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There is an excellent letter in today's Financial Times from James Skinner, a trustee of the New Economics Foundation, referring to the 'conspiracy of silence' surrounding the creation of money by commercial banks.

This is something Bernadette Meaden has drawn attention to here before.

James highlights how the creation of new money in the form of commercial bank money accounts for the creation of more than 97 per cent of the money in circulation (M4). It is widely believed however by many members of the public (and indeed commentators and policy-makers) that all money is created by the state or the central bank, rather than by the profit-making private banking sector. This of course has huge implications for how we address the financial problems we all face, or indeed whether we really face up to them in the first place.

The full text of the letter in today's FT:

“Sir, In your editorial “Restoring faith in the banking system” (December 29), you rightly draw attention to the useful role played by banks in carrying out their “core activities” of “the payment systems and deposit-taking”. However, you make no mention of their other activity, namely the creation of new money in the form of commercial bank money.

“Many people would consider this to be far the most important activity of banks in the current banking system, accounting as it does for the creation of more than 97 per cent of the money in circulation (M4).

“If banks did not enjoy this extraordinary privilege it is doubtful whether they would have at their disposal the quantity of profits that makes the current bonus system possible.

“It seems the apparent “conspiracy of silence” on this issue, which characterises the ongoing debate on the financial crisis, is not in fact due to any attempt to conceal a potentially embarrassing fact about banking.

“A recent New Economics Foundation publication, 'Where does money come from?', with a foreword by Prof Charles Goodhart, quotes the results of polls indicating that the public is largely unaware of how the banking system works.

"It is widely believed, for example, that all money is created by the state or the central bank and not by the profit-making private banking sector.

"The current debate on financial and monetary reform is unlikely to make much progress if this supremely important aspect of modern banking is not taken into consideration."

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