Let’s be honest.
Writing a letter to the Bank of England on a Friday night is probably not very high on anyone’s list of things to do. And it sure as hell isn’t on anyone’s bucket list. Mine included.
But never one to shirk my duties, or the chance to try something new and exhilarating, that is exactly what I did. Although it wasn’t on a Friday night. It was a Monday night, when there really isn’t anything more interesting to do anyway.
What harm can come of it?
Go on. Do it. I urged myself. Just log on and fill out the form and see what happens. The world is not going to end. What’s the worst that could happen?
I’ll be ignored.
Well, what’s the saying? Who dares wins. And, fortune favours the brave. To hell with it! I roared. Let’s do this! And so it came to pass, that fateful Monday night. I logged on to What Do They Know, tapped out my questions and hit the submit button.
And then I waited.
And waited.
And waited.
I genuinely thought my Freedom of Information request to the Bank of England had been filed under Y for “You must be joking Mr Carnihan, we’re not even going to dignify that with a response.”
I received an email on the 3 November telling me I had a response from the Bank.
I couldn’t quite believe it. Hooray! I cheered. I leapt for joy. I hugged and kissed my wife. OK. That last one isn’t true. I hugged the cat. My wife was at Body Combat punching a punch bag with great enthusiasm.
But I was terrified.
Honestly. Well, perhaps moderately anxious that the reply wasn’t going to be positive. Perhaps they had bothered themselves after all to write back and tell me they’d filed it under Y. Just for a laugh.
After another minute or two of flip flopping between should I or shouldn’t I, I decided I should.
I opened the reply.
I was stunned.
I was expecting a rather formal and stuffy response. I was expecting to be told that I was wrong on all accounts. I was expecting to be told what an impertinent fool I was for even thinking I could get away with bothering them with my nonsense.
And I was wrong.
About all of that. They were polite, considerate and helpful. Especially since, as they diplomatically mentioned, I hadn’t submitted a request that strictly fell within the remit of a FOI request.
Nevertheless, they could indeed confirm my questions and statements were correct.
Here’s what they confirmed:
  • Banks don’t lend you other people’s money. In olden days they used to lend you other people’s savings (or to be more accurate, a fraction of their savings) for example, but no longer. Nor do they lend you their own money that already exists in their vault or online account.
  • The money they lend you nowadays only comes into existence when you sign a contract with them. The money doesn’t exist prior to that point.
  • The bank creates a contract for the loan and, after you sign it, they add a number equal to the amount you want to borrow – which is written in the contract – to their spreadsheet (ledger). This brings the (electronic) money you are about to borrow into existence. The bank then transfers (deposits) those numbers into your bank account. Not a single note or coin is created. Not a single penny of your loan existed before you signed that contract.
Hey presto. “You’ve got money!”
The bank charges you interest on the money you borrowed: the electronic numbers they tapped into their spreadsheet and transferred to your account a the flick of a switch. Money that did not exist prior to you asking for it.
Which means…
Money isn’t created out of thin air, as is often said, and it certainly doesn’t grow on trees. No. It’s created in an electronic spreadsheet.
It’s not just private banks who can do this.
The Bank of England creates money in this way too, but calls it Quantitative Easing. Although they do still print notes occasionally (and the Royal Mint makes the coins).
Which also means…
  • There is no limit to how much money can be created, and;
  • Money made in this way can never run out;
  • The government doesn’t have to borrow money from a private bank to pay for anything; it can – and does – create its own money by instructing the Bank of England to do it.
  • It’s not necessary to collect a penny in tax in order to raise funds to pay for public services.
  • Money can be created, then spent. Then, that transaction can be taxed (which removes money from the economy) and inflation kept in check.
  • Collecting tax also create demand for and gives a currency its value: because if you didn’t have to pay your taxes in Sterling, why would you bother using Sterling?
It’s worth remembering this the next time an argument starts about how to pay for public services and whether or not the government needs to balance its books and what the true role of tax is.