Introduction
From Tudor coinage to today’s mortgage markets, inflation has always revealed who truly benefits when money is created. This article traces the history of currency debasement and modern bank lending to show how private debt creation fuels price rises — especially in housing — while ordinary people shoulder the burden. In understanding how “money from nothing” shapes our lives, we uncover how deeply debt defines the modern economy — and how it traps us in the very “Grip of Death.”
We all know inflation is one of the key aspects of modern economics. A state will try to keep inflation under control, without it going negative.
Ok, so what is inflation? It is simple a measure of the prices of key goods. If they go up, we have inflation.
In the UK, the government has set a target rate of inflation at 2%.
Let’s look at what can occur that can result in crazy inflation.
History delivers many lessons to us, so we will begin there.
During the reign of King Henry VIII, (The Mad King), he spent a lot of his time taking England to war with France. Wars are expensive business, as we know, and the royal coffers soon began to run low. Increasing taxation can only work up to a point, so he decided that England should ”print” more money. At that time, the coinage was based on gold and silver. Which is limited. You can not just decide to mint more money.
So, instead they minted new money but reduced the amount of silver/gold that was present in the coins. This is called debasement of a currency. This meant he now had new money to pay for the things that he needed to continue his wars.
Ok, this had waterfall effects on people and the economy. When presented with a new coin, traders would increase their prices, because the intrinsic value of the coin is now lower. But of course the face value of the coin is the same. So prices increased.
However, workers were paid the SAME salary as before in the new coins, so they suffered. They earnt the same and prices of goods were increasing.
So, was this a big deal?
Actually, yes, it was.
Many farmers now were able to expand and grow due to selling their goods at higher prices. They bought more land, and they raised the rent on those. Smaller landholders lost their land when their lease matured.
Also, the bigger landowners began to claim more of the common land (it was required that a certain amount of land be set aside for common use). This was illegal of course.
So the commoners struggled, while the wealthy became more wealthy. This lead to Kett’s Rebellion in 1549.
Between 1540 and 1560 wages fell by 60% while food prices kept rising.
As bad as things were in London, they were worse in Europe at this time!
Ok, let’s look at later times.
After World War 1, Germany was already in massive debt for financing its war efforts. In addition, they had to pay reparations, and they fell behind in 1923. Germany in fact ordered its workers to stop working!
This is because Germany was now partly occupied by French-Belgian military, so Germany had had enough. They continued to pay workers. And production decreased dramatically.
The result?
Hyperinflation.
Bread would multiply in price during a single day (up to 250x), and restaurant prices would increase whilst customers ate their meal.
Workers were paid twice a day because they needed money to be able to eat basic stuff.
By the end of the year you needed 4.2 trillion Marks to buy 1 US dollar.
We saw hyperinflation in Zimbabwe in the last two decades, but the worst case was in Hungary , in 1946 (after the end of World War 2). Daily inflation exceeded 200%, and annualised this is 13 quadrillion percent (google how many zeros that is).
Ok, very interesting, but that relevance does this have for us today?
During the times above, the government had the right to print or create money. Clearly, this is not always a good idea!
Nowadays, the ability to print money (creating new money via the issuance of loans) has been delegated to private companies – banks.
Banks are not financial intermediaries. They do NOT use depositors funds to lend to businesses. Fractional Reserve banking is not relevant today – banks are NOT limited by customer deposits on how many new loans they can create.
They simply create new debt as long as they see it being profitable. The only time it is not profitable is if the lender does not repay the loan.
OK, so let’s talk about this private creation of debt and how it impacts us today.
If a bank wants to give a mortgage, it simply creates this money/debt/credit. Out of thin air.
If you deliver more money into a system, and productivity does not also go up, you will get price inflation.
So lets look at mortgage lending in the UK:
Data from the FCA indicates that total gross lending for mortgages from 2007- 2019 is in the region of £2.7 trillion. That is quite a lot.
So in just over a decade, £2.7 trillion of new money/debt has been pumped into buying houses. And, guess what, house prices always rise, don’t they? Funny, that.
Let’s look at house price to income ratio – in 2003 it was 3.36. In the lead up to the crisis in 2007, it reached x5.
Last year in 2018 it was 7.77, the highest it has ever been in the official time series going back to 2002.
Let’s look at UK house prices:
Hmm, they seem to have been going up quite a lot.
Let’s look at the increase in money supply :
Note three things
- The rise is quite manic until that blip in the top right corner. This is when the financial crisis occurred.
- That tiny tiny tiny light blue line – that is the “real money” compared to Commercial bank money, which is debt/ money created out of thin air by banks.
- The total money supply around 2010 is around £2 trillion. This is LESS than bank lending for mortgages since 2007.
Do we see a connection between debt creation and house price increase? Hmm, I wonder…
Ok, ok- we could say that as house prices are increasing, so are wages. So lets take a look:
Well, it is clear house price rises far outstrip wage rises.
So, what does this all mean?
I am no economist, or a genius, but this is what I see from this data:
- Banks are creating money out of thin air as loans and mortgages
- There is literally NOTHING to put a limit on this creation of debt as long as the banks see this as profitable
- This new debt money fuels house price growth – the correlation is startling
- We, us, you and I, have to take out a ton of debt to own a home
- We spend 25 years paying this off
- Our life is now built around earning enough to repay this debt
- Every year, the banks issue more debt, house prices go up and we are further driven into debt slavery
Oh, did I forget to mention that the UK does NOT include house price rises in its inflation data !!!!!!!
Like I said, I am no genius, but to me, this seems like a pretty bad way to live.
And who is profiting from this?
The banks, by charging interest on money that simply did not exist before.
If debt and interest does not play a significant role in your life (negatively), then you are very lucky.
For the rest of us normal, working people, banks are certainly delivering us into this Grip of Death (Literal translation of Mortgage)