How is money created?

Almost all money is created by banks when they approve a loan. Notes and coins created interest-free by the New Zealand government amount to a mere 1.6% of our money supply; the rest is created as interest-bearing bank debt. This is a system that harbours the seeds of its own destruction.

Deregulation of banking 30 years ago compounded the problem, leading to a range of riskier and riskier “financial products” and a credit bubble. The resulting Global Financial Crisis that began in 2007 is nowhere near fully unwound.

The process by which banks create money is so simple that the mind is repelled.

— Economist John Kenneth Galbraith

Why is this a problem?

The fatal flaw with the current money system is that money is always in short supply. Banks providing loans create the principal only, leaving borrowers to find extra money to repay the interest, either by increasing their production, competing with others facing the same problem or by further borrowing. So the money supply must keep increasing, and with it, the total debt.

The never-ending need to increase production causes intolerable demand on natural resources. The competition for an inadequate supply of money is a bit like musical chairs: someone misses out, and bankruptcy is inevitable for some of the losers. Further borrowing compounds borrowers’ problems, consigning them to long-term and often inescapable debt.

What can I do?

Now you're asking the right question!

Living Economies Educational Trust exists to provide information on information on how citizen-led economic solutions can improve their community's well-being and contribute to a healthy planet. Just take a look at some of the Solutions discussed on this web site, visit our online shop full of useful resources, or contact our Trustees and other volunteers for additional support.

Where can I go to learn more?

  • Take a deeper look at our money system
  • The Living Economies (LE) Shop for an extensive library of resources explaining the problem with interest-bearing debt money and positive alternatives
  • Positive Money NZ for links to additional resources, with a particular focus on the role of banks in money creation (and less on the role of interest)
  • Contact the LE team for more support

Living Economies Educational Trust (LE) promotes exchange systems and investment models that build community strength and well-being, offer interest-free alternatives to 'business as usual', and respect both people and our living planet. Our network of volunteers can recommend resources and provide educational support for community initiatives. LE (CC 38114) is a registered educational charity, and we do not provide financial or legal advice.

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