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Ben Dyson: Where Does Money Come From?

Parliament places huge scrutiny on how taxpayers’ money is spent. But for the last 170 years, parliament has ignored the question of how money is created in the first place.

This oversight has led us into one of the worst financial crises in history, and has meant that government policy ever since 2009 has been ineffective in dealing with the big social, economic and environmental challenges that we’re facing today.

WHERE DOES MONEY COME FROM? (And why should you care?)

Most members of the public, and indeed many MPs, believe that only the Bank of England has the authority to create money. The creation of money by anyone else is seen as counterfeiting, a criminal offence.

This is not entirely accurate. The Bank of England does have the exclusive right to print paper money, but paper money now makes up just 3% of all the money in the economy.

The other 97% of money exists as electronic bank deposits – the numbers that appear when you check your bank balance. So who has authority for creating these deposits? In the words of the Bank of England:

 “Commercial [i.e. high street] banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.” (Bank of England Quarterly Bulletin, 2014 Q1) [LINK: ]

The Bank of England go on to state that “the majority of money in the modern economy is created by commercial banks making loans”. They maintain that they have ultimate control over the amount of money created by banks, yet recent history would call that claim into question.  As shown below, between 2000 and 2008, the amount of money – and debt – in the UK economy doubled as a result of money creation by bank lending. This created the debt fuelled boom that ultimately led to the financial crisis.

money creation debt
Money creation by bank lending

Even the former chairman of the Financial Services Authority, Lord Adair Turner, has highlighted this loss of control of money creation:

‘The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.’ (Speech to the South African Reserve Bank, Nov 2012) [LINK ]


There are striking parallels between the situation today and that in the UK in the 1840s. At that time, the state only took responsibility for creating metal coins. People would store these coins with goldsmiths (who naturally had high security storage). As the Bank of England describes, “The goldsmiths would give out receipts for the coins, and those receipts soon started to circulate as a kind of money.” The goldsmiths’ receipts had become bank notes.

Eventually, the goldsmiths realised that they could make loans by simply writing out new receipts (notes) and lending them to borrowers, even if there was no corresponding money in the vaults. This license to literally ‘print money’ was too great a temptation, and goldsmiths ultimately issued too many receipts, leading to a bubble in property and financial markets, followed by a banking crisis.

In 1844, the government passed the Bank Charter Act, which stated that only the Bank of England would be permitted to issue bank notes .

This was the last significant debate on the creation of money in Parliament. Since then, bank deposits have gradually replaced cash as the main means of payment. We have now arrived in a situation similar to that of 1844, where the excessive creation of money by private banks has led to a financial crisis.


In one way or another, money affects almost every aspect of our lives. The creation of hundreds of billions of pounds of new money by the banking sector was the root cause of the financial crisis. So it’s essential that we now ask some fundamental questions – both in and outside of parliament:

1.    Who should create money? Should the creation of money be the sole right of the state, through the Bank of England? Should high-street banks have the effective right to create money every time they make a loan, given the recent consequences for the economy? Would parliament ever have voted to delegate the power to create money to the same banks that caused the financial crisis?

2.    How should newly created money be used? Currently the bulk of money created by bank lending goes directly into the property market, pushing up house prices. Just 12% of UK bank lending are to businesses outside the financial sector. Do we want banks to have the power to create money when this leads to unaffordable housing and financial instability? Should we have allowed the Bank of England to create £375bn with little scrutiny from parliament, and use this money to inflate financial markets? Were there better uses of this money?

In a future article I will consider how we could remove the power to create money from the banks and return it to the state, and why doing so would be good for the economy.

(More information and videos about the problem with money are available from

(Chart source: Bank of England figures for M4 vs Notes & Coin in circulation)

Ben Dyson is the founder of Positive Money [ ] and a co-author of “Modernising Money: Why our monetary system is broken, and how it can be fixed

Money: An Issue Ignored by Parliament Since 1844
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