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Poll: Only 12% of MPs know that banks create money – Ben Dyson

Members of parliament in the United Kingdom lack basic knowledge about the fundamentals of money, leaving them ill-equipped to understand the impending dangers of a house price boom or a credit bubble, according to recent exclusive Dods Monitoring poll commissioned by Positive Money, the campaign body calling for fundamental reform of the UK money and banking system.

When asked questions about who creates the nation’s money in the UK, nearly three quarters got the wrong answer. 71% of MPs believed that only the government has the power to create money. In reality, the government now only creates coins and note which make up just 3% of all the money in the economy. The other 97% of money exists as bank deposits – the electronic numbers in bank accounts. This type of money is created by high- street banks – not by the government.

Just over 1 in 10 MP accurately understood that banks create new money every time they make a loan, or that money is destroyed whenever individuals or businesses repay loans.

MPs have no chance of understanding the house price bubble unless they know these basic facts about money. The financial crisis was caused by banks that created too much money and lent it recklessly. We’re now in danger of repeating the same mistakes.

MPs unable to prevent another financial crisis

Without understanding that banks create new money whenever they make loans, MPs are ill-equipped to appreciate that:

  1. The UK boom running up to 2007 was fuelled by the creation of new money by high street banks. Over £1 trillion of new money was created as the banks went on a lending spree.
  2. The housing bubble is driven by money creation by banks, rather than the scarcity of housing. The £22 billion of new mortgage lending provided in 2013 resulted in £22 billion of new money being creating by the banks and pumped into the housing market.
  3. Governments can create short-term economic growth by encouraging households to go further into debt, because every new loan from a bank creates money. But this ultimately increases the risk of another financial crisis.
  4. If all households tried to pay down their debts, money would disappear from the economy. This withdrawal of purchasing power could potentially lead to a recession.

Source: Positive Money (19 August, 2014)

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