11 Aug 2012

More on Money Creation in the Eurozone

I've been looking further into how money creation is handled within the Eurozone. As you hopefully already know, commercial banks have an almost total monopoly on creating new money. And, of course, when commercial banks create the money supply, which they do by waving the fractional reserve banking wand, they get to charge interest. It's a wonderful system for the banks - they literally get money for nothing. But it is a total disaster for the Eurozone's governments and taxpayers, who have ended up paying €4.48 trillion in interest payments to the banks since 1995.

But it doesn't stop there. The commercial banks also create the vast majority of the money that the rest of us use. How much?

Well, the European Central Bank actually provides quite detailed information about this. You can download a pdf file here, or download the complete dataset here.  A few months ago, I had already plotted the increase in M3, which is a fairly broad measure of the total money supply. That number had reached €9.87 trillion at the end of March this year. But I thought I would have a look at a breakdown of the figures. Here they are. I have charted the annual change in a variety of measures, together with the total outstanding amounts as of June 2012 - the bottom line.
As you can see, the total M3 has gone up again - reaching €9.93 trillion at the end of june. Indeed, with a very few exceptions (shown in red), the figures are nearly always positive - i.e. the banks are continuously pumping new money (i.e. debt) into the system.

But I was most impressed to see the numbers for "Credit to other Euro area residents" which was going up by over a trillion euros per year in 2006-8, reaching a peak of 1.39 trillion in the year up to June 2008. The total amount outstanding is now €13.36 trillion, even though the amount of credit actually shrank by €112 billion in the last year.

As far as I am aware, there are no numbers on how much interest this outstanding debt generates for the banks. If we assume around 8% per annum, it would be over €1 trillion.

The key question is this. Is this the best way to create the money supply? As with the figures from the World Bank, we can see that the commercial banks have been pumping hundreds of billions worth of money (debt) into the Eurozone economy every year. They get to choose where the money goes, and they get to charge trillions in interest charges on the "money" they lend. Much of the money gets used for fueling housing bubbles, or for buying imported flat screen televisions. And when it is not used to fuel consumer debt, it is being used to provide loans to speculators and for takeovers and mergers.

Just imagine another way of doing things. Suppose that we make it so that commercial banks can only lend money that they actually have. Suppose that they are no longer allowed to create money out of thin air, and charge money for lending that "money" to invididuals, companies and governments. Suppose that, instead, the creation of the money supply is the job of elected governments via central banks such as the ECB. And suppose that the central bank, instead of throwing over 1 trillion euros at the commercial banks and praying, the ECB provides the same amount of money that has been traditionally created by commercial banks for profit, but instead provides the money to governments which spend the money directly into the economy. And most importantly, suppose that the money is provided DEBT FREE.

Would this alternative system work better than the one we have? You bet it would.

What are the arguments that we have for keeping the existing system? I can think of only one - and that argument is totally phoney. We are told that allowing central banks to provide money debt free to governments would be inflationary. We are supposed to believe that the trillions of new money created by the commercial banks every year is not inflationary, that it doesn't cause property bubbles, that the trillions in interest charges that taxpayers end up paying to the banks is a good way of keeping inflation under control, and that the current system has not been rigged so that a powerful few can take all the benefits.

Sorry. I don't believe a word of it.

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