Where Does Money Come From? | Ole Bjerg | TEDxCopenhagen

[Applause] the great German philosopher Martin heiger once said that the things that are most difficult to think about are the things that are most familiar to us this applies very well to the topic of uh my talk today because what I want you to do is reconsider money so money is something that we all use every day we use it to buy coffee we use it to get paid for work uh we use it to pay our bills and most of the time we tend to take it for granted sometimes we may think about money if we have no money or a little money we may worry about how to get some money and we if we have enough money or even too much money we may contemplate how to spend our money however in this familiarity with money a very crucial question tends to uh get lost and it is the question how is money created in order to understand the economy and in order to understand money in the economy we need to start understanding that in our economy we have two kinds of money we have paper money and we have electronic money which is the kind of money we use when we uh use this uh kind of device uh a payment card if we think of money in terms of our daily use there doesn't seem to be much difference between the two kinds of money they are denominated in the same currency if you buy a cup of coffee it cost the same in regardless of whether you pay with this one or this one so the difference between the two seems to be merely a matter of convenience if however we ask this question how is money created we see that there is indeed a crucial difference between the two kinds of money let's start with the easy one this one paper money paper money is created by the central bank we can read that on the bank note uh if anyone else tries to create this kind of money and if they get found out they will go to jail for counterfeiting electronic money however is a little trickier the accounts that we have in our banks are called deposit account and that may sound as if ah okay so this kind of money is just this kind of money deposited in the bank and in principle that could be the case it is however very misleading in terms of understanding how money works in the economy because electronic money is created by commercial Banks when they issue new loans so how does this work how do commercial Banks create money so imagine that I go into a bank and I get a loan of 1 million Corona this loan will rarely be paid out in cash so what really happens well two things happens the bank issues the loan and thereby records that now I owe the bank 1 million Crona at the same same time they then credit my deposit account which means that now the Bank owes me 1 million Crona the trick here is however that this account money can be used as money in other words it is money so when I start spending my uh million Kona I merely transfer money from my account in my bank to someone else's account in his or her bank and in this process the electronic money is not somehow transferred into uh paper money and then transferred back into electronic money so essentially what happens when Banks issue a loan of say 1 million Chona they create 1 million Chona worth of new money they simply add this to the total supply of money in the economy so we've learned that we have two kinds of money paper money created by the central bank and electronic account money created by commercial Banks if we look at the total money supply in Denmark or United Kingdom or the Euro zone or comparable economies we see a similar pattern which is that paper money makes up about 5% of the total uh money in circulation whereas this kind of electronic account money makes up 95% of the total money supply and that's not even counting the money that are stashed away in the Cayman Islands or elsewhere so when we get excited about all these new ways of smart ways of paying for things not only with plastic cards but internet banking and smartphones we have to remember that the price that we've paid for this convenience is that we have essentially privatized the creation of money in our society so is this a problem and if it is why is it a problem I believe that it is a problem and I'm going to tell you why the problem is not that banks are evil or Bankers are greedy the problem is that banks are banks so this means that they are governed by certain incentives which makes them create money in a way that is not always you could even say rarely in line with the overall needs of the economy this has at least three very negative consequences it creates inequality it it creates instability it creates inequality and it creates a concentration of power so let's take the first one instability Banks's willingness to create new money and lend it into the the economy depends on the overall Cycles in the economy so when the econom is booming house prices are going up stock prices are rising the banks are very keen to create new money and lend it into the economy this however has the effect of inflating the prices in the economy even more so high prices go up even further and stock prices go up even further and then we have Bubbles and as we know ultimately these bubbles are going to burst and we will have a crisis as the one we saw in 2008 and as all of the crisis we've seen over the last four decades with regular intervals and when these Crisis happen the banks go into reverse then they become reluctant to create new money and lend it into the economy and this in turn then contributes to a deflation of the prices so house prices which are already falling will fall even more and the same for stock prices so in this situation the banks actually worsen the crisis that is already going on so in other words banks have an incentive structure for for creating money when we don't need it and holding back when the economy actually needs money we