A detailed report from the UK’s New Economics Foundation published earlier this year explains in detail the main power of banks: the creation of money. It breaks down the prevailing myth that banks have stockpiles of money that they lend. Instead, the reality, they explain, is that “banks ... do not have to acquire funds in the first instance before making loans.”
Even more importantly, the authors point out that a large proportion of banks’ profits are underpinned by their control over the money supply. In this way, banks control an essential piece of public infrastructure. The report describes the strong case for the public taking back some control over the creation of money.
In modern economies, such as the UK, however, money in circulation created by the state – physical cash – only represents around 3% of the total money supply. The remaining 97% is lent in to economies as the digital IOUs of commercial banks – the deposits that are entered in to our bank accounts when banks make new loans.
For example, in the UK case, we find that £182 billion of cumulative seigniorage profits would have accrued to the public purse since 1998 if 30% of the money supply had been in the form of digital central bank currency rather than commercial bank deposits. This profit would have been paid to HM Treasury and could have been used to support public priorities or reduce the government deficit.
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