Stuart Pinfold

Where does money come from?

From funny-man Dave Gorman's blog...

I'm sure I'm going to look very simple... but it's a genuine question.

Where does it come from? It's all symbolic anyway. If there were a hundred people living on an island without any contact with the outside world and they all had a pound each... and one of them opened a bank and offered the others 1% interest per annum... then how would they pay that interest? If someone invested their whole pound, then at the end of the year they'd be owed a penny and that would mean the banker had only 99p of their own pound left... which would make banking an inherently unprofitable business. Which (despite the recent evidence) it can't be... or there wouldn't be bankers.

If those hundred people continued to live with their pounds, swapping them here and there, the baker buying an apple from the greengrocer for a penny here and the greengrocer buying a loaf of bread from the baker for tuppence there, then I can see how some people would do better than others. Some people are going to get richer than others because more people spend more with them... but the sum total of their money would still be £100 and the only way of changing that would be to create more money out of thin air.

If some of them had kids that would just spread the wealth a little thinner. There are more people in the world now than there were 300 years ago and there's more money too. So where did it come from?

Someone has to have decided to just make more of it. Someone somewhere must be deciding to increase the amount of money in the world year on year. But who decides how much and where does it go to? Say you're one of the 100 people who all started with a pound each. And say you've decided that for your society's economy to function you need to have another £10 added in to the mix? So what do you do next? You mint another ten coins... and then where do you put them? Who do they belong to? Are they yours? The governments? How do they get into the system?

If governments are just creating more symbolic money each year, how do they decide how much to create? How do they balance that out with each other?

Let's say there was another group of a hundred people who lived on another island and they all started with two dollars each. Then one day, some brave mariner from Island A discovers Island B and the two islands start trading with each other. As it goes, what costs about a penny on Island A costs a couple of cents on Island B so everyone's happy trading two dollars for a pound.

So now what happens when the first island decides to add another £10 into their economy. They've just created something - out of nothing - that makes them wealthier than their neighbours. So what's to stop Island B deciding to just create even more money to make them even wealthier?

Countries borrow money from each other. For that to work there has to be some agreement between nations about where money comes from. You can't decide that a pound is worth two dollars if they're allowed to just make more dollars whenever they want.

Somebody somewhere has to be increasing the sum total of money in the world bit by bit... because there's more of it now than there was then... and there has to be some kind of international agreement between governments about how that works... or there would be no way of trading with each other.

So... on the off-chance that the World's Money Increaser (I think that must be his/her title) is reading this (and come on, I think there's every chance they google themselves) can I offer them this suggestion: make more.

You know how tax-payers are meant to be bailing out the banks with 500 squillion pounds? Why not just create a new 500 squillion pounds and use that instead? You won't even have to print the paper or mint the coins... because it's the kind of money that only really exists on computer screens and bank statements. Just tell everyone it's there... and then it is there... because surely that's how all money works anyway. Then the problem is solved and it won't have cost tax payers anything in real terms because we'll only be spending money that didn't exist before.

You know that National Debt that people are always going on about? However much it is... that's how much I'd create on Day 2 if I was in charge. Just make enough money to pay it off.

I don't know why no one seems to have thought of it sooner.

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