Where Does Money Come From?

Got any money in your pocket?  Where did you get it from?

Well most likely you got it from a cashpoint, but how did you end up with money in your bank account?

Maybe you work, and it came from your salary.  So where did your employer get the money to pay you from?  If they’re private sector, they sold goods or services, and they’re paying you out of their revenue.  Well where did people get the money to buy the goods?  They got it from their jobs, obviously.  But hang on, we’re going around in a circle here.  How did that money actually come into being?

It must have something to do with the Government, so let’s assume you work for the public sector, and the Government paid you.  Where did the Government get that money from?  Taxes, of course.  And taxes come from businesses and income, so we’re going back in circles again.

Now at this point your probably getting frustrated with me.  Everyone knows that the Central Bank (the Bank of England in the UK) prints the money for the Government.

Oh really?  How often do you actually use cash?  You’re probably paid by bank transfer directly into your bank account.  If you get any benefits (and if you’ve got kids you’ll get Tax Credits and Child Benefit even if you work) they go straight into your bank.  And you pay for things by card, on-line, or by direct debit.  These days, money is electronic. In fact, only 3% of the money supply is cash, the rest is digital money:  a record on a computer somewhere that someone has money in an account.

Now you’ve probably never thought of this, but I hope you’re not shocked to find out that the banks don’t have an amount of cash in the safe to equivalent to all the money in accounts.  The digital record in the account is the money.

So am I just being pedantic?  When we say “printing money”, we really mean that the Bank of England creates the electronic money, surely that’s what happens.  How much do you want to bet?

In one of the opening series of posts I showed that if productivity is increasing then new money needs to be constantly created and added to the economy at the same rate.  So this question of how money is created, who creates it and how enters the economy, is critically important.  And the answer is not the Bank of England, and it’s not the Government.  I will reveal all next week.