Money from thin air

How many realise that if all bank loans were paid, there would not actually be any money in circulation? Money is created when banks make loans.

It is interesting to see Don Brash’s retaliations against Bryan Gould’s assertions that banks create money “out of thin air”. But it is true!

An alternative is for the Government to take away this extraordinary power from banks and to make the creation of money a government function; a function which I suspect most people believe is already the case. This is not the same as having the central bank “print money” by relaxing lending policies, resulting in more cheap loans, which must still be repaid.

Here’s the difference — government creation of money is not based on debt. It is and should be based on direct spending of money into circulation by the Government itself. To do this in a way that promotes the best interests of society means the process would need to be depoliticised ie by the formation of an independent money creation authority that cannot be influenced by the government of the day.

Historically banks have always made lending decisions (and therefore money creation decisions) based on what is most profitable for banks which is perfectly understandable. But this *system* is flawed and is costing us billions.

Peter Judd, Mangere Bridge.