4 Aug 2012

How much credit is being created by commercial banks?

How much "money" gets created every year by the commercial banking system?

Well, I've found a whole set of figures in the World Bank dataset which appears to put some hard numbers on this activity. You can download figures for "Net Domestic Credit (current Local Currency Units)" for 214 countries with data that goes back to 1960. There are some holes in the data, and some countries have no data at all.

Nevertheless, by converting all the values into US dollars (using the World Bank's own exchange figures - and adding the Euro/dollar exchange rates by hand), I have been able to add up all the numbers to get a figure for the total amount of credit (debt) in the world economy. The total at the end of 2011 stands at nearly $85 trillion.

Even more significantly, we can see how the numbers have changed from year to year. This is effectively a measure of how much the commercial banks have been pumping into the economy in the form of loans.

Here are the figures.

The number for 1960 (in blue) refers to the amount of credit at the time. For the other years, I show the change from one year to the next. The value for 2011 is an estimate, because not all countries had provided the numbers. As a consequence, I used the most recent numbers for countries which lack the 2011 figures (about 10% of the total).

For a few years, the number is negative and shown in red - (1984, 1990, 1996-8, 2001 and 2009). But most of the time, the numbers are very large and positive. In particular, the years from 2003 onwards (with the exception of 2009) showed a massive increase in the money supply, with $7.7 trillion in 2007, $8.8 trillion in 2008 and $7.4 trillion in 2010.

Now remember that this is all money that the commercial banks create out of thin air, and then lend to individuals, companies and governments. They then charge us interest. How much interest do they get? Well, we know the numbers for government debt - It's over $1 trillion a year. But I'm not sure anyone has numbers for the interest payments on consumer debt. Given that credit card companies are quite happy to charge 15-20% and more, and given that consumer debt runs into tens of trillions, we can assume that there are several trillion more that is being sucked out of the world economy by the banks.

Suppose we had a different system. A system in which the $7-8 trillion a year of new "money" was created not by commercial banks for their own profit and used to fuel housing bubbles and speculation, but rather by elected governments who spent the equivalent amount of money on projects that were directly in the public interest - building affordable housing, hospitals, schools, transport systems, paying for teachers, nurses, police and firefighters, etc etc. Would the world be a better place? You bet.

In fact, it is interesting to note that the total level of credit creation per year is remarkably similar to the total amount of tax revenue for all the countries in the World Bank Database. For example, in 2008 the amount of tax raised was $8.46 trillion - a number less than the total amount of credit creation. And that means that if the governments were doing the same amount of money creation as the commercial banks, we could scrap tax completely. Now, there's a thought!

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