, and attract foreign investment, often worsening economic conditions.
  • Financial imperialism exploits developing countries, making them dependent on richer nations and corporations, eroding sovereignty and economic growth.
  • The financial system has evolved with securitization, derivatives, and speculative instruments, leading to market instability and the 2008 financial crisis.

01:38:39

"Stable Currency Proposal and George's Financial Struggles"

  • Proposes the idea of creating a stable currency by using 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 who faced financial struggles after his bank went bust, highlighting the impact of higher taxes on his lifestyle and the plea for donations to help him afford basic necessities like rent, car maintenance, and clothing.
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