According to Positive Money, 97% of the money in circulation in the UK is created by private banks when they lend. Only 3% is money created by the central bank on behalf of the Government. Shock, horror!
Actually, that sounded a bit high to me, so I looked into the origin of this interesting statistic. About 3% of the total money supply in the UK (sterling M4) is indeed notes and coins in circulation. But Positive Money aren't correct to claim that the rest is entirely held by banks. They've ignored the little matter of central bank reserves.....This is actually rather more important than it sounds, since the effect of QE and a generally risk-off environment has been to encourage banks to keep more money in reserve accounts at the Bank of England rather than lending it to each other. So the true figure is probably more like 90%.
Well, ok, that's still a lot, isn't it?
No, it isn't. You see, nearly 90% of the UK population has at least one bank account. And guess what they keep in those accounts? Yup, you got it. Money. In fact most of the money in our society washes around the banking system. Some of it gets diverted into central bank reserve accounts (7%), and some of it gets withdrawn from ATMs (3%). The rest circulates as paper (cheques) and electronic transfers from one bank to another corresponding to the payment and spending activity by households and businesses.
Fifty years ago the proportion of notes & coins in circulation to money held in commercial banks was much higher. That is because far fewer people had bank accounts and the majority of working-class people were paid in cash. Even for those who did have bank accounts, making payments directly from bank accounts was not a simple matter. Regular payments could be set up as standing orders, but all other direct payments from bank accounts involved considerable delay. Most people preferred to use cash for their daily expenditure.
That was the world that I grew up in. Cash was king, cheques took two weeks to clear and credit and debit cards didn't exist.
It's still like that in large parts of the world. Even in the UK, over 10% of people still work on a cash-only basis because they do not have bank accounts or because for some reason they cannot use their bank accounts (for example because of high debts - if someone is over their overdraft limit, any money they put into their account "disappears" and is not available for essential personal expenditure such as food, so they don't put money in the bank at all). They are the very poorest of our society.
In poorer parts of the world such as Africa, where high proportions of the population don't have bank accounts, payments are increasingly being made electronically in ways that bypass banks. Mobile phones, rather than bank accounts, are the preferred means of funds transfer. Various agencies are energetically trying to improve access to banking facilities, but not so that payments can be made - on the contrary, they are encouraging further development of non-bank payment platforms. They are more interested in encouraging people to use banks for STORAGE. You see, these very poor people don't trust banks. They like to have money they can touch. And they don't borrow - even if they could, many of them have a horror of owing money. They save instead. Cash, under the bed or the carpet. But people who stuff their mattresses with cash are at risk of losing their precious money through fire, flood, mice, beetles and above all through theft, often violent. Compared to those risks, banks in poor countries are safe places. They are also rare - which is much of the problem. No-one really wants to put their cash in the bank if the nearest branch is 60 miles away and the only way of getting there is walking. So reducing the number of the "unbanked" is an uphill struggle, both in terms of provision of basic banking services AND in terms of their takeup.
It's interesting, isn't it, that much of the debate that rages around bank reform in the UK is concerned with making banks safer places to put money and reducing our dependence on debt. It's almost as if we want to be back where we were fifty years ago - where much of the world still is. We look back on that time through rose-tinted glasses. We perceive it as a "golden age" of financial responsibility, when bankers were pillars of the community rather than the hated pariahs they have now become. But we were also materially poorer then. I come from a firmly middle-class family, but we did not have a fridge until I was seven, we did not have a washing machine, we only had partial central heating, we did not run a car and we didn't have a television. We did not have overseas holidays, we walked everywhere and we borrowed books from the local library instead of buying paperbacks. When clothes developed holes, we mended them. There was a stigma around debt and few people borrowed, except for mortgages - and even those were not as common as they are now, as that was the heyday of post-WWII social housing. And people saved, because saving was regarded as "good". Even if it meant that they struggled to provide food for their families, they saved. Many of those elderly people who saved so much then are now among the richest in our society: not only have their savings appreciated, but those who owned their own houses have also benefited from significant inflation in property prices.
I have no desire to return to that way of life. It doesn't look like a "golden age" to me. So many things we take for granted simply weren't there then. Yes, for many people debt has got out of control. Yes, banks have behaved badly and destroyed much of our trust in them. But does that mean we throw away all we have gained?
The fact is that our credit money system has allowed many of us to borrow from our futures and become materially richer in consequence. As a society our standard of living is very much higher than it was fifty years ago: we live longer, we are healthier and we have more material goods. I don't know that we are necessarily happier because of this, and there is no doubt that inequality within our society has risen - there are still pockets of serious poverty, and the rich have benefited disproportionately. There is much to be done to redress that. But I can't see why discovering that 90% of our national currency is created by bank lending is so awful that we need to completely dismantle our financial system. I really don't care how my money is created, as long as I receive it on time and can spend it on things I need. Whether commercial banks or central banks should create money is not important to those whose problem is that they don't have enough money.
It seems to me that we are spending an awful lot of time and energy arguing about who should own the production of the means of exchange in our society, when we could perhaps use that energy more productively in finding ways of redistributing that means of exchange so that everyone has enough of it......