Why is there so much debt? 10 years before the financial crisis started,
individuals and families in the UK had a total of £480 billion of debt. Since then, our debt has more than doubled. But who did we borrow all this money from? Was it from an army of grannies who have spent
their whole lives putting money away for a rainy day? No. When you go into a bank and borrow a large
amount of money to buy a small amount of house, that money doesn’t come from somebody else’s
savings. It’s just created, out of nothing, by the
bank, with a few taps on a computer keyboard. Sounds crazy, right? But this isn’t some
crime of the century; it’s just the way banks work. Here’s how the Bank of England
describes it: “When banks make loans they create additional
deposits for those that have borrowed the money”. [1] Those ‘additional deposits’ are just the
numbers that appear in your account, which you can use to pay for your new house. In fact, around 97% of all the money that
exists is created in this way, out of nothing, when banks make loans. Every loan they make
creates brand new money in the economy, whether it’s a personal loan, car finance or a mortgage. Now, here’s the problem. If almost all the money we use is created
by banks when they make loans, then for every pound of money, there has to be a pound of
debt. If we want more money in the economy, we have
to go further into debt to the banks, because more borrowing from banks means more new money
is created. But the process happens in reverse when we
repay loans; when we pay down our debts, the money effectively disappears. This makes it impossible for all of us to
reduce our debts. If we start paying it off, then the amount of money in the economy shrinks. Less money in the economy means less spending,
and less spending means fewer jobs. So there’s the choice: we can have either
more money…and more debt… Or we can have less debt and…less money. When the only way to get money into the economy
is to borrow it from the banks that create it, then we’ll always be trapped under a
mountain of debt. But it doesn’t have to be this way. If we
took the power to create money away from banks, and instead have money created by a public
institution that isn’t chasing short-term profits, …then this new money, as it supports jobs
and the economy, could be used to pay down the debt… …and we could finally start to clear this
mountain.