A finance Savvy Person Going places

Comment: There is historical evidence that indicates that banking preceded coined money by a number of thousands of years. Interesting, there is also evidence to suggest that the written word owes it origins to the need to keep accounts. See BOOK: Where Does Money Come From? https://www.positivemoney.org/where-does-money-come-from/

Comment: Goldsmiths promissory notes become recognised as legal tender through the Promissory Notes Act of 1704. See BOOK: Where Does Money Come From? https://www.positivemoney.org/where-does-money-come-from/

Comment: By the mid-19th Century the issuing of promissory or bank notes was getting out of hand. Banks were failing because they were issuing many more promissory notes than they had the gold to back them up; banks were failing. The government stepped in and passed a law that prohibited commercial banks from creating money through issuing bank notes. Currently in the UK, the Bank of England issues all bank notes for England and Wales. Seven retail banks, three in Scotland and four in Northern Ireland also issue bank notes, but this is regulated by the Bank of England. See POSTIVE MONEY WEB-SITE http://www.positivemoney.org/how-money-works/how-did-we-end-up-here/

Comment: However, that’s only around £1,000 worth of bank notes or coins for each member of the population, it doesn’t sound enough does it? See POSTIVE MONEY WEB-SITE https://www.positivemoney.org/how-money-works/how-much-money-have-banks-created/

Comment: In 2006, for example, seiniorage was worth almost £5bn to the UK government. See POSTIVE MONEY WEB-SITE http://www.positivemoney.org/2011/03/seigneurage-foregone-by-the-uk-in-2006/

Comment: Only 3% of the money in the UK economy, the £67bn, is actually cash. That means that the total amount of money in the UK economy to be about £2.2tn, with more than £2.1tn of this being numbers if computers. See VIDEO: Banking 101, part 3 http://www.positivemoney.org/how-money-works/banking-101-video-course/how-is-money-reallymade- by-banks-banking-101-part-3/

Comment: In 2001 the total amount of money in the UK economy was about £1tn, by 2009 this had expanded to more than £2tn.

Comment: As we will discover later in this quiz, it’s actually commercial banks that have created most of this money and not, as many people think, the government or the Bank of England.

Comment: In the process of Quantitative Easing, the Bank of England buys Government Bonds from the financial markets. This essentially injects money into those markets and, in principle, some of this money should then trickle down into the ‘real’ non-financial economy. See VIDEO: How to waste £375bn http://www.positivemoney.org/videos/introduction/waste-375-billion-failure-quantitative-easing-video/ See POSTIVE MONEY WEB-SITE http://www.positivemoney.org/how-money-works/advanced/how-quantitative-easing-works/

Comment: Only 8% of all the money generated through Quantitative Easing, that’s about £30bn, is estimated to have reached the ‘real’ economy. Meanwhile, the value of shares on the stock market increased by 20%. See VIDEO: How to waste £375bn http://www.positivemoney.org/videos/introduction/waste-375-billion-failure-quantitative-easing-video/

Comment: If the money from Quantitative Easing was spent into the ‘real’ economy, through public projects such as building schools or hospitals, it would get to real people through wages and then this would be spent again by those people benefitting others. It is estimated that this compounding effect would grow the economy by £2.80 for every £1 of money spent through QE. See VIDEO: How to waste £375bn http://www.positivemoney.org/videos/introduction/waste-375-billion-failure-quantitative-easing-video/

Comment: It’s quite illuminating how many people believe that banks simply act as storehouse for money. See VIDEO: Banking 101, part 1 http://www.positivemoney.org/how-money-works/banking-101-video-course/misconceptions-aroundbanking- banking-101-part-1/

Comment: Once you hand over your cash to the bank it’s not yours anymore it’s the banks. As such, they can pretty much do what they please with it. However, you do get something in return. The bank is obliged to give you a piece of paper, or a statement, which tells you how much they owe you. And, depending on the type of account you have, they are also be obliged to return that money to you, either on demand or possibly after some agreed period of time. See VIDEO: Banking 101, part 1 http://www.positivemoney.org/how-money-works/banking-101-video-course/misconceptions-aroundbanking- banking-101-part-1/

Comment: Your bank statement will tell you that you have a deposit account and the amount that’s in it, you would clearly regard this as an asset. However, the bankers look at things a little differently. They may now own your money, but they also know that they have promised to pay you back the money in that deposit account at some point in the future, so they refer to it as a ‘Liability’.See VIDEO: Banking 101, Part 3 http://www.positivemoney.org/how-money-works/banking-101-video-course/how-is-money-reallymade- by-banks-banking-101-part-3/

Comment: If you take out a loan, you’ll be given a statement telling you how much you owe. The banks see this as an asset because, even though they don’t have the cash in a vault anymore, they do know that they should get this money back at some point in the future. See VIDEO: Banking 101, Part 3 http://www.positivemoney.org/how-money-works/banking-101-video-course/how-is-money-reallymade- by-banks-banking-101-part-3/

Comment: Many textbooks still describe money creation and banking with this model, as do widely accessed public sources such as Wikipedia. Interestingly, Wikipedia has recently seen a dispute between editors of the money multiplier and fractional reserve pages and those who wish to update these pages to reflect how the system really works. However, Wikipedia’s view is that their entries should reflect the ‘text-book’ thinking of a principle – right or wrong -, rather than the most up-to-date thinking. So the description of the system using the money multiplier model remains on Wikipedia. See DISPUTE http://www.fractionalreserves.com/wiki_dispute.htm See VIDEO: Banking 101, part 2 http://www.positivemoney.org/how-money-works/banking-101-video-course/whats-wrong-with-themoney- multiplier-model-banking-101-part-2/

