Banks have two key powers in today’s economy – they get to decide how much money to create, and they get to decide who to lend this new money to.
How much money have banks created?
The chart above shows the amount of money banks have created and lent to individuals since 1988, mainly for mortgages, personal loans and credit cards. However, the chart does not include the money banks create and lend to businesses, and so underestimates the amount of money that banks have created. In actual fact the true figures could be double those displayed here. (It is important to note that this does not mean the money supply is increasing each year by the amounts that banks lend, as each year a proportion of loans are repaid and this shrinks the money supply. For example, if banks create £500 million a year by lending, and £200 million of loans are repaid in that year, then the money supply will only increase by £300 million [£500mil - £200mil]. To see the effect on the money supply once loan repayments are incorporated see the money supply chart below).
By 2004 commercial banks were creating over £500 billion pounds a year – that’s £500,000,000,000! In 2007 alone they created £567 billion – not including lending to businesses.
What else can you get for £567 billion?
It’s important to remember that this money was not going to businesses, small or otherwise. Instead it was being used for mortgages, personal loans and credit cards. While all these types of lending are useful in small amounts, they do not help businesses produce more goods and services. However, they do increase the level of debt in the economy. Because this type of lending increases debt without increasing the economy’s ‘earning potential’, it is unsustainable in the long run – as the financial crisis showed.
From the time when the Bank of England was formed in 1694, it took just over 300 years for banks to create the first trillion pounds. It took them only 8 years to create the second trillion. However, since 2008 the quantity of money in the economy has been falling – loans are being repaid at a faster rate than new loans are being made – the money supply is shrinking.
The doubling of the money supply has not coincided with an equal increase in the quantity of notes and coins in circulation. Today cash, the red line, accounts for approximately 3% of the total money supply. The green line, commercial bank created money, accounts for the other 97%.
Where have they allocated this new money?
Over the last 15 years the banks have used their power to create money to pump hundreds of billions of pounds into the housing market (as shown by the increase in the categories: lending to real estate and business services, and secured lending to individuals). This has pushed the price of housing out of reach of ordinary people. Lending to the financial intermediation sector has also increased greatly over the past 15 years – this sector includes the companies that were involved in much of the reckless speculation which contributed to the crisis. Meanwhile, lending to businesses has stagnated, harming the real economy and lowering employment and growth.
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