How we subsidise the banks - Positive Money

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From Positive Money:

By creating the UK’s entire money supply as loans, the banking sector is able to collect interest at an average rate of around 5% per annum on very nearly every pound in existence. This means in order for the non-banking economy (the other 98% of the UK’s population) to have a money supply with which it can trade, it must pay around 5% of all the money in existence to the banking sector each year. This results in a regular and ongoing transfer of wealth from the non-banking sector to the banking sector.

This generates huge income for the banking sector (imagine if you were able to charge interest at an average of 5% a year on all the money in the UK!). This system creates three re-distribution effects:

1. From the Poor to the Rich:

All money is created as debt by the banking system. This shifts the ‘baseline’ of poverty down to zero or negative, rather than a low but positive bank balance. Because it is those on below average incomes that end up with much of the debt, they end up paying interest to the banking sector, in effect meaning that the poor subsidise the rich.

2. From the ‘Real’ Economy to the Financial

Businesses are also in a similar situation. The ‘real’ (non-financial), productive economy needs money to function, but because all money is created as debt, that sector will also end up paying interest to the banks. This means that the real-economy businesses - shops, offices, factories etc – end up subsidising the banking sector.

3. From the Rest of the UK to the City of London

Because this debt-based system redistributes money to the banking sector, and the bulk of the banking sector’s salary payments are concentrated within the City of London, this means that there is redistribution of income from the rest of the UK back to the City of London.

All of these re-distribution effects are inherent to the system and will continue year after year as long as the money supply is issued by commercial banks as debt. It is very possible that the ‘upwards-and-inwards’ redistribution of income caused by this system of issuing money cancels out any downwards-and-outwards redistribution of income through the welfare state. Looked at another way, the welfare state may only be necessary thanks to the design of the banking system, and could be significantly scaled back if the method of creating money was reformed.