“Where does money come from?” Take your time. I’ll wait.

I’ve worked in and around money all my life, but to my shame, I’ve never really given much thought to the basic questions of how it worked. Or rather, I started thinking about it and soon gave up. Eventually, I bought “The Ascent of Money”, by Professor Niall Ferguson. He’s a professor at the Harvard Business School, and knows his stuff. Still - it’s quite dry. I’m not sure I was really paying attention.

Now - I’m studying for a Masters in Business Administration, and right now, I’m learning about sustainable finance.

So, where does money come from?

Central Banks, surely? The Fed in the US, the European Central Bank in Frankfurt and the Bank of England in London. That must be it.

Was that your answer?

Congratulations, some of our money does come from there. All the coins and notes. You have successfully identified where 3% of our money comes from.

What about the other 97%?

That comes from us. We make it up. Conjure it out of the air.

Seriously, we do.

If you want to buy a house, then the popular way of doing it, is through bank finance; a mortgage. So, I go along to Barclays, HSBC, Citibank or DeutscheBank and ask to borrow, say £500,000, secured against the house that I want to buy for £600,000.

Barclays makes me sign a load of paperwork, and then simply adds £500,000 to my account balance, which goes from £110,000 to £610,000 overnight. Magic.

I complete the house purchase, and initiate a bank transfer for £600,000 out of my bank account, which is instantly reduced to a sad £10,000. In return, I get a set of house keys and a big juicy monthly payment to make to Barclays.

Where did they get the £500,000? They didn’t. They made it up. At some point, they will need to include it in a calculation - lending versus deposits or central bank reserves, but actually, they may have sold the debt to another bank before then, or split it into parts, combined it with other loans and created a derivative.


97% of our money is made up by private banks issuing loans.

There is more debt owed to the banks than there is money in the world.

For decades now, money has become entirely detached from central bank reserves. This has proved really useful, for bank bail outs, pandemics and the like. “Financial crisis? Not at all. We just invented some trillions here and there.“

Old school economics maintained that debt eventually must be repaid. Bankers just nod and keep inventing money.

What will that mean?

Who knows? Ostensibly, wealth will continue to concentrate in fewer hands. Economic growth MUST be maintained to keep the merry-go-round going. Resources will be consumed to fuel the essential growth.

Then, it will go bang. Either the system, or the planet.

Optimists believe that we will invent new money. A new system. Community currencies, mutual credit clearing systems and the like. However, for every optimist, there’s a charlatan, trying to promote a cryptocurrency as mired in as many problems as the fiat currencies it intends to replace.

The more I learn, the more I tremble.

Serious stuff, I know. I’m off for a pint.