The fact is, and it has been so since 1694, when a borrower approaches a bank for a loan, the funds for the loan are not in the bank. They are created when, after assessing risk, a bank clerk enters the loan amount into a ledger, demands collateral; sets the rate of interest on the loan and after agreement has been reached, transfers the funds – as ‘bank money’ – from the bank’s account to the borrower’s account. This loan creates a deposit in the borrower’s account. Loans create deposits. Credit creates money.
It gets better: credit creates economic activity. This is why I consider the creation of a sound banking and credit system to be a great civilizational advance. In countries without sound banking and credit systems, it is very hard to kick-start and sustain economic activity, through investment and job creation.
It’s because we have a sophisticated monetary system and a well-developed (if badly regulated) banking system – that we can afford to tackle climate change.
There is no shortage of money. There may be a shortage of skills; of regulation; of commodities; of land; of water and atmosphere – but there need never be a shortage of money.
Read it at Debtonation
Ann Pettifor: speech notes for presentation to the Just Banking Conference, Edinburgh, 20th April, 2012
By Ann Pettifor
(h/t Tom Hickey at Mike Norman Economics)
Brilliant piece focusing on private credit creation and the enormous overhang of private debt that continues to depress economic growth. Sadly, the five tools for recovery do not appear politically feasible in the current state. Of those tools, however, I strongly favor a re-structuring of the banking sector that recognizes insolvency combined with a debt jubilee for households.
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