The £105 Billion Scam: How 18 Banks Create Money from Nothing and Charge UK Taxpayers Interest on It

 

A follow-up to my critique of Richard Murphy's MMT position

Richard Murphy is right that the UK government could, in theory, have the Bank of England create all the money it needs. But he misses the scandalous reality: instead of using this sovereign power, the UK has handed money creation for government spending to 18 private banks who collect £105 billion annually from taxpayers for this privilege.

The Comfortable Club of 18

Meet the Gilt-Edged Market Makers (GEMMs) - the exclusive club of 18 banks with monopoly rights to buy UK government bonds at auction. This isn't some historical accident; it's a deliberately maintained system that ensures every penny the government spends must first pass through these private gatekeepers.

These aren't your high street banks. They include giants like Barclays, Goldman Sachs, JP Morgan, and Deutsche Bank. And here's the kicker: they don't even need to use existing money to buy government bonds. They can create it.

The Magic of Zero Risk Weights

Under banking regulations, UK government bonds (gilts) carry a 0% risk weight. This means banks need exactly zero capital to hold them. Compare this to:

• Mortgages: 50% risk weight (banks need capital backing)
• Business loans: 100% risk weight (full capital requirements)
• Government bonds: 0% risk weight (no capital needed whatsoever)

This creates an infinite money creation loophole. A GEMM can create £1 billion, £10 billion, or £100 billion in new money to buy gilts without any regulatory constraint. There's literally no limit.

The £105 Billion Annual Transfer

In 2024-25, UK taxpayers will pay approximately £105 billion in interest on government debt. Let me break down where your money goes:

• £32-34 billion leaves the country - paid to foreign investors including pension funds in the US, Canada, and elsewhere
• £25 billion goes to the Bank of England - but this is just the government paying itself
• £22 billion goes to UK pension funds and insurance companies - benefiting mainly those with large private pensions
• The remainder goes to UK banks and financial institutions - including our GEMM friends

The Scam Exposed

Here's how the circular fraud works:

1. Government needs to spend money (on NHS, schools, infrastructure)
2. Instead of having the Bank of England create it (which it absolutely could), the government auctions bonds
3. Only the 18 GEMMs can bid at these auctions
4. GEMMs create new money from thin air to buy the bonds (remember: 0% risk weight = no capital needed)
5. GEMMs can keep the bonds and collect interest forever, or sell them on for a profit
6. Taxpayers pay £105 billion annually in interest on this privately-created money

No Market Discipline

The government and financial media perpetuate the myth of "market discipline" - that the government must satisfy private investors to fund its spending. But when those "private investors" can create unlimited money to buy government debt, where's the discipline?

Even if pension funds, insurance companies, and foreign investors didn't want to buy gilts, the GEMMs could simply:

• Create the money to buy the entire issuance
• Hold it on their books (at zero capital cost)
• Collect guaranteed interest from taxpayers

Post-Brexit Sovereignty Ignored

Since Brexit, the UK is no longer bound by EU Article 123 (which prohibits central bank financing of government). The government could:

1. Have the Bank of England directly create money for public spending
2. Eliminate the GEMM middlemen
3. Save £105 billion annually in interest payments

Instead, we maintain a system designed to extract maximum rent from taxpayers for the benefit of:

• Foreign investors (£32-34 billion)
• Wealthy UK pension holders (£22 billion)
• Banks and financial institutions (£26 billion)

Richard Murphy's Blind Spot

This is where I fundamentally differ from Richard Murphy's MMT analysis. Yes, the government could create its own money through the Bank of England. But focusing on theoretical possibilities ignores the actual institutional reality: we've outsourced money creation for government spending to private banks who charge us £105 billion annually for the privilege.

MMT advocates are right about monetary sovereignty but often silent about this privatized money creation scam. The issue isn't whether the government can create money - it's that we've handed this power to banks who use it to extract enormous rents from taxpayers.

The Democratic Deficit

No voter ever agreed to this system. No manifesto ever said: "We promise to let 18 banks create money from nothing and charge taxpayers £105 billion annually in interest." Yet both Labour and Conservative governments maintain this arrangement while claiming there's "no money" for public services.

What Could £105 Billion Buy?

Instead of enriching foreign investors and banks, £105 billion could:

• Double the NHS capital budget
• Build 350,000 affordable homes annually
• Provide free university education for all
• Implement a genuine green transition
• Give every UK household £3,750 per year

The Solution Is Simple

1. Use the Bank of England's money creation powers directly for public spending
2. Stop the unnecessary gilt issuance for spending that could be directly financed
3. End the GEMM monopoly on government financing
4. Save £105 billion annually in unnecessary interest payments

Conclusion: End the Scam

The UK government has the sovereign power to create its own money. Instead, it maintains a system where private banks create money to lend to the government at interest, costing taxpayers £105 billion annually. This isn't economics; it's extraction.

Richard Murphy is right that we have monetary sovereignty. But until we confront the institutional reality of how that sovereignty has been privatized for bank profits, MMT remains an academic exercise while taxpayers continue funding one of history's greatest financial scams.

The question isn't whether the government can create money - it clearly can. The question is why we allow private banks to do it instead and charge us £105 billion annually for the privilege.

It's time to end the GEMM scam.

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Note: All figures are from official UK government sources including the Office for Budget Responsibility, the Debt Management Office, and the Office for National Statistics for 2024-25.