can compare this a little bit to an umbrella shop which sells umbrella when the sun is shining but then when it starts raining the shop closes second problem inequality as we all know when we borrow money we have to pay interests and we can think of Interest as a kind of tax on money so we pay this tax to the bank in order to participate in the economy this form of money tax however works opposite of normal taxes because if you're rich if you already have money if you already have assets you can borrow more money at a very low interest rate if you have little money however you have to pay a high interest rate so you have to pay a high tax so to speak and of course if you're poor and you have no money at all then you can't borrow anything so to my mind the uh way that money is created is a key explanation for not only for the equality inequality that we have in our uh societies but also for why this inequality just keeps rising and rising and rising and this growing inequality applies to individuals but it also applies to countries so we see some countries paying a high interest rates and thereby becoming poorer and poorer and we see other countries getting richer and richer the third Point has to do with power so if you can decide when to create new money if you can decide how much new money to create if you can decide the price at which this uh money is Lent into the economy and for what purposes it is Lent into the economy then you have enormous power not only over the e economy but over society as at large so by privatizing our money system the creation of money we have essentially handed over a very vital societal power to the financial sectors I believe that's why many politicians today appear very impotent it's because the crucial decisions they're not made in Parliament anyway they're made in the boardroom of major private uh banking corporations so the way that money is created today explains instability why do we have all these crisis all the time inequality and a concentration of power outside of democratic institutions this may sound gloomy perhaps because it is quite gloomy the good news is however that there's a smart solution to this oops um now it may sound as if what we need need is a revolution and an entirely new money system however I believe that much less can do because what we only need is an update of our existing system let's look at the paper money again as I said before this is created by the Central Bank it has a monopoly on the creation of this kind of money it decides when to create them and it decides how much to create and whatever profits from the creation of money goes to the government who can then use them in the economy it can lower taxes it can increase social benefits public Investments all kinds of good things uh and this is indeed a good system it's something that we all take for granted we don't hear very very many people say oh yeah let's let's have private corporations make U paper money we don't hear that no it's a good system it does however have one problem it hasn't kept up with the technological development so if we want to make electronic payments today we can't use this kind of central bank money we have to rely on the money that is created by the commercial Banks we have to go through the commercial Banks account and their payment system so what we need to do basically in order to solve these problems is to update the central bank's old Monopoly on money creation so that it counts not just for paper money but also for electronic money so that rather than um commercial Banks um uh rather than depending on the commercial banks for our electronic payments we should all have an account with the central banks so that when we want to make electronic payments we can simply uh transfer money from our account in the central bank to someone else's account in the central bank now where would this lead commercial Banks would they be put out of business by no means CU their role would be what banks have done for centuries and what they actually or what they used to be good at which is good old classical banking they would take deposits of existing money and lend it to people who wanted uh invest or spend or whatever they want to do with the money so they should they should um be sort of a link between people who wanted to uh save up and and and people who want to uh borrow uh they they what they shouldn't do however is create new money so this system is called a sovereign money system because now the creation of money would be the Monopoly of the sovereign state so in the beginning I asked you to reconsider money and I want you to do this not just as a philosophical exercise exercise but also as a political reflection so when was the last time you heard two politicians debating whether private corporations or the state should create all the money that we all have to pay uh depend on for our daily expenditures to pay bills to pay our taxes and so forth never never because money creation and money reform they are not issue they are not part of the mainstream political agenda no this these issues they are reserved for technocrats in central banks at best and CEOs of private banks at worst so ordinary people have no business interfering in these matters so what I hope that you will take away from this talk are two things one I hope you will take away the confidence that you can understand and form a qualified opinion about money and money creation and secondly I want you to feel that you have a democratic right to at least be part of the system of the decision of who should create our money in the future thank you [Applause] [Music] [Applause]

Channel: TEDx Talks

Views: 147,971

Keywords: TEDxTalks, English, Denmark, Global Issues, Economics, Money

Id: CvH66fz9nyU

Length: 14min 54sec (894 seconds)

Published: Tue May 24 2016