British MPs Don't Know Where Money Comes From

It seems as if politicians are sometimes the most outspoken critics of cryptocurrencies. They are quick to label them as nefarious or money for "drug dealing". One would then think from their accusations that they don't know much about the technology behind cryptocurrencies.

This lack of knowledge would not be a surprise.

However, according to a recent survey of British MPs, only 15% of them actually now how Fiat money is created. This is quite a big surprise indeed. These politicians make decisions every day based on the financial wellbeing of the country yet they don't know how the money comes about.

Although this is quite an unfortunate statistic, one would be certain that the general feeling among the public would be about the same. Fiat money is used every day and is an inseparable part of our lives yet many don't ask the question of where it comes from?

Ignorance or Indifference

The survey was conducted by the Positive money organisation and polled elected officials in the British Parliament. One of the questions on the survey was how commercial banks create the money supply. At least 85% of the MPs did not know how the extension of loans impacted on this money supply. More shocking than that was the fact that at least 70% of the MPs thought that the government was the only one in control of the money supply.

This is also particularly relevant now in the case of great amounts of monetary easing across the developed world. Central banks from the US, Japan, Europe and of course the UK have flooded the markets with easy money. This is done without a real vote from the MPs and is currently beyond their control. Indeed, it seems as if MPs have not really taken an effort to learn more as the same survey revealed similar results almost 3 years ago.

Although there is a general perception that the creation of money is a complicated discipline, this may not be entirely true. Yes, there are different characterizations of money supply (M1, M2 etc.) but a basic understanding of the dynamics would help inform opinions. For example, 97% of the money that is currently in circulation is created by the commercial banks that extend loans to companies and individuals. These loans then flow into the hands of consumers and other businesses.

Rationale for Cryptocurrencies

The fact that this money creation is controlled by the central bank as well as the commercial banks that the central bank lends to was the drive behind cryptocurrencies. When central banks lend a small amount of "reserve money" to the commercial banks, they are allowed to make a large number of loans to people. These loans made at the complete discretion of the bank are really onerous and tend to tie people up if they cannot repay them.

If MPs understood this properly, they would know that Fiat money is indeed created out of thin air. Unlike when there was a gold standard, there is nothing that backs the currency other than a "promise to repay the bearer". This imaginary money is then used to hold people down with burdensome loans.

This is much unlike cryptocurrencies which are governed by cold calculated mathematics and established protocols. The supply of this money is controlled by no one and is completely governed by the rule of the protocols. This is the reason that they were created and is the drive behind their continuing mass appeal.

Perhaps if the MPs decided that they wanted to read up on the fundamentals of the Fiat money system, they would be more open to cryptocurrencies. Indeed, some may request the government only pays their salaries in Crypto.

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