Comment: There is no legal reserve ratio or fixed amount of deposits that a bank has to hold in order to make loans. It’s for the banks themselves to determine what reserves they should hold in order to remain solvent. See VIDEO: Banking 101, Part 3 http://www.positivemoney.org/how-money-works/banking-101-video-course/how-is-money-really-madeby- banks-banking-101-part-3/ See VIDEO: Banking 101, Part 4 http://www.positivemoney.org/how-money-works/banking-101-video-course/how-much-money-can-bankscreate- banking-101-part-4/

Comment: Money created from nothing, this does sound like magic, possibly even fraud, but this is how the system works. When you take out a loan from the bank, no one checks to see if there’s enough money in the vault - even the ‘electronic’ vault – someone simply types the numbers into your deposit account and you then have access to the money; they also type the same number into a loan account and you get a statement of how much you owe. To be fair, sometimes they also do check if you are likely to be able to repay the loan as well! See VIDEO: Banking 101, Part 3 http://www.positivemoney.org/how-money-works/banking-101-video-course/how-is-money-really-madeby- banks-banking-101-part-3/ See POSTIVE MONEY WEB-SITE http://www.positivemoney.org/how-money-works/advanced/introduction-to-balance-sheets/

Comment: It might be argued (and is) that the money created in deposit accounts, as a result of taking out a loan, doesn’t really exist; it’s just some credit and it’s cancelled out by it’s equivalent liability - basically it’s just an artifact of the accounting method used. However, this argument is somewhat undermined if it can be demonstrated that this money can be used in the same way as cash. Even the Bank of England agrees that this credit is effectively new money in the economy, see the Bank of England’s Quarterly Bulletin for Q1 this year. See VIDEO: Banking 101, Part 3 http://www.positivemoney.org/how-money-works/banking-101-video-course/how-is-money-really-made-bybanks- banking-101-part-3/ See VIDEO: Banking 101, Part 5 http://www.positivemoney.org/how-money-works/banking-101-video-course/do-banks-create-money-orjust- credit-banking-101-part-5/ See DOCUMENT: Bank of England Quarterly Bulletin, 2014 Q1 http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/ qb14q1prereleasemoneyintro.pdf http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014 qb14q1prereleasemoneycreation.pdf

Comment: Not only didn’t they have the money to lend in the first place, they charge you interest for the privilege of giving it to you! See VIDEO: Banking 101, Part 3 http://www.positivemoney.org/how-money-works/banking-101-video-course/how-is-money-really-madeby- banks-banking-101-part-3/

Comment: The government has never formally given this power to commercial banks and officially the government does not even recognise that commercial banks effectively have this power. However, recent briefing documents from the Bank of England do go some way to recognising this reality. See DOCUMENT: Money creation in the modern economy (BoE Publication) http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/ qb14q1prereleasemoneycreation.pdf

Comment: when a loan is fully re-paid the asset value of that loan to the bank disappears along with its associated liability. Of course, this isn’t an instantaneous process, this happens slowly over time. As you repay the loan this simultaneously reduces the size of the liability and value of the asset until both disappear. See VIDEO: Banking 101, Part 6 http://www.positivemoney.org/how-money-works/banking-101-video-course/how-money-gets-destroyedbanking- 101-part-6/

Comment: Well almost, it increased by 370%, while house prices increased by 200%. These increases are often attributed to factors such as too many people wanting to buy in certain areas, too much immigration and too few new houses being built? But, to put this into perspective, over same period for every four new people, three new homes were actually built. See VIDEO: Why Are They So High http://www.positivemoney.org/issues/house-prices/

Comment: And in London the rise was from 22.2% to 66.6%. See POSTIVE MONEY WEB-SITE http://www.positivemoney.org/issues/house-prices/

Comment: In essence, this means there is a steady redistribution of wealth from the poorest people in the population to the richest. Mid-income people pay around 3.5% of their income in interest. See VIDEO: Why are the rich getting richer http://www.positivemoney.org/issues/inequality/ See DOCUMENT: Banking, Finance and Income Inequality https://www.positivemoney.org/wp-content/uploads/2013/10/Banking-Finance-and-Income-Inequality.pdf

Comment: The vast majority of MPs don’t understand that commercial banks also have the ability to effectively create money through the issuing of debt. Only one in five MPs knew that this statement was false. See POSTIVE MONEY WEB-SITE http://www.positivemoney.org/2014/08/7-10-mps-dont-know-creates-money-uk/

Comment: These board members are not directly accountable to parliament, they have not been elected by popular vote and they are certainly not a representative cross-section of the British population. They are accountable to the bank’s share-holders, the vast majority of whom simply want the bank to make as much money as possible. See VIDEO: The Power of Banks vs Democracy http://www.positivemoney.org/issues/democracy/

Comment: Even when we exclude property from the numbers, which accounts for 51% of the money created, less than one-fifth of the remaining money that is created gets into the real economy. This means that the vast majority of the money in the UK economy is either trapped in property or used for speculation in the financial markets. See POSTIVE MONEY WEB-SITE http://www.positivemoney.org/issues/recessions-crisis/ http://www.positivemoney.org/issues/jobs-business/

Comment: This will increase as the national debt continues to rise. Because, although the current government have reduced the deficit, this simply means that the rate at which the national debt is going up is now less, but it’s still going up. The government still spends more than in collects in taxes – if only the government had collected the £1tn in Seiniorage for all the money created in the 8 years before the financial crisis! See POSTIVE MONEY WEB-SITE http://www.positivemoney.org/issues/taxes/